<p>Fraychielle:</p>
<p>I think we mean well. Personally, I am trying to reason with people who are going headlong into the most expensive venture of their lives without giving adequate consideration to "rational thought". This is not a soapbox for me. This is a "bully pulpit" in the truest sense of the phrase. By "converting" or convincing one more individual to not make financially disastrous decision to buy a home in the current market, I believe I am doing good in a society gone stir crazy about homeownership regardless of the stakes, and without paying any heed to consequences for most people not in one of the categories you describe (the vultures, flippers, foreclosures, panic sellers etc.).</p>
<p>Look, almost everyone I have met, including the worst of the permabears, are bullish on housing in the long term. They are just irked about the disconnect between current prices and reality, and have turned into cheerleaders for a fall in prices from current levels.</p>
<p>So in answer to your missive, the facts are this: Anyone who is buying today will be burned by falling prices <em>for certain-</em> IF he or she is impacted by a very possible recession later this year. This is a very likely scenario for anybody who works in industries that heavily depend on "consumer sentiment", or anyone who is fortunate enough to work in an industry which directly depends on the RE industry (including builders). So you may have people who have secure enough jobs (in the gov't for example) that maybe in shape to ride out the decline, but a vast majority of people do not know, are completely clueless about what the possible impact might be of this decline.</p>
<p>Consider this example to clarify my thoughts:</p>
<p>Most people who are considering a purchase are still looking at 80 + 20 financing (i.e. 100% financing with 80% conforming loan + 20% with a mix of I/O and other ARM or balloon type loans). Let's say our friend CK likes a house and agrees to buy it for $700,000 today. He is 100% financed, with money enough probably just to take care of the closing costs. His monthly payments will look approximately look as follows:</p>
<p>P&I on Loan #1 - 80%: $3,700</p>
<p>Loan #2: 10.5% amort over 30 years, balloon due at year 10: $1,300</p>
<p>Effective Taxes @ 1.8%: $1,050.</p>
<p>HOA etc: $250</p>
<p>Total monthly recurring obligation: $6,300.</p>
<p>Most likely he and and his spouse make enough to cover their monthly obligations. Keep in mind that the rent on such a new townhome or yardless SFR at VoC is probably going to be no more than $3,000/ month.</p>
<p>If the property declines 10% in value (a conservative estimate), it will be worth $630,000 in January 2008. If CK or his spouse (heaven forbid) loses a job because of one of the reasons mentioned above, and therefore may not be able to make their monthly obligation and may have to sell. (Keep in mind that a $3000 rent of it increased by 10% (unlikely but possible) would still be $3300. Not enough to rent it out and stay cashflow positive.)</p>
<p>So the option is to either (a) sell this house and pay off the loans, or (b) foreclose/default on the loan. If chosen to sell, the damage is obvious, it would be around -$70,000 price drop -6% selling cost, + any principal paid in 12 months or a total of approximately $105,000.</p>
<p>If you are in a postion to ride out such a scenario, more power to you. Most people are still grappling with the affordability gap and are trying their best to make enough to "qualify" to own a $700k house, but just barely. The cash cushion in just not there. How many people do you know who will confidently say: my monthly expenses are $6300 for housing, + $4000 for the rest, and I have 12 months cash cushion, i.e. $120,000 in the bank?</p>
