“Where are the best Real Estate bargains now for single family homes? Or what is the best way to research that answer as a lay person with little real estate knowledge?”
The Harvard MBA Says:
I’m hardly a real estate expert, but as the masthead says, you can ask me anything!
I have been following the housing bubble for years, and I do think that in the inevitable overcorrection, there will be some great bargains. The trick, of course, is figuring out when things have bottomed out. There’s an old investor’s expression that I think is quite apt: “Don’t try to catch a falling knife.”
Every housing bust follows the same script. First, transaction volume dries up as buyers refuse to pay, and sellers refuse to drop their prices. Eventually, prices decline while volume remains low (the phase we’re in now). The bubble hasn’t truly ended until volume picks up again (the precursor to rising prices).
In addition, homes, like any other asset class, can be valued using objective criteria, allowing you to tell if they are over- or undervalued. Here, there are two primary criteria to apply.
The first is to look at the ratio of median home price to median income. When the ratio is high by historical standards, homes are overvalued. When the ratio is low, they are undervalued. Homes in Silicon Valley have a median cost somewhere in the $1 million range. Homes in the Houston area have a median cost somewhere in the $200K range. Even if the median income in Silicon Valley is twice that of Houston, housing still looks overvalued.
The second is to look at the ratio between the cost of owning a home, versus the equivalent rent. In an efficient market, the costs should be roughly equal. The cost to rent my home in Palo Alto is around $2,600 per month. The cost to buy it (assuming a 100% mortgage–not that I recommend such tactics, but it’s better for an apples-to-apples comparison) is almost $7,000 per month. Even accounting for the mortgage interest deduction (which most people overestimate), it’s clear that Palo Alto housing is still overvalued.
Armed with these principles in mind, there’s a simple way to find housing markets that are truly bargains. What you’ll need are historical data on housing prices, transaction volumes, median income, and median rent. The ideal time to buy is when:
- Transaction volumes are rising rapidly
- The ratio of home prices to incomes is historically low
- The ratio of home prices to rents is historically low
I don’t have time to find sources for all this information, but I suspect that you’ll be able to get most of this data from free sources on the Internet.
To these quantitative measures, I’ll also add one qualitative measure: If people say that real-estate investing is dead, start buying like crazy. During a bubble, a sure sign of a market top is when people start saying the fateful words, “This time, it’s different.” After a bubble, a sure sign of a market bottom is when people start saying the fateful words, “X investing is dead.”