Two weeks ago I got an e-mail from someone asking for my thoughts on the housing market ..

I've known this guy and his wife for a number of years now and they've spent the last four, maybe five, years fixing up an old historic house in the city. Think this Old House but a little further south. It's been a lot of work for them, not to mention the time and cost involved, but the project is nearly complete now and all their efforts are starting to show through in form of a magnificently restored house. They both have good stable government jobs, still though they are somewhat concerned about the future of the market in their neighborhood and what this might mean for them down the road.

Here is his paraphrased question:

So, what is your current take on the housing market? Prices are all over the place in our neighborhood. The big places are still selling for a lot, but just around the corner, they can't sell.

And my response:

In my opinion, it's really hard to tell what is going to happen longer term because the big unknown is how much inflation will the government allow (cause). It's easy to say prices will be relatively flat for some time based on the current market but if they let everything else inflate eventually what you owe on your house becomes a lot less in real dollars (just as our current national debt becomes a lot less as well). So I guess I'm saying that I still expect prices in 2016 to be about where they were in 2006 as I stated at that time, but at the same time feel there is a very good chance that inflation though killing us in other ways will actually help bail people out of some of their housing related debt.

I also think there are a lot of people out there with money who can buy the big houses like yours and get financing (although I believe there is somewhat of a lag in this market) whereas the D and A's are essentially out of the game now without the cheap financing. So that is why you see higher-end houses still selling but most first-time buyers (who drive the entire food chain and eventually support the rest of the market) are out of the market because they either rushed in over the last few years or have no real money for a down payment. The other unknown is tax policy. At this point we have no idea how Obama's taxes on the rich might affect the upper end of the market or how a housing stimulus package might change things as well. At the end of the day, I think you just have to be reasonable and accept that you don't know what you don't know so that you don't get into a tight situation. I have a pretty good idea of your situation and don't think you have gone overboard so as long as you are comfortable you won't have any problems (unless you want to move in the next year or two).

As for when things might turn around, look at this chart on monthly mortgage rate resets. I think it is safe to assume that after 2012 things could improve dramatically when all these people who shouldn't be in houses in the first place stop putting downward pressure on the market when their loan resets and they have no option but to walk away or sell. Now that we know that a lot of the worst loans were made in 2006 at the peak of the madness that spike in resets looming in 2011 (when 5-year interest only ARMs issued at the peak would expire) is particularly troubling (if not alarming). Of course a policy change could push this date forward or backwards too depending on what happens. So like I said just realize that you can't know exactly how the future will look and use common sense and don't do something stupid and you will be fine.



This is very much what I have told others who have e-mailed me or called me looking for investment advice. Two days ago in talking about the bank meltdown with someone else they asked if I would be a buyer or seller of stocks on Tuesday and I said there were good buys out there and not all of these banks are going to zero. I believe Wells Fargo proved that point today, at least for now, but tomorrow is another day. And we have to remember that Wells Fargo's news wasn't that all was well and improving but more of the sort that things are bad but not as bad as some thought or as bad as at IndyMac.

Don't forget to check back to Dan's Deep Creek Blog for future updates.