Sunday, February 01, 2009

"Now's a good time to buy"

I hate it when I hear people say that, but I hate it more when people believe it.

Consider this, in May 2000, the Nasdaq had fallen 35% from its height. Did you think at the time it was a good time to buy, just because it was cheaper than it was before? Hopefully not, because you would have lost more than 60% on that investment over the next two years.

A deflating bubble is not a good time to buy, it's a good time to watch. The only time to buy is when there's confidence in that market.

The case in point today is the housing market. How many times have you heard someone alluding to it being a good time to buy over the last year or so? For me, it's plenty. And they're all wrong so far. The market has kept dropping even though people say it's a good time to buy.

So when I look at a crappy house in Burlingame where they're asking $1m for a house with a musty, spongey floor and beer mirrors on the wall, I just have to laugh a little.

Now, if you think you're paying a fair price for that house, then bless you... you're helping all of the homeowners on the block. But consider this house for rent, a block away, for half the price of a mortgage on the first house (assuming 20% down).

Buy a smaller house for that much more than renting a bigger house, in a climate where the prices are almost sure to drop? No thanks.

If you don't believe me that real estate has much further to fall, consider this tidbit gleaned from Mish's blog:

"Moreover, historically, the ratio of real estate loans to cash averaged 1.25 to 2 (!!!) on a sustained basis, whereas the ratio at the unprecedented hyper-leveraged point in 2007-2008 reached 12-13:1, with real estate loans as a share of all bank loans reaching almost 60%. Real estate loans/GDP topped out at 26-27% (!!!)."

If that's not a recipe for disaster, I'm not sure what is. Mattress, meet your friend Benjamin Franklin.

1 comment:

Clong said...

But it has an ESTABLISHED Magnolia tree. Not some little whipper snapper tree just trying to break into the business. Worth at least $200k, no?