I lived in San Francisco during 1998 and 1999 and enjoyed a front row seat to the Internet Bubble.  While there my roommate at the time joined my long-running Fantasy Baseball League and has participated ever since.  Until last season we had accumulated a spectacular string of five consecutive league championships.

Every year in preparation for the draft we catch up by phone.  Last year’s phone call was a particular interesting and amusing conversation.

I reached my friend while he was living in a tent city.  He and several other strangers were camping out to preserve their position in line.  Now such activity might have been respectable had he been enduring the self-flagellation in pursuit of “Stones Tickets”, Black Friday specials or Grand Theft Auto: Chinatown Wars.

He and his unwashed, new friends were sleeping under the stars to earn the opportunity to buy a house.  Now such behavior was almost commonplace during 2005 in boom states as investors queued up for days to place deposits down on theoretical condos.  But this was 2008!  The sky had already fallen.

My former roommate had been enticed by a “once in a lifetime” opportunity to buy a new house from a homebuilder at liquidation prices.  The builder had excess inventory in a completed development and was highly motivated to dispose of it.  Apparently the discount was attractive enough to motivate otherwise reasonable people to forego showers, electricity and in-door plumbing for several days. 

My friend is long on common sense and had consciously avoided homeownership for a decade because prices in his home state of California were overvalued.  But the allure of the discount was too much to resist.

I reiterated my doomsday perspective on housing and the economy but, despite sharing my trepidation about the future, he would not be dissuaded.  And frankly he had other, non-financial motivations for the home purchase and made a financially self-aware decision.  He had accepted the likelihood of continued falling prices and was taking a calculated risk.

This year’s conversation was interesting as always.  His housing update included an assessment that the entirety of his purchase discount had evaporated in only year’s time.  He finds himself in a similar position as the homeowners within his development did 12 months ago.  Prices continue to slide, inventories are growing, for sale signs are everywhere and the next foreclosure to occur in the development may eliminate the remainder of his paper home equity.   

Similar experiences have been occurring since 1996 and continue through today.  People have consistently fallen prey to the allure of assets on sale, ignoring the fundamental question as to what the assets are actually worth. 

Given the fundamentals, there is no reasonable basis to believe that home prices will stop falling in the near term.  Buying a house in a leveraged transaction while prices are falling is an extraordinarily risky proposition no matter what the perceived discount.  Falling prices can rapidly erode hypothetical or real home equity, place homeowners underwater with respect to their mortgages and endanger their financial futures.

It is a far better strategy to wait for verifiable proof that prices have stabilized.  Leaving a couple of thousand dollars of potential discounts on the table is far preferable to buying a house while prices are falling.  And does anyone really expect there to be a shortage of foreclosures or distressed properties two years from now? 

I can only hope that the nation’s continued real estate woes prove to be a distraction for my friend, providing me with a much needed competitive advantage as I pursue another championship within The California Penal League!