Whenever someone asked me why I didn’t own real estate, I would simply point out that no properties near me cash flowed. I first started blogging about real estate in 2003, noting that a property in the same condo complex where I was renting was actually more money to own than to rent. I pointed out, correctly, that this meant I could not possibly cash flow on it as a rental with a 30-year fixed mortgage. (Those condos have already lost value, as I predicted, and are poised to drop further.)

Even though many looked at me like I was crazy for “throwing my money away”, I continued to rent. In August 2006, I predicted the real estate crash year by year, and also predicted that I would buy a house in late 2010. So far, my predictions have been eerily accurate; I predicted that Fannie and Freddie would crash, housing values would drop by at least 35%, and saw the recession coming.

I spent hundreds of hours accumulating data, confident that the coming crash would represent one of the biggest opportunities to buy property in our lifetimes. Here, I take my accumulated knowledge and answer your five most common questions about buying real estate.

Even better, I am also giving you a free copy of my rental property income worksheet. Frankly, it’s so worthwhile I could probably sell it, but I’m happy to give it away to you, my loyal reader. The worksheet allows you to plug in a few numbers and see quickly whether any property cash flows. You can download it after reading this post.

1: When is it a good time to invest in real estate?

The simple answer is “When you can get the lowest price to rent ratio for the property you are buying.” Here’s how to find the ratio:

Find a comparable rental (craigslist is good for single-family home rentals.) Find the purchase price of your property. Take the purchase price and divide it by the lowest price of the comparable rental in the same neighborhood. For instance, if the property price is $199,000, and the rental price for a similar property is $1595.00, your ratio would be 124.76.

Ideally, look for a ratio of 100 or less. 80 is awesome. Anything better than 80 and you’re probably looking at significant repairs; factor any repair costs into your purchase price. Anything over 150 isn’t worth buying; it won’t cashflow well as a rental. Anything over 200 isn’t worth buying even if you plan to live in it, since the house will most likely lose value over the next 3-5 years to the extent that renting is a more worthwhile option.

This is my first step in plotting out a potential investment, since it fairly quickly weeds out overpriced properties.

2: What type of real estate should you buy?

I wasn’t sure, so I asked an expert: Jim the Realtor. Jim is in the business of selling real estate, but he’s also honest and blunt — characteristics I appreciate! He said two things that I hadn’t heard previously:

1. Jim recommends buying a single-family home with at least 1500 square feet, with at least 3 and preferably 4, bedrooms. Here’s the key: The bedrooms should all be on the ground floor. Jim says that a lot of older couples will be selling their homes and looking to rent; by owning a rental property with all the bedrooms on the ground floor, you can attract them. Older people also make great, consistent tenants.
2. For most “owner-occupied” mortgages (which are much easier to qualify for at this juncture), you need only live in the property 1 year from when you purchase it. Then, as long as you keep the same mortgage, you can rent out the property.

If you plan to do this, there are a couple of caveats. First of all, not all mortgage documents have a 1-year timeframe, so check your mortgage documents before you sign them! Secondly, assuming you plan to buy another property and start a “property ladder”, remember that your next mortgage company will only let you count 75% of your rental income as income for your next mortgage. Also, since you already have one mortgage, your credit score will probably be lower, which might impact your rates on your next house.

Study the implications of this before you decide to rent out your first property and “ladder” — preferably with your accountant — but even with the restrictions, this may make sense for you.

HOA fees

I don’t recommend buying an investment property with HOA (Home Ownership Association) fees if you plan to own it long-term. A $100/month HOA fee may not seem like much, until you do the math for 30 years: it’s $36,000! That’s a huge chunk of profit flushed right down the drain. If you insist on buying a property with HOA fees, make sure it’s discounted by at least $20,000-$30,000 compared to a property with no fees. Also, when performing your price-to-rent calculation, subtract the HOA fees from your potential rent price.

3: Where should you buy a property?

Most people tend to assume their immediate area is best for buying real estate, when it may not necessarily be. What should you look for in a place to buy real estate? Here’s a short list:

Job growth: Look for an area that has had better-than-average job growth over the past 10 years. Use caution when buying in an area overly dependent on one sector of the economy, such as Silicon Valley and the tech industry. If the general metro area hasn’t had job growth, but the neighborhood you are looking to invest in is desirable, that might also be a decent choice. Unemployment rate ideally should be lower than average.
Median income: Higher isn’t necessarily better; look for a neighborhood with a steady median income.
Good schools: Many families renting will pay more for better schools. Find a school’s API rating. Make sure it’s better than surrounding zip codes. GreatSchools.net has this information.
Proximity to public transit: This will become critical as gas prices go back up (and since you’re buying for the long term, expect them to!) Ideally, your house would be located close to at least two types of public transit…but not so close that the house shakes every time the train comes in.
Walkability: Another factor that will become more critical in the future. WalkScore.com gives you this information, on a scale of 0 to 100. Ideally, your property would have a 60+ score.
Property tax rates: Consider state property tax rates, and state government health, when making your decision. For instance, California can only increase your property taxes 2% per year thanks to Prop 13, but the state is bankrupt and is currently seeing a mass exodus of citizens to other states. Due to government issues, California probably isn’t the most ideal state to buy property in.

4: Should you buy right now?

There are definitely some properties that are cashflowing right now, but many are in out-of-the-way areas that require a car, where rent prices haven’t plunged as much as they likely will in the future. While there are certainly investors in the market right now buying great properties, there’s also a frenzy for lower-priced properties. First-time buyers, lured by the $8000 Obama tax credit and 3% down FHA loans, are competing with investors. Higher-priced properties, on the other hand, have farther to drop.

While I don’t deny that there are a few folks out there getting amazing deals right now, I think small-time investors should wait until the first-time buyer frenzy has subsided and better, closer-in properties start to really drop. I don’t think you have long to wait; 12 to 18 months should be sufficient to buy your first property, and the good deals will continue for 3-5 years past that. Don’t rush; there are plenty of deals to go around.

Spring has far more buyers than winter; savvy buyers will wait until the end of the calendar year to buy, no matter what year it is.

5: What’s most critical?

The most critical component of investing in residential real estate is cash flow. Will rents continue to stay the same, or will they plummet since everyone is leaving the city you want to invest in?

In my spreadsheet, I don’t account for potential gains in property value as a component of a real estate investment. That’s because I know that in a sane market, real estate only appreciates about as fast as inflation…and over the next few years, it’s likely that any property you buy will actually depreciate a bit.

