Some interesting thoughts on the housing market...

I stumbled on two interesting articles about the housing market on two different economics blogs. Since the housing market is something I'm always interested in, because I have a very large dog in the fight (having managed to buy a townhouse last summer at what was evidently the very peak of the market), I figured they were worth commenting on.

The first is from the economist. Much of it deals with the idea that the quest for cheaper housing has caused urban sprawl, as people spread outward in search of cheaper housing prices. As the writer points out, much of what is saved in cheaper housing prices is eaten up by transportation costs.

I don't think it's quite this simple. People do leave the city for cheaper housing in the 'burbs, but it's not the only reason for them to leave - they also leave because of better schools, less crime, lower taxes, cheaper car insurance, because they want to have features like a lawn that are difficult to have in the city, and because living in the city can be a hassle in a ton of ways, from parking to grocery shopping, and because the features they want in a house may not be available in the city.

I've lived in a few different places in Baltimore City, ranging from places that are barely in the city (an apartment complex in Mount Washington as a college student, a duplex in Hamilton as a recent college grad), to the dead center of the city (a rented room in Reservoir Hill). The things I like about being out of the city include most of the things I listed above, including the crime aspect - the wheels got stolen off my car when I lived in that Mt Washington apartment complex.

In one of his books, David Brooks commented that cities have turned into places filled with those too poor to get out and those who are rich enough that they can afford to get around the difficulties of city life. I think that's accurate. I think it's also the reason so many people buy houses in the suburb. It's easy to find a cheap, run-down house in a sketchy neigborhood in the city, and it's easy to find a nice million-dollar mansion or half-million dollar restored rowhouse. But finding, say, a $250,000 or so house in a decent neigborhood where you feel safe and don't find your car on blocks on a Friday morning is near-impossible.

I also have a problem with the claim that the suburban lifestyle causes people to own cars, eating up the housing cost savings because they have to spend it on transportation. Sure, there are certain cities - NY and DC - that you can live in without a car. But that's not to say those are typical cities. There are few neighborhoods in Baltimore that are easy to live and work in without a car. People in cities who don't own cars generally don't have cars because they can't afford them, not because they don't want them or wouldn't find them useful. And if you own a car, even if you don't use it or don't drive far, you still have significant transportation expenses. Many of the costs of owning a car are fixed - car payments, insurance. Sure, you use less gas need fewer oil changes if you have a 10 minute commute (like I did when I lived in the 'hill), but my car payments and insurance were more than my rent when I lived in the city.

The other interesting article is from Megan McCardle at The Atlantic, who is outlining why she doesn't think houses will go up in value - because taxes are unlikely to increase sharply (so the tax benefits won't increase sharply) and because it's unlikely that mortgages will get longer than 30 years - but the wild card is land, because there isn't going to be more land, and zoning restrictions and environmentalists often limit the amount of available land. For the third, on the positive side, I'd also add that favorite realtor's maxim - location, location, location. There's plenty of land, even buildable land - but it's not always near where jobs or other things people want to live are. While people have fled to the 'burbs, jobs still seem to be in cities - so first and second ring suburbs will probably still be in demand (I hope).

But what I really found interesting was the 40-year mortgage comment - because I have a 40 year mortgage. My logic for getting it was that it would keep my payments more manageable, but I could always throw more money at getting it paid off as my income increased and I got other debts paid off. Plus, I have a pretty good interest rate, so if we ever have Carter-like levels of inflation, I could take the money I would use to pay off the mortgage and put it in a 20% savings account. Being risk-averse, I would rather have a fixed rate 40 than an ARM or IO. If housing prices start going up, I wouldn't be surprised to see the 40 make a comeback - lenders get an extra 10 years of interest, plus less risk of default, because the minimum payment doesn't change - much of the trouble recently has been with ARMS (adjustable rate mortgages where the interest rate changes) and IO (Interest Only, where the first couple years are only interest and not principle, after which the payment increases when principle is factored in). After all the defaults on IO's and ARM's, lenders are going to want to avoid them, but they still will want to write loans to people who can't afford the payments on a 30-year fixed - so the 40 may make a comeback.

So should you buy a house? Am I a moron for buying one - should I mail the keys back to the lender and put my stuff in ministorage? Who knows. I just thought these articles were interesting food for thought.