The Cost of Waiting for the “Bubble”

I have been meeting people who are considering buying here in the Los Angeles area, but believe that a “Bubble” is building.  Hopefully you read my last co-authored article Bubble or No Bubble: Here’s the Skinny, which shows the data is pointing away from a “Bubble” happening for at least another 2-4 years.  However, perception can be reality, and some believe that they would rather wait to purchase.  However, even if prices go down, there are hidden costs and risks to waiting.  Here are four hidden costs to consider:

1. The total cost of rent: Assume the price of the home is $1,000,000 and prices soften and you buy at $900,000.  If it takes four years to get to that point, you will be paying rent during that time.  For example, if you are paying $2,500/month in rent with no rent increases, you will have paid out $120,000 with nothing to show for it.  Therefore, when you think you saved $100,000 on the purchase, you actually paid $120,000 with no mortgage payment tax breaks and no appreciating asset.  In many areas of Los Angeles, current rents are equal to or more than what the cost of ownership is.
2. Interest rates can change: No one can truly predict the future, and this includes interest rates.  In 2-4 years, if interest rates go up, you may be saving money on the purchase, but your payments may be the same as if you buy now.
3. There is low probability there is going to be a huge discount when a housing slow down happens: Unfortunately when people read in mass media about the housing crisis, that is a nationwide report.  Los Angeles, like every market, is unique in its own way.  During the recession, homes in prime areas (such as Beverly Hills, Westwood, Bel Air, and others), only dropped between 15%-25% versus other neighborhoods where home values dropped 50%-60%.  In addition, one of the major factors for the recession was because of very liberal lending regulations.  Since that correction has been made, it is unlikely that a huge housing discount will be happening.
4. Supply and demand will always play a factor: If home sellers see that prices are dropping, they may not want to sell, decreasing area inventory and thus driving prices up as demand grows.

Thinking that waiting for an inevitable “Bubble” is not always the best strategy.  The key is to get into the game of real estate.  If the market isn’t doing well and you can afford to keep the home, you do not have to sell and you can rent it out.  The advantage of real estate is that there are multiple creative solutions to building wealth and working through the housing cycle.