Wednesday, December 07, 2005

Let's play "Should I buy...or wait"



On one of the threads today, an anonymous poster asked me a question about whether they should buy a house or wait. I will paste part of our conversation below...and then give my answer.

Anonymous said...

So are you saying to wait until 2007?

I am about to put 40k down (10%) on a detached house in a good neighborhood in La Mesa (San Diego). 800 sf house w/ 2-car garage on 7200 square foot lot. This is a house we could raise 2 kids in for ten+ years.

I am doing a 30-year fixed 6.5%... Payment with PITI is 30% gross income... FICO is probably 650-675, can I do better on the rate?

If I wait 2 years I can easily put 80k down or more... but I have already waited a long time.

12/07/2005 10:02 PM

I asked the poster the purchase price of the home, and what they were paying in rent. The purchase price is between $400,000 and $425,000, and:

Anonymous said...

I pay 1450 in rent, larger, nicer place in a better location.

12/07/2005 10:23 PM

***UPDATE!!*** I found a pic of a house in La Mesa that is similar...about 875 sqft with a 2 car garage. Built in 1942.


OK, here we go! Let's assume you get the house for $400,000. You put your hard earned 40k down, and finance the last $360,000 doing a full doc, 30yr fixed, at 90% LTV with NO PMI. I looked at the rate sheets of 3 major lenders, and used the 675 FICO to give you the benefit of the doubt. I was coming up with pricing in the 7.25-7.5% range. Remember, you are doing a loan to 90% with no PMI, so the rate will be higher. Again, I do not think you can get a 6.5% rate at that LTV on a 30yr fixed.

So let's see what that mortgage payment comes out to...(tapping away on my old school HP calculator)

$360,000 loan amt. 7.25% 360 months payment= $2455.83
BUT to be fair, I'll use 6.5% like you posted payment= $2275.44

Now lets look at the taxes. $400,000 x 1.25% = $5000 a year or $416.67 per month.
Let's throw in $50 a month for insurance.

Soooooo...the grand total is (at your lower number) = $2742.11
the grand total at the more realistic rate is = $2922.50

You would be paying an extra $1292.11 (or $1472.50) per month to, by your own admission, live in a smaller, crappier house, in a worse location than where you currently rent.

But wait! You get a TAX deduction for your interest and property taxes. I don't know your tax situation, but lets just assume you get 28% of your taxes and interest back each month, so that comes to $700. So, even after the tax break you are still spending $592.11 (or $772.50) to live in a smaller house in a worse neighborhood.

Assuming you have NO other car payments or debt, you would need to make $5484.22 (or $5845) per month to be at a 50% DTI exactly. This equates to making $65,810 (or $70,140) per year.

Because you are reading this blog, I'm sure you are somewhat aware that there has been some "housing bubble" talk over the past few weeks. The questions you have to ask yourself are, what is the upside for me to buy NOW, and what is the downside of me buying NOW.

I think the downside WAY outways the possibility of appreciation at this time. But lets say that I'm wrong, and property goes up 3% next year. You would need to spend an extra $12,000 to buy the same house. But guess what, you saved an $15,500 by continuing to rent ($1292.11 x 12 months), not to mention you were in a bigger house in a nicer neighborhood.

Let's say that things drop the 10% that many people think is possible. That 10% drop would completely wipe out the 40K you put down on the property. How would that feel??

The most striking thing to me, is that you would be willing to take your family of 4 (I assume 2 parents and the 2 kids you mentioned) into an 800sqft house in a WORSE neighborhood, and pay more money to do it!

It is just a place to live!! I'm not telling you what to do, I would just hate to see a family buy at or near the top of an 8 year real estate bull market, and be stuck there for the time to come. Do NOT look at the past performance of the market and assume it will continue.

IF you do decide to buy, I would keep your 40k in your pocket, and do an 80/20. Yes, the payment will be a bit higher, but at least you keep the 40k in savings for a rainy day. You might end up upside down on the property, but at least you would have savings and a steady job and be able to keep making the payments.

What happens if I am right?!?!? What happens if you keep saving money, and prices decline? How would you like to buy a bigger house in a nicer neighborhood to raise your kids for the next 10 years. 800 sqft cannot be anything bigger than a small 2 bedroom. That is not very much space to raise a family of 4. I live in a 1000 sqft condo and I cannot imagine 3 other people here with me.

