Did you ever notice how politicians talk different stories, make a little rah, rah but the Economy continues on and on, with little changes. Home prices go up and down, and then up again. Eventually, prices are always higher because of inflation and the needs of a forever increasing general population which, in itself, creates the demand for additional housing. Incidentally home price changes are not included in the Government’s inflation index – ever wonder why?
What’s going on today; basically the same old thing, with a few new wrinkles. The US Government appears to be doing everything possible to drive housing prices higher. They are making it more difficult for investors to buy, with tighter credit standards, increased down payment requirements and tougher limits on how many properties one can own. On the other hand, they are making it even easier for owner-occupants to buy. By that, I mean that if you are going to live in the house, you can buy with very little down, poor credit and a limited income. And, as you know, if you are a first home buyer, you can get an $8,000 credit when you close, in addition to investing practically nothing, to start with. Later this year, this $8,000 credit is likely to be extended and perhaps offered to all owner-occupant buyers.
Isn’t this a different wrinkle on the old Clinton-Bush strategies of getting everyone into their own home, regardless of whether or not they could afford it. The difference is that before, a result of this strategy was increased home prices. Now, the strategy is designed to get rid of existing inventory. But, since home prices have already dropped precipitously, an ancillary benefit from this strategy is that home prices will go back up, again.
Why should this strategy work today, when the old strategy failed miserably? The answer is that home prices are so low in many areas of the US, that it is not likely that they will go lower. When you combine this with low interest rates, the average family can easily afford to keep their home today, rather than have to walk away from it and rent something cheaper. For example, in Florida the average family’s debt to income ratio has dropped to 19%, where it was close to 50% or more, just a year or two ago.
And, make no mistake, these government incentive initiatives are essential. Why, because the only way to protect our banking system is for home values to increase. In this way, bank collateral will not have to be further written down, thereby not endangering our banks and bringing the whole financial system to its knees again. To the contrary, this will enable bank reserves to be reversed, thereby adding substantial additional liquidity to the financial markets.
Along with higher home prices, inflation is one of the likely results. But inflation will only further benefit us property owners. Since most of the money invested in homes is generally borrowed, the lenders will be taking on the inflation risk, and we will profit from it. Don’t worry about it being more difficult for people to pay for their homes because of the coming inflation. Guess what, along with the rise in the price of products and homes, there will also be a corresponding rise in wages. We see evidence of that considering that the minimum Federal hourly wage has been raised to $7.25/hour. Expect more to come.
In essence, we are preparing for a coming wave of home price increases.
If you would like more information and/or if you want to be added to the Fischer Group's "Weekly Newsletter" on what looks to happen next in Housing & our Economy, please visit our free website at www.Fischer-Investment.com.