Real Estate bubble bust may be worse than Dot Com bubble bust

risky. he's banking on the fact that boom or no boom, rich kids go to vanderbilt university here... and daddy will pay for the nice "condo" that's near bars, class, and all the other rich kids.
m.

But that's only in the short-term. In the long-term the rents will even out with the mortgage costs. And if there are any long-term investors in the market, they will affect the prices you can get.

geyser, nobody is paying attention to the rent ratio. They're paying attention to the free money. Everything just keeps appreciating, it's like magic, the prices just keep going up and up!

This paper by a couple of physicists shows the whole thing coming down on top of us in mid-2006.

Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.

America's ratio of prices to rents is 35% above its average level during 1975-2000 (see chart 1). By the same gauge, property is “overvalued” by 50% or more in Britain, Australia and Spain. Rental yields have fallen to well below current mortgage rates, making it impossible for many landlords to make money.

To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America's ratio of house prices to rents back to its long-term norm. Elsewhere it would take even longer. It seems more likely, then, that prices will fall.

It's a renter's market because a lot of people are moving on from renting to buying, people in that echo boomer age range who all decided to settle down at once and caused a 'housing shortage' to crop up at the same time the investing populace of all ages decided condominiums were a better bet than tech stocks.

I guess I'm a bit confused by this statement. How will the market not permit widespread losses on rent? Will owners just hold out and lose money until they can get what they need? Will renters just pay whatever landlords say? There are plenty of places that were bought years ago that don't need to get the kind of rent required to cover recent mortgages.

If the demand is not there at a given rental fee to cover mortgage costs for a certain price paid, then a loss will be generated. Since so many people are buying at inflated prices (economist cites NAR figure of 23% of houses bought in 2004 were for investment purposes), the possibility seems entirely plausible.

$315,000. I put 10% down, because I can, and my coworker here says he got a deal from Wells Fargo at 5.5% 30-year fixed.

That's $1,618.20 a month according to Bloomberg.com, not including the condo fee, maintenance, closing costs and all that jazz.

Right now I pay $1250 in rent, plus electricity, and that's it. That affords me the ability to put at least $400 a month into investment accounts which will hopefully weather this bullshit.

Also the building I live in is fucking old as hell, $315K? Fuck that! Sucker even covered up the hardwood with carpet.

-- geyser muffler and a quarter (right.knewi...), July 12th, 2005.

The Economist had an article maybe 6 months ago saying the exacpt opposite -- that in MANY housing markets, right now, it's cheaper to rent than to buy. Potential rental income may be a large part of what drives value (if there is such a thing), but only supply and demand drive price.

Of course, this is for the reasons stated above -- investors buying lots of properties, property flipping, general market euphoria and/or panic.

Rental incomes are much more tied to reality, I think -- because you're not dealing with mortgage loans, people can only pay what they can actually afford to pay. And investors aren't renting, so there's not all that artificial pressure.

Also, when enough people are buying, it means those same people aren't renting, so less demand for rentals. And vice versa.

but you'll pay less in taxes if you're paying a mortgage which might more than make up for this difference; factor in the equity you gain in the condo and you could well come out ahead. but I'm not an accountant so maybe not.

I pay less in FEDERAL taxes, but the county and the state could give a shit. If I factored that in, which the bloomberg calculator doesn't, I suspect my ACTUAL monthly payment would be even more.

if you have at least 1 functioning brain cell, rent don't buy. let the stuff that comes w/ buying be some other shithead's problem.

-- carbon (identitymachine...), July 12th, 2005.

Or, in the case of Jersey City, IN the ghetto. $375,000 for a two-bedroom. Not even near the PATH. One of its selling points is "walking distance from HOBOKEN." !!!???

HAHAHAHAHAHAHAHAHAHA wtf seriously?

so i really don't blame those of you who are totally uninterested.

i guess it's just possible here. you really CAN fuck up here too, but it's possible to buy and it not be totally insane.
m.

It will almost certainly not have a great room, those things kind of skeeve me out.

And we didn't buy on speculation, either. We bought because we are having a third kid and we need the living space.

"Walking Distance To Hoboken" should be a ska song.

it's a good thing that you didn't make this recommendation a few years ago, tombot, seeing as that point there were more ska-bands in the hoboken/jersey city area than there are flies swarming around a freshly-squeezed batch of horse shit.

Does the *shudder* World Inferno/Friendship Society still exist?

apparently