If there is one lesson I can impart to you, it’s don’t buy real estate based on potential appreciation. Ever! Even if the only calculation you do is the price-to-rent ratio, you’re still better off than those who buy hoping for appreciation.

Always buy a property that cash flows well as a rental, even if you never plan to rent it out! Why? Having the flexibility to rent the property gives you the ability to move and start your own property ladder instead of paying 5-6% to sell. Buying a property with a low price-to-rent ratio also protects you, to some degree, from price depreciation.

Are you in the market? Waiting? Have you purchased income property recently? I’d love to hear your stories in the comments!

Download my rental property cash flow worksheet for residential real estate investing.

Read my previous posts about real estate.

This post was featured in the Carnival of Personal Finance.

How do you envision your future retirement?

Some shocking statistics recently caught my eye. The median IRA balance is just $55,000, and the median 401(k) balance is just $15,000. Baby boomers are working longer, since most do not have enough saved to retire comfortably. And, given the statistics, it’s likely you are in the same boat.

Why is it that so few of us save enough for retirement? Why are we so woefully underprepared?

I usually search for answers for these thought-provoking questions in marketing books. Often I find that lack of good marketing is underneath a lot of personal finance problems. Car manufacturers are great at showing off the sleek curves of their latest model, but “retirement” typically doesn’t have flashy commercials. But is it really that simple?

While reading the book Made to Stick recently, I came across an interesting principle: concreteness. The authors, Chip Heath and Dan Heath, describe it as one of the features necessary to make an idea stick in your mind. They cite an example of The Nature Conservancy, a nonprofit organization dedicated to preserving land. When they touted how many acres of land they wanted to save, people simply weren’t interested. But when they showed a particular piece of land they wanted to save, and named it “Mount Hamilton Wilderness” (after a local mountain), people flocked to help them.

Why is this? Our brains aren’t wired to have a tangible picture of “1,000 acres”, but they are wired to understand “Mount Hamilton Wildnerness.” Making something tangible — giving us the picture in our minds — makes it meaningful.

How does this relate to retirement?

One huge factor in why we don’t save for retirement might simply be that we lack a visual anchor in our minds for the word “retirement.” In other words, if I ask you to define “retirement”, you probably won’t have a quick answer. You may visualize some old person fishing or sipping a Mai-Tai on the beach, but you probably won’t relate that to yourself.

But if I ask you to define “watermelon”, you can probably visualize not only the fruit itself, but one or more times where you’ve eaten it, smelled it, or seen it.

How do you avoid the trap of buying tangible objects such as houses and cars instead of saving for retirement and investing? You start by making the things you desire tangible.

Making Retirement Tangible

There is probably something you spend $5 a day on that you could do without. A daily coffee; a Coke or two from the vending machine; a lunch out instead of brown-bagging it; premium cable TV and video games. Whatever it is, no matter how silly–write it down. Chances are you can easily visualize whatever it is. You can probably remember the last time you used it (especially since it probably hasn’t been that long ago!)

$5 a day, invested at an 8% annual return for 30 years, is over $228,000. (It’s actually even more than that, since you’re investing daily or monthly instead of annually.)

The problem is that’s where most personal finance authors stop. They show you a latte vs. $228,000 and expect you to be in awe. They expect that you will do the logical thing and cut out the latte.

Since Starbucks is still in business, that obviously doesn’t work.

Why don’t you pick the money? Simple: $228,000 is not tangible. It doesn’t have meaning or value to you. Those lattes hold an emotional significance and a value to you, but $228,000 does not.

Our next step, then, is to make $228,000 actually worth something to you.

What $228,000 is worth to you will be different for every person. Let’s assume for now that you plan to retire with your newly found $228,000. (By the way, if you plan to retire in 40 years instead of 30, that $228,000 becomes nearly $535,000!)

Now that you have visualized the video games, coffee, movies, or whatever you’re spending money on now, the next thing to do is visualize what you want out of retirement. So you have your $228,000 (or $535,000.) What are you going to do with it?

If you write down some lame one-word answer like “fishing”, by the way, I will kick you.

Visualizing Your Retirement

How about this retirement option? “For my retirement, I’m going to sell some of my possessions, take 4 years and travel the world. During those 4 years, I plan to see Paris and buy a designer dress, go to Switzerland and ski the Alps, and head to Australia and try a vegemite sandwich. I’ll save some money by living cheaply, and I will learn to speak at least one other language.”

Or this? “I plan to move to Mexico and rent a gorgeous beach house. I will enjoy living in a community with multi-cultural folks who love a warm, sunny climate. I’ll learn how to wrap a burrito so the stuff inside it doesn’t fall out, and I will teach music–particularly piano–to others to make a little pocket change.”

What’s happening here? Suddenly, your retirement is becoming real. If you do this right (look at travel magazines and talk to others for ideas), you’ll feel a shift in your thinking. Suddenly that latte doesn’t seem appealing…not when your dream is put off another day into the future!

Want to seal the deal? Find a picture or two that you feel represents your future retirement and place them where you will see them every day. If you feel so inclined, write something inspirational on the pictures. Maybe you can even think of a catchy saying to remind yourself of what’s really important. What about “A Coke a day keeps my retirement at bay?”

Most of us haven’t even taken a few minutes to think about what we really want out of retirement. No wonder, then, that nearly 50% of us choose to cash out our 401(k)s instead of rolling them over. It’s not just about how much money you will need to retire and when you can afford to retire; it’s about making retirement tangible. Real. Beautiful, even.

On Buying a House

This same line of thinking helps us understand why people buy a house, even at their own financial peril. Even when they know that renting and investing the difference could make them a millionaire, they still choose to buy.

Why? Simple: “Investing” isn’t tangible. Neither is “a million dollars.” (You can’t picture “a million dollars” as easily as you can a watermelon.) But a house is tangible. You can see it, walk around in it, live in it. I could just have easily named this article “Why Most People Buy A House Instead of Becoming a Millionaire.”

If you have a spouse or significant other who is interested in buying a house — or there is even part of you that desires it — numbers probably won’t change your mind. But what if you consciously decide to rent for less money every month and invest the difference? Remember to make it tangible. “If we choose to rent our current place instead of buying a house, we can afford to go on a vacation to Europe this year.” Maybe you can retire five years earlier than if you owned a house. (But remember to plan out exactly what you’re going to do once you do retire!)

