Now before we get to this next part, it probably applies to first time home buyers who are single or married sans kids.
Around this point my buddy msgnet made a spreadsheet to analyze returns between investing in the stock market and owning a house. He blogged about his interesting findings as to why a house isn't necessarily the best idea for everyone because of the interest that one pays and so forth. While we dont necessarily get along on politics, he is spot on his analysis. Worth a read here .
Now that housing prices are dropping everywhere, I have heard a lot of people around me talk about how now its a great time to buy. This time around I have some cash saved up and could probably spring for a down payment but I wanted to do my research and go in armed with information. A few months back I found some rather interesting data from, Yale Econ professor, Robert Shiller's web-page. Robert Shiller is one of the creators of the Case-Shiller home price indices that are widely used as a benchmark for housing prices.
He has an excel file that tabulates inflation adjusted prices (actually the index) over the past 120 or so years. Shown below is a chart that spans the full data range. He actually called the housing bubble a long while back in his book titled Irrational Exuberance .
One can infer a few things from that chart. Housing prices, over the past 60 years or so, have remained roughly flat with inflation. This is not all that surprising, really. The second is that we just experienced the biggest housing bubble in recorded history. What could explain this bubble? Its not as if the US population shot up all of a sudden or that land is all of a sudden scarce. Building costs aren't sky rocketing either. One reason would be if borrowers had easy access to credit and the pace of new construction doesn't catch up with the rate at which new buyers get their hands on credit. Enter the sub-prime mortgage mess and it all makes sense.
Now here is a plot since 1980 that shows the bubble and the aftermath.
As one can see housing prices are still falling, precipitously so. This is the market correcting for the bubble and it has not bottomed out. I would expect it to get back to its historic level since nothing has changed fundamentally and access to credit isn't going to be what it used to be. In fact I wouldn't be all that surprised if prices dropped below historic levels since we are in the midst of a recession and incomes are probably going to be lower over the next few years. So what does this all mean. As long as my money is invested someplace that matches inflation and I am disciplined about putting away money in an IRA or some other tax efficient investment, there is no need to rush back to the housing market. If the housing market drops below historic levels, a nice buying opportunity ensues and even if I miss the bottom, it is not as if I will be overpaying for the house given that inflation adjusted home prices historically remain flat. So there, that is why I am not buying a house.
Here is a link to Robert Shiller's data and if it not updated in the future, its easy to do it yourself if you look at the methodology.
