NYT: The Hidden Truth about Home Prices

[sdrealtor]

PC,
“People need to learn to manage their personal finances like businesses. A business doesn’t care if it owns or rents the building that it’s located it. The important thing is the profit to the shareholders at the end of year.”

Tell that to the wives and children of the world. I disagree on this one. If you run your personal finances like a business your will be very lonely. Your kids will never go to Disneyland as it’s not a good investment. You’ll never go out to dinner because it’s cheaper to eat at home. You’ll never buy a car because it depreciates the second you get behind the wheel. Sure there needs to be a decent balance but there is too much in life to enjoy on a personal basis to run one’s personal life like a business.

[ibjames]

I agree sdr, but I think he was referring to the house portion. A typical example is my wife, she wanted in a place, no matter what the cost, because renting is “throwing money away” or all our family sees us and we don’t own, she wants a home, etc. etc.

Such a big purchase, while you want a home, you still have to apply business principals to it

My wife and I probably go out too much! lol

[sdcellar]

Whoa, we must be the exception that proves the rule, because we recently became renters *and* followed that up with a trip to Disneyland!

[Daniel]

SDrealtor,

I disagree to your disagreement (is this possible? :-). I do think people should run their personal finances like a business. But that doesn’t mean skimping on pleasures or being cheap. Quite the contrary. Consumption is consumption, and it costs money to have a good life. Perry’s example is actually very good: if it costs substantially less money to rent than to buy the SAME house (can’t emphasize SAME strong enough), then one should rent. If you want a car example, I can give you one: I would never buy a $30K car if I could rent the same car from Hertz for $150/month. Of course, car economics dictates that the actual rental rates are much higher, making buying the car the far better deal in real life.

Bottom line: consumption and investment are two different things. Housing is a very odd mix of the two, and one has to be very careful in separating them. That’s why it’s crucial to compare similar houses when making buy-vs-rent (i.e. investment) decisions.

[PerryChase]

Daniel, thanks for elaborating on my point. You explained it really well.

It’s hard for people the separate the investment and consumption aspects of “a roof over your head.” Buying a house generally comes down to an emotional decision. I hear too many people complain that it sucks to rent an apartment. Then they rush out to buy a $500k fixer, the carrying cost of which is $3000+. Why don’t they just rent a much nicer house for $3000 and save themselves the trouble and risk of owning? Because they believe that renting is “throwing money away.” The way I view it, buying that $500k fixer is throwing money away + living in an inferior house.

[powayseller]

Daniel, Bob C. does this type of analysis every month, but it is time consuming. You could contact him to find out more about his findings. Even when you break down the sales into those subcategories, you can still find prices increase, because the smaller the sample set becomes, the worse the data gets. I may have this mixed up, but it seems one month the 2200 sq ft homes increased in price, but upon closer inspection the reason was that it was the 4 bedroom homes that were selling and not the 3 bedrooms. In previous months, both types of homes sold equally, but now the 4 bedroom homes carried a premium. Or you could have a few homes with more money invested in remodels, or fewer facing a busy street, and all these things make the prices go up.

sdrealtor is right – you can’t know too much about this market unless you are either hitting the pavement every day, or talking with someone who is! The numbers are obviously flawed.

For those of you defending Case-Shiller, please explain why you think it is accurate of today’s conditions.

Perry, I agree with you. It comes down to doing the math. Too many people are brainwashed into thinking that buying a house is better than renting. People are not educated on housing market cycles or asset bubbles, and that is the problem.

[sdrealtor]

Now that you put it that I way, I agree about buying vs. renting. I have many clients that I am encouraging to wait. Buying a house is definitely better than renting. However, buying a house while commiting financial suicide is not.

[Author]

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