Real Estate Bubble?

The Star Ledger had an article Sunday about private investment companies helping people that want to invest in properties but can't get a conventional loan from a bank. Business Week had a stat this week that 31% of single family homes purchased in the last year were purchased with interest only loans.

For the life of me this real estate boom looks and feels mighty similar to the tech boom. Articles in magazines and newspapers are talking about the "new" reality of real estate and how this is a supply and demand driven boom. It seems like people can't wait to jump into the housing market. The question, however, is can they get out quick enough.

Just last week I stopped in at an open house in High Bridge. The house was well kept, but old, small(900- 1200 SF) and in a difficult location. The seller was looking for $280,000. I asked the realtor what was a typical rent for this type of house in the area and he told me that it would rent for $900 to $1200 per month.

If you mortgaged the entire amount of the house and included property taxes the monthly payment on this house would be around $2700 per month. The rent would only cover 30 to 40 percent of the cost not counting repairs. In effect that house is selling for 70 times earnings! People that are buying houses as investments have better beware. If this bubble bursts a 20 to 30 percentage fall in prices will drive many of these "investors" into bankruptcy.

I think that if I sold my house today I wouldn't buy another at these prices. I'd rent. It's cheaper right now. I'd also be tempted to hold my cash... Keep my powder dry, so to speak. When this ends there is going to be tremendous values out there for the savvy investor.