Do you know how many dollars your spare room is costing you?

Do you have a guest room but few friends? (sorry.) A formal dining room that looks pretty because it rarely sees a crumb? A formal living room that only gets walked through on the way to your home’s hub: the kitchen and family room? Spare rooms… you dust them, vacuum them, furnish them, paint them, fuss over them… but rarely do you LIVE in them.

How many dollars does a spare room cost?

I pondered this question during our walk to our neighborhood park today. Our condo is surrounded by large suburban homes. Each home statistically has an average of 2.5 people living in it. I suppose the poor little 0.5 member is missing a few body parts. Probably from all that excess dusting. I digress. I look at these gigantic homes and wonder how many of their rooms get LIVED in on a daily basis versus how many sit pretty all day long but never see any true love.

So being the environmentally sensitive money gal that I am, I crunched some numbers today to see if I might encourage a few folks to join me in downsizing to a just-the-right-size home.

For those of you that don’t enjoy numbers as much as I do, I’ll get to the punchline pronto:

In my neighborhood, a typical 12′ x 12′ spare room (guest room, formal dining room, whatever) could cost about $350,000 EACH over the course of a 30 year mortgage!

Mommy’s Million Dollar Recipe: Dusty Room Dump-lings

Downsize your home by 432 square feet (three 12’x12′ rooms)
Which will reduce your monthly housing expenses by $530 a month
And invest your monthly savings into a diversified investment portfolio
Yield: Over one million dollars ($1,000,000) in 30 years!

For my fellow number nerds, here’s the assumptions I used for my calculations:

12′ x 12′ = 144 square foot spare room
Typical cost of housing per square foot (in my location) = $150
= $21,600 cost per spare room
@ 5.5% mortgage interest rate for 30 year fixed
= $122.64 month / room in principal and interest cost
+ $18 / month / room in property taxes (1% of value annually)
+ $9 / month / room in homeowner’s insurance (0.5% of value annually)
+ $27 / month / room in allowance for periodic maintenance, repairs, remodeling (1.5% of value annually)
= $176.64 / month / room…
…NOT including extra utility expense or furnishings
+ lost opportunity cost of $176.64 savings invested at 10% long-term compounding average annual return for 30 years (mortgage term)
= $348,692 TOTAL PER SPARE ROOM (x 3 rooms = $1,046,076)

So what do you think? Is this million dollar recipe worth dumping a spare room or three?

Why I’m Waiting Until After 2012 To Buy A Home

The real estate and mortgage industries are trying hard to convince us that NOW is a good time to buy a home. They use low mortgage interest rates and the soon to expire First-time Homebuyer Tax Credit program (which I qualify for since I’ve purposely been a renter for the last 6 years) as their rationale.

Don’t expect unbiased advice from salespeople! What most won’t fess up to is that if I (or you) buy a home now, we’ll likely be throwing our precious money away because home prices are still under great pressure. I’ll wait until the knife stops falling, thank you very much.

We are done with subprime resets but… pay attention… there is a second wave of mortgage resets to endure. What is a mortgage reset? It’s when the homeowner, who bought a house with a low “teaser rate” and planned to refinance when the house price went up, gets a new payment that is far higher (not always, but usually). Many homeowners can’t afford these resets, especially with unemployment and underemployment rates at these levels. Lenders are cautious and tightening their underwriting guidelines so refinancing may not even be possible for many borrowers.

The first wave of resets was subprime. The subprime wave is over. Whew! That hurt! But Alt-A and Option ARM resets aren’t over and combined, they represent a much larger category of mortgages than subprime. Most of these mortgages are already underwater: the home has negative equity; the home is worth less than the mortgage owed. The combination of resets plus the underwater status will likely add fuel to defaults and foreclosures, putting yet more downward pressure on home prices.

Some argue that the problem with adjustable rate mortgages resetting to higher payments isn’t as important now because many of those loans defaulted early. Even so, we still face the major problem of shadow inventory: distressed mortgages facing foreclosure and bank-repossessed properties that have not yet reached the market. At the current rate of sales, it could take almost 9 YEARS to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years (according to LPS Applied Analytics).