I hope this helps some. I look forward to the feedback...

SoCalMtgGuy

111 Comments:

Blogger Rob Dawg said...

Additional caveats:
The mortgage deduction goes down each year. The AMT is likely to apply to a $65K income with this large of a deduction.
And finally a fovorite of mine. The closing costs typically run 7%. Like it or not the first time you walk in the door you have already used up $30,000 of your $40,000 downpayment. And don't let anyone fool you about them paying or that lie. There is only one party at the table writing checks, for eveyone else it is payday.

12/08/2005 5:22 AM  
Anonymous Anonymous said...

God, I want out of my apartment, I do, and I can "afford" a home, but it's this exact scenario that just kills me and makes me hold onto my rental. I have no backyard, no storage space, but I do have an extra 4k in my savings account every month. I am hoping to the heavens that I am right about this!

12/08/2005 6:11 AM  
Anonymous Anonymous said...

HI this is the OP... I would be paying PMI (165/mo)... could be wrong on the FICO basis as my co-borrower (wife) has a high score.

Also to note we dont have kids yet but want to in the next 1-2 years. Also should note that the schools in the new hood are 10x better than the current location.

Appreciate the input!

12/08/2005 6:40 AM  
Blogger Rob Dawg said...

Right now you are renting living space for $1.50/sq ft per month. You are considering buying living space for over $500/sq ft. Maybe think of it as renting plus layaway purchasing 4 sq ft per month. End of the year you've bought 50 sq ft outright. If this were something less emotional like a car would the decision be easier?

12/08/2005 6:45 AM  
Anonymous Anonymous said...

Wow! Very thought-provoking anaylysis.

12/08/2005 6:49 AM  
Blogger dwr said...

SoCalMtgGuy,
Excellent analysis, I hope you convinced them to wait it out for a couple more years.

12/08/2005 7:19 AM  
Anonymous Anonymous said...

OP here - I don't know if I'm convinvced, to be honest. Intelligent analysis but it's looking like it's gonna cost me 600 bucks more to own a home vs rent it! That's chump change.

What is the difference to me if the house loses value, as long as I can make my payments?

If I wait 2 years and get a loan at 8% , even with a lower price how exactly am I getting ahead of anything? What if the prediction is not true, what then?

Yeah this place is small but it's got an attached 2-car garage that could become a master suite in 5-10 years time.

I mean the reality is my wife and I make 115k and can afford to buy this place... I guess I just don't see any real point in waiting another 2 years...

I plan to make offers at 8-10% under ask as a hedge against a 10% drop - would this offset the downside enough for this to make sense?

12/08/2005 7:28 AM  
Blogger Lou Minatti said...

socalmtgguy, I have been lurking here (after find your blog via Ben) and I just wanted to echo everyone else and say your blog is great.

I don't live in a bubble area per se, but like many other readers I've been scratching my head the past decade wondering WHAT THE HELL IS IT THAT I AM DOING WRONG?

I don't drive an expensive SUV, or have granite countertops, or own an RV, or have a bigass flat-panel TV or go to Europe on vacation every year. Lots of my peers do. They have all these cool things and go on these great trips and I don't. Sure, there is some jealousy involved.

But I do have money saved and $45k left to pay on my mortgage and I pay my credit card off in full each month. In fact, if it wasn't for the convenience and the frequent flier miles I wouldn't use a credit card.

Reading your blog makes me realize that I (and most likely all of your readers) have made the right decision and it's everyone else who is nucking futs.

12/08/2005 8:00 AM  
Blogger Lou Minatti said...

Intelligent analysis but it's looking like it's gonna cost me 600 bucks more to own a home vs rent it! That's chump change.

Like the man said, you want to pay more to live in a smaller place in a worse neighborhood. And you'll be trapped in the place because you'll be upside down on the loan and can't afford to sell until many years down the road when (hopefully) it will regain the value you paid for it.

So what's the upside to this again?

12/08/2005 8:03 AM  
Anonymous Anonymous said...

Upside? I own the house. Nabe isn't that much worse - in some people's eyes it would be better. I can build a mini-ramp in the backyard.

I can't be kicked out, my "rent" never goes up either.

