Comments on: The Rent vs. Buying Dilemma: Mortgages the Southern California Way. 3 Factors to look at: Increase Rental Prices, Housing Price Declines, and Tighter Credit Markets.

By: tim foster

tim foster — Sat, 29 Dec 2007 04:20:15 +0000

[…]
A couple quick thoughts.
1. The bubble will not burst until 2008. That’s when a majority of Arms will come due and foreclosures will start to saturate the market. In 2009/2010 you will see people think they are picking up real estate at a low value, so we will get another small peak in real estate. End of 2010 will start a recession type period and home values will really plummet over the next four years. I do not want to put all the stats here, but read some of the literature by Harry Dent.
2. People who claim that Southern California is a desirable place to live and there is a lot of demand for housing have to realize that there was not a worldly climate change that suddenly made Southern California so great. It has been desirable for a long time. It is merely speculators with deep pockets looking for a quick buck that made buying desirable.
http://www.johnbeckland.com/
[…]

By: CHESSNOID

CHESSNOID — Fri, 12 Oct 2007 04:13:12 +0000

Great post Dr HB. I grew up with the value that renting is equivalent to throwing your money away. I think the environment we are in now has changed that idea. Your analysis on the numbers makes sense.
Keep it up. I enjoy reading your blog.
Cheers!

By: Nathan

Nathan — Thu, 11 Oct 2007 18:42:18 +0000

I’m just a beginner - but if I understand this correctly, renting would only make sense if:
property appreciation rates increased; or
rents increase/property values decline such that the rental rates are more inline with monthly mortgage payments.

By: Mike J.

Mike J. — Thu, 11 Oct 2007 17:53:03 +0000

Just found the site. I really enjoyed the article. This whole housing thing is out of control in California.

By: Dr. Housing Bubble

Dr. Housing Bubble — Thu, 11 Oct 2007 04:57:53 +0000

“I think your analysis is flawed because you’ve assumed that you can earn 7% on investments. I don’t think you can do that with equivalent risk.”

The assumption here is that there is equal risk with buying real estate. In fact, I would say buying real estate in the current market place is more risky then buying stocks or investing in other avenues. For the past few years, my portofolio in commodities and energy is doing much better then 7 percent. Biotech has also been doing well.

The purpose of this article is to highlight that buying in high priced areas does not make sense in the current market. However, I own cash-flowing real estate out of state which does make sense. And the one other benefit from owning property is leverage. But the analysis is for high priced metro areas and by running the numbers, buying right now doesn’t make sense.

And you are only looking at CDs and other low risk investments. Real estate in high priced areas has the misconception of being a safe investment; if anything, it is a short-term speculative play. You might as well short stocks in specific regions based on employment numbers, weather conditions, and population trends.

Simply following a one track strategy will never get you to financial success quickly. You can always follow the typical wealth building strategy of putting 10 percent into your 401(k) for 30 years and have a decent nest egg (assuming inflation doesn’t kill your return); but you need to think outside the box in the current marketplace to be profitable. That may include short positions, aggressive plays in certain sectors, and buying in underpriced areas. My guess is most people that read this site are looking to buy in high priced areas and are simply looking for an entry point in the market. With the current pro-housing rhetoric, it is clear that someone needs to run the numbers and offer a clear analysis that buying right now makes no sense. Never did I say people shouldn’t buy ever. What I did say is there will be a time to buy, simply not now.