Another knife that has the potential of slashing home prices further is the increasing prevalence of walkaways (strategic defaults): the decision by the borrower to stop making payments on a mortgage despite having the financial ability to make the payments. Walkaways happen after a substantial drop in the house’s price. The borrower is underwater so she decides to free herself from the burden of mortgage debt. Once free of the mortgage, she is free to use her income for other expenditures. The borrower, after deciding to not make payments any more, can live free of the costs of mortgage payments until the lender forecloses — which may take the lender from several months to years!

A study in September 2009 from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. While I haven’t looked for a more recent statistic, I can only guess that this number will climb as more homeowners get mad at Wall Street and as walkaways become less morally and ethically charged.

I’ve been told by countless Realtors that I should buy a home NOW because having been a renter for the past 6 years, I qualify for the First-Time Homebuyer’s Tax Credit. But what do you think will happen to house prices once the tax credit incentive expires? I’d say houses will not sell as well as they have lately (with the credit artificially propping the market up) which will increase the supply of homes on the market… and push down on prices.

I’ve also been told by Realtors that I should buy a home NOW because mortgage interest rates are so low. But I don’t worry about rates because I have the cash to purchase our next home outright if the interest rates move up. Even if I did need a loan it wouldn’t change my mind because as Patrick Killelea astutely points out,

It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

  • Your property taxes will be lower with a low purchase price.
  • A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life.
  • As interest rates fall from high to low, house prices increase.
  • Paying a high price now may trap you “under water”, meaning you’ll have a mortgage larger than the value of the house. Then you will not be able to refinance because there you’ll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.

Additionally, if interest rates rise, the number of borrowers who can qualify for a higher mortgage payment will drop. Less qualified buyers in the market means… you got it… more downward pressure on home prices.

In summary, I see no rational or compelling reason to buy a home right now. 2012 or after? We’ll see!

Note: This post was featured in the most creative Carnival of Personal Finance I’ve ever read — check it out! The Origin of the Piggy Bank by Well-Heeled Blog

Don’t miss anything: Subscribe to receive free email or RSS notifications whenever I publish a new blog post. No spam, no risk, and it is easy to unsubscribe should you ever change your mind. Follow me on Twitter (@MillionMommyND) where I share interesting articles, opinions, quotes, tips and other bite-sized tidbits relevant to success, happiness and financial freedom.

Is The Recession Over? My Gut-Check Impressions on the Future of Our Economy.

I’ve been receiving emails lately from people asking questions like:

“Is the stock market experiencing a true recovery or is this just a bear market rally?”
“Do you think we’ll see a V, W, U or L shaped recovery?”
“Should we expect deflation or inflation?”
“When will my house be worth as much as I paid for it?”
“How should I invest my money? Stocks, bonds, cash, real estate, gold, or foreign currencies?”
“Is the recession really over?”

Some are saying that I’m prescient (have knowledge of events before they take place). As much as I wish this were true, it isn’t, I promise. I got out of real estate and stocks before many others simply because I stopped listening to mainstream and acknowledged the writing that was already plastered on the proverbial wall.

Like many of you, I hear and read convincing forecasts made by a variety of so called experts who support opposing arguments and recommendations. And each time, I try like hell to take a step back and take a gut check. What seems to make the most sense to me? Is there evidence to support it and if so, who or what is the source? What emotion am I feeling and what does this emotion “want” me to think? What is the worst thing that can happen if a particular forecast comes true? How can I reduce the risks associated with various outcomes? And last but not least, what decisions will allow me to sleep well at night?

I’m hesitant to share my recession outcome opinions with others for a few reasons: 1) I don’t want anyone to make decisions based on my guesses, 2) Discussion of possible outcomes often turns to politics — and political discussion tends to get overheated, 3) Some might take perverse joy from pointing to this post in the future, with a wagging finger, telling me how wrong my guesses ended up.

But I’ve decided that I’m as entitled to guesstimate forecasts as anyone else, so here it goes, for nothing more than entertainment value and for exposing my potential bias. Normally I provide hyperlinks to information, statistics and educated opinions that support my writing, but not today. If you want to read the news or hear what the “experts” are saying about this stuff, use Google, turn on the boob tube, crank the radio or grab any newspaper. There is no shortage of opinions thrown about. Please come to your own conclusions.

