Here is Richard Russell's take on the real estate market in the...

Here is Richard Russell's take on the real estate market in the US. Sound familiar.

What's the state of Real Estate?

One of the big questions of the day is - whether real estate is in a bubble or not. This is a critical question, since a huge amount of America's wealth is tied up in real estate.

Over the weekend I looked at a little house which is for sale a few blocks from here. The seller is asking $1.3 million for the house. The house is 1800 sq. feet, it was built in 1928, and it's in a good location. It's a flimsy little house, two story, and my guess is that it cost around $6000 when it was built. The only good thing about the house, as I said, is its location. The price of $1.3 million is laughable, but I'm not laughing because it wouldn't surprise me if the house sold for that price. To my mind, the house is worth $50,000 mainly because it's in a good location.

But believe me, house prices have risen into the wild blue yonder. By my old yardstick, a house always costs you 10% a year to carry, and this includes repairs and the cost of carrying a mortgage. The question then becomes, what can you rent the house for? If you can cover your costs (as I said 10%) with your rental fees, then the house is priced reasonably. If you can't even cover your costs with rent, the house is overpriced.

Today most people can't begin to cover the cost of a house via a rental. By my reckoning, this means that homes are overpriced. I remember when real estate was underpriced. My father was in real estate all his life. Back in 1942 I used to go over "breakdowns" of real estate in New York.

In those days brownstones were selling at "give-away" prices. For example, a brownstone that was half-rented would sell for 10,000 or more. With a mortgage of $10,000 down, the place would generate a profit of 25% to 35%. There were brownstones available all over New York, and today they would be selling in the millions of dollars. But in 1942 if people had any money they were hanging on to it and not willing to buy anything.

So real estate in 1942 was the direct opposite of what it is today. In 1942 for a little money you could buy a great bargain, a building that would throw off up to 35% return the first year. Today, for a lot of money you can't buy a building that will throw off a profit. Today, you buy real estate for "pride of ownership."

CJ