Monday, December 19, 2005

To Buy or Not To Buy, That Is The Question

The housing market has changed dramatically in the bubble markets since the summer time. Back in the summer bidding wars were common and inventory was very low in the bubble markets. Those days are long gone.

Today, a new reality faces both buyers and sellers. Inventory has increased rapidly in the past 4 months in the bubble markets. In Phoenix, inventory rose from 10,748 on 7/20 to 27,684 on 12/17 according ZipRealty and Bubble Markets Tracking Inventory. Some real estate agents are even claiming that is it a buyer's market due to the increased inventory, lack of bidding wars and the small reductions in prices.

So is it a good time to buy in the bubble markets?

Real prices will continue to decline in the bubble markets for many more years. The bubble markets will experience price decline of at least 20% in real dollars [inflation adjusted] over the course of 3 years. In most bubble markets, the peak price was reached in June, July or August of 2005. Many bubble markets will experience real price declines much greater then 20%. Some may experience price declines of 60% in real dollars over the next 3 years. Of course some markets may keep on declining for more then 3 years.

Just as importantly, monthly rents are cheap compared to buying in the bubble markets. Buying in the bubble markets generally costs 1.25 to 2.5 times the cost of renting ( for a similiar property; assuming 30yr fixed, solid credit, property taxes, and typical interest rate tax deduction). Each month hundreds if not thousands of dollars can be saved and invested.

Buying in a bubble market does not make financial sense. As housing inventory continues to rise and prices decline there will be lots of buying opportunities in the future. This is not a seasonal dip. If you earn a reasonable income it is an absolute fallacy that you need to "Buy now or be priced out forever." Renting and waiting is fiscally prudent. Don't be fooled.


  1. Buy in a bubble market, and catch a falling knife. I bought a new townhouse in 1989 in Connecticut, because prices had fallen 7% from the year before. Well I caught a knife- and prices fell another 6 years-till late 1996. How much? another 30%-which is about 5% a year. Buy now weep- you may not get back your purchase price for many years.

  2. absolutamente, per favor.

  3. Let's see. For 12 years I owned and never saved a penny. I sold 2 years ago, banked 240K, and now earn $1000 a month in interest. I've thought about buying, but it doesn't seem to make sense. Currently I pay $800 a month to rent a great apartment in the heart of Boston and last year was able to save $20,000. As a minimum would the $600,000 house I might buy today appreciate 20k a year for the next five years? Something tells me no. I'm just as happy renting as owning.

  4. I'm having trouble too, giving up the idea of renting this nice place at a good price. My strategy is to wait until prices drop noticeably in the neighborhoods I care about, then to make lowball offers under those new prices.

    Sooner or later I'll catch someone who is desperate to sell. My strategy is to check the tax records and try to find a property that, if sold at my lowball price, would not cause the owners to have to bring cash to the table.

    And if it doesn't work, so what? I just wait longer, very comfortable in my rental unit.

  5. A little off topic, but I am considering CT skytrekker - any updates on the housing situation up there? Fairfield County specifically? Your scenario is my biggest fear - I want to buy a house, have kids, the way I always imagined it - but my senses are telling me that it's not going to work out that way for me unless I want to lose a boatload of cash. No one seems to follow the CT bubble, so any input would be appreciated.

  6. Personally, no way.

    There are plenty of nice places to rent.

  7. I don't know - you guys seem all of one view. I rented out a condo in DC just last summer that I had bought one year before (September 2004) and the rent is covering all my costs - not building a huge cushion for repairs or anything (but the place is just two years old) and not paying down principal (which is not an economic cost anyway, but a cashflow issue). Based on most recent comps in the building, I estimate the place has dropped about 3% in value from this summer.

    While this situation is not great, it doesn't fit the doom and gloom of you bubble hypers. As a contrarion value-oriented investor over many years, I've even begun to look on the unanimous consensus shaping up around the housing bubble as a contrarion indicator that things will not drop anywhere near as drastically as some people have suggested. For example, the suggestion that pruces couild drop 60% in real terms over the next three years is an outrageous, hyped up number for all but the most bubblicious markets.

    This is the view from someone who is generally sympathetic with bubble concerns. I will list in March a second DC condo that I bought in 2002 because I don't want to be overleveraged when prices will clearly drop. My point is to highlight the risk of _overselling_ the potential downside.

  8. "For example, the suggestion that pruces couild drop 60% in real terms over the next three years is an outrageous, hyped up number for all but the most bubblicious markets."

    The 60% real dollar price drop is for the most bubblicious cities like Bakerfield, CA and some other cities that have experience ridiculous price appreciation over the past 5 years. Most bubble markets will NOT experience such huge real dollar price declines.

  9. To anonymous 7:51,

    In my opinion, things haven't completely collapsed yet, so they don't look awful right now. But they still have plenty of time. The NASDAQ still looked o.k. in April 2000, but it was past its peak already.

    In many markets, prices rose far more than 60% over the last 5 years. Why do you think a 60% decline is outrageous?