Once you add in property taxes, home maintenance, water, garbage, and HOA or Mello Roos fees, renting a home typically comes out ahead. In fact, a recent study showed that middle-age renters in 2004 were more wealthy than the equivalent homeowners. Use this to your advantage and enjoy your rich life!

Take a few minutes now to sketch out and visualize your dream retirement. Discuss your plans with your spouse or significant other. Make it as tangible as possible. Maybe you can even start working toward it in other ways (learning the language of a country you want to live in, for instance, or planning a small trip to a potential place to live.) The more real you make it, the more likely you will be to save for it.

And remember: An indulgence today will lead your retirement astray!

Recommended Reading:

• Made to Stick. If you are selling a product, or if you are interested in why certain stories and commercials seem to stick in your head better than others, this is the book. Well worth reading.
• The Impending Retirement Crisis at MoneyNing. David does a good job of breaking down why our country is facing a retirement crisis.
• One Decision That Can Make Anyone a Millionaire.Can buying a used car instead of a new one really make you $1 million? I break it down.
• Carnival of Personal Finance #199. This post was an Editor’s Choice!

Perhaps the most interesting prediction I made was comparing Fannie Mae and Freddie Mac to Enron. I thought then, and still do believe, that this will make Enron look like chump change. In the August 2006 post, I wrote:

“(Fannie and Freddie) are allowed to borrow money at interest rates lower than any private company due to the assumption that they will be bailed out by the U.S. government if they go under. The problem is that this implicit (NOT explicit — Fannie/Freddie loans do have a disclaimer stating that the government does not guarantee their loans) assumption has allowed corruption to reign supreme. Earnings were ridiculously overstated. Then the executive management paid themselves huge bonuses based on the fraudulent earnings. This has ‘Enron’ written all over it.”

I have to say I missed that prediction, only because I was too early — the Fannie/Freddie bust did not happen until a few months ago.

What this should show you is that this corruption was known at many levels years before it became headline news. In fact, Warren Buffett stopped investing in Freddie in 2001, “when it became apparent the company wasn’t being run well.”

Apartment Complexes and Commercial Real Estate Buildings Fall Into Foreclosure

As I theorized in 2006, headlines make the financial news section when they have interesting numbers, but they don’t make the front page of the newspaper or media service until they affect people. Once you read the financial news on a regular basis (I read it every day), you start to get a sense for what will eventually affect people, and what will never gain traction because it is theory or policy.

Here’s a great example of an article that will make front-page news next year or in early 2010. Some very large New York City apartment complexes are on the verge of default. Why hasn’t it made front-page news yet? Simple: The residents haven’t yet been affected. But soon the owners will have no choice: tenants will either have their rents doubled, causing a mass exodus and protests (front-page news for the New York Times), or the owners will default and the bank(s) holding the loans will put these large apartment complexes up for sale (also front-page news, since very few of these defaults have happened in the past few years.)

But for now, it’s relegated to the business section. There are some shocking numbers in the article:

“Savoy Park… was refinanced a few months before the credit markets stalled last summer. Credit Suisse pooled the main or senior $210 million loan with other mortgages and sold it to Wall Street investors as a commercial mortgage-backed security. The owners secured four additional loans, bringing the total debt on the property to $367.5 million, with a loan-to-value ratio of 88 percent, according to Realpoint.”

That means the owners had debt totaling 88 percent of the property’s value — and this was at the height of the market, meaning the owners are now likely underwater.

The interesting thing is that, using the article’s numbers, you can actually predict when it is likely that this apartment complex will fail. “There is no evidence that the owners are having trouble covering their debt service of nearly $2 million a month,” the article says. Then: “The building’s annual net cash flow was only $4.3 million at the end of last year.” And finally: “The landlords have a… generous reserve fund… to cover the shortfall on their senior debt — $30 million.”

$2 million a month x $12 = $24 million, minus the $4.3 million cash flow = $20 million. Reserve funds: $30 million. Doing a bit of back-of-the-envelope calculation, the building will likely fall into foreclosure in approximately 18 months.

Why Commercial Real Estate Failures Matter to You

Why does it matter to you? Because thousands of large apartment complexes and office buildings were financed in this way during the boom. Something you may not know is that I considered buying some commercial property here in San Jose a couple of years ago for my hosting company. I looked into several buildings — nearly all of which had recently changed hands to a “private equity” firm. Many of them were selling “office condos” (commercial property) at double the monthly price it would have cost my company to rent the same amount of space.

Needless to say, we ended up renting.

The fortunate thing for the renters in this particular apartment complex is that it is rent controlled. I’m dead set against rent control since it raises prices and reduces available supply, but in this particular case, it’s the only thing that is keeping this story from heading to the front page.

“Subprime” Disappears from the Headlines

What else is going to happen in 2009? The word “subprime” is going to disappear from the news. Here is the mortgage rate reset chart. By mid-2009, the vast majority of subprime loans will have finished resetting, which means that by mid-2011, the majority of subprime foreclosures will be over.

Instead, in 2009, “prime” foreclosures will become the new front-page news. It turns out that prime loans were just about as rotten as subprime.

I posted a link recently from CNN showing that 1 in 25 “prime” jumbo home loans (loans greater than $417,000) are now in default. A friend asked me: “What does that actually indicate?” Great question. It means that 4% of all those who purchased a home with a loan greater than $417,000 are now past-due by at least 90 days on their mortgage. At least 80% of these loans will go into foreclosure.

61.9% of the loans in the Bay Area in January-June 2007 were prime jumbo (also called “non-conforming”) loans.

This means a substantial percentage of “prime” loans on higher-priced houses in California are headed into foreclosure.

And that means this snowball of lower house prices has just started for the higher-end properties here in California.

Avalanche of Foreclosures Means House Prices Continue to Fall

Another tidbit for 2009: Foreclosures will start to outnumber homes being sold in many areas of the country. Realtors are crowing about home sales being up, even though prices are down. But when you look at two pieces of data for the same month: number of foreclosures, and number of homes sold — a different picture emerges.

View from Silicon Valley did some excellent research. Taking the total number of home sales for June in Santa Clara County, and subtracting out the number of foreclosures, the net number of homes sold in this county was just 433.

Don’t let this data mislead you; it doesn’t imply that all but 433 homes sold were foreclosures. It’s intended to point out that while Realtors trumpet high sales, they’re fighting a losing battle. The number of foreclosures coming on the market means that even the higher sales numbers won’t make prices go up anytime soon.

When Should You Consider Buying a House?