Here are my gut-check guesstimates on the future of the economy:

I think the stock market will climb a bit more, then retest the March lows. Minus some funky blips, I think we’re in for a long “L” shaped recovery; or really, one that looks more like a long bathtub:

(March ’09)    /\_____________/    (several years later)

Note: The bottom of my tub diagram should have an overall slow gradual curve to it plus a few wicked and jagged up-down points but I don’t know how to illustrate this with my keyboard. My bathtub edges should look taller, too. If it wasn’t so close to my bedtime, I’d draw you a picture instead…

I think we’ll continue to experience deflationary pressure. I think the Fed will continue to “stimulate” the economy but will face an upward battle trying to make it stick. If and when deflation is curbed, measures will be needed to tighten the money supply to prevent hyperinflation. I think these measures will be taken. From what I understand, it is easier to curb inflation than it is to stop a deflationary spiral.

I think housing prices have further to fall in most areas. Besides the probability of an overcorrection, Baby Boomers are beginning to hit retirement age and because much of their net worth in real estate and stocks has been wiped out, they will be downsizing en masse. McMansions will languish on the market or they’ll be repurposed into multi-family or extended-family units. Commercial property will be hit with a sledgehammer.

I think I will continue to stash most of my cash because with deflation, cash is king. When I do buy ETFs (only the ones that are experiencing upward momentum), I will keep tight stop losses in place. I will take a look at the currency market (certainly not my area of expertise) to see whether or not it’s a good fit for me. Overall, during this extremely volatile market, my main focus is capital preservation. This keeps me sleeping as snug as a bug in a rug.

In this economy, I think one of the best places to invest is in one’s own skills and education. I think vocational schools will see an increase in enrollment while universities see a marked decrease.

Entrepreneurs most likely to succeed will be the ones who bootstrap, sell low-priced necessity items, entertainment or services and keep overhead extremely low. Most of them will operate from in-home offices.

Because I think prices will continue to fall, I will continue to put off large purchases.

And finally, as painful as the process is likely to be, I think the Great Recession will ultimately be the Great Shake Up our society and planet needs to get on the financially and ecologically sustainable track. (Wow, that’s a mouthful.)

Okay, now it’s your turn. What do YOU see in your magic crystal ball? Please share your opinions and guesstimates in the comments. Have fun and play nice.

Relevant Post: Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario

Realtors Might Not Have Your Best Interests At Heart

I made contingency-free, cash offers on three different houses this week. I used recent sold comps (comparables) and price-to-rent ratios to calculate a reasonable price.

All three listing Realtors refused to present my offer to their sellers “because my bid wasn’t close enough to their asking price”.

Even though Realtors are legally required to present all offers, sometimes they don’t.  If I was in the mood for it, I’d get stinky and insist upon it. But obviously, I know these Realtors won’t present my offer in a positive way to their clients. I’d be wasting my time. My contingency-free cash offer might be good for their seller, but the lower price would mean a lower commission to the Realtor…

The Realtors in our local market appear to be in denial about the state of our current economy and still have their heads in the sky about house valuation. Houses are getting contracts, then failing to close because they fall short when it comes time for loan appraisal.

During my housing search, I’d ask the listing Realtor how they arrived at their price. What comps (comparable sales) did they use? Most of the Realtors told me they used “active comps” (houses currently for sale) rather than “sold comps” to set their price!

…so what that those overpriced active comps have been languishing on the market month after month…

Their rational went something like this:

“It isn’t fair that appraisers include foreclosures and short-sales in the sold comps. They haven’t walked through those houses to compare interior finishes and condition with the house we are selling.”

Helloooo? Appraisers have NEVER walked through sold house comps to compare finishes and condition. Why should it be different now? Furthermore, appraisers can’t use active comps in their appraisal report.

Here are some of the other ridiculous things we were told:

“It’s not a house, it’s your home. Your daughter needs a home.”

