This is a bad time to buy a house

Tyler Cowen at Marginal Revolution gives what I think is bad advice on housing. He says:

So go ahead and buy that house. Yes, you might be better off by waiting for the price to fall. But don't worry about bursting bubbles, you won't end up worse off.

This is not true. If you buy a house for $600K, and the price drops to $400K because the bubble bursts, that means you lost $200K. Ouch.

What happens if you buy your house, and then lose your job and can’t afford to make your mortgage payments? Well in a rising market, you just sell it and make a profit. But in a falling market you’re in a real bind because if you bought the house with 10% down and its resale value has dropped by 33%, you can’t even afford to sell.

Prior to the new bankruptcy law you’d just file for Chapter 7 bankruptcy and let the bank get stuck with the house (such is the cause of recessions), but now you may get stuck paying for your mistake for many years. (Although, with your “means” calculated based on your last six months of income, if you can stick it out for six months of unemployment you could still get the benefits of Chapter 7—just what our economy needs, another government law which actually encourages people to be deadbeats.)

Even if you can afford to sell your house, you wind up losing your life savings. So my advice is don’t buy a house right now.

Comments

[Anthony R]

I think the original advice to go ahead and buy, and the advice to not buy now are both correct and incorrect for one very simple reason, the following. In areas such as the one where I live, where housing prices are skyrocketing, investors have come in and bought up properties that are already rediculously expensive, built an even more expensive house, and sold at a low marginal profit. This however is done all across the area. What this creates is a situation where end purchasers are buying homes with drastically inflated prices with the promise of an increasing market value and low mortgage rates. This problem is further compounded by the fact that the development companies take their money and run, where as end consumers are stuck paying mortgage rates. What seperates this bubble from the one in the 80's, is that this economy has created the wonderful, artifical creation of the varbale-year ARM. This vehicle allows people to have a low rate for a few years, with the chickens coming home to roost (litterally) within a few years time of purchase price - right about the time that the housing market has cooled OR WORSE yet, reversed itself. My advise, pick your location, location, location - wisely! Don't buy in Stamford, CT though....

- Anthony R. (22, Stamford)

[Micah W]

The title of the article is "Sophistical Arguments", so I don't think it is meant to be taken seriously.

[Half Sigma]

Darn, another one of those parody posts that I didn't get!