In fact, you have plenty of time to wait if you want a good deal on a house. Mish of Global Economic Trend Analysis says you have 15-20 more years to wait until prices return to their ’04-’06 levels. He uses data for Southern California, but I have been tracking both NorCal and SoCal markets and I see no difference in price deflation between the two.

In August 2006, I said that late 2010 would be the best time to buy a house. I’m sticking with that. If you want to buy a house, put the money you would pay for a mortgage payment (since even with 30%+ drops, it’s still more money to own a house in most parts of California than it is to rent) in a savings account. There’s absolutely nothing wrong with waiting this out for a few more years and getting a better deal. Use those years to live frugally, pay off your debt, and build a substantial piggy bank instead of taking on more debt.

When you are ready to buy, calculate the monthly rent for a comparable place using craigslist or local classified ads, and multiply that rent price by 150. If that number is lower than the price of the house you want to buy, I’d recommend waiting. For lower-income areas (the ones hit hardest by subprime foreclosures), multiply by 80 instead to avoid continued deflation.

A Summary of my Headlines for 2009

• Apartment complexes, office buildings, and other commercial real estate bought at the peak will go into foreclosure in the next 12-18 months, or will be forced to raise rents substantially to stay in business. Since customers won’t take the rent increase nicely, this will likely make for some interesting headlines, and potentially lawsuits. This likely won’t happen until late 2009 and will continue for several more years.
• “Subprime” will disappear from the headlines and will be replaced by “prime” — particularly jumbo prime loans (those greater than $417,000.) Those jumbo prime loans will be much harder to get, and prime mortgages will default at a heretofore-unbelievable rate, bringing house prices on the high end down significantly.
• More waves of foreclosures will mean housing inventory, despite strong sales on the low end, does not decline significantly. Therefore, prices will continue to drop.
• It still won’t be a great time to buy a nice house. Wait until 2010 and use the 80-150x rent calculation to decide for yourself. In the meantime, stop taking on additional debt and start saving for a down payment — you’re going to need it, especially if you intend to buy a nice house.

What are you seeing in your local area? What are your real estate predictions for 2009? I’d love to hear from you in the comments.

This is the blog post that you should send to anyone who is considering buying a house in the next 12-24 months. At the very least, it will arm you with excellent negotiating power.

Two Metrics That Show Whether ANY House is a Good Buy

Here are two facts that are well-known by a few savvy folks, but that most house buyers are unaware of. How do you tell if any house (no matter what the neighborhood or location) is a good buy? Just use these two rules of thumb:

1. Housing prices historically should be 3-5x median annual income. This one is easy to calculate. Look up the median household income for your area on city-data.com. Using their guide for 95118 (my zip code), and scrolling to the bottom of the page, we find that the estimated median household income in 2005 is $73,840. That means house prices for an average house should be in the range of $221,520 to $369,200. The lowest-priced single-family home in this zip code, however, is $489,900. That means prices still have far to drop!

   The great thing about the 3-5x median annual income marker is that it works for pretty much anywhere in the country. In more desirable areas, it’s more likely to be 5x annual income. In less desirable areas, you will be able to get more bang for the buck.

   For instance, in 47012, the zip code I grew up in (in Indiana), the median household income for 2005 is $43,174, and the lowest-priced single-family home on the MLS is just $14,500. (Yes, in Indiana, $14,500 buys you a house with land!) A comparable house to the $489,900 house here in 95118 sells for about $70,000 in Indiana — 1.62x median annual income there vs. 6.63x median annual income here. This shows how inflated prices are here in California — as well as in many urban areas around the country.

   Wait until you see many houses available in the 3-5x income range before buying.

2. Housing prices should be approximately 100x-150x monthly rent. This is another indicator to see if housing is overpriced in your area. Keep in mind that ideally, your monthly mortgage payment should be less than an equivalent rent payment, since mortgage payments don’t include taxes, insurance, and maintenance, and rent payments do.

   Let’s use a local example. I pointed out in 2003 that I felt the condo development where I lived at the time was overpriced. Now, recently, a condo in that development came on the market at a lower price than what I saw in 2003 — $329,900. This looks like a good deal when you consider that the same condo was selling for $342,500 in 2003, but let’s look at this through a different lens: rent prices. Here’s a nicer condo in the same development renting for $1600/month. That means you’re paying 206x rent to buy the condo (plus over $200/month as a homeowner’s association fee!)

   This means this condo, even at the “reduced” price, is still not a great deal. How low will prices go? Realistically, I think these condos will be back at 125-150x rent within a few years. That means this $329,900 condo will only be worth about $240,000. Don’t buy unless you’re under 200x rent, and even then, consider (using the other facts in this blog post) that the market may drop even more. An excellent rule of thumb is to never pay more in a 30-year fixed mortgage payment than you would in rent, since that’s a great example of a bad deal.

When Will Higher-Priced Houses Fall?

Here is an estimate of exactly when higher-priced houses will fall. It’s based on research I’ve done since 2006 and hours of reading and correlating past housing bubbles to this one.

1. We still haven’t seen the worst of the foreclosure crisis. Several people have commented or written to me asking when housing prices in more desirable neighborhoods such as Los Altos, Palo Alto, and Mountain View will fall. Those areas are still showing relative strength. Why are they showing strength? Simple: Foreclosures drive market prices, and there haven’t been as many foreclosures in those areas.

   Why fewer foreclosures? It’s not for the reasons many think — that people who buy in those areas have better cash cushions. It’s simply because prime loans have longer reset periods — and many of them haven’t reset yet. The reason we are hearing so much about “subprime” is because subprime loans reset sooner than prime loans.

   Take a look at this mortgage rate reset chart. It will allow you to “psychically” predict the news headlines for 2009. What will those headlines say? As you can see, subprime will continue to make headlines through 2009, but in 2009 and 2010, new headlines will appear: “Alt-A vulnerable too. Option ARMs resetting like mad.”

   Many people think “prime” loans are safe. They’re not — as evidenced by stories like this local couple who took out a $1M “prime” loan and who will now likely default. Even “prime” homeowners couldn’t do the math to realize that a $2800 payment on a $1 million loan doesn’t pay off all the principal. Welcome to the new reality of “prime” loans. We will be hearing many more stories like this next year as more Option ARMs reset.

2. Housing runs in 16-year cycles. It always amazes me when I hear people say, “The housing market is unpredictable.” Actually, unlike the day-to-day fluctuations of the stock market, the housing market is strongly predictable. Why? There are typical points in your life when you’re buying a house and typical points when you’re selling one. Since birth cycles are well-known, we can predict housing boom and bust cycles. It takes almost exactly 16 years for a housing cycle to complete a full turn. This has been true since the Great Depression.

