Thursday, December 29, 2005

Want to Make A Point? Change Your Reference

I tell you, I'm tired of journalists using flawed logic to make a point. The latest comes from this piece by David Leonhardt arguing that buying a house is less of a strain today than in the 80s and hence somehow a correction in housing prices isn't imminent. In fact, here's how the story ends ...
"When you get affordability stretched so much, all the creative financing in the world can't stop some correction of house prices," Mr. Rosen, the University of California economist, said. "It happened in Hong Kong, Japan and England."
It looks as if it may not happen, though, in most of the United States.

Why would he compare with the 80s? If you thought it was something to do with how 20 years makes a good timeframe for comparison, you'd be wrong. You see, the way to sell your idea is to pick an arbitrary reference for your argument. For example, if you want to show you lost weight, start your count right after a huge Thanksgiving meal, and end it when you are sick and have lost several pounds. Is it a correct measure? No, but it tells the story you want it to.

So why the 80s again? Well, the federal funds rate in the 80s ranged from 6.5 to over 19%. Of course, the costs of home ownership were high... buying a house in the early 80s was like buying it with a credit card today! Costs have come down now because of interest rates, but that doesn't reflect anything about the value of the asset!

To be fair, Leonhardt does have some reasonable points about just how much incomes have gone up in some communities. But then he somehow tries to imply something about a national market, indicating that housing isn't overpriced except in a few places.

I certainly am not anti-home buying. In fact, I've been advising a good friend of mine to buy a house, because he and his wife will be living in the same city for at least 6-7 years. Time is a friend, because you can wade out troughs along the way. But I certainly don't agree that housing isn't set for a correction. And I'd give an earful if I ever met the Gilberts featured in the story:

The most money that Tim W. Gilbert has ever had in his possession was $15,000, he said, in the form of a check for a job he had done as a carpenter. But he and his wife, Marjorie, were still able to buy a 1936 Cape Cod-style house this year for $176,000 in Poland, about 45 minutes north of Portland. They took out two mortgages rather than making a down payment and they use Mr. Gilbert's $5,000 or so in pretax monthly income to cover $1,600 in mortgage, tax and insurance payments. Ms. Gilbert, a writer, home schools their daughters, ages 4 and 6. "I paid rent for 18 or 19 years," Mr. Gilbert, 38, said. "We waited years and years. We wanted to make this happen."

The most you have EVER saved is less than 10% of the value of the house! Gosh, if that's all the discipline you have, where are you going to come up with the money when those faucets start to leak, the water line bursts, and that heat pump quits?

Sorry, I know I'm opinionated ... that's why I have a blog! But if you can't save enough to put at least 10% down, you have no business owning a home!!

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