My wife and I are plan­ning to move some­where where you can walk to shops and restau­rants. We were think­ing about sell­ing or rent­ing our cur­rent sub­ur­bia home. So, as usual, I picked up a bunch of books from the lo­cal li­brary. This is one of them. Amazon re­views are here.

My opin­ion on the book

The au­thor did a good job of pro­vid­ing nu­meric ev­i­dence of the pos­si­bil­ity of a real es­tate bub­ble. What I did­n’t like is that he did­n’t pro­vide a log­i­cal frame­work to eval­u­ate res­i­den­tial real es­tate. I was ex­pect­ing some sort of DCF model that uses rent as the free cash flow. Instead he cites Median house/​Me­dian Income and some other con­tin­gent ev­i­dence to prove his point. It is like a book on stock eval­u­a­tion that just uses his­tor­i­cal P/E as a mea­sure. He also fail to pre­sent sim­i­lar sit­u­a­tions that re­sulted in a cri­sis. Quite dis­ap­point­ing in that re­gard

How it re­lates to my choice of sell or rent

I cre­ated my own ex­cel spread­sheet to look at the two dif­fer­ent sce­nar­ios (if you are in­ter­ested I can share). It looks like rent­ing is the loos­ing one. We gain more by sell­ing and in­vest­ing the eq­uity in a con­ser­v­a­tive way. The book made me take a hard look at our lo­cal real es­tate mar­ket: the ra­tio Median House/Median Income is about 4.3 (above 3 is bad). Rents are low and house prices have been grow­ing like crazy. This makes me think to buy a small condo, or even to rent for a while. We haven’t re­ally de­cided yet.

Book sum­mary

1.      House prices are high while every­thing else is low: rents, econ­omy, stocks Yes, there are big­ger houses now and rates are low (but won’t stay low for­ever)

2.      Mortgage takes more and more of the av­er­age salary, fore­clo­sures and per­sonal bank­rupt­cies are at record high. People is more and more lever­aged

3.      The house mar­ket is far away from an ideal mar­ket. A bunch of lenders re­ally make the prices. Bubble can eas­ily cre­ate in in­ef­fi­cient mar­kets

4.      People think houses can just go up: same mind­set as the in­ter­net bub­ble

5.      House prices have been grow­ing like crazy. The fast grow­ers of the past are the fastest grow­ers now: it is like mo­men­tum in stocks

6.      Many of the pre­vi­ous crashes were based on lever­age and some kind of Ponzi scheme

7.      It will start if rates goes up (people can af­ford less), if they go down (the econ­omy will be very weak), banks be­come less ag­gres­sive in lend­ing, con­gress re­duces tax ben­e­fits

8.      Under a worst case sce­nario Fannie Mae and Freddie Mac ($3 tril­lion of very lever­aged and de­riv­a­tive in­vested money) stum­ble and then it may be a world­wide de­pres­sion as banks cred­i­bil­ity goes down

9.      What you can do: de­crease your ex­po­sure to real es­tate (rent, down­size or move to cheaper area), be less lever­aged, hedge your real es­tate ex­po­sure by not buy­ing real es­tate cycli­cal stocks