   In 2006, I made a shockingly accurate timeline of this current bust based solely on a blog that posted newspaper clippings from the previous bust in the early 1990′s. You’ll see this in a lot of newspaper articles, too — you’ll be surprised at how many times you see “since 1991″ or “16 years ago” in an article referencing when the last time this happened was.

   By this methodology, the bottom should be in between late 2010 and 2013. But don’t expect housing prices to rise much if you buy then. But then again, you weren’t buying as an investment, were you?

This post gives you all of the tools you need to figure out when buying a house makes financial sense — no matter where you live. Keep in mind that no matter what housing prices look like, if you don’t plan to stay in that house for at least 5 and preferably 10 or more years, it’s not a good deal to buy. Just rent and invest instead. Even investing in bonds will likely bring you a better historical return than housing — 5-6% per year vs. 2-3% for housing.

In my opinion, it is always better to have liquid, easily-accessible cash (in mutual funds or high-yield savings accounts) than it is to have your money tied up in real estate. It’s much easier to click the “sell” button in your trading software and get a transfer to your bank account in a few days than it is to take weeks or months to sell your house. Keep yourself liquid, set up an automatic savings plan, and save for your retirement instead of expecting your house to make you rich. By following these simple steps, you will be well on your way to creating a wealthy future.

The unfortunate incident was that my old desktop computer, which I set up in 2006 and used pretty much every day since, finally gave up the ghost. Therefore, I spent most of this weekend setting up a new desktop system (a Shuttle SX38P2 Pro with an Intel E8400 processor overclocked to 3.4GHz/1600MHz FSB, if you’re curious.)

While setting up my new desktop, I decided it was probably time to “clean house” a bit and go through all my old documents. I spent a few hours weeding out over 50GB (!) of no-longer-needed files. While digging through archives of documents I had saved, I came across a gem: A PDF report from the National Association of Realtors, which is dated November 28, 2005.

I now vaguely remember chuckling at this report in 2005 when I saved it, knowing I would probably want to keep it for posterity. I have saved it in all of its glory here on my server for your reference. As you read it, I assure you at least some of you may think this is fake or exaggerated. Fortunately for both of us, some not-so-astute Realtors(TM) made a copy freely available on their site as well. (I note that they have removed “Fremont” from the title of their copy of the PDF…likely because their office does not serve the Fremont area.)

Let’s kick back, pop open a cold drink, and have a look!

NAR Decries: No Bust In Sight!

A quick refresher — 2005 was the year housing prices peaked in the Bay Area. There were no signs of a slowdown in sight. The NAR made this quite clear:

“With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the San Francisco-Oakland-Fremont metro market, as detailed below, reveals that there is little danger of this.”

Shew! Sure glad I trusted the NAR. *wipes sweat from brow*

Next paragraph:

“Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. But this ratio is a misleading measure in assessing bubble prospects. A more relevant measure is the mortgage servicing cost relative to income. This ratio is at a very manageable level. It implies no widespread financial overstretching to purchase a home in the region.” (emphasis mine)

I am sure all of the people whose homes are now in foreclosure found this very comforting.

“Affordability”

“The current price of $726,900 is more than three times the national average.”

Let me emphasize that this was the median price… i.e. half of all houses sold for more than $726,900. This in an area where the median household income is just over $70,000 a year! How can the “median” family have afforded a house that was 10x their annual income? The answer is… they couldn’t, and so they resorted to “liar loans” and interest-only loans in a sucker’s game that would leave everyone involved worse off than before.

“Job Creation” Touted Is Actually Nonexistent

Of all of the crap in this PDF, there are two things about it that really do bother me. The rest I can shrug off or laugh at, but these two are artful manipulation. Here’s the first one:

“The job market has turned the corner after taking a large hit from the fallout of the technology bubble. There have been 24,100 payroll job additions in the past 12 months to July. Many new job holders seek their own housing units.”

STOP RIGHT THERE. Contrast the above statement with the following article, which appeared in the San Francisco Chronicle in September 2005 — just two months prior to this bubblicious PDF:

“The Berkeley labor economists noted that the state’s economy has gotten a huge boost from housing. Construction and related fields such as real estate or lending, all related to the housing boom, accounted for half of all the net job growth in the state between 2002 and 2005.”

HALF. HALF of all job growth since the bust in the so-called “Silicon Valley” was NOT in tech, but in real estate.

Are you beginning to see what a monster this housing boom/bust has created? We are nowhere near the bottom. Those real estate jobs that were created arguably won’t be needed in a bust, just like the many dot-com boom jobs that were created vanished within 3 years after the bust.

This is only the beginning of the shakeout. It has been only about two years since the party stopped. It will be several more before we can realistically say what an impact it will have when most of the jobs that were created during the “recovery” disappear…again.

NAR Acknowledges the Dark Horse

This is the other piece that shook me so visibly. NAR and others have been quiet about how many houses were financed with dangerous “ticking time bomb” loans. But in this document, it’s clearly spelled out:

“ARMS accounted for 67% in 2004 across the region, one of the highest rates in the country. Furthermore, the interest-only loans accounted for nearly half of all loans in 2004.”

ARMs are Adjustable Rate Mortgages, or mortgages that “float” with the interest rate. Many of them have “introductory rates” at 1, 2, or 3% and then reset higher — much higher — after a period of 3-5 years.

Here is a chart (not from the NAR, of course) that shows when the ARMs will reset:

(Click on image for bigger image)

We are not even a year into this chart. The worst is yet to come. 67% of the loans taken out were adjustable rate. The recent interest rate lowering by the Fed may help folks with these loans out, and surely some of them will refinance…but banks won’t refinance loans that are “underwater” — where the borrower owes more than his/her home is worth. As prices decline, more and more of these homes go underwater.

In Conclusion: Pay Attention!

Pandering and bad statistics being touted as “news” showcases a major problem I have with newspapers and news sources in general: often, in an effort to be “balanced”, they will place a quote from a NAR representative or a local real estate agent next to a quote from an economist. The problem is that one group (real estate agents) makes money when you buy a house, so of course they will always urge people to buy. The other side — economists — have no vested interest in what the market does, because they get paid to write reports no matter what happens.

Whenever you read news articles, be careful to pick out why someone is saying what they are saying. If their job depends on you taking a specific action (like buy a house), they will make sure their slant is that you should do it, even if it is clearly not in your best interest. Take anything anyone with financial vested interest in you taking an action says with a grain of salt.

