The Economist has a brief piece in the dead tree edition (not yet online) on why investing in housing isn’t always the no-brainer it’s meant to be. They list seven fallacies that housing advocates (which includes ever real estate agent and mortgage officer I’ve met, as well as friends who have assumed mortgages and want some company) frequently proffer.
Much of the article I agree with and mirrors the thinking that led me to conclude that now is simply not the time for me to get a house. Economically, I’m better off renting. Sacrilidge, I know. But basically, the stock market is just upswinging from the bottom, while the housing market, if not at the top, is near it. Getting out of one at the bottom to get into the other at the top is pretty much a fundamental economic no-no.
However, one point I have questions about. They argue that low interest rates do not necessarily make a higher overall mortgage a good idea. The reasoning being that our current low inflation makes the interest relatively more expensive. So a higher interest rate with greater inflation means the money you pay down the road is worth less, so each payment is relatively cheaper for you. A low interest rate with even lower inflation means that each payment is still more expensive for you, as other prices and wages don’t rise relative to your house payment.
Fair enough–but if inflation is at an historic low, doesn’t that mean that it’s a good bet it will rise? Locking in a low interest rate now means that if the inflation rate increases in the future, you’ll be better off than if you’d assumed that mortgage at a higher rate. Volker and Greenspan have been good, but it’s too much to expect that we’ll get that level of inflation fighting from here on out.
That being said, the article lists 6 more reasons why price declines in high housing price areas are not unthinkable–c.f. Tokyo for an object lesson.
Today’s news that DC residents thinking of a lifestyle change are considering leaving the area means that demand for housing is not a constant, even if available land is. (AAA sucks rocks, and their website isn’t updated, so typically there’s no link)
So, if you’re renting, relax. Use your cheaper rent (mine is at a minimum half of any potential mortgage payment) to save money and put it in the upswinging market. But I’d ask questions before knocking a low interest rate.