Wherever you share love and laughter is home. Calling a house a “home” is a manipulation of your emotions for their profit. As I’ve said before, whether you pay rent to your landlord or pay interest to your mortgage company, you are buying shelter.

“You can’t paint your walls when you rent.”

Why not? We rent, we paint! If your landlord doesn’t care for the accent colors you’ve chosen, simply paint those walls back to white when you move out. Or use white walls as a backdrop for colorful furnishings.

“Real estate is local. Our local market won’t continue to suffer like the national market is because….. (fill in the blank with an odd assortment of rationales)”

Yes, local markets do vary. But lending is global and loans are harder to get. As long as credit and lending standards are tight and unemployment climbs, house prices will continue to drop everywhere.

“Mortgage rates are low. Hurry! Buy now before interest rates goes up!”

Think about this one: What will happen if/when mortgage interest rates go up? I’ll tell you: Buyers will qualify for smaller loans. This will dampen house prices even further. We can pay cash for our next house so the higher the mortgage rate is, the lower the price, so all the better for us.

“Rents could go up, but your mortgage payment will always stay the same.”

My response to this one could easily fill a whole ‘nother post, but let me just say this for now: Rents are limited by the amount of money people earn — rather than how much they can borrow. Besides, mortgage expenses do increase over time: think maintenance and repairs, property taxes, insurance, HOA fees.

We are renewing our house lease. We will compare our cost of renting versus buying again next year.  If our local Realtors are still playing these silly games, we’ll focus our search to properties listed for-sale-by-owner. Undoubtedly, house prices will have dropped even further by then, making it easier to win a favorable bid. In the meantime, we are happy to be home.

Read more housing crisis articles:

When Should I Buy a Home? Have We Reached Bottom Yet? What Is The Right Price? written by me
Why Downsizing To A Smaller Home Can Make You Happier written by me
Can’t Sell Your Home In Today’s Market? Here Are Some Suggestions written by me
10 Things Your Real Estate Broker Won’t Say by SmartMoney
Housing Crash News from

Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario

Rebecca commented:

I enjoy these posts – thanks for adding a voice of reason given the vast propensity to imagine the solution to the problem is doing more of the thing that caused the problem. We’ve collectively been telling ourselves the same stories so long it’s hard to ram home still that they *are* just stories; it’s good to keep hearing stuff like this to remind us. Like Anna, I’d love to read your thoughts on surviving the possibility of heightened inflation over the coming years – its impact on savings and so on. I know you suggested in a previous post you were concerned with this matter. Any thoughts?

Many fear hyperinflation, but after digging into the topic, I don’t think it’s as likely a scenario as prolonged deflation. From what I’ve been hearing, talk of hyperinflation might be driven more by politics than economics.

We are experiencing deflation right now. Using the 12-month change in the Consumer Price Index as the measure, inflation has been negative for three consecutive months. I think the more likely scenario will be like Japan: low inflation, low interest rates, and falling house prices for at least a couple more years.

… Japan, during what came to be known as its “lost decade.” A gigantic real-estate boom in the 1980’s came crashing down in 1991, bringing many other prices with it. Efforts to restart the economy foundered time and again, as businesses were not able to generate the kind of profits that would reignite prosperity’s cycle of hiring and spending. Not until 2005 was the deflationary era finally declared to be over. ~ New York Times

Because I’ve been sitting on a considerable sum of cash since I made my exit from the stock market during the first half of 2008, I’ve been mulling over this topic. I’m still trying to wrap my head around the implications of hyperinflation and prolonged deflation. I am not an economist, so please take my thoughts and opinions with a grain of salt. In other words, this post is not investment advice; just my best guess and opinion.

During deflation, debt is the enemy. Deflation is better for those with savings accounts because it increases the value of the money they have saved. Deflation rewards people like me (with cash) and retired seniors (who no longer need to worry about rising unemployment rates and would benefit from living cost containment).

During hyperinflation, the last place one wants to be is in cash. Inflation is better for those who owe money because it reduces the value of the money previously borrowed. Inflation is better for those in debt — including the US Government. So naturally, the Fed wants to create and maintain a moderate, steady rate of inflation.