Always keep abreast of alternate sources like Patrick.net and the Housing Bubble Blog for non-Realtor-biased news.

My next real estate post will be next week, and it will be your complete guide to figuring out exactly when the higher-priced houses will begin to fall in price (I have charts!) and unbiased numbers that show you how to decide when a coastal property or a higher-priced property is considered “affordable”. It’s something that many of you have requested — and that I have a personal interest in, as I do expect to eventually buy an ocean-view property. Of course, I am not a real estate agent, and I won’t make any money whether you decide to buy a property or not… I just enjoy researching and writing about economics and real estate.

Make sure to subscribe to my blog — I post about the real estate market at least once a month. As always, if you have questions or comments, I welcome them in the comments below — and I do try to answer them all.

The main thing I want to point out is that the magnitude of the price drops is increasing, not decreasing. Prices are dropping faster than they were 6 months ago. While this means you’re likely to get a better “deal” if you shop for real estate now, it’s also likely that you’ll save a lot more money by waiting…even if you choose to only wait 6 months.

Taking Another Look at 95127

I use zip code 95127 as a leading indicator of the rest of the Bay Area. It’s an outlying part of San Jose that has a lot of “starter homes.” 95127 has more foreclosures and the prices are progressing downward faster than most other zip codes I track here in San Jose — hence the “leading indicator” moniker. What is happening in 95127 is a microcosm of the distress that is hitting most suburban, “middle-class” (if you can call zip codes where the average house is over $600,000 “middle-class”) areas of San Jose.

To illustrate this point, let’s refer back to the two properties I highlighted in my January real estate post. First of all, it’s worth noting that both houses I highlighted in January have sold — no doubt to people who thought they were picking up a pretty good deal. If they intend to live in the house for at least 10 years, they didn’t do too badly — that’s what they are probably thinking. However, I’m going to show you how by waiting just 2 months, they could have saved $50,000 on the price of their homes. That’s 12.5% of the value of these homes!

From my January post:

Property #1 is 124 Birch Ln, San Jose, CA 95127. 3BR, 1 bath, 1564 sq.ft. on a nice-sized lot of 7840 sq.ft. Last sale 7/1/2005 for $601,000. Now asking $399,000. Doing the math, we find that is a 34% discount off peak. The MLS lists 3 pictures of the inside and it seems to be in fairly good condition.

Now, just two months later:
Take a look at MLS #733671 — 10309 Murtha Dr. Five bedrooms, 2 baths, 1965 square feet. A couple warning factors: The property is sold “as-is”, and states “Remodeled kitchen, granite counters, hardwood floors prior to foreclosure lot.” This could mean that some of the flooring and counters have been torn up. This property is obviously a “look before you leap” situation. It is currently listing for… $399,900. Even if it does need work, 400 more square feet and 2 extra bedrooms for just $900 more than the house in January mean waiting was the right decision.

This house last sold in February 2007 (just over one year ago?!) for $689,713. That’s a 42% discount in 13 months. I don’t think there has ever been a stronger argument for waiting to buy. Imagine what waiting another year will bring!

January House #2

Back to January:

3356 Joanne Ave., San Jose, CA 95127. 3BR, 1 bath, 1075 square feet, on a 4,792 sq.ft. lot. A pretty fair specimen of a house for San Jose, though the MLS listing doesn’t include inside pictures, so it probably needs work. Now asking $400,000. This isn’t as good a deal as the first property…

This is where you start to see some huge advantages to waiting. In January, I pored through over 200 properties in Santa Clara and San Mateo counties before finding these two to highlight. Now there are twenty-two 3BR+, 1000sq.ft+ properties in 95127 under $400,000. There were just a handful in January.

I figure we might as well compare our January property to a similar one. Since there are so many to choose from, I picked the cheapest one: MLS #783032, 3420 Dominick Ct, 95127. Unlike the Joanne Ave. property I covered in January, this one has several pictures. It is 1203 sq. ft. (128 sq.ft. bigger than the Joanne Ave. property), with 2 baths instead of one. It’s also on a larger lot: 5227 sq.ft. The pictures show dated carpet, paint, and wallpaper that need to be updated, but the house is overall in good shape. And are you ready for this…this larger house is listing for $350,000.

So, by waiting 2 months, you can either get a much larger house for the same price, or save $50,000 (and get the seller to front an additional $10,000 on paint and wallpaper to have a house that matches your needs.) Also, though I still haven’t seen a house that is cheaper to buy than to rent when factoring in property taxes, maintenance, and insurance, at least the mortgage payments by themselves are similar to your rent payments.

A Quick Synopsis Of 95118

For the first time in several years, two 3BR+, 1000sq.ft.+ houses in my zip code, 95118, dropped below $500,000. They sold quickly after dropping their prices below $500,000. However, since there is a lot of inventory in San Jose, I expect other sellers to do the same. This is especially noteworthy since nothing similar in this neighborhood sold for less than $600,000 in the past few years. Now it seems that < $500K is the price point where houses sell. There are also some short sale 2BR condos for $250,000 in my neighborhood — again, a price that hasn’t been seen in a few years. Finally, there is a duplex almost identical to the one I live in on the market, in my zip code, for about the same price my landlord paid in 2004. I see no one is really rushing to buy it…and after watching my landlord put tons of money into this duplex over the past 4 years, I understand why!

Of course, I will keep you posted as things change — I’ll likely post every month or two with updates. I am also tracking Pacifica and Half Moon Bay ocean-view houses, since that’s what I’m most interested in buying. Non-ocean-view houses have been tanking almost as hard as San Jose, but ocean view properties aren’t falling as quickly. Ocean view houses only seem to be down about 10% from the peak. I think it will take another 6-12 months before there is significant price movement there.

Should You Buy Now?

So now should you buy? No way! If houses dropped this much in the past 2 months, they will continue to drop more. Besides, even with these price drops, you’re still better off renting. The conforming loan limit change won’t make any difference — these houses are under the old $417,000 limit anyway. There are now more houses for a better price than there were two months ago. What will the next year or two bring? It will certainly be interesting…and I will keep posting about it.

The housing bust is progressing quite nicely, and identical to what I predicted in 2006. It’s now 2008…what does my prediction say for this year?

1991 (2008): A “dead cat bounce”? Some folks wondering if the bust has bottomed out or not. Sales are abysmal (e.g., -42%). Other parts of the country showing some signs of recovery.