12/08/2005 8:17 AM  
Blogger Lou Minatti said...

Upside? I own the house.

No you don't. The lender does.

Nabe isn't that much worse - in some people's eyes it would be better.

So it's a worse neighborhood and you plan on moving with your kids there?

I can build a mini-ramp in the backyard.

I have no idea what that is. A mini-ramp for what? A go cart?

I can't be kicked out,

Yes you can. Fail to make the payment.

my "rent" never goes up either.

But your property taxes do. Then there's the maintainance and insurance costs. And be sure to budget for $15k or so every couple of years for new siding and a new roof.

Look, if you were in at the early stages of the bubble I'd say great. But EVERY sign is telling you that the bubble is now ENDING. No more property value increases. In fact, prices will be declining.

12/08/2005 8:32 AM  
Blogger Shawn said...

AFB,

But you didn't consider the fact that after 30 years this person will own a house of at last 400K. I think you should only compare the interest that he pays with the rent. The interest is variable, but in average is about ~$1400/month, which is similar to his rental.

12/08/2005 8:32 AM  
Anonymous Anonymous said...

"So it's a worse neighborhood and you plan on moving with your kids there?"

Ok let me clarify this. It's a better neighborhood. It's cleaner, wealthier, better schools. it's just that we are hipsters so it's kind of "Suburban" to us.

A mini-ramp is a skateboard ramp. They take up 20 x 40'

By this logic no one would ever buy a house. In 30 years will the house be worth more than 400k? I think so!

12/08/2005 8:42 AM  
Blogger SoCalMtgGuy said...

Good comments all.

You make over 100k a year. That is great money, and I'm sure you are saving quite a bit each month.

What was an 800 sq ft house going for in la mesa 3-4 years ago?!?!?

I bet that it didn't take a 6-figure income to afford that "lifestyle" a few years back.

I know the "rush to own" is big, and it is HARD to be patient. Trust me, paying a mortgage on a house that you are upside down on, might sound OK right now, but after a few months of it, you will get SICK of it. You will be sick to your stomach to see that if you had waited, you could have bought a bigger house, a nicer house, in the neighborhood of YOUR choosing AND had lower property taxes to boot.

What happens if some of the predictions of a 30% pullback are true?? What if you could get that house for $280,000 in a year or so? You could put less money down (only 28k), have a lower mortgage, and lower taxes. OR you could buy a nicer home for the same 400k.

Just trying to offer some more thoughts...

SoCalMtgGuy

12/08/2005 8:42 AM  
Anonymous Anonymous said...

"What happens if some of the predictions of a 30% pullback are true?? What if you could get that house for $280,000 in a year or so? You could put less money down (only 28k), have a lower mortgage, and lower taxes. OR you could buy a nicer home for the same 400k."

I guess I have a hard time seeing that happen. I could see 30% happen in condos, but not houses. I could easily see a 10% drop, but that's why I want to offer 10% below ask.

I mean for a house in La Mesa to be worth 280k the impact to the city would be so massive that I would think there would be much bigger problems than home prices.

12/08/2005 8:45 AM  
Blogger SoCalMtgGuy said...

Anon...

THAT is the problem...everybody thinks of their house as an "investment" after these past few years.

Yes, real estate goes up in value OVER TIME. The exact figures are about .6% a year adjusted for inflation.

The past few years of 20-30%+ appreciation are NOT normal, and there WILL BE a correction.

There are going to be LOTS of bargains out there. The supply of homes on the market is growing...and during a time of year when they are ususally shrinking.

Stay the course, and you will be rewarded. I know it is hard, but hey, you don't have kids yet, what is the rush???

Keep saving. With the cash you have on hand, you WILL be able to get a really good deal in the near future.

SoCalMtgGuy

12/08/2005 8:47 AM  
Anonymous Anonymous said...

I hear you and appreciate the input. Unfortunately I have learned over time that no one can really predict the future.

12/08/2005 8:49 AM  
Blogger SoCalMtgGuy said...

anon...

The same thing was said about soooo many stocks during the boom. XYZ will "never" see the 40's again.

Again, what was that house in la mesa selling for a few years back. I bet it could have been in the high 100's or low 200s.

What REALLY changed for it to double in value??

Don't take your 100k income, and compete with 40k stated income earners. Let this thing settle out, and I think you will be rewarded.

