April 25th, 2008

Captain Obvious

How to know when we're at the bottom of the housing crash.

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The shills and cheerleaders are already calling the "bottom" in housing prices. It's worth recalling that these are the same Nostradamuses who declared the last "bottom" in 1991, 1992, 1993, 1994, 1995 and 1996 - and voila, they were finally right seven years into the slide (1997).

Want to know when the "bottom" is finally in? The "bottom" will be close when buying real estate make sense as a sound business proposition. What's a sound business proposition? Making a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates - and make a profit on day one in cash-accounting terms.

If you can't rent the property out for a profit from day one, it isn't the bottom.


They go on to explain the math that allows you to calculate a surprisingly good estimate of if you'll be making a profit from day 1 or not. Let's take the place I currently live as an example. It rents for $900/mo, which means the yearly rent is $10,800. Now you multiply that by between 6 and 10, depending on how nice the neighborhood is. This is the magic step that factors in all the things that you'd normally be paying for, like property tax, interest on the mortgage, etc. I'm in North Boulder, so let's go right to the high end and multiply by 9. That gives us $97,200. If my place were for sale for that price, it would make economic sense to buy it.

The last condo I saw advertised for sale in my building was priced at $175k. Clearly, we are nowhere near the bottom.
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