August 13, 2005


Do Try This at Home: Assess Your Area's Real Estate Bubble (DAMON DARLIN, 8/13/05, NY Times)

This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.

When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation. [...]

Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.

But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.

Except that there are no renters at block parties.

Posted by Orrin Judd at August 13, 2005 5:29 PM

Huh? I've never seen a block party in the three neighborhoods where I lived in homes my family owned. Only in cities, while renting.

Posted by: Rick Perlstein at August 13, 2005 6:24 PM

The real disparity is at least twice as large as these numbers suggest. The owner buying in California today will also have to pay $1,200 a month in property taxes. This raises his cash cost from $3,775 to $4,975/month, more than twice what the renter pays... I don't know why this important factor gets neglected in so many similar comparison exercises.

Posted by: ZF at August 13, 2005 6:58 PM

Don't forget the $140K downstroke.

Posted by: Robert Schwartz at August 13, 2005 8:21 PM


Your neighbors not like you? We have at least one a year.

Posted by: oj at August 13, 2005 8:22 PM

He is your friend, OJ.

Posted by: Robert Schwartz at August 13, 2005 8:31 PM

The comparison between owning and renting is a little more complicated than shown due to factors such as property taxes and other ownership costs, but there are also the tax benefits from interest deductions. Perhaps the biggest difference is more intangible--commitment. The renter is involved, but the owner is committed.

Posted by: Kurt Brouwer at August 14, 2005 4:03 AM

Not according to Orrin, who believes that the "owners" should just walk away when the market heads south, which makes them renters who overpay.

Posted by: Michael Herdegen at August 15, 2005 2:45 AM

Renters don't have any equity.

Posted by: oj at August 15, 2005 7:50 AM

People who buy $ 720,000 condos in San Diego aren't going to have any equity until 2012 - if then.

It'll take the "owners" probably fifteen years to break even with the renters.
So, if one thinks that one will be spending a generation in San Diego, by all means, buy.
If not, rent.

Posted by: Michael Herdegen at August 15, 2005 8:52 AM

People who buy $720k condos aren't going to rent even after the bubble bursts. They're too wealthy.

Posted by: oj at August 15, 2005 8:56 AM

Not in San Diego, they're not.

They're middle class.

That's the point.

That's why it's an unsustainable situation.

Posted by: Michael Herdegen at August 15, 2005 9:45 AM

The American middle class is wealthy. If they don't live in a $720k house they'll move to a $400k house. That house will cost $700k in 2008.

Posted by: oj at August 15, 2005 9:58 AM
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