A year ago, losing a house to bank repossession still seemed like a rare event, confined to people enduring unfortunate personal circumstances - job loss, divorce, illness, death of a wage earner.

But this year, as the real estate market slumped, housing prices sagged and - most important - massive numbers of adjustable-rate mortgages reset to exorbitant rates, foreclosures became commonplace, their numbers soaring every quarter. California, a favorite hunting ground for the so-called “exploding ARMS,” has been particularly hard-hit.

1) From market value appreciation angle: both land and structure will appreciate in its initial 2-3 decades, the structure value may flatten or decay after that, although very slowly.

2) From IRS tax point of view, they only think of structure depreciation. Over the period of 27.5% years, the value of the house will be depreciated to zero. That’s about 1% a year decay.

Miat’s comment: I print out the following OFHEO data for LA region as a study material. We can see that over the past 3 decades, LA region averaged annual growth rate in home price is about 8% a year. However, if a short sighted Electrical engineer (and the most unlucky one) bought his house in 1990 and couldn’t put up with the pain of home ownership, he sold it in 1996, he lost lots of money. However, another patient Medical doctor bought in late 70s, and still own his house till today, he has seen his house rose about 10 multiples in value. Historical pattern is simple, but to a unprepared soul, its effect can become relentlessly brutal. Where are we now? Pattern matching tells us that we are at 1991 or 1992, +/- one year. So, when you decide to buy a house today, first decide who you want to be: The short-sighted EE or a patient MD?

The factor you missed to consider is that all investors are greedy. They will always try to rent the house using market rent. They will not base rent on their mortgage payment. For example, if their P.I.T.I (Principla, Interest, Tax and Insurance) is $1400/month, they will not rent out at $1400/month. They will always check with MRIS to get the market rental rate, currently $1700/month. They are happy to retain the profit of $300/month. In some cases, in order to increase competitiveness, the investors can reduce rent by 50-100 to rent out. However, not everybody will do so.

Boom #1: You were too young to even see it. Even if you see it, you will shrug it off and say “these people are lucky…, I won’t have that luck and money”.

Boom #2: That was 10-12 years after boom #1, you had some money. You bought your first house. But the timing was not that good. You bought right before the collapse. Then you got side-tracked by all the “end of world” talk about real estate. You felt very good at mocking these dummy investors: “How dummy are they! still buying when nobody is buying…”. You took pleasure by cursing them.