Undue Praise For Chicken Little Shouldn't Scare California Homeowners

by Be_Devine [courtesy of Calitics - Front Page]

The lead story on the SF Chronicle's website is an article singing the praises of California Real Estate blogger Patrick Killelea who runs the site Reality Parser.

The gist of the article is how smart Killelea is because he saw the burst of the California housing bubble coming.  Nevermind the fact that his prediction was eight years too early.  In fact, he was so smart that he didn't buy a house in Berkeley in 1999 because the market was just too overpriced.

How smart was Chicken Little's decision?  Read the flip

The article describes how smart Killelea was by not buying a house at the height of the dot-com bubble:

In 1999, he and his wife tried to buy a house in Berkeley at the height of both the dot-com bubble and housing mania.

"It all felt rigged," he said. "Everything was set up to get me to overbid and not do an inspection; basically throw caution to the wind. It just felt really wrong. I felt like a sheep among wolves."

After being consistently outbid, the couple decided to rent instead. They found a charming Menlo Park two-bedroom on a tree-lined street for $2,700 a month. After a couple of years when the rental market softened, they asked for a rent reduction and now pay $2,350. "I would be paying out and losing about three times as much" to own the equivalent house, he said. "In some big urban areas like Manhattan and the Bay Area, it may never be cheaper to own" than rent.

His theory is that people are better off not buying a home.  Instead, they should rent and use the money that they "save" to invest in other ways. 

Killelea does contract programming work but said he can take off months at a time from his $100-an-hour software gigs because he took his savings from renting instead of buying, invested in the stock market and did quite well. His last job ended in March and he's just thinking about looking for a new one.

Now wait a minute.  There's no dispute that there's been a slow-down in the California housing market this year.  But does that really mean that families shouldn't buy houses that they can afford because the market is too "overpriced"? 

Let's take Killelea's own story as an example.  He was scared to buy in Berkeley in 1999 because, at the height of the dot-com boom, he was worried that prices were too high.  Well, as it turns out, in 1999, the median price of a home in Alameda County was $289,000.  Had Mr. Killelea purchased that home, he probably would have put 20 percent ($57,800) down and would have financed the remaining 80 percent with a mortgage paying interest at around 7 percent.

Last month, even after all the problems in the economy, the mortgage market, and the housing sector, the median price of a home in Alameda County is $660,000.  

If Killelea had bought that median home in Alameda County in 1999, at the height of the dotcom boom when everyone was sure that home prices had peaked, it now would be worth $371,000 more than he paid for it. And because he only needed to put a 20 percent down payment, that translates to a 641% rate of return on his money.

If Killelea considers an eight-year return of 641 percent to be shabby, then god bless him. Killelea says he did "quite well" by investing in the stock market instead of buying a home.  How well?  Well, if he had invested the same $57,800 in the S&P 500, he would have realized a return of about 17 percent (about $10k) in the same time period.    "Quite well," or just about keeping up with inflation?  I don't think anyone is retiring early based on stock investments in 1999.  Personally, I would rather have the $371,000 profit over the $10,000 profit.  Call me crazy. 

There are many problems in our housing market, many of which were caused by irrational speculation.  And many counties in California and across the country have been hit much harder than the Bay Area.  But that doesn't mean that people who can afford to shouldn't buy a home to live in. 

I hope Killelea is not actually convincing Californians to make the same stupid decision he made by not buying a home they can afford.  And it is irresponsible for the San Francisco Chronicle to report such irrational alarmism without any real counter-argument.