<There are many, many times in our lives when we have to stare into the future and throw the dice: Buying a house>
[Pg. 90]
"Well," he said thoughtfully, "maybe it's time for the two of you to start thinking about buying a house."
"Hold it, Hazen," cried Peter. "Last year, you told us we were clever for renting rather than buying a house. Make up your mind."
"Times change," replied Hazen. "and you've got to change with them. Maybe you're ready for your own home again. I'd be glad to talk real estate with you- just name the time and place."
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[Pg. 106]
"But before we get started on our lunch. I was wondering whether you wanted to talk about real estate."--[Hazen]
"Great!" said Peter. "I want to hear what's changed on your mind on the subject."
"Nothing's changed, actually." Hazen answered. "I'm convinced that real estate is no longer the investment vehicle it was back in the 1970s and '80s, when the boomers were in the midst of housing themselves. And you know what happens to prices when demand outstrips supply! Your parents reaped the financial rewards of selling their homes to this gigantic groups of buyers. But things are different now. The boomers are housed and the surge of buyers is over. The smaller baby bust generation can't continue the home-buying bonanza. The larger echo boom generation won't be buying homes until the 1920s. And even that's not going to amount to a real estate boom because so many boomers will be wanting to move out of their family homes at that time. We'll have a situation where we'll see lots of demand but an equal amount of, or maybe even more, supply as boomers downsize."
"Are you saying that housing was overvalued in the '70s and '80s?" I asked --- [Meredith]
"Not at all. Those astronomical values were justified back then. People were willing to pay those prices. They are overvalued compared to today's market. But that comparison is completely theoretical. And hindsight is always 20/20. I'm not buying a house today in the 1980s market. When we're valuing any commodity- housing, food, stocks - we've got to look at the here and now. What's it worth today? Then, when we're determining whether that commodity is going to be overvalued by tomorrow's standards, we've got to factor in our best guess, based on a combination of historical evidence and future predictions and estimates. And I'll tell you right now, there is nobody who can accurately predict what lies ahead. The result? There are many, many times in our lives when we have to stare into the future and throw the dice," said Hazen.
"So, this is what it boils down to- pure speculation?" asked Pieter.
"No. Ideally the guesses you make- whether it's a decision to buy a home or invest in a stock - will be educated guesses. That's one of the reasons we're talking about valuations today. Part of that decision making is an attempt to figure out whether the commodity you buy will hold and, you hope, increase in value in the future. But there are some basic facts we can't overlook. If I'm the only guy selling water in the desert, I can charge a lot more than the fellow selling water in downtown Ottawa. The price of the water in the desert is overvalued compared with the price of the water in Ottawa. But if you desperate need a drink in the desert, that's a minor detail. And, as we mentioned during our discussion of the Internet, values and the way they're calculated do change, depending on where you are and when you're there."
"So what's going on now?" Pieter asked. "I keep reading about how hot the real estate market is - housing starts are up in nearly every large community."
"That, I believe, is a result of pent-up demand. Now that the economy is healthier than it has been in the past five or six years, those people who put off buying a home have entered the housing market, giving it a temporary injection of life," explain Hazen. "In the long run, real estate looks dismal as a place to invest money. The better way to look at a home is a place to live. There's a journalist in the U.S., Craig Karpel, who says that we have unreal expectations of the values of our homes. He says that we don't go to the restaurant, eat a delicious meal and then leave, expecting the owner to pay us. Why, he asks, should have all the benefits of living in a house and expect to be paid for the privilege of enjoying that experience? Many experts predict that if boomers hang on to their real estate too long, they'll see some of their equity vanish. I think that many people are beginning to understand this. Large numbers of folks have seen their mortgage payments decrease in the dace of falling interest rates- either they've renegotiated their mortgages or their mortgages have come due. In any event, we haven't seen these people out there buying bigger and better houses as a result. No, many people out there are staying put, realizing that the biggest house they can afford to carry may not be the best investment."
"Well, that's not good news," I said. "So why on earth are you suggesting that we should get back into the market?"
"Let us live while we live," replied Hazen, with a grin on his face.
"What do you mean by that?" asked Pieter
"We should strive to live for today and plan for tomorrow,"repied Hazen. "I guess what I'm really saying is, don't live in either extreme. I see people who have never saved a dime and live only for the moment. Others save everything they can get their hands on and live like paupers today. Take my word for it, neither extreme is good for the soul and, looking at the big picture, neither is good for the economy. We should be doing some of each- a little saving, a little spending..."
"I don't know," muttered Pieter. "We very nearly lost our shirts on our first foray into real estate."
"So that's it?" A slightly sacarstic tone had entered Hazen's voice. "You're not going to have what you want because you're afraid to take a chance? Life's not going to be very fulfilling experience if you don't take some risks along the way."
"Risk is a big part of my work life, Hazen," replied Pieter. "I'm not so sure that I want to have risk become a significant element of my personal life too."
"I'm not talking about gambling here," Hazen said with a chuckle. "The real estate market is life any other. You research, you study, you assess the risks you're facing- and then you go for it. I know both of you- you'll regret it if you choose the cautious course. Let's take a good hard look at the real risks here." He paused, staring in turn at both of us, ensuring that he had our attention. "Some things have changed for the two of you over the past year. Pieter, you in particular seem to be having some serious issues about living in a rented home. Look at your reaction to the washing-machine imbroglio. You're not happy. I think it's time to ask yourself whether, for your own peace of mind, you should start looking around for a home to buy. Your business has picked up, Pieter, and the financial plan you put in place last year is already paying dividends. Maybe the time is right."
"But how do we avoid the mess we got ourselves into the last time?" I asked.
"I think if you pay close attention to the market, you can minimize that kind of risk. First and foremost, pay attention to demographics. That means stay away from starter homes out in the suburbs. There's nobody to buy them now. Second, adhere to the golden rule: Buy what you need and not what you think you want. In other words, be realistic about your needs and your pocketbook. A local magazine recently published an article listing the 500 most expensive homes in Ottawa. Well, I know a few of the people on the list who are using way too much of their income to support that fancy house. It's so important for them to be in the right neighbourhood that they're willing to risk their future security- they don't have enough income left over after paying the morgage to save for the future. That's just dumb! Third, be very careful about the location and neighbourhood you choose. Your best bet would be a neighbourhood that serves as a large a community as possible. By that I mean you want to be in an area that appeals to all ages. For example, many suburbs cater only to families with young kids. By looking for a neighbourhood that appeals to a broad cross-section for the population, you'll increase the number of potential buyers when you go to sell."
"It all boils down to supply and demand," I said. "Where do we find these mass-appeal neighbourhoods?"
"You're living in one right now," replied Hazen. "Walk along the streets in the Glebe and you'll see all ages and all varieties of households. That's because the neighbourhood is very central, close to downtown but with great parks and shopping and services within walking distance. The Glebe is an example of a neighbourhood were housing is going to hold its value. There! I've given you my best guess on the valuation level of real estate in the Glebe."
"But we could get more house if we bought out in the burbs," said Pieter. "We'd easily pay $225,000 for a 1,500 square foot house in the Glebe. We could get a 3,000 feet way out in Orleans for that money. I just don't know. I do know that I'd love to be in my home."
"There are the trade offs. Life's full of them," replied Hazen.
<Taken from WHEN THE PIG GOES TO MARKET: How to Achieve Long Term Investing Success by DAVID CORK>
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