Many people worry that the amount of money the Fed is spending to stimulate the economy will create hyperinflation. I think these fears are unfounded, at least for now. Last I heard, the Fed created about a trillion dollars, which sounds enormous, but is actually small when compared to the approximately $10 trillion drop in housing values and ~$10 trillion drop in stock market capitalization.

The Fed realizes they need to be careful — if they dilute the economy with too many dollars, they risk creating hyperinflation. Hyperinflation would be tough on everyone, including the Government, because foreigners would stop lending money to the US — unless they were sufficiently rewarded for taking on the heightened risk of investing in dollars.

Compensating foreign investors for taking on inflation risk means raising interest rates. But increasing interest rates would push homebuyers and homeowners with adjustable mortgages right over the edge. Mortgage rates have increased recently and if they keep increasing, we should see home prices fall further. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Collapsing property values simply are not synonymous with hyperinflation.

According to this recent article in the New York Times:

For the short term, investment experts agree, deflation is more probable, with unemployment still climbing and the economy still mired in a recession. There’s talk of green shoots, but most everyone agrees that an earnest recovery is a long way off.

No one knows for sure what is more likely to occur: prolonged deflation or hyperinflation; or when the economy might change course. So how can we prepare for either scenario?

If you think hyperinflation is likely, you could invest in:

  • shorter-term fixed-income investments
  • TIPS (Treasury Inflation-Protected Securities)
  • foreign stocks and currency
  • real estate, REITS (real estate investment trusts)
  • commodities
  • precious metals
  • gold

During hyperinflation, the last place one wants to be is in cash.

If you think deflation is likely, you could:

  • raise and hoard your cash.
  • live below your means.
  • put off big purchases until prices drop more. You are, in essence, actively making money just by not losing it.
  • rent a home rather than own because home prices, like other hard assets, will continue to drop in value during deflationary times.
  • de-leverage yourself: pay off your credit debt as soon as possible — and don’t start building it up again. You don’t want your debt to expand at the same time dollars are becoming more valuable!
  • invest in dividend paying stocks. But it can be tricky to find a secure dividend paying stock in a deflationary environment.
  • play the currency market (certainly not my area of expertise).
  • play the short side using things like inverse index funds that move in the opposite direction of the market. Caution: While there are possibilities for making huge returns in this market, the rallies in a bear market can whomp you. Your timing must be precise.
  • build a CD ladder. The longer the duration the more risk there is, but at least your principal is protected.
  • invest in yourself and your education. Staying employed in such a downturn is the most important thing.

During deflation, debt is the enemy.

What am I doing? What do I plan to do?

Over the course of the past few years, I have positioned myself as best I can for the current economic deflation: I sold my home, paid off all of our debt, pulled out of equities and hoarded cash.  Today I am in a wait-and-see holding pattern and once deflation is curbed, I am in a great position to change course accordingly: I have cash ready to buy the hard assets (when they are cheap) that will help me weather inflation.

What about you? Do you think prolonged deflation or looming hyperinflation is more likely? Why?

When Should I Buy a Home? Have We Reached Bottom Yet? What Is The Right Price?

My question has to do with the timing of buying (a home), especially in the current market. I would like to know from your perspective when a time to buy might be. I’m not asking for you to predict a date, but rather I’m interested to know what indicators and trends you might look at to make a decision to buy a home. Any response you have is much appreciated!” ~Adam

(Ed Note: The following is a reprint of an analysis I wrote in April, 2008. My family and I have since moved into a different rental home so the numbers I used to illustrate these concepts would be different today. However, the concepts remain the same. I’ve also added an update after the conclusion of this post.)

Using three indicators and the home my family currently rents as an example, I’ll illustrate how I gauge whether (or when) the time might be “right” to buy a home.

The home I rent today might sell for $250,000. We pay $1,295 per month for rent. It is a single-family home located in Colorado with four bedrooms, three baths, a two car attached garage, a fenced yard and 2,120 square feet.

