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Why It's a Bad Time to Buy a House: High 'Real' Mortgage Rates, Record Inventories

Posted May 22, 2008 12:45pm EDT by Aaron Task
Related: XLB, WM, COF, CFC, FNM, FRE

Updated from May 22 

The government reported Thursday that home prices fell 3.1% in the first quarter, the worst quarterly drop on record.

As bad as that sounds, the housing market is going to get worse, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

Because home prices are depreciating, the "real" mortgage rate for homebuyers is about 15%, Sonders says.

While buyers have the advantage in today's market, using borrowed money to buy a depreciating asset is a dicey decision, as is lending money to someone in that position, she says.

For those and other reasons, most notably still record-high inventory levels, Sonders believes home prices are likely to fall another 10%-15% before bottoming.

Update: Sonders' concerns about inventories were borne out in Friday's existing homes sales data. The National Association of Realtors said existing home sales dropped 1% in April, which was actually a smaller decline than economists' forecast.

But inventories of unsold homes rose to a 10.7 months supply, the highest level since June 1985.
 

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