Tuesday, January 27, 2009

When is a good time to buy a house?

This is the Case-Shiller housing price index. It tracks the pricing of the same set of homes that are sold and resold. Many economists prefer the Case-Schiller index to the more widely reported "Median Home Price". The reasons for this preference are twofold:
1) You are tracking the value of the same item over time, so there is no need to get fancy trying to infer the value of a newer home in comparison
2) Median is an average. It is very sensitive to outlying numbers. As an example: Five guys are shooting pool in Trout's. Their median income is $30K. Bill Gates enters the bar and joins in for a set of 9 Ball. The median income has just risen to $29.6 Billion (Gate's 175.6 billion in Dividends from Microsoft shares divided by six people)

Back to Case-Schiller (the superior housing value indicator ;)
I am by no means a real estate expert, but I CAN read a simple chart. My thought is that if you purchase a house right now, you will experience a prolonged loss of value over time.

From the look of the long-term trend, 70-75 appears to be the correct range for a non-bubbly housing market (i.e. where you get fair value for your hard-earned money). There is a distinct possibility that the market will overcorrect on the way down, possibly to the 60-65 range.

How far the trend drops depends on how much revulsion there is to real estate after people's wealth has been destroyed. Remember the suspicion toward dot.com stocks after the tech bubble burst? This may be the same afterwards.

On the other hand, even now it still appears to be a great time to SELL a house - assuming you can find a qualified buyer, that is! ;)


(Click on image to enlarge)


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