Moderates make up the majority of the market but as we all know, housing prices are set at the margin.

Well said.
Now, prices are set at the margin… if moderates “withhold their vote” pushing prices down… it delays their buying.

Again, I’ll buy before prices hit bottom (partially for tax reasons, partially as I put a higher utilization value on a house than the average bear). But for now… its only sensible to wait.

I like the strategy my fiancee proposed; we’re going to live from our May wedding on (well… after the honeymoon) as if we just bought a $850k home. (Tax, mortgage, insurance, and other assumptions apply. The “difference” to real income goes into investments managed by her.) You see, we have a $100k disagreement on what price of home we can afford. If she is right… we get a $850k home. If I’m right, we’ll buy a $700 to $750k home.

Oh… the added savings aren’t for the down payment. Its for “play and furniture money” so that the first few years of home ownership isn’t as financially ugly as it might be.

So I guess this is a moderate strategy. I simply accept that home prices where I want to live will never hit 3X income. Cest la vie. But 11.4X?!? Every cycle they’ve dropped to 6X (from 8X).

So wait… see… watch inventory… incomes, etc. But I plan to buy when the downside risk is only $100k. (I currently estimate a $250k to $500k risk on the properties that I like.) Yes… buy before a clear bottom.

But my spreadsheet with reasonable home appreciation assumptions, etc. needs to stop screaming sell and instead say “buying isn’t so stupid.” (Again, a $100k of risk is not going to kill me. But $500k… yikes!)

Got popcorn?
Neil

ps
I’ve lurked on this blog a bit.

What? You mean to tell me I can’t believe that tanned man in the late night infomercials trying to sell me a package for three “easy” payments of $99.95 that will allow me to net $20,000 cash flow a month? Darn, I knew it was too good to be true.

Jessica.

There are three books that you should read:

Automatic Wealth by Michael Masterson
Life 2.0 by Rich Karlgaard
The Millionaire Real Estate Investor by Gary Keller

These books should offer you a balanced approach to real estate and evaluating real estate. Life 2.0 will help explore the larger issues of living in a place you love and factoring price as well. Automatic Wealth focuses on building wealth by increasing your income from working hard in your profession, investing in some real estate, stock investing, and having your own business.

If anything, I enjoy and have gotten a lot out of these books because they focus on real estate as a part of your portfolio and not a get rich quick scheme. No Hawaiian shirt tanned man selling you $20,000 per month simply by following their program. As someone who owns rental property I realize that the most important thing in purchasing real estate is understanding the financing behind it – the Millionaire Real Estate Investor should give you some solid ideas on getting the price of a property…a simple hint, not one property in California will work with their numbers.

Cheers,

Dr. Housing Bubble

It doesn’t happen very often in Southern California. Last time was in and around 1997. It tends to happen at market bottoms; in fact, it is one of the reasons a bottom forms.

The main reason some people still rent in that environment is because renters generally lack the downpayment that used to be required to buy. The downpayment requirement used to be a barrier to home ownership, and as such, tended to keep prices a bit lower. Once the 80/20 combo loan because common, this barrier was removed, and home ownership went from about 62% to about 70%. It is also one of the reasons this bubble took off.

As Dr. Housing Bubble pointed out in his post, if you wait for rents to align with payments, you may never buy because it might not happen. Generally it does at market bottoms, but it doesn’t have to. It didn’t in the Bay area market during the 90’s downturn.

Personally, I think it will this time because the flood of foreclosures to come should drive prices down pretty low. It may even overshoot the rent/own breakeven point in favor of ownership. There is another level of support where rent actually provides a positive cashflow for investors. This is a very durable support level that is never breached for very long.

Also, keep in mind that the rent/own breakeven price point probably will not be reached until 2010 to 2012. IMO we will have strong declines for 2-3 years lowering prices 30% or more. After that we will probably have another 2-3 years where prices drift down slowly until a durable bottom is formed at prices about 40% below today. I believe it will take that long and go that low because all these exotic mortgage products with 3, 5, and 7 year terms utilized over the last 5 years will need to reset and force an underwater homeowner to sell. Until all these timebombs have detonated, I think it unlikely that prices will appreciate. If you are buying because you are looking for appreciation and you want to catch the next wave, you will probably be disappointed.

Dr. Housing Bubble, I am very interested in learning more about investing in real estate and creating passive income. I was in the local bookstore the other day looking for information on the topic and was surprised to see just how many books there are on the education of real estate investing, real estate market economics, etc. Could you, or anyone else for that matter, recommend the best books from which to learn?

A very appreciative,
Jessica