SoCalMtgGuy

12/08/2005 8:50 AM  
Blogger SoCalMtgGuy said...

Anon...

Right, noboday can predict the future.

BUT after an 8 year bull market run in real estate that has NEVER been seen on this scale before, where do you THINK it would go.

Nothing goes up forever. Nothing goes up in massive spurts without giving something back. Look at stocks, oil, gold, commodities...everything has a great run, but it NEVER lasts forever.

It is NOT different this time.

You are at the tail-END of a great run. You have waited this long, what is a little longer going to hurt??

12/08/2005 8:56 AM  
Blogger marin_explorer said...

THAT is the problem...everybody thinks of their house as an "investment"

Yes, based on the past decade, versus a long-term analysis. There are far too many social pressures to buy, which should be a red flag to any prospective buyer that we're in a mania. Aren't houses at best a hedge against inflation? People think they're investing, but in reality they're paying a bank to occupy a house, while it slowly rots away. I don't see housing producing anything of value to merit the recent annual gains.

12/08/2005 9:03 AM  
Anonymous Anonymous said...

It sounds like OP is *really* being pushed to buy a house. So OP, what's the wife's opinion? Is she the one goading you into buying a house *NOW*?

Since you mentioned you don't have kids yet, but want to, I'm thinking the wife's nesting instinct is pushing you into a bad decision.

12/08/2005 9:04 AM  
Blogger Former LA Homeowner said...

Anon,

Looks like who have made up your mind of buying the house. The only advice I can add is wait a few more months and offer 20% less than asking instead of 10%. You are buying for the long term and for a better neighborhood and school district. Do you really think renting a few more months to see where the San Diego/LA Mesa market is heading goes to is going to hurt you? You have an excellent salary with ample down payment - that is rare in the home buying market these days. Use it to your advantage instead of jumping the gun, IMHO.

12/08/2005 9:06 AM  
Blogger Lou Minatti said...

I could easily see a 10% drop, but that's why I want to offer 10% below ask.

As SoCalMtgGuy said, what do you think accounts for a house in La Mesa doubling in value in just a few years? Do you think it's because everyone wants to live there and people are willing to pay premium prices and therefore $400k is a reasonable price for a *tiny* house in a questionable neighborhood? (As an aside, do you really want to live in an 800 square foot house with two kids? For decades?)

Let me give you a personal history lesson. The Texas RE market 20 years ago sounds a lot like SoCal. Lots of people were moving here in the 1980s (and still are). Some cities, including Austin, had a "buzz". At the time it was considered to be the "in" locale. Prices increased accordingly.

Then prices dropped and continued to do so for YEARS. In one quarter alone (1989) Austin RE prices dropped over 20%. That's not a typo. 20% in ONE QUARTER. In a place that lots of people want to live.

Please read this article. You are inside the bubble and cannot see what everyone else sees. We went through it before and know what it looks like, you don't.

http://www.dallasnews.com/sharedcontent/dws/bus/columnists/all/stories/082805dnbusburns.31d011e.html

12/08/2005 9:20 AM  
Anonymous Anonymous said...

I'm anon at 6:11, dying to leave her apartment. Yes, I am female and my nesting instinct is strong as hell. I crave a house with basement and garage and attic and all that, and I can afford it. But my instinct is not strong enough to buy an 800 sq. foot home. My 2 bedroom condo is bigger than that. Most one bedrooms in my area are that size.

I am not in favor the 4000 sq. ft. McMansion by any means, but I am realistic. I see how much space my husband and I occupy in 1200 sq ft. Adding a child and all that goes with to that and I think I would tear my hair out. If you are so desperate to buy despite the warnings and really think you will stay for 10+ years, maybe even the magic 30 number, go for something bigger than that.

On an end note, we have friends who bought a home several years ago that is 1000 sq ft. and they are crying to get out. However, they cannot seem to sell it because it's so small and their neighborhood has not gentrified as quickly as planned. With a baby on the way, they are more than a little nervous about the space issue.

12/08/2005 9:27 AM  
Blogger SoCalMtgGuy said...

anon 611

I'm glad to see that the logical "instinct" is winning over your nesting instinct. I know it is hard, but you WILL be rewarded.

