Quote from OldTrader:
The point is, put the pencil to some of the scenarios. You may be surprised, especially if you plan to hold the property for let's say a 10 year period.
OldTrader [/B]
The keys here are how long the person is going to live in the house and what their financial status is. Unless you are moving to an area of brand new homes and/ or buying a condo , you also have to factor in a TON of maintenance costs over a ten year period. Roofs , painting, decks, plumbing repairs etc. could add up to a lot of money over ten years.
I think that when the bubble bursts it will be much different throughout the USA than the flat periods ( downturns in inflation adjusted dollars in the early 80's) and the regional downturn of the early 90's.
In the 70's , almost everybody had a 20% down fixed loan with a gross income ratio of 3 times ( 33% ratio of the loan payment to gross monthly income ) that included the monthly cost of the loan including taxes and insurance)
In the 80's most loans were made to 20% down buyers. Ratios were relaxed to 36%. Ten % down buyers still had to meet a 33% ratio for a fixed loan. Including credit card and car loan debt , the back end ratio could not be more than 45%. To get a 10% down loan people had to have GOOD credit.
In today's world ratios are being thrown out the window. I've heard radio ads by loan brokers that are like car dealer ads.
" Bad credit, Low credit, No credit. We can finance anybody for little or nothing down."
That is why I think that when the bubble bursts , it will be more than a regional downturn. I do know that little or nothing down deals to marginal people are being made all over the USA. In other words: Millions of houses throughout the USA are in weak hands. That was NOT true in the early 80's or early 90's.
To answer the original question; just because you can buy a home does NOT mean that you can really afford one.
I bought my most recent home with a large down payment from equity off of a previous home. My ratios are well below the ratios required in the 70's and I might live here the rest of my life.
A person with 20% or more to put down and an income to properly service the loan and maintain the house over the 10 year period is almost certainly better off buying.
The low down crowd ( unless they have fantastic incomes from a stable job ) is probably better off renting. Once the bubble bursts , I can see a domino effect coming. The weak hands could end up with no home AND bad credit from a foreclosure.
Though I've heard of people that made fortunes by buying up property, renting it out, wait for appreciation, taking a loan out to buy more property and renting that out too, rinse and repeat. Doesn't that business plan require the own to rent ratio to be below 1?