First “Price is Right” Indicator: The Price-to-Rent Ratio

Rents are a useful barometer for tracking housing markets. Like a P/E (price-to-earning) ratio for a stock, a P/R (price-to-rent) ratio can help identify relative real estate bargains. The lower the ratio the better. The current price-to-rent (P/R) ratio for my home is 16.09 ($250,000 price divided by $15,540 annual rent).

The New York Times article, Ratios of Home Prices to Rental Prices in Selected Metro Areas indicates that the P/R ratio in Denver during the first quarter of 2000 (before the US asset-based economy switched from stocks to housing) was 11.6.

Therefore, the current P/R ratio on my home is 38.7% higher today than it was in 2000 (16.09 versus 11.6). If the P/R ratio for my home was to return to year 2000 “pre-bubble” levels, my home would sell for $153,250 today rather than $250,000. Therefore, unless I find a “bargain” – a foreclosure, short-sale or bank-owned property with a reasonable P/R ratio, I’ll probably wait until my local market returns to pre-bubble price-to-rent levels.

Second “Price is Right” Indicator: When will buying real estate make sense for landlords?

I recall times when local investors could buy a house with 20% down, rent it out at market rates, and make a positive cash flow in year one. In fact, I’ve done it before. But during the real estate bubble, investors speculated. They bought homes that created a negative cash flow, then counted on home appreciation to pay them back someday in the future. As with any investment, the more speculative, the more risky. I’d rather wait until I can buy rental investment homes that create positive cash flow from the get go. Future price appreciation would be icing on the cake.

My (speculative?) landlord bought our home in 2006, near the peak of the housing bubble. Here’s an estimate of the annual costs our landlord incurs on our home:

Item Annual Cost Notes
Down Payment $2,000 20% of $250k = $50k down. $50k x4% in T-bill, CD or bond instead.
Mortgage Payment (P+I) $14,772 $200k @ 6.25% 30 yr fixed
Property Taxes $1,500 0.6% of hm value
Insurance $900
Maintenance, Repairs $2,331 15% gross annual rent (this is the minimum allowance typically recommended)
Property Management Fees $1,399 9% of gross annual rent (8-10% is typical)
Vacancies $1,295 1 month per year allowance
Marketing and Leasing Fee (by Mngmt Co.) $583 90% of 1 mo. rent every 2 yrs (80-100% is typical fee)
Auto Expense $0 (assuming owner relies 100% on mngmt company)
Total Annual Cost $24,780

+ $15,540 Annual Gross Rent Collected

– $24,780 Annual Costs

= $9,240 Annual LOSS

Obviously our landlord was betting on home price appreciation to continue at unprecedented rates. Bummer.

In order to break-even in year one, our landlord needs to increase our rent from $1,295 to $2,065 per month. Of course if he tried to do this, we’d move out, no one would move in, and his investment property would sit vacant. Not good! So he’s not likely to raise the rent.

Alternatively, if he had bought at the “right” price with the intent to create a near break-even cash flow in year one, he’d have paid only $130,000.

$130,000 is 48% less than the current value of $250,000! Ouch!

If our landlord had bought this home for $130,000, this is what the math might look like:

Item Annual Cost Notes
Down Payment $1,040 20% of $130,000 = $26k down x4% in T-bill, CD or bond instead.
Mortgage Payment (P+I) $7,680 $104k @ 6.25% 30 yr fixed
Property Taxes $780 0.6% of hm value
Insurance $900
Maintenance, Repairs $2,331 15% gross annual rent (minimum)
Property Management Fees $1,399 9% of gross annual rent (8-10% is typical)
Vacancies $1,295 1 month per year allowance
Marketing and Leasing Fee (by Mngmt Co.) $583 90% of 1 mo. rent every 2 yrs (80-100% is typical)
Auto Expense $0 (assuming owner relies 100% on mngmt company)
Total Annual Cost $16,008

+ $15,540 Annual Gross Rent Collected

– $16,008 Annual Costs

= $468 Annual LOSS (almost break-even)

Third “Price is Right” Indicator: An “old” rule of thumb for establishing fair value of rental property is to multiply the annual gross rent by 6 (in not-so-great neighborhoods) to 10 (in premium neighborhoods). This gives you a “business” estimate of the value of a rental. In my case:

$15,540 annual rent x 6 = $93,240 value of rental (in not-so-great neighborhood)


$15,540 annual rent x 10 = $155,400 value of rental (in premium neighborhood)


In my area, house prices are still elevated relative to rents.