2008 is when you might tell me that I was wrong about all of this and that we’re starting to recover. WRONG. 2008 will NOT be the bottom. Remember, we still have our “0″ year ahead of us.

An interesting thing happened as I perused the MLS last week. (I log on about once a week to track real estate prices in a few different areas of the country.) For the first time since I started tracking real estate in 2003, I found two houses that were affordable from a historical perspective.

I combed through about 200 houses for sale in San Jose, CA, and Pacifica/Half Moon Bay, CA. San Jose is where I live now and I’m most likely to actually want to buy a house in Pacifica, so I am tracking both areas. San Jose is progressing ahead of Pacifica…the first REO’s (“real estate owned”, or properties foreclosed and taken over by lenders) showed up in San Jose in mid-2007, and did not show up in Pacifica or Half Moon Bay until November.

We’re now at about 7 months after the first REOs appeared in San Jose, and the desperation is clear. I’ve watched mortgage companies post REOs for what the property last sold for (at the peak of the market in 2004 or 2005.) Of course, none of those properties sell for that price, so they get aggressive on the price drops until the property sells.

Through my research, I have found the first two affordable single-family home properties in San Jose since I began tracking in 2003. I’m actually shocked that these exist this early in the bust cycle. This confirms that it’s a bloodbath out there.

Property #1 is 124 Birch Ln, San Jose, CA 95127. In fact, both of these properties are in 95127, which is an outlying area of San Jose (confirming my theory that the “tidal wave” of foreclosures would start from the exurbs and work its way inward.) 3BR, 1 bath, 1564 sq.ft. on a nice-sized lot of 7840 sq.ft. Last sale 7/1/2005 for $601,000. Now asking $399,000. Doing the math, we find that is a 34% discount off peak. The MLS lists 3 pictures of the inside and it seems to be in fairly good condition.

This house would rent, in decent condition, for about $1800/mo. Doing the math for 200x rent comes out to $360,000, which I’m guessing the bank would take as an offer.

Property #2 is 3356 Joanne Ave., San Jose, CA 95127. 3BR, 1 bath, 1075 square feet, on a 4,792 sq.ft. lot. A pretty fair specimen of a house for San Jose, though the MLS listing doesn’t include inside pictures, so it probably needs work. Now asking $400,000. This isn’t as good a deal as the first property — rent probably would be $1500/month, which makes the house a bad value at anything over $300,000 (rent x200).

The thing I find most interesting about this property is that it wasn’t last sold during the 2004-2005 peak. The house last sold on 5/1/2001 for $365,000. Doing the math, we find that there was less than 2% appreciation per year since 2001. Not exactly what the Realtors had in mind when they recommended you buy!

These are only a small slice of what is to come. I predicted a total loss of 35% off peak prices by 2011. I’m amazed to see houses already listing for 34% off peak prices. So do I think this is the bottom? Do I recommend you buy? Not a chance!

The “tidal wave” is spreading inward, with San Mateo County and San Francisco just starting to get hammered. Bargains still require you to hunt them down and do some legwork — I only found these two properties after looking at hundreds of single-family homes for sale. The best values are in the lower end of the single-family home market — the high end still has flippers on the market trying to sell big houses for twice what they paid for them a few years ago. It will take another 12-24 months for this to shake out.

Based on the information above and my own prediction timelines, I am going to say that 2009 will probably be the first year you will want to consider buying a house. Even then, you’ll still have declines to deal with for a few years, and flat prices for a few years after that. However, by the end of 2009, if you can find a house that is selling for 45-50% off its peak price (and those deals will be out there, if not more discounted), that you actually see yourself living in for at least 5-6 years, I’d recommend a buy at that point.

This is just the beginning. We are in for a long ride. I am enjoying seeing prices finally become more reasonable, but I’m still a happy renter. I’m holding out for ocean-view property discounted from $1M peak price to $575,000 or so, where I will happily snap it up. I expect I will be renting for at least another year or two!

1990 (2007): Prices take a serious plunge. One article claims that housing booms are a bad thing and we should hope prices stay low. Increasing mortgage rates are blamed for the bust. The word “recession” is mentioned. Gloom and doom.

That’s next year. How many times do you think you will hear the words “looming recession” next year? More than you want to, that’s for sure…

Ah, yes. Recession, recession, recession… Yep, all over the news. Notice I called it a “looming” recession in my post last year. That’s because “A recession is traditionally defined in macroeconomics as a decline in a country’s real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative real economic growth).” (thank you, Wikipedia.) We won’t hit two consecutive quarters this year (or, if we do, it’ll be 2008 before we know we did.) I think the actual “recession” will start next spring.

2008 will be a disaster year for housing. Let me share with you a choice quote: “‘Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets,’ said Lawrence Yun, senior economist for the Realtors.” That’s from this article, published today and titled “Existing Home Sales Fall in 41 States.” Have a good, hearty laugh over that one. Prices are nowhere near “stabilizing.” Homes here have lost about 15% of their value since the 2006 peak. They still have a good 25% more to go down from here…and that’s probably a conservative number.

The proverbial **** has hit the fan here in California. You are no longer able to get an interest rate under 8% for a loan over $417,000. Take note of that number, because I don’t doubt that will become the subject of a heated political debate. $417,000 is highest rate at which Fannie Mae and Freedie Mac will buy a loan. Loans at or below $417,000 are called “conforming.” Loans above $417,000 are “non-conforming”. Since non-conforming mortgages are defaulting at shockingly high rates, and there is more risk associated with them in a market where prices are going down, interest rates have skyrocketed for those loans.

61.9% of the loans in the Bay Area in January-June 2007 were non-conforming loans.

That’s why this post is entitled “The Game is Over.” The jig is up — there’s simply no way more than half of the buyers who qualified for home loans in 2005-2007 in the Bay Area will now be able to afford loans. Add that to the people who can afford home loans, but don’t want to buy in a declining market, and you have a perfect recipe for huge price drops.

