Point counterpoint: time to buy?

Source: Wall Street Journal
It's been a scary few years for the housing market. But at some point, the nightmare has to end (please?). Is now the time? Should first-time home buyers consider jumping into the market? After all, home prices have fallen 34% from their 2006 peak and mortgage rates are hovering at or near record lows. On one side are those who argue that homes are more affordable than they have been in decades, based on how much monthly income a mortgage consumes and whether owning is less costly than renting. An uptick in home buying by investors already is under way, they say—an indication that those who wait may miss out on a good buying opportunity. On the other side, pessimists insist that the housing slump is far from over, and that prices will continue falling—perhaps as much as 20% or more. Excess inventories, they say, are the problem, and some estimate it could be four years before the market absorbs all of that extra supply. Eric Lascelles, the chief economist at money-management firm RBC Global Asset Management Inc., says this is a remarkable time to be a first-time home buyer. A. Gary Shilling, president of A. Gary Shilling & Co., an economic consulting firm in Springfield, N.J., says buying now is a terrible idea. Yes: It's a Rare Opportunity By Eric Lascelles This could be the best time in a generation to be a first-time home buyer. Cheery views such as this are out of vogue and easy enough to dismiss as the ravings of a serial optimist. And yet this opinion isn't based on any heroic economic assumptions. To the contrary, it is constructed upon a more curmudgeonly foundation: In my estimation, the stock market probably underestimates Europe's woes, U.S. economic growth may fall short of expectations, and—of greatest relevance—the overall housing market is likely still several years from normality. Nevertheless, this is still a remarkable time to be a first-time home buyer. Affordability is the best it has been in 30 years, thanks to the combination of a 34% decline in prices since the 2006 peak and a historically low 4% average rate for a 30-year, fixed-rate mortgage. The two affordability metrics that truly matter are how much monthly income a mortgage consumes, and whether this is less costly than renting. On the first count, I calculate that home prices are now an astonishing one-third cheaper than the historical norm. On the second, real-estate website Trulia figures that buying is cheaper than renting in 98 out of America's 100 major markets. That is practically a clean sweep. Rock-Bottom Rates Investors get this. While households dither, investors ramped up their home buying by 64% across 2011. They understand that this is the mother of all buyer's markets, and won't last forever. The prospect of making a profit by flipping these properties is still rather distant, so they lay in wait for an eventual rebound and in the meantime make money by renting out their properties for more than the monthly mortgage payment. Yet most people are sitting on their hands, frozen not by the fundamentals but by psychology. For those able to overcome their phobias, a blazing contrarian opportunity exists. Here's a dirty little secret about recessions: They aren't bad for everyone. They can even be downright beneficial if played right. Roughly one in 30 Americans is unemployed as a result of the financial crisis. The rest have sidestepped this blow, and what's more have been given the gift of extraordinarily low interest rates. The long arc of history reveals no other sustained period of real interest rates this low. It is mind-bending that American home buyers can now borrow for 30 years at a cheaper rate than either General Electric Co. or the Australian government. And unlike their counterparts in most other countries, Americans can lock in today's borrowing costs for the full life of their mortgage, enjoying perfect certainty about future payments. The finances of most households have had a rough go over the past several years. Many were ravaged by financial markets. Others are trapped beneath an illiquid and possibly underwater home. However, the situation for first-time home buyers is different. They largely skated through the past few years. They weren't yet in the housing market, and so escaped that devastating hit. And with an average age of 30, they hadn't yet accumulated sufficient assets to truly suffer when markets fell. A significant part of this cohort's savings has been generated in just the past five years, and while markets have been enormously volatile over that period, a monthly savings plan would have generated a 26% return in equities and 22% in bonds. First-time home buyers may not be so hard up for their down payment after all.

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