Buying a house part 2

This post is the second part investigating why buying a house in Austin at this point in time is not a good idea. First, I am not condemning the purchase of family homes. It is a great idea most of the time. It helps investors build equity and brings a sense of pride. Unfortunately, right now is not the time to jump in areas like Austin where prices are way above reasonable. This is not even addressing places like California where home prices are at ridiculous levels. I have had many arguments with people that seem to be backed with an unwritten American mythology concerning house buying. Here are their arguments with my counterpoint to each statement.

Their statement: It does not cost much more to buy a house over renting.
My argument: In the first part of this post, the monthly cost to rent was about $1050 in comparison to buying an average priced Austin house ($187, 000) at $1700 per month.

Their statement: It is best to build equity in something you own. Renting is throwing away money.
My argument: This point leans slightly towards their side. One thing to note though, during the first 5 to 7 years the majority of mortgage payments goes to interest, not principle. It takes a long time to actually build any real equity in a house. If one is not going to live in a place at minimum 5 years, it is not worth the effort of buying.

Their statement: Interest rates are going to rise.
My argument: Yes, interest rates are going to rise. What they fail to comprehend is as interest rates rise, the amount of money banks will loan to families will decrease. The result will end up reducing home prices. The mortgage a family is paying will be greater than the house's value in the future. This is not a way to build equity!

Their statement: The first-time home owner's $8,000.00 tax credit runs out at the end of April.
My argument: Yes, it does. This is only a federal tax credit. If a family is at a 28% federal tax rate that means their tax liability decreases by about $2,200. It is really not that much. What happens to housing prices rush to buy is over? Demand for houses will decrease driving house prices down just as the cash-for-clunkers had automobile demand decrease when the program ended. (Addendum 4-27-10: My argument was a little off. The tax credit is a dollar-for-dollar $8000 reduction of your federal tax bill as pointed out by my friend Lasso. It is only once. This still is not enough money to make a difference in buying when housing prices are $187,000+.)

Their statement: Housing prices will only go up!
My argument: Housing prices will not go up, but will go down. Two reasons why this will be true. The most important one is the banks are not making the excessive loans as they did in 2004-2007. The exotic loans that allowed janitors to afford mansions are things of the past. They will never return. Finally, good paying jobs have yet to return and most likely it will take a long time for them to return. No one can afford a house unemployed!!! No jobs, not housing boom. The plot below from the blog Calculated Risk shows home prices decreased in February. This trend is just going to continue until a significant amount of hiring is going to take us out of this 17 % (9.7 % official collecting benefits) actual unemployment rate. When I mean actual unemployed are those who wish to work, but can not find jobs. When house prices decrease, you lose money!

What I have learned in this intellectual practice is that people tend to follow the herd mentality. The rush to buy a house now is because everyone else is doing it or they are afraid that prices will skyrocket again. Get the free money with the tax break! Rational thought is dismissed during the rush.

Buying a house

My blog covers a wide range of topics. Often, economics is one field I poke around. This post is inspired by a conversation with my coworkers about a week ago. They suggest I purchase a house in the current market/economy. At the moment, my job is not secure at Spansion due to Chapter 11 bankruptcy, but that may change over the next few months. It is uncertain. Putting that aside, I am going to discuss why someone should NOT purchase a house at this time. My coworkers were correct in the past sense. I should build equity in a house. Yes, I am throwing away money in rent. Those statements are true in the Austin home market until the recent housing bubble (yes there is one in Austin) and the current state of employment within Austin. It is not wise to currently buy a house.

First, it is a false statement saying that buying a house is a little more than paying rent. Bull. The breakdown below will show you why. These are approximations.

Renting a 2 bed 1 bath apartment per month in Austin, TX:
Base rent = $900
Renters insurance = $50
Utilities = $100
Upkeep = $0
Total = $1050

The average home price in Austin is $187, 000 according to the Austin Chamber of Commerce. This is low compared to many places like California and Florida, but it is quite a bit higher than surrounding areas. Using a mortgage calculator and the average home price to get the monthly mortgage payment after a 10 % down payment at 5% interest.

Buying an average priced home in Austin, TX per month costs:

Base mortgage + Mortgage insurance + Tax = $1395
Homeowners insurance = $100
Utilities = $150
Upkeep = $200
Interest tax break = -$125
Total = $1720

Note folks, this is a 63 % payment increase over just renting alone. This does not even take into consideration the down payment of $18,700 and the extra fees of paying escrow along with a realtor (6% commission). In reality, it is about 73 % more expensive to buy a house. It is not a slightly higher cost to buy a house in comparison to renting an apartment.

This is part 1 of 2 posts that makes the simple point of purchasing a house is not slightly more than renting an apartment. The next post, part 2, will discuss why one should wait to buy a house a couple of years from now.

Fighting Israeli's

Ever since its inception in 1948, Israel has been at a state of war or constantly on the verge of war with their Arab neighbors. Actual major conflicts since independence include the 1948 Arab-Israeli War, the Six-day War, the Yom Kippur War and a pair of conflicts with Lebanon. Currently, all of Israel's neighbors are hostile and terrorists such as Hezbollah within the occupied territories would love to wipe Israel off the map. It is no wonder that Israel spends over 7 % of its GDP being ranked 6th highest in the world on military expenditures in this category.

This tank system dubbed the "Trophy" seems to be the latest in the Israeli military's arsenal. It is an active defense system to knock down anti-tank missiles or rockets. It uses a radar system and shoots quickly at incoming targets.

The tiny Trophy system, lodged behind small rectangular plates on both sides of the tank, uses radar to detect the incoming projectiles and fires a small charge to intercept them, said Gil.

After firing, the system quickly reloads. The entire process is automated, holds fire if the rocket is going to miss the tank, and causes such a small explosion that the chances of unintentionally hurting friendly soldiers through collateral damage is only 1 percent, the company says.

I am curious what the small "charge" is they are referring to. The only 1 % collateral damage would make this quite a unit if the claim is true. The article has capabilities for the system at quite a high standard.

Developers say the Trophy can stop any anti-tank rocket in the formidable Hezbollah arsenal, which struck dozens of Israeli tanks and killed at least 19 Israeli tank crewmen during their month long war.

"We can cope with any threat in our neighborhood, and more," said Gil, the Trophy's program manager at Rafael. Citing security considerations, the company would not permit publication of his last name.

I am guessing the date weapons of Isreal's neighbors would not stand a chance against this unit. Modern weapons most likely would defeat the Trophy. Looking through the article, one key factor appears as with all nifty high tech weapons, cost.

Israeli analyst Yiftah Shapir said it is premature to tell whether the Trophy can make a major difference, however. He said the army must cope with the high costs of the system and determine exactly how it will be used.

"When everyone knows that it works properly, it will change the battlefield," he said.

Israeli media have said the cost is about $200,000 per tank. Rafael refused to divulge the price of the system, saying only that it's a "small fraction" of the cost of a tank.

This might prevent deployment of the weapon. Israel is price sensitive to unproven, expensive weapons due to the country's small size. We shall see Trophy's outcome over the next couple of years.