A loud “Amen!” with regard to reducing your exposure to “variable-rate or interest-only loans”, but damn, even we’re not as bearish as financial consultant, and author (Sell Now! : The End of the Housing Bubble), John Talbott:

“According to San Francisco’s LoanPerformance.com, half of all Bay Area home buyers used interest-only loans to make their purchases last year. With so much of their income already relegated to their mortgage payment, says Talbott, even a small rise in interest rates will push many to — and beyond — their limit. For others, a divorce or job loss will spell financial ruin.”

“The problem, he says, is that home prices are way overvalued — just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property’s true value.”

“People should protect themselves, Talbott says, by divesting themselves of any investments in real estate, including stock. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for awhile.”

Here’s what we say: if you won’t be able to afford your “investment” (i.e. property) should interest rates rise and/or the market turns, then now might be a good time to either consider selling, or to reconsider any irrationally driven (e.g. “prices always go up” or “if you don’t buy now, you’ll be left behind forever”) urges to buy.

Otherwise, just don’t worry about it (too much).

Don’t Fear The Bubble [SocketSite]
Sell Now! : The End of the Housing Bubble [Amazon]

One thought on “The Bear”
  1. I’m not a real estate professional. I bought
    a house in 2002 (bidding against 14 others,
    writing a love letter to the owner, and all
    the usual). I was skeptical about the market
    then and still am, although it looks like I’ll
    do OK even in the downturn (5.5 fixed 30 yr +
    200K appreciation in current market).
    I have read quite a few real estate blogs since my
    life is now tied, as it were, to your profession.
    Call it wishful thinking, if you will, but it seems
    to me that the people pushing the “P/E ratio” for
    housing have tended to be from the extremely
    jealous securities industry (the same people who
    were being radically downsized after the crash
    in 2000). Of course it makes sense for the
    rental market, but it surely doesn’t have
    any correspondence with my psychological reality.
    I’m not going to rent my house. I live in it.
    I paid a lot of money for it to live in a great
    city. I was in a very cheap and nice apartment
    deal with sweeping ocean views, but I left it
    in full knowledge that a house isn’t as cheap
    even with the tax subsidies and appreciation.
    I left because the apartment was falling down
    and I couldn’t do anything about it, which made
    me depressed. Now I can battle the dry rot on
    my own and am much happier (seriously).
    The landlord doesn’t hang around, I can move a
    wall, install a skylight, and basically
    control my space like an emperor (except for the
    friendly city building inspector).
    So don’t let the propaganda of those stock
    losers get to you. Here’s a way to respond
    to their P/E ratio argument. Which of them
    ever computed the P/E ratio on his beemer
    (before it got repo’d)?

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