Buy a House at 2002 Prices? Why I Still Don’t Want It

The median price of a resale home in the U.S. fell 3.7% in January 2011 from a year earlier to $158,800—the lowest level in since April 2002. If you can pay cash, you will get your best deal. So the question is, “Should I buy real estate now?So this is what the American dream has come down to: if you want to buy a house these days, you pay cash.

Some say it was President Carter that started the dream, “every American should be able to own a home.” Others say it was Bill Clinton’s Administration that really pushed home ownership in America.

Whoever it was, the dream has fallen flat on its fat face. The politicians have screwed it up again for us. About one-third of all resale homes bought in the U.S. in January were paid with hard cash, because home financing has all but dried-up.

And despite people paying cash for homes, which one would think signifies the bottom of the market, prices continue to fall. Figures released by the Washington-based National Association of Realtors showed that the median price of a resale home in the U.S. fell 3.7% in January 2011 from a year earlier to $158,800—the lowest level in since April 2002.

If you can pay cash, you will get your best deal. So the question is, “Should I buy real estate now? And my answer is that it’s still too early in the year to buy. The interest rate on the popular 30-year mortgage has been rising with long-term interest rates. RealtyTrack Inc. says the number of homes receiving a foreclosure notice this year will jump 20% from 2010. And new homebuilder stocks, a leading indicator, are still in the dog house.

Early on in the residential property market crash, former Fed Chairman Alan Greenspan was quoted as saying that the softness in the housing market would be contained to the housing sector and that it would not spread to the rest of the economy. The day he made that statement, I said to myself, “Oh my goodness, this is the fellow that has been running the central bank for years? He has no idea what he is talking about.”

The U.S. residential real estate crash hurt the speculators and those who were buying homes they couldn’t afford—they deserved it. But the conservative-risk American, the one who didn’t play the real estate game, has been hurt like everyone else.

The first lesson here: don’t trust the politicians, because whatever “big idea” they seem to come up with, it comes back to haunt us in about 10 years’ time. So, when they say it is okay to increase the national debt to above the current $14.3-trillion limit, don’t think that will not come back to bite us.

The second lesson we have already learned. The NASDAQ Composite Index peaked early in the year 2000 at about 5,000. Today, 11 years later, that index is still down 45%. I don’t expect the housing market’s return to fare any better than the NASDAQ’s.

Michael’s Personal Notes:

I’m a big Italian red wine lover. In fact, maybe I like red wine too much. Brunellos, Barolos, Amarones…can’t get enough of them. And the older, the better.

Through the years, when I see a research study that says moderate consumption of alcohol is good for you, I take the article home to my wife (who is strictly a social weekend drinker). But today I go home with the study-of-all-studies under my arm.

According to a research report released today by the “British Medical Journal,” 4,235 studies in respect to alcohol consumption were reviewed and 84 were taken in for analysis. The researchers concluded that the 84 studies provide strong evidence that one to two alcohol drinks a day are likely to reduce heart disease up to 25% for males and females.

On the other hand, maybe I shouldn’t show my wife this research. She might go from a casual weekend drinker to a daily drinker, which means it will cost me more money—I will need to buy even more wine and find a way to get those kids to school every day. Some things are just best kept to yourself.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up a shrinking 4.5% for 2011. What happened to the market’s big advance?

Too may advisors got bullish. Interest rates started to rise. Oil hit $100.00 U.S. a barrel, as civil unrest hit the first oil-producing country. But have no fear my dear reader; this bear market rally is far from over.

Bear market rallies don’t end quietly; they end with euphoria, with a big bang. Too many advisors were calling for a market correction—the stock market never delivers what is expected of it. But the recent market action should not matter to PROFIT CONFIDENTIAL readers. The resource stocks were up sharply Wednesday—and that means my readers’ pockets should have been well primed yesterday.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi, PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.