Saturday, August 27, 2005

Pay Attention Now, or Pay Later

Wise prognosticators like Robert J. Shiller use very precise language for a reason. Pay particular attention to the words used when someone predicts a drop in housing prices of "40 percent in inflation-adjusted terms over the next generation." That doesn't mean a $500,000 house is going to be $300,000 next year. First, understand that a "generation" can last 10, 20, 30 years or more. And then you have to adjust for inflation. Consider it this way:
Using ONLY inflation-adjusted dollars:

Purchase a $500,000 house in 1980

House value stays flat for 10 years

Same house worth $500,000 in 1990
(You'd have to spend $853,759 in 1990 inflation adjusted dollars to have the same buying power as that $500,000 had in 1980)

LOSS: 41 percent, or $353,759 in inflation-adjusted dollars.
An article by Holden Lewis of underscores this point. The Lewis article is addressed to "Bubble Sitters," those who are waiting to buy a house until the bubble pops and prices fall. According to Lewis the "Bubble Sitters" might be waiting for a very long time:
Should you rent and wait to buy a house after prices fall? Don’t get your hopes up. If history is a reliable guide, home values in your target neighborhood probably won’t fall. But they might stagnate long enough for your income to catch up to prices.

This year the Federal Deposit Insurance Corp. prepared a research report titled, "U.S. Home Prices: Does Bust Always Follow Boom?" The answer to the question in the title is ‘no.’ Sometimes a housing boom ends not with a decline in values, but with prices leveling off or rising slowly.
Like I said... Pay attention to the words.

Find the Holden Lewis article at the Portsmouth Herald in Portsmouth, NH.

— The Boy in the Big Housing Bubble