I don’t think we’ll begin to see huge price drops until this time next year. A year from now is probably the first point at which I’d recommend actually buying a house…no matter where you are in the country. Prices are dropping now, but they’ll drop more once all of the bad loans are squeezed out of the system. This is going to take a while. Sellers haven’t realized what happened…the bomb that just dropped. They’re still pricing their houses 10-15% below peak. It will be several months before housing prices adjust to this new reality. Don’t kid yourself…this is the new reality. Bernanke may drop the Fed funds rate later this year by 0.25% or 0.5%, but that doesn’t automatically mean that you’re going to be able to get a non-confirming mortgage at less than 8%. Those two things simply aren’t correlated. Mortgage interest rates are dictated by the market for mortgage-backed securities and what buyers of those mortgages are willing to pay, not by what the Fed dictates. Remember, in my chart I mentioned that it wouldn’t be until 2010 that houses truly became a bargain. Notice the quote from the early 90′s bust: “1993 (2010): It’s definitely a buyer’s market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980’s.” We have quite a way to go until we reach that point. We will get there, but it’s not going to happen more quickly this time.

I’m happy to wait things out. How are you doing? I hope you sold your house last year… we’ve passed the point of no return at this point, and it’s downhill from here for the next 6 years or so. I’m optimistic about all of this, though. Downturns are when the most amazing things happen… inventions get made, and people band together to help each other. Yes, it won’t be easy. We will be hit harder than we were in the dot-com boom. But opportunity always awaits.

By the way, if I could make a recommendation… invest in a growing country, and get out of dollars. Which country? That’s for you to determine.

First of all, most of my predicted bubble headlines for 2007 are still making news. I don’t wish to change any of them, and I’m sticking with those predictions for now. A few more recent stories that jibe well with my predictions (and we’ll see more in 2007!)

• Looks like Fannie Mae may take down KPMG with it, as this Titanic grasps at (sues) everything in its path before finally sinking. KPMG out of business? Maybe, maybe not…too close to call at this point. If I had to guess, I’d say the lawsuit will be thrown out and/or KPMG will emerge “victorious” — but battered.
• Florida’s still shaping up to be a disaster. Despite a quiet 2006 hurricane season, Florida’s houses are dropping in value at an astonishing rate, and wind insurance is playing a huge factor in that decline. From the linked article: “Insurance companies dramatically raised premiums after Hurricane Katrina. Depending on where they live and their policies, Florida homeowners may pay as much as 10 times more for flood and wind insurance than last year; premiums can exceed $30,000 per year on mansions.” Woof.
• Naples, FL seems to be “ground zero” for home price declines, taking the one of the largest YOY (year-over-year) price declines for a major market. From the article: “Median sales prices for homes dropped by 13 percent from $479,800 in November 2006 to $415,200 last month.” I’d hate to be someone who bought in 2005. Foreclosure, anyone?
• Ah, yes, and speaking of foreclosures, that’s going to be a popular news item in 2007. Watch what’s happening in Denver now for a preview of what California will be like in 2007 and 2008. Bloomberg says “About 20 percent of sub-prime mortgages granted in the last two years will end in foreclosure as owners struggle to make payments and home prices stagnate.” A reminder that more than 60% of the loans granted in California in the last few years were “payment option” or “adjustable rate” mortgages — exactly the kind of loans that were offered most often to sub-prime borrowers. By 2010, 1 out of every 15 borrowers in California could lose their home to foreclosure. That means, if you live in California, you’ll likely know someone who was foreclosed. The really unfortunate part is that most of these borrowers have no equity in their homes, so there’s no good reason for them to try to hold onto their house. They’ll just give up the keys and walk away…and the “investors” who bought piles of subprime loans on Wall Street will take the hit.
• Speaking of mortgage lenders…how are they doing these days? Well, if the last month is any indication, most of the subprime mortgage lenders will eventually either be sold at cut-rate prices or simply close their doors. OwnIt Mortgage Solutions became one of the first lenders to go out of business last month. That company provided thousands of loans to subprime borrowers in California. There will be more…many more.

I’m now going to go out on a limb and make a few bolder predictions not just encompassing 2007, but the rest of this decade. The oft-mentioned retirement of the Baby Boomers is almost upon us. By 2010, most of them will retire. Or will they?

You see, a lot of those Baby Boomers put all their wealth into dubious investments like overpriced real estate. I’ll use my landlord as an example, but there are millions more like him. In 2004, my landlord had a brilliant idea to buy a bunch of overpriced properties in the Bay Area and rent them out as his retirement strategy. Unfortunately for him, the fundamentals didn’t really make sense, and he’s been losing money on most of them. The rental prices he gets are break-even with his mortgage payments, but by the time he factors in repairs and property taxes ($6250/year on the place I’m living in!) he’s underwater by a significant margin. I assume he expects to sell for a profit (“real estate only goes up!”) to fund his retirement. He’d have to do that in the next 12 months, though, to make much of a profit (if any) and it looks to me like he’s planning to sit on them for a while longer.

Baby Boomers who bought into real estate (or, increasingly, even the stock market, which is fairly overvalued right now as well, though I don’t expect it to crash in 2007) to fund their retirement will be mostly out of luck when they decide to cash out in 2007-2011. That means that the much-vaunted “worker shortage” due to baby boomers retiring will most likely be nonexistent. Remember all those scary charts that projected a massive worker shortage by 2010? I don’t think you’ll see that as the case, with baby boomers going back to work (or not retiring in the first place) because they need so much money in order to survive. Unfortunately for them, most of the Boomers are very consumerist, meaning a “simple” lifestyle is not an option, and thus they will work well into their 70′s in order to continue to feed their lifestyles.

Speaking of “simple” lifestyles, as the economy tanks over the next few years (first real estate, then industries directly related to it like mortgage brokers and construction, then industries feeding the home industry like Home Depot and Lowe’s, then furniture stores, then service industries like plumbling, then businesses who sell to those businesses…creating a dramatic ripple effect through the economy), the “simple”/”frugal” lifestyle will start to come back into vogue. This is the time to take advantage of that trend and start a website, blog, or whatever else you want devoted to some niche of that lifestyle.

If you’re not the entrepreneurial type, I recommend holding off on major purchases and focusing on paying down debt as quickly as possible. Be long in cash and commodities and short in bonds/CDs (no reason to go long in bonds with the inverted yield curve.) Cash will be king once the stock market grinds to a halt (probably in late 2008-early 2009 or perhaps later…hard to forecast at this point.) Even now, there is not much to be made in mutual funds/stocks unless you trade (and trade well/do your research) instead of hold.

I’m also predicting that something major will happen to Lowe’s or one of the smaller home improvement chains. I believe a buyout/merger is imminent in that industry.

That’s a rap for 2006, and some guidelines on how to make money in the coming years. I’ll post more ideas as I have them (and I do have them!) Expect more blog posts from me in the New Year as I integrate blogging into my daily routine. Enjoy the rest of 2006!