Rhetorical question- how many real estate cycles have you lived through? Where were you living when that was happening?
To take just one example of an adverse market while showing my age-the S&L "crisis" was only minor if you lived somewhere other than CA/FL/AZ/TX/New England, but there was fallout to some degree in many other places. I concede it wasn't "national" like the 2008-10 bust, but for the people in those markets it was painful. Should have seen the discounts to book/invested $$ when I helped liquidate failed institutions in the early 90's. In addition to the homeowners stuck, unable to sell at any price in those markets at that time. As late as the mid-90's owners in many areas of SoCal were selling at a discount from what they paid 5-6 years earlier. Another factor in SoCal and NE was the decline in defense spending after the USSR collapsed. More than one thing can happen at once.
One can believe it won't happen, or to me, or it won't be meaningful, but I've seen all those first-hand.
Another rhetorical question-Have you gamed out what could go wrong with your forecast? What is the impact if one or more of the "nope" turn to "yes"?
You're betting your money, not mine. I've seen too much go too wrong to play at this point. Just hoping the market hasn't completely collapsed and there are still buyers when it's time for me to sell in a few years. Good luck, hope it works out for you as confidently predict.
I'm 40 and lost my first $20k I saved (and then some) to a townhome I bought in 2005 that I sold in 2009. And the S&L crisis was fairly minor to housing even in the areas you mentioned. Yes a 5% drop in price stinks, but not a big deal unless you just bought and had to sell immediately, which given the average age of living in one place is 13 years, is not common.
As I've already said, I don't want prices to keep rising. My main focus on real estate is
cash yields. Rents are insanely sticky so if housing prices tank and rents are stable, I will back up the truck and live a wonderful early retirement. So what will I do if prices drop? The answer is BUY-BUY-BUY
Second, I've thought about this and done more analysis than probably 50 typical Americans combined. Nothing is indicating prices will drop.
I think the better question for risk is would you rather buy now and perhaps see a 5% drop in prices in the next two years than stay as a renter or the possibility we see both rents and home prices both go up 25% over the next two years? Keep in mind the only time we've seen housing prices drop 5%+ since 1900 is twice, both largely caused by foreclosures. But given we have the best underwriting class of buyers in US history the last few years and there are 5 million more jobs available than people looking for jobs, that seems highly unlikely in the current situation. Second, do you think prices will be lower or higher in 10 years than today? How about rent? The answer is both are likely to be much higher. Just like with stocks - trying to time the market is extremely difficult.
Another question - were you giving people the same advice a year ago? If so, you did substantial damage to anyone you gave advice to with rents and housing both up nearly 20% nationally in the last year and mortgage rates 1.5-2% higher.
One of the key things for investments and things like this is to look at it without emotion and look at the situation factually. Except for the fact that it costs more, every other factor is bullish for housing. Most folks get really emotional about housing and indeed act like a 2-3% drop in prices are the end of the world (still way less volatile than stocks and bonds!)
I don't know about using your bonds for paying for the house. I'm not saying bonds are worth holding in this market, but I don't know why someone who could easily qualify for a 5% mortgage when inflation is 8.5% wouldn't borrow instead. It seems like free money. Cash may be king, but the highest offer is still the most compelling argument.
Because the bond is a fixed coupon and inflation is irrelevant. A mortgage is effectively a negative bond (to you, a positive bond to the noteholder), so trading a 2.5% yield on a bond for a 5% yield on a mortgage is a good trade. And while inflation is obviously very high right now, what sources of investments do you have right now that will confidently deliver over 5% over the next year with no risk (just i-bonds) or 10% with moderate risk? Now you could make the case to both get rid of the bonds and take on a mortgage as well, but this is basically an intermediate step with a guaranteed increased effective return to your net worth.
