Introducing Housing Market News Stalker: Patrick Killelea

Patrick's about us page starts like this:

"Patrick Killelea has no background in real estate at all. You should not believe anything he says until you understand the math yourself. Here’s the math:

3% annual cost of renting is less than the 9% annual cost of owning the same thing

If you understand that, then you probably understand the rest of this site as well. If your job depends on not understanding that, then you won’t understand it."

I dare you to find another Patrick Killelea in the U.S housing market.  There aren't many.  When he lost his Silicon Valley job, he decided to focus on his housing news site.   If you type "housing market news" in google his site is number one -- with over 750,000 page views monthly. 

He is becoming the leading source of honest-to-goodness housing news and commentary on the internet.    We may not agree on every issue, but seeing eye to eye is not the point, he is apt to lean on the truth than to please himself, Realtors (or home buyers!)

You'd be hard-pressed to find someone as passionate in the industry in educating home buyers -- even to his own financial peril, resisting the urge to benefit from the majority of real estate and financial companies (to advertise on his site).

Hope you learn something...

• You write with an impassioned sense of urgency in regards to the perils of buying overvalued real estate. How did you get started in all this? Who are your main influences that helped shaped your investment thinking?

I got started when I tried to buy a house in Silicon Valley during the dot-com bubble and realized that the prices were completely disconnected from rents. You could rent the exact same house for a year for only 2% of the cost of buying it. Why would you ever pay a mortgage in that case? It was completely insane.

I've read a lot of investment books and the people that really resonated with me were Peter Lynch and Warren Buffett.

• If a person merely scans your posts they could easily misunderstand you as being completely against investing in real estate. But the more I read your posts, the more I see that this is not the case; you simply warn people not to get into bad deals -- bubble markets. Just to make it official, what's your opinion in buying homes?

Compare it to the cost of renting! That's really all you need to know -- just be sure you include ALL the costs of owning. Most people forget about property tax, maintenance, insurance, and the possibility that prices will fall. They just look at the monthly mortgage payment. That's a big mistake. I have a calculator to help with that:

Home Mortgage Calculator

But if after considering all that, you find it's cheaper to own than to rent, go ahead and buy!

• Your buying safety rule as simple as it is, was one of the most important real estate lessons I learned this year. Can you describe to us how this can help a buyer make a better investment decision?

Just compare the cost of renting to the cost of owning the same thing. The break even point is somewhere around 6%. If the annual rent is about 6% of the purchase price, it's a toss up whether to rent it or buy it. If the rent is lower than 6%, rent. If the rent is higher than 6%, buy.

(Editor's Note: Buying Safety Rule:

The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable)

But that's just a crude rule of thumb. Use my calculator or one of the others on the internet to get a better idea of what to do.

• You've had a good amount of speaking gigs talking about real estate and bubble markets, what has this experience been like for you? And how has the perception of people about real estate changed?

I love talking about real estate, because I get a chance to warn people about the many layers of businesses and government that all want to trap them in as much debt as possible. It's great to feel I can help people avoid that trap. People quickly see that it's all true.

• Inman has included you in their list of the most influential real estate bloggers how's your relationship with the real estate industry?

The real estate industry mostly doesn't like me. They're trying to trick you into making very bad decisions, and I'm telling you how they're trying to trick you.

• In your opinion, what can we do as a Realtor to really add value to consumers?

Tell the truth. Spell out the rent vs buy calculations. Find them a place that's really cheaper to own than to rent.

• Talking about the housing market crash, when did you first see it coming? What were the signs that the real estate bubble was imploding? (Reno's home sales started to dive in August of 2005.)

It was obvious in 1999, but I had to wait until 2005 to really see the results of so much overspending. The main sign was that banks would loan any amount to anyone, no questions asked. At that point, you knew they were desperate just to keep the whole ponzi scheme going.

• It seems to me that it may take a long time before we go through double-digit increases in housing prices; besides another housing bubble, is there another kind of housing crisis that could happen? (Or is already taking place.)

Bubbles are the main danger to a country's financial health. Japan is still working off it's huge bubble of 1989 or so.

• Any happy real estate thoughts lately? Any opportunities you are seeing?

All my real estate thoughts are happy! Lower prices are WONDERFUL for buyers. There are really a lot of good deals out there now, but still mostly in the poorer neighborhoods. When the jumbo loan limit resets in October to be slightly lower, that will helps prices fall.

And when Fannie Mae and Freddie Mac finally die, that will be the best thing that ever happened to US buyers. Prices should take another big dive.

• If you had 5 minutes to talk to a home buyer who wants to make a good buying decision, what would you tell her?

Just compare owning to renting the same thing. If you can save a ton of money one way or another, do it!

-Patrick Killelea

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