Using the above indicators, the price of the home I’m renting should be between $130,000 and $155,400 — rather than the current $250,000. Significant price declines are needed to bring home prices back to their historical relationship to rents (and/or rents need to increase substantially) before the P/R ratio makes sense again.

June 2009 Update:

A year ago, we moved to a 3 bedroom, 2 bath condo. We pay $1150 per month in rent and this includes our water, sewer, trash, cable TV, yard maintenance, clubhouse, swimming pool, hot tub and exercise facility. These HOA benefits cost our landlord about $200 per month. Our landlord bought our condo for $177,100 in 2002. Therefore, our P/R (price to rent) ratio is just under 13 if you include the HOA benefits in our rent; or about 15.5 without them. The most recent comparable sales price I can find for a similar unit was $160,000 in March 2007. I don’t know what our condo would sell for today, but the price would need to drop to $132,240 for the P/R ratio to match our local 11.6 pre-bubble average.

We will continue to rent for as long as it is cheaper to do so. We enjoy our modern condo with all of it’s amenities and proximity to a huge park. This said, we ARE looking to buy land or a home eventually — but only if we can find one for the right price! We are in an enviable position — we can make a low price offer sound appealing to the right seller — because we don’t require a mortgage, we can pay cash if necessary, and we don’t have any home sale contingency to delay closing. When the time and price is right, we will find (or build) our little green dream home.

Readers: What indicator(s) are you watching to access real estate values? When do you think the market will hit bottom? Please do your own math for your own local market and leave your results in the comments for comparison and discussion.

Recommended reading: US Housing Crash Continues: It’s Still A Terrible Time To Buy: Falling House Prices Are The Solution, Not The Problem

Why Downsizing To A Smaller Home Can Make You Happier

As the current lease on our rented condo rolls towards the end of the contracted dates, some of our friends are asking us, once again, when we plan to stop renting and buy our next home. When I share my findings that renting is still cheaper than owning in our town, some suggest we “should” move into a larger home. When I ask, “Why should we move to a larger home?”, responses usually include a quick shrug of the shoulders, a time-stalling “uhhhh,” then perhaps something like “your daughter will need more space as she gets older,” or “don’t you want to grow a larger garden?”

I’ve learned that everything you own owns you. Several years ago, we chose to free ourselves from the handcuffs of STUFF. We downsized our lifestyle almost 50% by moving from a 2450 square foot home into a condo with about half as much floor space. In doing so, our housing and utility bills dropped dramatically. We sold half of our belongings and made over $13,000 in cash. Decreasing our monthly expenses caused our net worth to grow exponentially.

More importantly, our minds are more at peace, and we live a more culturally rich life. We have more time and energy to consume experiences rather than things. We play more with our child, talk more with each other, and enjoy more of life.

Less space gives us more of everything we value most.

According to David Wann, bestselling author of Affluenza: The All-Consuming Epidemic, many of today’s three-car garages occupy 900 square feet, which is about the average size an entire home was during the 1950’s. Today, most people use the extra garage space to store things they own but seldom use.

The number of “very happy” people peaked in 1957, and has remained fairly stable or declined ever since. Even though we consume twice as much as we did in the 1950s, people were just as happy when they had less! 86% of Americans who voluntarily cut back their consumption feel happier as a result.

This recession is putting the squeeze on many families. Perhaps it’s time to consider downsizing your biggest budget buster– your housing expense.

Renting is NOT throwing your money away

Whether you pay mortgage payments to the bank or rent payments to your landlord, you are paying for SHELTER. Contrary to what most people used to believe (but now we know better, right?), homes do NOT always go up in value. Your home is your shelter — not an investment. Often it is less expensive to rent a home than to buy one. Consider renting and investing your down payment savings and your monthly savings into income-producing real estate, businesses, stocks and bonds, or your education instead. You will often come out ahead financially in the long run.

And you might find yourself happier for it, too.