Monday, March 24, 2008


In the late 90s as .com fever was sweeping the nation, seemed like every 2nd show on TV was about investing. In the mid 00s every 2nd show on TV was (and for some reason still is) about flipping homes. Now that the recession is upon us, seems like every 2nd show on TV and radio is about money management. The two current gurus on this subject are Suze Orman and Dave Ramsey. Both have syndicated TV and radio shows and sell gajillions of books. Dave brings in the 'Jesus is leading me down the righteous path' angle for those in need of some preaching to go along with their finance advice.

Ramsey is a life long real estate 'investor' and general REIC insider, so I wouldn't expect him to be anything but a shill for the industry. He still is telling his followers that real estate is a can't miss opportunity and this whole housing crash is a nothing to get worked up about. A tiny blip and of course the best time to buy.

Suze Orman on the other hand has it almost right. And I am glad someone is finally telling the great unwashed masses the was things are. She is right that 6 months from now r/e will be no better than today and most likely much worse. She is right that as prices are falling, 1st time buyers are benefiting. She's right in that making 50% off lowball offers costs you nothing and you shouldn't be afraid to insult anyone by doing so.

She is wrong however on the general nature and tone of the article. That is this kind of desperation to buy your first house. Buying a house only makes sense when one of two conditions are met. Home prices are rising or the cost to own is less than the cost of renting the same house. And when I mean the cost to own, I mean mortgage, taxes, maintenance, repairs, insurance, HOA and the lost monthly interest earned from a down payment. If at least one, and preferably two of those conditions are not met, then buying is a bad move. Doesn't matter how great a FICO score you have or how desperate builders are so that they throw in free tile floors. It's all just noise to drown out the fundamentals. And she never mentions this, sticking to the NAR (National Association of (Lying) Realtors) talking points. If a house that is worth $250K was selling for $500K last year, just because it is selling for $400K this doesn't mean you should run out and buy it.

It would be like giving someone advice on buying stocks. Sure company XYZ will decrease from $25 to $15 over the next 6 months. And sure you're better off putting your money in a 3.5% CD instead. But since the stock was at $40 at one point, and you've never owned stock before, you should buy anyway, because stocks are a good investment over 10 years. Sounds like insane advice, yet when the same advice is given with regards to house buying, people act on it and buy houses.

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