I'm not even talking about buying McMansions...but 800 sqft is TINY for 3-4 people...even if it has a 2 car garage. Heck, it is tiny for ONE person.

Thank you for your input...I think your perspective might help our anon poster make their decision.

SoCalMtgGuy

12/08/2005 9:46 AM  
Blogger passthebubbly said...

I don't live in a bubble area per se, but like many other readers I've been scratching my head the past decade wondering WHAT THE HELL IS IT THAT I AM DOING WRONG?

I don't drive an expensive SUV, or have granite countertops, or own an RV, or have a bigass flat-panel TV or go to Europe on vacation every year. Lots of my peers do. They have all these cool things and go on these great trips and I don't. Sure, there is some jealousy involved.


Lou, if you lost your job or quit working, could you live off your savings for at least a couple of years without making any undesirable lifestyle changes (moving somewhere unattractive, donating plasma etc)?

I'm in the same boat as you. I just don't see the point of owning lots of things, and that includes houses. Things cost money, they wear out, they require maintenance, you have to insure them, they get lost or stolen, they become obsolete and sometimes you don't enjoy them as much as you thought you would. Now I'm no ascetic or anything, but I realize 99.927% of the US doesn't think like me.

BUt I have money saved up. If I want to move somewhere else, I can. If my job sucks, I can leave. If I want to spend a year hiking the Appalachian Trail, I can. (By "money saved up" I mean anything with easily discernable value that I can easily and cheaply liquidate, such as stocks and bonds.) I'm no millionaire, but I can go several YEARS without working, not that I'd want to.

Now my assets aren't appreciating as much as condos in San Diego have in the last few years, but they're making money. And they give me peace of mind and freedom. Do all the folks buying sh*tbox houses have THAT?

12/08/2005 9:53 AM  
Blogger Live and Work in Irvine said...

This purchase rationale baffles me.

Most of us feel there is no appreciation upside potential at this time.

You would need to make 7%-9% just to sell a house purchased today and sold tomorrow.

Why not lease a really nice house for two years?

Correct my if I am wrong, but isn't the standard deduction for a couple around 10K if they don't itemize?

Doesn't that equal about 30K in interest if you are in the 28% tax bracket?

If so, there is no tax advantage.

12/08/2005 9:54 AM  
Blogger ed said...

This is all about predicting the future. Just like when you buy stock or any other asset.

Socalmtgguy's excellent analysis showed that buying the same house this year instead of next year is better if the house appreciates by about 3% or more. Any more than 3% and you're better off, any less and you are worse off than if you had waited. The farther away from 3% you get, the greater the gain or loss. And it can be really big, because you are so heavily leveraged. (Of course this assumes interest rates stay the same. If rates go up, you might be better off buying now even if the house doesn't appreciate at all, or maybe even goes down in value.)

So what do you think is going to happen? Last year, houses appeared overvalued and they still went up 20%. If you'd bought the house last year, you would have made nearly as much on the house as you made at your job!

That's the downside of waiting...you could miss another steep appreciation, or you could miss the low interest rates.

I don't think we really know what is going to happen, but my guess is that another year of steep appreciation is quite unlikely. On the other hand rates will probably increase. The only advantage of waiting is the chance of the house depreciating by a significant fraction (like, say 10% or more). How likely is this? I don't know...I'm not nearly as confident as the bears on this blog who are so certain we'll see a 20% or more decline.

You say that you're planning to make a lowball offer. If your offer is accepted, that indicates tht the house has essentially already depreciated. This means it would have less far to fall in a further decline. So if you can get that deal, it would obviously be much much better. And if you can't get it now, why not wait and get it next year?

12/08/2005 9:59 AM  
Anonymous rent_boy said...

hey all you anon's,
you can select "Other" and give yourself a name.

If the OP did do an 80/20 and had to sell in 2 years on an upside down house, wouldn't he end owing money to the bank?

12/08/2005 10:01 AM  
Anonymous Anonymous said...

Ah you silly Californians...

I just bought a house in Milwaukee's best neighborhood, less than a quarter mile from the shores of Lake Michigan and a 100-acre Frederick Law Olmstead designed park.

I paid $400K for a 3000 sqft. Victorian with a brand new kitchen and HVAC system, 10 foot ceilings, a front porch, a backyard, and a 10-minute commute to where I work. Plus I get all the charm and craftsmanship of a house originally constructed in 1898.

