bostonbubble.com

[baby1nut]

On the theory that houses pretty much keep pace with inflation, I took the amount the house we're interested in buying sold for in 1985, then using an inflation calculator came up with a present day value of approx. 170K.

The owners are currently asking 519K, a price that of course reflects the intervening bubble years.

This would seem to leave us with a gap that's much too wide to resolve, but a complicating factor is we'd be selling our house in the transaction, one purchased in 2001. Since we'd be benefiting from a sale price that is still in my opinion overvalued, it gives us the ability to overpay somewhat, overpaying in this case meaning to pay more than amount reflecting inflation.

I could use some help in trying to sort all this out. Anyone want to take a crack at it?

Many thanks

[GenXer]

The theory is wrong. Housing prices may be driven by complex processes, but the resulting behavior can be analyzed by modern statistical methods. Prices are much too random to make blanket statements such as 'prices keep up with inflation'. In hindsight, maybe. But not if you bought in 2005 and hold even 10 years. You may be surprised to find that this is a coincidence, depending on which period you select. Don't even try to dig into that one. The price fluctuations are so random, and so extreme at times, that your answer depends totally on the time period and the start/end dates, which will bias your results to the point where they are meaningless.

Prices are driven by the number of houses for sale, and as I mentioned before in the forums, the 'Eastern Block Mentality' effect is still in effect - the lack of a good inventory keeps the prices and demand artificially high. Enough people who are still employed buy recklessly believing that the prices have hit bottom, thus keeping prices from falling more. The sellers are waiting, also believing that everything is over, and prices will start going up.

The problem is, prices can change quickly, and you can not take for granted that the price you get for your house will be the same 'high' price that you pay for this one. Another complication is interest rates which are moving very quickly. So in one scenario you can overpay for this house, get less than you like for yours, and get high interest rates to cap it off. Don't forget that you have to sell your house first before you buy this one, so that will probably drive the price (if you are crazy enough to buy the house before you sell).

[WestCoastXPlant]

Well, i'll take a stab since we had the exact same dilemma

We did use the calculation you suggest and then used price per sq. foot in recent sales. For us, the inflation calculation came to "only" 100K less than price per square foot, so it actually seemed about right(house in a "desirable" area, very updated) We offered a little over assessment, which is 110K over "inflation price" at 3% and about 10K over the highest "zillow"-like estimate we've seen. We'll likely not get the house though as it's still about 8% less than asking price.

I don't know how to tell if you're overpaying -- areas don't appreciate uniformly (Detroit was once a booming job hub) and "official inflation" is typically understated. Even if you ignore that, truth is the seller won't sell at an "inflation adjusted" price if houses in that hood are still selling much higher -- so I wouldn't go with that strategy unless you're potentially willing to wait _a long_ time.

[mpr]

[GenXer]

Calculators are wrong and useless. I wrote about this a while back. Its not even a question of whether they are wrong - its a question of how wrong they are. It is irrelevant what happened in the past. You are looking to the future, and nobody knows, or can predict with a reasonable degree of accuracy.

If you are looking for a strategy, a calculator is useless. You can not plan your finances on what may happen in the future - what you need to do is to make plans such that whatever happens, you stay solvent. On a larger scale, you may first want to sell your house first, so that you dont condition your purchase on the sale of your house. Otherwise, you are putting yourself at a big disadvantage in a market like this, where houses can take a long time to sell.

Many people here are renting and not hurrying to buy in this market. It makes no sense to sell at a profit, and then to plow all of your 'windfall' into an overpriced house. Where's the logic here? Buy low, sell high. The best strategy will probably be to rent in the meanwhile, but this assumes that prices will come down, which nobody knows when or even if it will happen. If it does not happen, many of us are happy to rent for years (or as long as it takes to get a price one can afford given everybody's finances).

[Guest]

genXer,

I realize I'm using a very blunt tool when I talk about inflation, yet as you say in hindsight there's some validity to it. The charts I've seen are pretty striking in this regard.

I'm only using it as a starting point, a way to get my arms around something very elusive. I should have been more clear aobut that. If nothing else, by comparing the asking price to the inflation adjusted number, one begins to get a clue as to how over-valued this house might be on a long term basis.

I can't argue at all with what you say with respect to renting while prices continue to fall, assuming that is that life could be reduced to such simple terms. There are other factors though, notaby quality of life to be considered. It's a lovely old house with a fabulous yard in a private setting that suits us quite well.

That said, were I starting from scratch with no equity in a current home (We own it outright), I couldn't bring myself to buy a house that in my view remains grossly overvalued. But somehow the fact that I do, makes such a purchase much more palatable, psychologically speaking anyway

Complex matters. I wish I were smarter.

[Guest]

I would rather measure a local housing market price with the local people's average income. I can't remember the exact number, but Boston average family annual income is around $65000, so 30% of that would be $19500. divided that by 12 would be $1625.
Now you can buy an $345000 house, put down 20%($70000). The remaining amount of $280000 with 5.5% 30 year fix, should get the monthly payment of around $1600.
So look at your town's average family income, do the math, then to see if that house's price is below or above the average local home price. Then you know if that house is affordable or not(locally).

[GenXer]

Well, I think you know what the answer should be. Quality of life is very important, but the question is, how much are you sacrificing for it? You sacrifice either way, its just that I prefer to sacrifice a bit in quality to get financial stability rather than sacrifice financial stability to get a bit better quality.