The Investment U e-Letter: Issue # 405
Thursday, January 20, 2005

Real Estate Investing Reviews: Changing My Tune
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U

For years I feel like I’ve been the one voice in the world saying that U.S. housing is not in a bubble.

For readers of my newsletter, True Wealth, it’s been the right call. They made triple-digit returns on a few of my recommendations in real estate investing and housing stocks.

As an example of my real estate investing bullishness, back in November of 2001, I wrote to my readers: “The price of a new home is still below its 1989 peak [adjusted for inflation]. For the last ten years, people have been investing in stocks and ignoring real estate Right now, people can afford more house than they could at any time in history.”

I said buy. We bought REITs, and homebuilders. And made great profits.

Now times have changed, and so have my real estate investing reviews. Real estate was cheap in 2001. Today, at best, it’s fairly priced. And there are clearly some “bubble” areas.

Bubbles and Water… and Where NOT to Buy

There is no housing “bubble” in middle America. Take St. Louis, for example. The median home price has actually fallen a little since 2000. And 84% of residents can afford the “median” home. No problem there. Home prices won’t bust, as they never boomed in the first place.

Now consider San Diego. The median home price in San Diego has more than doubled since the bursting of the Nasdaq bubble in 2000. Now only 5% of San Diego residents can actually afford the median-priced home. That’s troubling.

In the Nassau/Suffolk area outside New York City, the median price of a home is up by 155% since the stock market peak in 2000. Eric Fry, editor of The Daily Reckoning, joked that residents there couldn’t even afford to buy their own homes if they had to. And he’s right only 12% of residents can afford the median home there now. I wouldn’t be a buyer there

I don’t know when this real estate bubble (which is primarily confined to coastal towns and wealthy coastal population centers) will burst. And I don’t know if it will be violent, or if the air will come out slowly. But I’m not interested in buying in these places right now.

Considering the nationwide picture, it is not that bad. Nationwide, 51% of families can afford the median home. That suggests a market in balance right now.

For the last 10 years, housing was “cheap” – more than 60% of homebuyers could afford the median home. It has been much worse. Homes were expensive for homebuyers around 1980, significantly due to extremely high interest rates. Right now, we’re in the middle.

My Real Estate Investing Review: I’m No Longer Bullish

In short, I was bullish on real estate. I no longer am.

This doesn’t mean sell everything. If we’ve learned anything from the Nasdaq bubble, it’s that bubbles can take asset prices much higher than we can possibly imagine. But if you’re highly leveraged in real estate, and you’re thinking about taking on yet another project, you’d better think hard – especially if you’re near the coasts.

For years I said real estate investing was a good deal. Now, it’s just fairly priced, at best – and quite likely not even that on the coasts.

Good investing,

Steve

P.S., While I’m no longer bullish on it, you can still arm yourself with valuable insight from earlier real estate investing reviews.

Related Articles

• 2006 Housing Market Bubble: Today’s Selloff In Real Estate…and How Many Years Before the Next Bull Market
• Real Estate Bubble 2005: What’s Really Happening
• Housing Bubble: The New Real Estate Conspiracy
• The Beginning to the End of the Housing Market?

Invesment U Archives