I'm pretty sure CNBC (which runs 24/7 behind me in Fool HQ these days) has taken a page from the hourly action at Disney (NYSE:DIS) theme parks. Instead of the Princess Parade, the channel provides ultrafrequent updates on the housing bubble, inviting important guys in suits to debate whether or not there is such a thing, and what might happen if said bubble did nor did not pop. Will builders like KB Home (NYSE:KBH), D.R. Horton (NYSE:DHI), and Pulte Homes (NYSE:PHM) take it on the chin?
Perhaps not, to judge by housing demand. Today, the news is that existing home sales rose to a record 7.2 million in April, increasing 4.5% over March. The median home price was up to $206,000, 15% more than the year before. Plenty of observers attribute the recent increases to speculative "investing," though others insist the trend is built on solid demographic shifts.
In our neck of the woods, things look pretty unhealthy. I recently came across an OK-looking three-bedroom, maybe 1,000 square feet. 1950s vintage. Needs a new roof and windows and updating throughout. Price: $500,000. If you're screaming, you don't live in the D.C. area. The showing agent expected prospective buyers to make an offer within two days, and, as is now usual here, to waive all reasonable protections like inspection clauses. To me, that screams, "Bubble!"
But that doesn't mean it's true everywhere. And it may not matter.
So, here's a thought. Ignore the entire question, and just do the math. The thing you need to know is if buying a home makes sense for you, and we can help you there. (We've got 17 calculators here that run the numbers. You can compare mortgage rates here. And unlike Professor Combover, we won't charge you $300 to learn the basics.)
For a reality check on the house I spied, I popped a few numbers into our handy rent vs. buy calculator. It informed me that we would be $60,000 worse off after seven years if we buy rather than continue to rent. It also assumed we'd be comfortable putting more than 50% of our income on the line for a home payment every month and it assumed 5% annual appreciation in housing prices for the entire seven years. In my opinion, those are pretty bad assumptions.
The bottom line is this: A home is not an investment. It can work like one, if you pay the right price. But if you're forced into overpaying to keep up with a frothy market, the odds aren't in your favor. Personally, I'd rather put my spare cash in Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) and let the homeowners pay me.
For related Foolishness:
- Will home-builder investors be nailed by the housing market?
- Home Depot or Lowe's? I've got my opinion, but the answer might be "both."
- How much would you pay for virtual classes from Trump?
- The Fool's homeowner message boards (free trial required) are full of great advice.
As much as he likes having a home, Seth Jayson is quite attached to cash in the bank. At the time of publication, he had no positions in any firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
