Housing On the Way Down

For all of you who are thinking of buying a home: stop right now, and wait. Those houses you are looking at will be cheaper in about eighteen months! Here’s a great article from the New York Times: Drop Foreseen in Median Price of U.S. Homes

The biggest lesson to take away from the information in this article is that real estate is not a certain and great way to build capital. Despite the evidence of the last ten years. There have been at least two long stretches of time when home prices did not rise very quickly and barely kept up with inflation. You would have been much better off investing in a portfolio of stocks that mimicked the S&P! Anyone familiar with the economy knows that, over the long haul, stocks are by far the best investment, beating housing by a long way. People forgot that, and piled into housing as if it were never going to be a problem. That was and remains irrational.

You should buy a home only when it is cheaper than renting. And you should sell your home and rent whenever renting gets to be cheaper. Of course that’s difficult to do because the tax laws are skewed toward ownership; you can’t always tell when renting is a better option; and ditching a home is tough in a down market like now. But please people: let’s be sensible and evaluate home ownership as an economic decision, not and emotional decision. Most people I know are totally irrational about home ownership and still cling to the idea that it a safer investment than the stock market. Not true!

The point is that all investments bring with them risks. Right now housing is a rotten investment. Given the size and scope of the house price bubble that is now bursting I would estimate that it will be years before we see real gains in house prices across most of the country. Only in areas of steady population growth and/or desirability will prices rise. And even there not by much.

The relationship to keep an eye on is not the absolute level of prices, but affordability which is the ratio of prices to incomes. That relationship is way out of whack at the moment because incomes have been stagnant for most wage earners [only the really wealthy have seen incomes gains during the Bush era]; that means affordability will have to fall back in line. that can happen in two ways: either prices fall; or prices stay where they are [i.e. stop rising] and wait for incomes to catch up.

That has been my position throughout this bubble. It remains my position.

All of you wanting to buy a home: don’t. Save your money, keep renting and wait for prices to fall. then buy in late 2009 or early 2010.