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.