December 14, 2007
-- by Dave Johnson
In for a Surprise... Go read it, but I just had to reproduce the chart here:
In August, 2006, I wrote a post Today's Housing Bubble Post - How Far Can Prices Fall?
Suppose rents are $2000 a month for a 3-bedroom house. Subtract from that repairs, maintenance, etc., and let's say you are clearing $1800. Instead of trying to calculate property taxes let's just say $400 per month - which is lower than what they would be ($650) if purchased now but you'll get my point in a minute.That's SF Bay Area pricing, by the way. And prices tripled here in the bubble, so that sounds about right.
So you're clearing about $16,800 a year from your investment. Let's say you are shooting for a 7% return. That means the house SHOULD be priced at about $240K, approx 1/3 of current pricing.
But I'm not going that far in my prediction. You have to account for ten years of inflation - which is higher than reported. Also the dollar drop means people from other countries will find higher prices cheap and the Bay Area is a premium place to live. And other demographic factors. But I don't rule out a 50% drop. Prices here really shouldn't be much higher than maybe $400K
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