An anecdote to clarify what I’m talking about. When I moved to SD in 2000 I bought a condo that would have broken even on a cash flow basis if I had decided to rent it out – that’s right, broken even… maybe even provided a small positive cash flow. And this was in a reasonably nice, albeit 20-year old, complex (maybe that’s an oxymoron – I don’t know). From the price history I could tell that buying one of these units at any time between 1996 and 2000 would have given you break even or slightly positive cash flow using traditional financing (20% down, fixed-rate mortgage) and then-current rents. Now perhaps that was unusual at the time. I wouldn’t know as I had just moved to the area. In hindsight, obviously, I should have bought a much larger, pricier place. I had no idea how crazy things would get.
Anyhow, I sold in 2004 (for a bunch of different reasons at the time) as the ownership premium we have been discussing had risen to about 160%. The premium then rose to almost 200% over the subsequent year-and-a-half (yup, I left money on the table) before declining back to around 160% today. (I track this complex as a market bellwether because I’m familiar with it.) My suspicion is that the premium will decline further to 120% or less before this decline is finished.
My point is that the people who bought at 160% probably won’t see much appreciation over an 8-10 year time horizon, so there’s no need take such appreciation into consideration – it probably won’t be there. Which is one of my points – this premium is telling you the degree to which you’re overpaying on the fundamentals. I’m highly confident that if you consistently pay a 150% premium to own/live in a house/condo, in most cases you will experience minimal appreciation over the subsequent 8-10 years.
(Also, I’d love for someone to pull these figures – I’m too lazy – but my suspicion is that residential rents in SD County have not increased by more than 3% per year on a PPSF basis since 1990. They almost certainly have since 2000, but it wouldn’t surprise me to see 2% increases over the next several years. Most this type of rate-of-change analysis is highly dependent on your starting point.)
For the record, the only reason I own now is because I ran across a (crazy) seller in a building I really liked who was willing to leave a big chunk of equity in the unit and assume virtually all of the downside price risk over the next few years. (It’s a very complicated transaction – I won’t bore you with the details.) I’m paying a 115% ownership premium, which is fine with me. Otherwise, I would have been content renting for several more years.
Having said that, I could buy my place and your place for cash tomorrow. But the accumulation of that capital didn’t come from buying dear and selling cheap, but rather the other way around.
