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.
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absolutamente, per favor.
ReplyDeleteLet'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.
ReplyDeletePersonally, no way.
ReplyDeleteThere are plenty of nice places to rent.
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.
ReplyDeleteWhile 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.
"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."
ReplyDeleteThe 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.
To anonymous 7:51,
ReplyDeleteIn 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%.
dc_too,
ReplyDeleteThanks for posting your thoughts. I agree. With all your insightful comments there is much less need for me to comment on the comments.