Dodging the real estate bust

There has been a lot of talk about the housing market lately. A number of economists or experts have expressed concern about the extent of the housing bust. Is it done, or will it continue to fall?

In the Wall Street Journal this week, there was an article about renters who feel vindicated, because they did not buy homes during the boom. Some sold their homes at the peak of the market and are now renting, while others have been waiting on the sideline for years. One renter, in particular, has been a strong advocate of renting over buying. He makes some very logical arguments. Check it out.

It's not clear what you should do if you don't have a house and want to get into the market. Only you know how much house you can afford. If you follow the traditional lending rules (see Patrick's website), you should be OK. This rule is possible to follow in some areas of the U.S. However, if you live in the San Francisco area, where the median price of homes are above $650K while income levels have not risen much in the last few years, following those lending rules might not get you into a house. In this case, you'll have to stash as much money away as you can and wait with Patrick. (Note: The tax advantage of owning a home is only an advantage if you follow the traditional lending rules. See Patrick's website for details.)

If you already have a house/condo/townhouse and you don't mind the hassel of moving, you might want to consider selling it and socking that profit to build your wealth, increase your net worth, and plan for early retirement. Be aware that if the gain from the sale is greater than $500K per couple or $250K per person, you'll be subject to capital gains tax.

If you are holding onto the home in hopes that housing prices will resume their skyrocketing trend, you should keep that hope in check. Don't gamble. It's the worst thing you can do with any investment.