[quote=urbanrealtor]PR, I like your reasoning and would like to engage you on two points.
1:
The problem with what you are saying PR is that it assumes that you can both effectively discount risk out of a successful purchase and still successfully compete as a buyer.
In my experience, achieving perfection in risk management (especially by discounting) is desirable but not practical.
If one is to drop a price in order to avoid being upside down, then in most purchases there will be another buyer who is marginally more risk tolerant.
2:
The other issue is that if, as history would suggest, home price dynamics reflect household income, then it may be rather safe to assume that values will increase in the long term. I very much agree that the boom was unsustainable but the historical trend tends to oscillate around income oriented coefficients. Those coefficients are relatively constant and those income numbers tend to increase over time. Ergo, housing tends to increase over time. This is not bullishness but an observation of visible data. Most of it has been pointed out by Rich.[/quote]
ur, I agree that you cannot simply order that the price of a specific property be lowered until it satisfies your own risk comfort level. What I am saying is that most people should be computing that comfort price level first, assuming (for safety) some depreciation, such as 30%.
Then go find the property that you like best for that price. It might be smaller than the home you’d like (if you didn’t ever have to actually pay for any of it), but it’s what you can really afford.
On the notion that house prices track with incomes over the long haul, I basically agree. However, the assumption that the deviation from the growth in incomes will be benign, or won’t last very long, is not reliable. Just as stock prices can go through lousy 20-year periods, so can house prices. We just have seen only the opposite for 20-year periods in our lifetimes, and that means we tend to assume a bad 20-year period is too unlikely to worry about. But take a look at the long Shiller indexes, and you can see that recent home prices were more inflated than at any time in recorded US history. Unwinding that over the next 20 years means it’s more likely we’ll see unusually bad returns – quite possibly net losses, after inflation.