    I think a 60% real decline (or much more) is coming for many areas. Now I doubt the government will sit by and let that happen in nominal dollars- there will probably be plenty of inflation to mitigate the fall in nominal terms. But in real terms, I would expect house prices to go back to no more than 3 times local income, and much less for older houses in rougher neighborhoods.

    In the DC area, this would translate into a fall of at least 60%.

  10. Anonymous -- please do three things for us:
    1. Tell us today the price you expect to be asking in March.
    2. Tell us in March the price you just listed at.
    3. Tell us, whenever you close on the property, how much you got.

  11. Wait a second - he said he bought a condo in September 2004, in the first paragraph. In the second paragraph he describes himself as a "contrarian value-oriented investor."

    Listen up, Anon 7:51. Condos in DC were up five to six HUNDRED percent in September '04, over the preceding 7 or 8 years. People in September 04 were fighting, through bidding wars, to buy them. People were, literally, sleeping in line on sidewalks all night to have a shot at buying in new developments.

    Those two, publicily available pieces of information should have sent any "value-oriented, contrarian" running for the hills, clutching his wallet. And the only "unanimous consensus" that housing prices will fall is found on websites like this, where very small numbers of like-minded people gather, in disbelief, to watch the madness and share their observations. (Take a bow, David)

    I will state flatly, as I have before, that throwing numbers out, like 10%, 20%, etc., is a fool's game. No one knows, no one, what will happen tomorrow or next week.

    All we know is that historically, any huge run up in asset prices (see DC condos, above), fueled by easy money and captured in the public's imagination as a "can't lose" investment, always ends very badly. Always. There are no "permantly high plateaus," no "soft landings."

    If you are indeed in the market for "investment purposes," and you came that late to the party, I would get the hell out while you still can.

    And hey, thanks for stopping by and sharing your insight.

  12. dc_too,

    Thanks for posting your thoughts. I agree. With all your insightful comments there is much less need for me to comment on the comments.

  13. Nigal

    Fairfield county is among the highest priced places in the nation- If possible I would avoid the entire county. You might try Litchfield county- in the western part of the state- some great buys in Torrington- I live a mere 65 miles from Toney Westport- and the price differences are incredible. Are you going to work in NYC? If so the cheapest place would be Milford and West Haven-both in New Haven county and along the shoreline- prices here are much more reasonable- the commute into NYC is longer- but most take metro north into the city anyway. The best bargains in Connecticut are in Tolland and Windham county (eastern Connecticut) and New London county (which is on the ocean) A new Colonial in Coventry CT in Tolland county -a mere 22 miles from Hartford on nearly 2 acres, 2500 square feet- basment, double garage, 3 bedrooms 2 baths, hardwood floors, fireplace, around 315K. This area is attracting New Yorkers, burned out Wasgingtionians, Many from Boston, Some Californians and even those from hurricane thrashed Florida- Housing here is low- relatively speaking, compared to Fairfield county (where the same home would be over a million) and in The Boston and Providence Metro areas. I feel there will be a correction here- but not like what was experienced in my post above. This time the builders have not overbuilt- so the fall here will be limited to 10-15% over the next few years.

  14. Also Nigal

    Prices have gone up in Connecticut everywhere- condo's SFH -however compared to the NYC area- which includes Fairfield county- the state is a relative bargain compared to DC/NVa- all of California, many parts of Florida, and again metro NYC.

    I would not be overely concerned that you will loose lots of cash here- the inevitable recession from this bubble will be felt here- but since the state is not dependent on real estate for growth- the decline here will be much less severe.

  15. Thanks skytrekker. My commute is a concern - I work in NYC now, and although I don't want to forever and neither does my husband, it could be that way for a while. Plus I want kids soon, and a long commute kind of kills that idea (for me anyway - I know people do it so I won't judge but I'll be a first time mother - no way am I going to have that). I will look into the commutable areas that you mentioned that are cheaper than Fairfield.

    Our dream is to eventually move to a place that is much more rural, with some grass and space - I would love to live in eastern CT along the water, but I fear that's a few years off!

  16. Nigal

    look into the following towns in New Haven county, West Haven, North Haven, Orange, Milford, Trumball, and Woodbridge- all have reasonable prices that are much less then Fairfield county- In Litchfield county, New Milford is very pleasant with a charming downtown and reasonable housing prices prices- and less then 2 hours into the city. Here is a home built in 1994 1700s quare feet colonial see 275K as I said about 2 hours from the city. I feel this is very reasonable compared to greater NYC and northern NJ- there are some great housing bargains in Connecticut, considering its location, closeness to urban centers, yet peaceful countryside and ocean.But as I said above FAIRFIELD COUNTY- it is overpriced. Eastern Connecticut is 'hot' and is attracting many- rural, small towns, and proximity to Boston (1+ hour) Providence (35 minutes) Hartford (30 minutes) and the sea coast- with beaches in Connecticut and RI nearby.