re: rent now, buy later
Interesting case study from the US I wanted to post
Case Study: Mr. & Mrs. John Q. Traveler Profile: Family of three Jobs: Computer technician and medical insurance claims processor and would-be real estate tycoons
Both husband and wife have stressful jobs and need to get away. After losing money in the stock market, they have tried their hand at real estate. They own a home with a lot of equity, but bought a rental last year that is bleeding them dry with negative cash flow as a result of low rent-to-value ratios. They can’t get favorable financing for rental property because it is a rental and there is very little equity. They overpaid for the property and the rent isn’t commensurate with their expenses of taxes, insurance and mortgage payments.
They have decided to pull out the equity of their home to put down on their rental to reduce the negative cash flow. They can get a much more favorable rate on their residence versus their rental. Makes sense until you consider that it has not occurred to them that real estate prices are at bubble levels. It would make more sense to get rid of the rental, since prices are softening and it is creating a household budget problem. This financial strain has created stress in their lives.
They were doing well until the stock market collapsed and they lost money in stocks. They thought it better to go with a sure thing with real estate, which can only go up. Besides, they figured they could write off most of the expenses. In addition to refinancing their home and rental, they need an extra $12,000 to pay for a European vacation to relieve the emotional stress. They don’t have the cash to pay for the vacation -- that will come from the cash out of refinancing their home. They called the loan officer from Europe to make sure that they were approved as Mrs. Traveler was worried about how the credit cards will be paid if their new loan is approved for less money. My friend tells me they will probably get the money. Very few households have been turned down in this market.
It then goes on to discuss: At the moment American consumers are making the most of rising housing prices and falling interest rates to finance their monthly bills. The current trend in refis is coming from cash-strapped homeowners who need to borrow more money than their house is worth. Pressure is mounting on appraisers to come up with higher appraisal values now that home prices are starting to soften. We are now approaching the end of the line. When prices start to fall debt-trapped households will have nowhere else to go. The equity markets are doing the heavy lifting to replace savings and home prices will eventually turn down when a dollar crisis hits the bond markets. When this happens, interest rates will head up and the refi boom will go bust. The home equity well will run dry. When rates start to rise, variable-rate mortgages payments will go up. Limited-term fixed rate mortgages will have to be refinanced at higher rates when they mature. Home equity will start to disappear. The result will be a flood of bankruptcies that overwhelm the financial system as homeowners walk away from properties, leaving financial institutions and bondholders holding the bag. This will be a time of extreme social unrest.
Homeowners just don’t see the storm clouds that are on the horizon. The rising tide of asset prices that have supported consumption this last decade is coming to an end. Like cargo ships overloaded with cargo in a violent storm, debt-laden balance sheets and no savings have left households ill prepared for the storm that lies directly in front of them. Instead of taking precautionary steps as the equity bubble burst, consumers have been led astray by the next bubble. Most investors follow whatever is hot. For the last three years, real estate has been "the place to be." But just as expanding credit helped to create the stock market bubble, it has also led to a mortgage bubble, which spilled over, into the housing market creating yet another asset bubble.
