Any asset allocation formula is mostly arbitrary
Q: Like many renters in the Bay Area, I thought the rise in home prices in recent years meant that I would never be able to buy. But now that prices are declining, there seem to be a huge number of houses on the market, and sales even at reduced prices are sluggish or non-existent. Is this the time to buy?
A: I wouldn’t dare offer a one-word answer to that question. However, it appears that the real estate bubble could lose more air.
In many Bay Area communities, prices have fallen to where they were nearly two years ago. However, to get back down to the long-term trend line, they would need to fall considerably more, perhaps as much as 10 or 15 percent.
I wouldn’t push anyone to buy at current levels. If you buy a house with a 20 percent down payment, and the house’s market value then falls 10 percent, you will lose half your investment. That’s comparable to what happened when the stock bubble burst in 2000-02.
Many sellers seem to be in denial, pricing their houses as though the market were still at the top. They remind me of the Nasdaq diehards who refused to believe that their market was collapsing, and stuck with Cisco Systems stock all the way from $80 to $9.
If you want to dip a toe in today’s housing market, don’t be self-conscious about offering 10 or 15 percent below the asking prices. You need to protect yourself.
What do you think? Do you agree?