Sunday, October 30, 2005

The end is here

I promise that this will be the very last post on real-estate.

The mainstream press has not yet highlighted this, but prices have fallen close to 20%, since March, in some neighborhoods in the hottest real-estate markets of San Diego, Boston and Bay Area. When these numbers are uncomfortable, you usually get to see from beginning of the year and from the same month last year figures!

Stocks of home-builders have fallen an average of around 30% from their recent highs, and some have lost 60% of their value. If you believe that there is no bubble, you should be buying now. I personally think that this bubble is bigger than the dot-com bubble. With the tech bubble, even in the final stages, there was atleast a hint of innovation/new technology. The only innovation in the real-estate bubble has been so called creative financing i.e lending to people who in their right minds should not be borrowing to buy a house.

So, how much do I think home prices will fall ? In the Bay Area and Boston, I see a 60% fall from their highs. I could be wrong - at the height of the tech bubble, I responded to a few (and they were not happy with my response) friends that JDSU could lose 70% of its value. I was wrong - JDSU at today's price has lost around 97% of its value. This is a company with real assets, real technology and patents. If my numbers are wrong again in the same league, brace yourself for a long recovery period.

Buying a house with the intent to stay in it for atleast 7-10 years should still be fine, as long you don't expect it to appreciate in value. But (I have heard this too many times now), seeing it as the only and the most desirable way to build so-called equity is just not smart. Within a couple of years, a lot of people will have negative equity, courtesy their homes.

If you are still in doubt, study the Japanese real-estate market.

As for renters, unlike in past housing busts, this time, after a initial increase in rental prices, the rents will also come crashing down given that so many of these houses were bought as rental properties. So, if you are among the ones who decided to rent, don't take a long-term lease - go month-to-month.


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