Q. In a recent column you highlighted that property values have escalated due to a number of reasons, including low interest rates. You further asserted that when interest rates rise there will likely be significant adjustments in the market that could have catastrophic effects on homeowners.

With all that said, you ended your column without any recommendation, advice, or guidance in how individuals can protect themselves. The obvious question not addressed is simply, "So what do we do now?"

Should individuals not purchase homes?

  ---D.K., by email from Dallas, TX


A. How you respond depends on your circumstances and where you live. Both vary a great deal so there is no one-size-fits-all answer. What you do depends on whether you currently rent or own and whether the area you live in is expensive relative to renting or cheap relative to renting. Think of it as a series of quadrants created those factors. (See illustration below)


The Four Quadrants of Home Ownership










Renter in an Expensive Area.   If you are currently renting and live in an area where houses and condos are very expensive, continue renting. Let others take the risks of ownership, particularly if there has been a lot of speculative investment buying in the area. Remember that speculative owners need to find a way to cover their monthly costs. There is a significant chance that those owners will end up subsidizing you as a renter because the property will cost them more to own than they can charge you for rent. Any city that has, or will have, a large supply of new condos and houses on the market is a good candidate for remaining a renter.

But suppose you are desperate to own. Then what do you do?

If you've got the income to support it, you look for a vacation home in a reasonably priced market.

Renter in an Inexpensive Area.   In this circumstance you have a luxurious choice. If the area is so inexpensive that you can reduce your shelter costs simply by owning a house, you should buy if you expect to live in the house a long time. There is, however, a caveat: Some areas are inexpensive and will remain so because they are losing population, have miserable weather, etc.

Owner in an Expensive Area.   If you own a house that has appreciated rapidly and would like to retire, downsize, or leave the area, this is a good time to sell. According to the cost of living calculator at homefair.com, for instance, a Boston homeowner earning $100,000 a year can move to Scottsdale Arizona and maintain the same standard of living for $72,800. Most of the difference is accounted for by housing costs. The same person could also move to Cape Coral Florida and maintain the same standard of living for $70,000.

Most of the major coastal cities are good places to leave--- if your work (or lack of same) permits it and you want to make a change. Many people near retirement but with less of a nest egg than they hoped can convert a perilous retirement to a prosperous one simply by moving to a less expensive area and downsizing.

Owner in an Inexpensive Area. Here, you can simply hold and wait for better times. You aren't exposed to a major loss the way homeowners in most of California, Florida, and the Northeast are. Most cities in Texas are good examples--- you get more shelter per dollar in Austin, Dallas, Houston, or San Antonio than you get on the East or West coast. According to Homefair.com, for instance, you'll only need $55,000 of income to have the same standard of living in Austin as you'd need $100,000 for in Boston. As a former Bostonian who has spent a lot of time in Austin, I think that's a pretty good trade.

The important thing to remember is that prices are relative and people are mobile. Seven years ago, when I told a younger brother who lives in Los Angeles that my wife and I had sold a little Eastside Santa Fe house for an unbelievable $200 a square foot, he said, "Scott, you should leave Dallas more often. That's cheap. Anyone from LA, San Diego, San Francisco, Chicago, Boston, Washington, New York, or Miami would think it was a steal."

He was right. It has since resold at a much higher price.