Monday, July 22, 2002

As stock prices settle slowly towards historically normal P/E ratios, collapsing a bit like an overcooked soufflé, bemused observers have to wonder if there's another soufflé about to drop. (Those of us who can afford to be bemused, at any rate; I've been dragging my feet on getting my retirement funds into equities for years, to the deep frustration of my relatives who write books on investment, and a narrow consideration of my short-term results relative to market norms would certainly lead one to believe that sheer bloody-minded indolence has been severely underrated as an investment strategy. But regrettably, past performance is no guarantee of future results).

With that in mind, I've got to wonder what the heck is going on in real estate. Like equities, Boston housing prices have been soaring in recent years (as they have in a lot of other cities), and long-time residents of many neighborhoods who didn't have the foresight to buy some years ago are finding themselves chased out of their homes by rent increases. But lately, not only have rents stabilized, but the market as a whole has taken a peculiar turn.

Historically it's been the norm that (at least after considering the tax benefits), it's cheaper to own than to rent. In Boston nowadays, though, when I look at what's out there and do the math, that's no longer the case; last year, when I was last looking, they were roughly at parity (at least for the condos or apartments in the city that I was looking at), and since then, sale prices have continued to soar, while rents have stagnated or even dropped a little, depending on how you count. (Landlords are signing new leases with a month, or even two, of free rent, a discount which avoids the shame of actually cashing a smaller check, and the horror of renegotiation with current tenants).

So we have sale prices rocketing up, while rents, which can be taken as at least a crude index of underlying value, are going the other way. I've actually had the joy of asking a few real estate brokers about this, and had them roll their eyes and say they don't understand it either --- which means they're either unusually candid, or brushing off an unqualified sale. But one explanation could easily be that residential real estate prices (soaring in many cities around the country) have been another bubble.

Which could get very uncomfortable for families which have counted on their homes as an investment, particularly if they're already suffering the consequences of declines in the equity market...


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