Palm Springs for Gay Men: On Buying a House

By Gymbrat, Your Webmaster

Everybody is buying a house today. Shouldn't my partner and I finally buy ourselves a house, too? It would be so nice and romantic, and we would save a lot on taxes. Having our own swimming pool and our own rose bushes. Only - the houses seem to be sooo expensive. Can we afford it?

Updated 11/13/04

It is very tempting to do what everybody else does, just when they do it. When you go to a party, you want to arrive when everybody is there. You don't want to go out to eat when only one other table is taken. And how much fun is an orgy with no other guys there?

This is different. Stocks and houses should be bought when nobody wants them. Maybe you will understand why after reading this essay.

Your Webmaster bought his house in Palm Springs in 1991. 1900 square feet, three bedrooms, three baths, pool, central air, attached two car garage. He paid $165,000 for it. It had been listed for $239,000, but the owner had just reduced the price to $169,000 to get rid of it.

Several years later, a neighbor lost his wife and wanted to sell his house and move elsewhere. A bit more plain looking, maybe, but generally the same stats, only no pool. The house sat empty for 1 1/2 years, listed at $139,000. Finally it was sold for $112,000.

This was obviously a time when nobody wanted to buy a house, a perfect time to buy. House prices were down quite a bit, and your Webmaster applied for, and got, a temporary government reduction in the value of the house of between $25,000 and $36,000 during the three years 1998-2000, meaning a bit lower property taxes.

Today, four years later, similar houses in the same neighborhood are sold for $600,000, four times more than four years ago. Two adjacent newbuilt houses of 2200 square feet on the same size lots have just been bought for $750,000.

Yes, they are expensive now. And people buy houses as if they were in panic. They expect prices to quadruple again in the next four years. $750,000 times 4 means $3,000,000. Yeah, right!

We have seen charts of house prices over the years, and they go up and down in nice, predictable waves of several years each. They all come down almost, but not quite, to the price at the start of the wave. We are right now on what should be the top of the current wave - we are more than twice as high up as the preceding wave. On our part, we are waiting for a spectacular downhill run.

Most people can not afford the current prices, but they are fooled into believeing that they can. They get an adjustable rate mortgage with no downpayment at all, and they have to pay only the interest for the first three years. At a special 4% interest, monthly payments on a $750,000 house would be $2500. Not too shabby. But then, after three years, the interest rate turns to normal, and the loan will have to start being paid off. Assuming an 8% interest rate during the 30 years, the monthly payments will be something like $6000. With good pay rises and no job outsourcing, maybe that is a decent cost. But with the cost for a similar house by then half of what was paid, it will still feel kind of lousy.

Half? Well, that is only our guess. But, you see, over a long time, the cost of housing can only go up in line with people's income. If they went up faster, it would mean that other things people buy went up slower - and they ain't! Things have already started to happen in the economy. Not only is there a housing "bubble" about to burst - the big trade and budget deficits will start to be felt, and the (so far slowly) rising Federal Reserve interest rate as well. As early as two years ago your Webmaster expected that the houses would top out - ouch! he was very premature. Now he is absolutely sure that we are at the peak. If he misses the flight this time it won't be by more than a minute or two.

So even if you shouldn't buy a house right now, you need to live somewhere! You and your partner want to give dinner parties in a nice house. You want to wake up and fall into the pool. You want a place "of your own". Tending the tulips. Of course - you don't want to live under a bridge while you are waiting for the buying opportunity. Rent a house! Take a two or three year lease. The monthly rent ($1500, $2000?) would be way lower than any interest-only payments on a loan, not to speak of a mortgage payment. And in the meantime, enjoy seeing the cards falling all around you.

We will periodically post some current financial articles, where housing is involved, on this page, and we start right now. This sort of stories you will not read in any publications that are dependent on advertising from real estate businesses, because they profess that the rising house prices will continue forever. Come back soon and see what more we'll have for you. It should make interesting reading.

And if you have any comments, pro or con or yawn, please let us know. If you tell us explicitly to publish your comments, we will do so. And if you explicily tell us to include your name or your e-mail address or whatever, we will do so. But we promise never to publish your message or identify you, unless you specifically tell us to do just that.

The higher the climb, the further the fall... Americans need less confidence and more reason... Needing actual money to buy a house... Standing in the warm glow of the housing boom - are you wearing your sun block?

It is as if there were a universal law, dear reader.

The more a man has, the more he has to lose. The higher he goes, the further he may fall down. The finer his reputation, the greater the potential disgrace.

When a man climbs a mountain, the higher he goes, the greater his danger. If he has his wits about him, he becomes more cautious with every step.

But as asset prices rise, typically, a kind of perverse and reckless mass psychosis sets in: As the risk increases, people become more carefree and confident. As they approach the peak, the thin air must make them a little lightheaded.

Much of the world has enjoyed a real estate boom over the last seven years. Since 1997, property prices have risen 53% in the United States. In some hotspots - such as broad sections of both coasts - prices have risen much faster.

"The United Kingdom is worse than America," said our friend Tim Price the other day. "In the United States there are hotspots. In the United Kingdom, the whole country is hot."

Britain is a smallish island, after all. On average, property has risen 116% since 1997. Ireland, an even smaller island, has seen increases of 174% over the same period.

A few places have resisted the trend. In Germany, for example, the property boom never quite got underway. The typical house sells for 3% less this year than it did in 1997. It's easy to see why. The German mortgage finance industry seems stuck in an earlier, more responsible, age; you have to have money to buy a house in Germany. Typically, buyers need to come up with a down payment of 40% of the purchase price.

By the way, in Japan you can buy a house for 22% less than seven years ago.

In London, the housing boom seems to have come to an end. The press reports that prices fell in October - the fifth month of falling prices in a row.

But in America, house prices are still moving up...and both lenders and buyers are becoming more and more reckless. No sun ever rose without setting sometime later; the longer the sun shines, the closer comes the twilight. But property speculators in America are still enjoying the warm glow of a boom. They should come in soon, is our advice, before they get burned.

[The Daily Reckoning Nov 12 2004]

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