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Why now may not be such a Great Time to Buy a House

After reading this article on Forbes.com, I feel like the writing is on the wall, and I have posted about it before. The government’s massive spending may not have been enough to turn the economy around. It was enough to delay the destruction, but in doing so only makes it worse.

Many people who bought houses in the last year thought that they could get a free $8,000 just by buying a house. Hate to break it to you, but it’s not that simple. The reason the government was giving away the money was in an attempt to prop up the housing market. The only problem is that it was unlikely to work.

It was unlikely to work because of unemployment. With high unemployment levels, the rate of foreclosure will be high. As soon as the tax credits expire, the housing market will just go down, and even faster than before.

What does that mean for the people who just bought houses? Their $8,000 in free money has disappeared, along with their down payment. Now they are stuck in a house that they owe more money that it is worth. And it is likely to continue to go down in value for the next few years.

And, as soon as one of the homeowners loses a job, the house will quickly fall into foreclosure and they will just leave. Who wants to fight for a house that is upside down? It’s silly. Who will get stuck with the bill? The government (because the $8,000 is now gone) and the bank.

I think this is a clear case of government’s good intentions having the exact opposite of the desired effect. It is fine to stimulate the economy (at least in theory), but enticing people to buy houses when the housing market is going straight down is irresponsible if not downright harmful.

Who did the government offer the free money to? It was offered to first time home buyers, who probably do not have the most experience in owning real estate. The government identified the people who are most likely to misunderstand the risks, and paid them to buy a house when the market is going down, unemployment is going up, and the economy is unstable at best.

There are a few people who took the $8,000 and were able to leverage it into a good investment. How? By buying the property right. That means cheap. A friend of mine told me that they are selling houses outside Las Vegas at foreclosure auction for $25,000. Now that could be a good investment (especially if you are going to live in it). But most of the people who used the tax credit went through a real estate agent and paid retail price for the house. I don’t think that is a good idea in this economic environment.

Many of the government’s most expensive initiatives are similar to the first time buyers housing tax credit. They are designed to help people, but end up doing more harm than good. Each person needs to think for themselves and get educated on how the economy works and how to know if it is a good time to buy a house. We can’t let the government do the thinking for us, any more than we can let anyone else do our thinking for us.

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  1. June 24th, 2010 at 06:38 | #1

    An important question any prospective buyer needs to ask is “why isn’t housing booming with fixed rates below 5%?” And they’ve been there for the better part of 18 months–enough time for the cheap money to work.

    That situation alone points to a fundamentally distressed market. At any other time rates that low would have brought buyers out in droves and accelerated the price spiral. What’s differenet this time?

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