Wednesday, November 19, 2008

The Rise of FHA

Back in January of this year I wrote a post saying I didn't think there was a housing bubble. I pointed out that the cost of building a house had not dropped and that with the price of oil was going up which could only lead to an increase in the cost of raw materials.
Well, if a housing bubble is defined as rapidly dropping prices, I was wrong. Oil prices have dropped and the glut of foreclosed homes persists. We are at a moment in history that will be remembered for some time. With a recession in full bloom and a cascade of more bad financial news it seems the housing slump will never end. Credit is tight making it much harder to buy a home. A year ago a home buyer with less than perfect credit could finance 100% of the cost of a house and have the seller pay closing costs. It was just like a late night TV show, "get in with nothing down". FHA loans had fallen from popularity. Putting 3% down and paying mortgage insurance premiums was unattractive.
Today, if you have limited cash, you can hardly beat FHA. If you have 20% or more down payment FHA is not the way to go. Real Estate agents and Banks are boning up on FHA mortgages because in many cases they are the only way to get a house sold.
With this talk of doom and gloom comes a silver lining. Home prices are historically low(this is an understatement) and they are sure to increase at some point.
Because of the slow economy oil prices have dropped, factories have closed and demand for everything is unnaturally low. When the economy begins to swing oil prices will shoot up and inflation will start to rise. When all of the empty foreclosed houses are finally sold, people in middle and higher priced homes will suddenly be able to sell and move up or build.
Builders will not be able to respond to demand and prices will be driven up further. This is the next economic challenge. It seems like this whole scenario will lead to high inflation. Real Estate is a good investment in such a climate.
If I was a true believer I would be buying rental homes, but I'm not. This is the stuff of history, things could still get worse. If you can afford a house, need a house and have a steady job, I'm not sure how you could miss in today's market. Those who are speculating today could hit it big, but they are braver than me.