Q. Could you explain more fully what you meant in a recent column about residential real estate? How do you calculate the premium you refer to? Are you comparing a mortgage payment to a rental payment? And if so, what down payment do you assume for the buy side of the property?

This is what you wrote: "One way to make certain you avoid the bubble is to check the cost of any house you consider against its likely value as a rental. If there is an "ownership premium," don't buy."

  ---J.W., by e-mail from Florida


A. There is no formal equation for making this comparison. There would be differences of opinion on exactly what you should be comparing. But let's try an example:

•   In Dallas, you can buy a 1350 square foot townhouse with 2 bedrooms and 2.5 baths for $140,000. The mortgage, association, insurance, tax, and utility costs will total about $1750 a month or about $1.30 per square foot. Area rents, ex utilities, run about $1.10 per square foot. The $.20 per square foot monthly difference is pretty close to what electricity, gas, and water cost. So, without considering the tax benefits from mortgage interest and real estate tax deductions, you can own a home in Dallas at a rent equivalent cost.

•   Compare that to Santa Fe, New Mexico. Three years ago my wife and I sold a 1,300 square foot adobe house with 2 bedrooms and 2 baths to purchase a larger property. The house we sold for $280,000 but wouldn't rent for more than a small house in Dallas. Last year the same house sold again, this time for $450,000. That's a bubble price: the monthly cost of owning the house dwarfs the cost of renting it.

Paying a premium doesn't guarantee you will lose money. There are houses that have sold at ownership premiums over rental value for decades, particularly in second home areas such as Cape Cod waterfront, Aspen, Palm Springs, Naples (Florida), etc.  Most people don't own second homes and most homes are purchased with regular paychecks. When home prices outrun paychecks, it's a vulnerable market. That's why the housing bubble is probably concentrated in East and West coasts. 


  Q. My wife and I have an ongoing argument that we'd like you to settle. We've built up about 3 months worth of expenses in savings ($7,200).  I say it's now time to devote our excess income to paying off a consolidated credit card debt of about $7,000 at 9.9 percent interest. Currently, we put about $300 a month in savings and pay $750 toward the credit card debt monthly.

I contend we now have enough in savings to start paying about $1,000 a month to knock down the credit card debt.

Is this a sound decision or should we continue to build up the savings until we have about 4 to 6 months of expenses, as my wife believes?

---J.C., by e-mail from El Paso, TX


A. Start knocking down the credit card debt. Here's why:

•   First, the amount you need in savings reserve isn't fixed--- it's really a matter of how long it might take you to find a replacement job. The higher your income, the longer it takes to replace a job that has been lost.

•   Second, if you lose your job, the $7,200 reserve fund will be supplemented by a combination of severance pay and unemployment benefits, making your reserve fund go further.

•   Third, all the credit currently used--- $7,000--- will be available after you pay the debt off. Indeed, if you pay the debt off you will probably find that your credit limit has been increased. When the credit balance is zero your emergency resources will be $7,200 in savings plus $7,000 (or more) of credit.