Economist: Now Not The Time To Buy A House

Economists are divided on whether buying a house is a good move in the current market. Host Guy Raz talks to economics blogger Barry Ritholtz, who thinks prospective buyers need to watch out. He says prices could drop another 10 to 15 percent.

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GUY RAZ, host:

Some market watchers say that's still true. But not Barry Ritholtz. He is the author of the book "Bailout Nation." And he says the problem, at least for the near-term, is simple: There are too many unsold homes on the market.

Mr. BARRY RITHOLTZ (Author, "Bailout Nation"): In a typical, normal housing cycle, in any given time, this four, five, six months supply of housing available, we're now running well in excess of double that over 12 months of supply and that's just the homes that we know about that are currently listed for sale. There's a huge overhang of what we call shadow inventory, which are homes that are either owned by the banks and not put on the market or that speculators and investors had purchased and they're not defaulting on them yet, they're still carrying.

But, you know, the classic line that stockbrokers say, home investors have been saying, which is, dear God, just let me get to break even and I'll dump this dog.

RAZ: Barry Ritholtz, it is, or at least until recently, has been an article of faith in this country that your home was the best and safest investment you could make. You know, it's foolproof, right? Do you believe that will still be the case in the coming decades?

Mr. RITHOLTZ: Well, first, it really depends on what you pay for a home. I'm a big fan of saying there's no such thing as toxic assets; only toxic prices. But the current environment is just so different than the previous two or three decades. If you look at the factors that were driving home prices from 1970 to 2000, they don't exist going forward. So the sort of appreciation that we saw in the '80s and '90s, that's not likely to come back anytime soon.

RAZ: So you're saying that period of time was an aberration, that this idea that you should always pay more than you can afford, your house is always going to increase in value, that was based on a belief of something that happened in just 20 or 25 years?

Mr. RITHOLTZ: Yes. You stop for a moment and think about what the environment was like in that period of time. First, you have the baby boom generation, born between let's call it '46 and '60. In the '80s and '90s, they were in the prime home-buying age. And that pig is through the python. That demographic bulge doesn't exist.

And then in addition to that, you have these massive tailwinds of mortgage rates that had entered a 20-year decrease. The cost of credit and the availability of credit had gotten increasingly beneficial to real estate buyers. Go back to the mortgage rates of 1980, they were 17.5 percent. You could go out and get a 30-year mortgage right now, today, at four-and-three-eighths.

These are just unprecedented, unconscionable numbers and there's really very little room for them to go any further. They're likely, over the next 10 to 20 years, to go higher. And that creates a headwind to potential real estate appreciation.

RAZ: Barry, house prices are down presumably, mortgage rates are incredibly low, is this a good time to buy?

Mr. RITHOLTZ: You know, I never have a hard time buying an asset class if you can get a desirable property at the right price. And that's the key. The problem is people have a real fear of buying an asset that's in free fall. And I think the worst of the housing drop is likely behind us. But by my metrics, we're 10 to 15 percent above fair value.

So assuming we only drop to fair value, there's still some downside going forward over the next, let's call it eight-quarters. But if you could get a good price on a property that you're okay living in for five to 10 years, if you're not afraid to negotiate and if you're not afraid to walk away from a house rather than overpay for it as a buyer, there's plenty of opportunities, you just have to be very selective and wait for the sellers to find religion.

RAZ: That's Barry Ritholtz. He's the author of "Bailout Nation." He also blogs about the economy at The Big Picture.

Barry Ritholtz, thank you so much.

Mr. RITHOLTZ: Thanks for having me.

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Pick The Better Investment: A Home Or Your Mattress

Dawn Crowell with her four children.

Dawn Crowell (center) with her children clockwise from top left: Jordan Shypulski, Zac Shypulski, Elizabeth Shypulski and Eli Shypulski. Courtesy of Dawn Crowell hide caption

itoggle caption Courtesy of Dawn Crowell

"You need to invest in your future." "A home is a great investment." "It might be painful for a while, but it's worth it."

These are the refrains Dawn Crowell of St. Paul, Minn., heard over and over again from just about everyone.

The single mother of four eventually bought a house with the assumption that it would only increase in value. But like millions of Americans, Crowell has seen the value of her house plummet.

Over the past four years, Americans have lost more than $5 trillion in wealth tied up in their homes. Economists hold vastly different views on whether there are worse days to come, and whether the home was ever meant to be a nest egg.

The 40-Year Bubble

Market-watcher Barry Ritholtz tells NPR's Guy Raz that based on his estimates, homes are still overvalued by about 10 to 20 percent, and that means prices can go down even further.

For him, there is no such thing as a foolproof investment, and the conditions that created the rising home values of the last 20 to 40 years were rare.

"If you look at the factors that were driving home prices from 1970 to 2000, they don't exist going forward," he says.

Ritholtz attributes the housing bubble to both the availability of credit and the baby boom generation. He says in the '80s and '90s that generation was at prime home-buying age, and now, that demographic bulge no longer exists.

Plus, he says, there’s the impact of mortgage rates, now at record lows just above 4 percent.

"They're likely over the next 10 to 20 [years] to go higher and that creates a headwind to potential real estate appreciation," he says.

Long-Term Investment

But according to professor Karl Case, one half of the Case-Shiller index, there's some good news as well.

The Case-Shiller index is one of the best measures of home values, and the latest numbers show that homes are now worth about the same as they were in 2003.

Case says the housing market seems to have bottomed out, and in some places, prices are coming back up.

The cost of California homes — which account for a quarter of the market — have gone up dramatically. Not long ago, San Francisco had hit bottom; Case says that market is now up by 21 percent.

"Eventually when prices get down low enough, people are going to buy this property," he says. "They're going to buy it up, they're going to live in it, and by all historical standards, they're getting a pretty good bargain right now."

According to Case, prices are the best they've been in five years — and perhaps in his lifetime. He says the idea of a house having ever-increasing value never existed, but a house can still be a good long-term investment.

"If you don't think of housing just as something to earn you capital gains in the long run, but something you're going to live in, and you can afford to pay the payments on it," he says, "it looks to be a pretty good deal."

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