The housing market and you

I’ve written about the San Diego housing market from time to time. Mostly, I’ve written words of caution. Things like, if something can’t go on forever, it won’t, and trees don’t grow to the sky.

The double-digit price increases folks got used to cannot and will not go on forever. Forever has already arrived, as it is abundantly clear that the housing market boom has stalled.

While the last stall, in 1990-'91, ended with a genuine crash and panic selling, I don’t see any panic evident this time around, at least not yet. The housing market doesn’t usually turn on a dime. It is more like a supertanker that can go on for miles even after you throw the engines into reverse.

In order for panic to set in, we would need some sort of outside shock to the system. In 1990, the shock in California was a massive layoff in the defense and aerospace industry, accompanied by rising interest rates. Rates are on the rise today, and we will have to wait and see how far they go.

But what does any of this mean for you? For the vast majority of homeowners, it doesn’t mean anything, really. If your home goes up in value, what does it really do for you? You could sell it, but you would just pay that much more for another one. You could borrow the equity and buy a new car, but that is money you still have to pay back.

Rising housing wealth is paper wealth for most people. In the end it enriches the heirs to your estate, but it doesn’t do all that much in the here and now. The only way to really come out ahead is to play a housing arbitrage game and sell the expensive house here along the coast and buy a cheaper one in the Midwest somewhere.

Likewise, soft or falling prices don’t hurt most homeowners.

You should care about the current risk in the housing market if you are an investor or if you are shopping for a home. At the prices of recent years, an investor in residential housing is guaranteed to lose money month after month. The only way to come out ahead is if prices go up by at least 5-6 percent per year. They did in the past year, but they are running flat right now. A slow but steady reversal is the usual pattern from here.

A house recently sold near my neighborhood for about $1.2 million and was immediately rented out for $2,900 per month. After taking out property taxes, insurance and minor maintenance of $1,300 per month, the owner is netting $1,600 per month before any other expenses. That is a pathetic 1.4 percent return on investment.

If the owner has taken out an 80-percent mortgage at a 5.5-percent note rate, he is running a monthly loss of $2,800. If he gives up and sells it after two flat years, he will lose more than $135,000 after closing costs. The only way this so-called investment will break even is if the value goes up by more than 6 percent per year.

So why did the investor buy this house? I asked him and he said that it will go up by at least 15 percent per year for the next five years. How does he know this? Because he just does, that’s how.

If you do not own a home, you can do the above math in reverse. You can rent for $2,900 per month what would cost more than $6,500 in monthly payments to buy. No, I don’t want to hear about exotic mortgages that pretend to lower your monthly payment. I wasn’t born yesterday and I don’t get fooled by “option ARM” and negative amortizing loans.

Even after the tax benefits, you lose. If you have found the perfect home that you will live in for the next 20 years, then you might decide to just buy it anyway. But if your time horizon is short, it’s probably better to sit it out and rent for a while.

As for the rest of you, the housing market risk is still very real. Consumer spending funded by home equity withdrawals has accounted for about one-third of our gross domestic economic growth the past few years. This spending can only continue if housing prices rise.

If they stay flat, that entire component of growth will go to zero. Strip one-third of economic growth out of the numbers and we will have ourselves an economic situation that will affect all of us, even those who otherwise could care less about the housing market.

Rick Ashburn manages investments for private clients. Write to him at or 7777 Fay Ave., Suite 230, La Jolla, 92037.