My First Home:
A guide for first time home buyers
By Jeff Gregory • Bankrate.com

Thursday, July 27
Posted 11:38 a.m. EST

Housing prices headed for a slowdown, but still affordable?

If you're on the verge of becoming a first-time home buyer and listen
to the economic experts at the Federal Reserve, then you can breathe a
soft sigh of relief or smirk like a wise guy or both.

The Fed wizards have gazed into their liquid crystal displays and
declared the housing bubble will not burst, because there is no
bubble, and that the acceleration of home prices is losing velocity.

" ... expectations of future price appreciation have been slowing over
the past decade, roughly in line with the slowing of overall inflation
.... (The study) also supports the conclusion that the current housing
market is not characterized by widespread expectations of rapid future
price appreciation," Fed researchers wrote in the study released
earlier this month.

If you believe the Fed researchers, then you're probably disappointed
that home prices won't return to reasonable levels (compared to family
income) any time soon. However, you're probably also a little relieved
to hear that the absurd increases in home prices during the last
several years have lost steam.

Chin up, first timers!
Also according to the Fed's study (don't choke on your Cheerios),
homes are now more affordable than they were in the 1970s and '80s.
(gasp ... hack ... hmphh ...) Sorry, couldn't control myself.

This is based on the Fed's formula for determining affordability,
defined as:

"the ratio between the annual principal and interest payments at
prevailing mortgage rates on a constant-quality new single-family home
(assuming a thirty-year, 80 percent loan-to-value [LTV] ratio loan)
and median family income.

This ratio has been relatively stable, around 15 percent, for
several years, which is as low as it has been over the past
twenty-five years. This is in sharp contrast to the conditions of the
late 1970s and early 1980s, when high home prices and high nominal
interest rates combined to erode cash flow affordability."

That's right. Quit your whining, and just buy a house. The bargains
have never been better.

This is why, even though I consider myself a "big picture" person, I
have such an aversion to macroeconomics.

The difference is the "big picture" in my mind includes data points
that are more constant across the human experience (health, happiness,
family, love, truth, intimate connections with fellow human beings, as
well as violence, war and death). You know, things that we all share.

The Fed's "big picture" crops out too many pixels in my opinion, and
seems to contradict the headlines (see "Existing Home Sales, Prices
Hit New Highs", which notes that the median home price jumped more
than 5 percent in June to $191,800.)

In my opinion, the Fed's formula fails to include critical
affordability data -- such as student loan debt, costs of owning and
maintaining a car (including car insurance) and the reality of coming
up with the 20-percent down payment that the Fed uses in all of its
calculations of affordability -- which play an important role in what
a person can afford. (Psst. I'm not sure a 20-percent down payment is
still a realistic standard. Are you?)

Are you going to tell me that the majority of first time buyers in
California, New York, South Florida, Las Vegas and other areas that
have seen double-digit gains over the last three years can afford to
purchase decent homes?

"Afford" is a tricky word. Based on reader e-mails I receive, the main
way people can "afford" these outrageously priced homes is with
interest-only loans. That's a rather risky road, akin to leasing a
Mercedes convertible you can't afford -- you look rich, but you own
nothing.

I'm not sure what world the Fed researchers are picturing, but it
doesn't seem to match the world I'm living in.

Of course, I live in South Florida, where the median home price has
soared to $267,000. (Everybody in South Florida who has $52,000 ready
for a down payment, raise your hand!!!)

Maybe, I'm just bitter about being priced out of thousands of
neighborhoods. Maybe I'm alone on this. Maybe.

I would love to hear from all of you. Especially folks outside the
"bubble" areas of New York, California and Florida, etc. Are you
feeling the pinch? Are home prices creeping out of your reach? Or is
the Fed right? Speak up, please.

http://www.bankrate.com/brm/news/rea.../fthb-blog.asp


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"Husbands are like fires. They go out if unattended." -- Zsa Zsa Gabor