Since my wife and I earn more than 200K a year, we have plenty of money left over for travel to Chicago, the beach, even California wine country.

Sure it gets cold here in the winter, but spring, fall, and summer are gorgeous. Why all of you continue hanging on in California with all its problems is beyond me.

12/08/2005 10:04 AM  
Blogger SoCalMtgGuy said...

rent boy

yes, they would have to come to the table with money to close the deal...BUT their rationale is that they would just continue to make the payment.

I say it is better to have a slightly higher monthly payment, but a large amount of savings...instead of a slightly lower payment with little to no savings.

Does that make sense??

SoCalMtgGuy

12/08/2005 10:05 AM  
Anonymous OP said...

Ok what if I told you that 40k was actually half my savings?

12/08/2005 10:10 AM  
Blogger Lou Minatti said...

Lou, if you lost your job or quit working, could you live off your savings for at least a couple of years without making any undesirable lifestyle changes (moving somewhere unattractive, donating plasma etc)?

From savings alone, yes, for 3-4 years. No vacations or major purchases, of course. Just paying the mortage and taxes and insurance and keeping food on the table.

I don't know how people with nothing saved can sleep at night.

12/08/2005 10:22 AM  
Blogger SoCalMtgGuy said...

OP

I have said about all that I can say!! You are going to rationalize buying this house if it kills you.

Just because you would still have money in savings, what do you have to LOSE by waiting?!?!?

Look at this article about Tom Barrack...a real estate investor with a 25 BILLION dollar portfolio. He could buy any and every property he wanted to...but he doesn't, why? BECAUSE IT IS NOT A GOOD VALUE!!!!

Article about Tom Barrack - Billionaire RE Investor

12/08/2005 10:24 AM  
Blogger SD_suntaxed said...

Anon buyer said:
Upside? I own the house. Nabe isn't that much worse - in some people's eyes it would be better. I can build a mini-ramp in the backyard.

I can't be kicked out, my "rent" never goes up either.

12/08/2005 8:17 AM

Anon, I also live in SD. My situation seems very similar to yours. I've also debated this question.

There are days when I would LOVE to paint the interior walls of my rental a bright neon orange and green just because my rental contract states I can't! My space is limited and I am limited in what I can do with that space. The last 2 houses that I rented were sold out from under me with almost no notice. My rent has been jacked up this year, citing a shortage of rental housing in the area. (Too many condo conversions with too much tied up inventory.) Like you, I know what it means to be tired of the hassles associated with renting and being at the mercy of someone else.

Like Anon 6:11, I'd love to have my own place and I could afford it. But, I've watched places around me more than double in price over the past few years. Those places that are now for sale are sitting on the market with no takers.

In my own case, I feel that the RE market here is so out of whack that I would rather continue renting, despite the drawbacks.

If you haven't already, you may want to drop by Rich Toscano's site, piggington.com. It has some excellent SD specific information in the free articles.

Best of luck to you in your decision either way!

12/08/2005 10:37 AM  
Anonymous Tyler Durden said...

Remember one thing: the things you own end up owning you.

If things go bad with your significant other, your job or if a storm blows off the roof where you rent, you can move away. Need a career change? Do it. If you have a huge mortgage and you lose your job you are SOL. Patience is key now that we're at the peak of the market.

Last summer when I renegotiated with my company I had enough cash to live for 8 months, and more then two years if I sold my 2 year old car that is worth ~40% more then I owe on it. I knew this, and my boss knew this, and I walked away with one of the biggest salary for someone with my experience in my company, and leagues beyond people with my background.

How did I manage to play hard and win? Because I had nothing to lose, and if you go ahead at the wrong time you're setting yourself up to lose big.

12/08/2005 11:00 AM  
Blogger Karen said...

Tyler, you are very wise, and I'm sure you are great asset to your lucky employer.

12/08/2005 11:09 AM  
Blogger Rob Dawg said...

