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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: chomolungma who wrote (391944)	4/14/2003 2:30:09 PM
From: sea_biscuit	Respond to of 769670

From itulip.com : The list of rationalizations of recent residential real estate price increases usually carted out are as follows. Low interest rates. These have made homes seem more affordable, despite the increase in prices. Tight supply. The number of new homes for sale now is lower than it was at the Nasdaq's peak in March 2000. Aggressive mortgage lending. Lenders have loosened credit standards in recent years, allowing borrowers with relatively high levels of debt to get loans. Borrowers can also make much smaller down payments, in some cases as little as 3%, compared with the more customary 10% to 20% of years past. Shift in investment strategies. Many Americans, spooked by the stock market over the past year, appear to be shifting money into residential real estate. One indication is that average down payments have actually increased in the past two years, suggesting that many of the buyers are people with large sums of money that they previously would have put into the stock market. In June, according to Economy.com, the average down payment was $34,700, up from $30,500 last June and $28,700 in June 1999. These factors beg the question, are home prices too high? Phrased another way, are households purchasing homes they cannot afford? To asnwer that question, let's first consider our society's relaxed view of debt in general. Most home owners buy homes they cannot afford just as most car buyers now purchase cars that they cannot afford. What's the definition of "cannot afford" when buying a car? Purchasing an asset with debt makes sense when the value of that asset is likely to be higher at the end of the term of the loan than it was when the loan was taken out, that is, when the asset tends to appreciate. This is the case with property, especially over the 15 to 30 year term of a mortgage. The capital gain realized from the appreciation in the price of the property over the term of the loan should more than pay for the interest cost of the loan. A car on the other hand is a depreciating asset because it is almost always worth less than the original purchase price when the time comes to sell it. In fact a car depreciates around 20% immediately after it is purchased new. Buying any depreciating asset with debt is simply a poor use of credit and bad household finance. As with any depreciating asset, a car you can afford is the one you can pay for with cash. But the practice of purchasing with debt a four wheeled depreciating asset or one with surround sound has become institutionalized. The Fed even encourages this kind of behavior. In a recent statement, Greenspan offered as a hopeful economic sign that households were using cash-out refis to pay down credit card debt. Are we really supposed to believe this is a good thing? If you use a credit card to buy a home entertainment system and then pay off the credit card with the cash you take out in a refi, you have in effect taken an asset that depreciates 80% in two years and put it on a 30 year mortgage. Never mind that statistics show that more than half of the households that do this wind up building up their credit card balances again anyway. In his next breath, Greenspan talks about the benefits of "financial literacy." Hope he's not teaching the classes. What's "cannot afford" mean when buying a home? The historical average for the cost of a mortgage is 25% of gross income. That's what the banks used to recommend, before they got desperate for households to sell mortgages to. In bubbly real estate market like Boston's today the average mortgage has reached 44% of income. That's a housing bubble. Period.