Homeownership is deeply ingrained in the American psyche. No denying that, in fact I applaud it. The personal and societal returns are literarly incalculable. Homeownership is not the same as terminal indebtedness. Just because a whole buch of jerks over the last 5 years are in homes they shouldn't have been able to afford and perhaps their willingness to be stupid has affected your ability to get what you want and presumably deserve that's no reason to join them. This isn't a purely zero sum game. Ignore their "gains," ignore their "loses" real soon as well. Not your problem. To some extent this harkens back to the old "you cannot cheat an honest man" axiom.

An expensive home, even when affordable is a risky venture the first few years at least. In a down market even worse. My sister is going to rent in upscale Boston for a year or more. Why? Because the interest from their Hawaii sale in August -more- than pays the rent. It is immoral to give your money to the top of the bubble even if you can afford it.

Next year your cash in the bank and no contingency sales restriction will be worth additional tens of thousands in the purchase negotiations. Think about it as earning 100% on your money over the next 6 months. The lure of ownership is strong but think about it as being paid thousands every month to wait. Heck, forget all this just look at the inventory and ask if you wouldn't like twice as many choices 4 months from now?

12/08/2005 11:22 AM  
Anonymous Jamelle said...

Fortune doesn't let you read the whole article. But CNN does http://money.cnn.com/2005/10/21/news/newsmakers/barrack/?cnn=yes
This is in reference to "Tom Barrack is selling most of his U.S. portfolio. Maybe you should be nervous too."

12/08/2005 11:22 AM  
Blogger SoCalMtgGuy said...

Janelle

Fortune used to have the whole article...but I guess once it goes into the "archives" you have to be a paying member.

THANKS!

SoCalMtgGuy

12/08/2005 11:30 AM  
Anonymous outside4 said...

Great thread. BTW - Thanks for the blog.

I am in a similar boat in Cali, Bay Area. I am in my early 30's, married. I don't intend to retire here but work and family keep me and the wife here for now. We could be here for sometime. I have been renting since college, and missed the RE boom personally, however I manage a trust with RE in it so I manage that.

I empathize with OP's drive for a home. I myself felt this, and still have pangs about it. I could at this time do a LTV at 50% with a huge downpayment as one can imagine at bay area pricing. But I hate what that money will buy, and I KNOW it's way overpriced. I also "missed the boat", but I remember 2001 and all those heavy in the stock sectors. We just can't do it right now, and are gambling on a 10-20% drop off in pricing. We have seen 10% on several properties already - just sellers are still not ready to accept the pain of the drop and many are in denial. How much drop, how long? Not sure. Certainly it's not rocket-science to know that the boom can't last, has stopped, and will recede like it has time and time again.

It's sorry to see lenders so loose with lending. I heard a heavy radio ad lender doing another one of those $200 month mortage opt-arms saying, "could you use an extra $30k right now?" Sick.

BTW - I work for an alt-a lender.

12/08/2005 11:38 AM  
Blogger SoCalMtgGuy said...

Outside 4

I agree with you. It makes me sick to see the way the lenders will GIVE money to any idiot to make a quick buck TODAY.

Once the MBS buyers wake up to what they have been purchasing...really look for things to change.

I can tell you already that the investors are demanding more...they want a higher return for the risk they are accepting.

It is going to get interesting here REAL soon.

12/08/2005 11:58 AM  
Blogger doctorwho said...

You boys are still, after 5 years, just as wrong as you are batshit crazy.

California will see yet another strong year of economic growth in '06, including continued appreciation in real estate, albeit at a slower rate.

If your model has been 100% wrong for 5 years running yet you persist in clinging to it, you have no right to wonder why those around you are keeping their distance.

You and your kind have been 100% wrong for 5 years, boys.

Since ’01.

Oh fucking one, baby.

You’re batshit crazy, boys.

You know I'm right.

Face reality.

Deal with it.

12/08/2005 12:10 PM  
Blogger SoCalMtgGuy said...

Ha ha!!

My first Troll! I'll take it as a compliment.

Compare the posts of doctorwho to others on this thread. Whose posts make more sense, and don't need to resort to profanity and name calling.

12/08/2005 12:28 PM  
Blogger keith said...

with the PE ratio of houses (rent to ownership cost) sooooooooooooooooooooooooooooo out of whack, why are FB's or anyone so desirous to purchase?

One reason - expectation of future profit. Period.

And when that expectation is gone (i.e. after this week's barrage of news) - then presto! no more buyers

Check out deveopments at http://housingpanic.blogspot.com

keith

12/08/2005 12:40 PM  
Blogger keith said...

oh, I sure hope Doctor Who is a proctologist. The country will need more of those with so many people getting F'd up the A**

:^)

Congrats AFB on troll status. We love trolls.

12/08/2005 12:42 PM  
Blogger Karen said...

Congratulations! It's quite an accomplishment to have attracted a troll. You must be doing something right.

12/08/2005 12:47 PM  
Anonymous Tyler Durden said...

We've been wrong since they dropped the prime rate to 0%? Get real man, it was written in the sky that all the "free" money would wind up in the real estate market. Now if things would have gone right the low cost of leverage would have made company invest and create job in the service/industrial sector. But those sectors (and let's forget IT, even worse) have not grown in the low interest times. We knew that property value would explode, and everyone knows FBs around them that are just lining up for their bankruptcy settlement right now. I'll be saving a seat in the auction house trying to low-ball the banks.

Risk capital is usually hard to come by, but lending tons of money to people with very little cash flow is financial russian roulette. The bullet is up soon.

See ya next tuesday when the feds bump up the interest rate. You'll probably be whining with the rest of the mortgage/residential construction industry that what they're doing is bad for their business.

12/08/2005 12:51 PM  
Blogger Former LA Homeowner said...

Attracted a troll, a pretty angry one at that. The grieving process is moving along just fine. Next, the trolls will be bargaining.

12/08/2005 1:10 PM  
Blogger Lou Minatti said...

When I periodically post something about the bubble on my blog, I have a similar troll drop by. Ben nukes the guy ("Mr. PeePee" over there) within minutes on his blog, although you can see the message if you get there fast enough.

I think it's just one guy trolling the boards. I'll wager he's in deep denial, faced with a bad RE portfolio or he works in the biz and realizes his gravy train ride is over.

12/08/2005 1:14 PM  
Blogger moqui said...

OT but right blog I think….
I went to open a CD at an IndyMac branch that just opened in chino hills…still had the temporary banner name on the suite. Any ways, I explained to the manager that I don’t understand how this branch can offer me 4.55 APY for a 6 month term and turn around and lend long term money out for 6.12% APR?
He told to me that they now hold 75% of the mortgages that are based on Arm’s with intro rates that adjust after 12 months. He said they charge 1% origination and have a prepayment clause so the revenue is made on the poor saps that must reset or refinance after a year.

Just to reassure me that my money is safe, he spun his monitor around so I can see a picture of the senior VP Mark Mozilo, son of countrywide founder. He looked mafia-ish. I left the bank without opening the account.

This will be a 180K cd titled with beneficiaries in order to be insured. Still, I’m not interested in testing the fdic insurance program.
This whole mortgage business is not making any sense to me!

BTW great info here!

12/08/2005 1:27 PM  
Blogger SoCalMtgGuy said...

Thanks Moqui!

Take a look at everbank.com I know they have some stuff with some nice payouts.

I have not researched the "FDIC insurability" of everything over there...but it is worth a look

SoCalMtgGuy

12/08/2005 1:32 PM  
Blogger betamax said...

"On an end note, we have friends who bought a home several years ago that is 1000 sq ft. and they are crying to get out. However, they cannot seem to sell it because it's so small and their neighborhood has not gentrified as quickly as planned."

That's going to become a common story - people have been buying shitholes in drug addict neighborhoods with the expectation of gentrification that may never occur. Even in a best-case 'soft landing' scenario, neighborhood development will be greatly diminished, and the reality is that it might never come at all. Your friends are screwed, as are many others.

12/08/2005 1:39 PM  
Anonymous outside4 said...

Doctorwho:
While it is not good to feed-the-trolls, your post here is completely worthless unless you back it up with some numbers.

Why don't you stop trying to sell BS and start talking numbers. Not doing so makes you seem like snakeoil. And don't go back to 5 years ago - this is not about a past boom.

12/08/2005 2:42 PM  
Blogger zoovisitor said...

Your entire premise is not only wrong, but even assuming it was right it depends on a series of interconnected events, all of which must lead to massive, unprecedented levels of foreclosures:
1.) Interest rates rise high enough to kill the market.
2.) Current lending practices are severely curbed.
3.) Speculators rush for the exits at any price.
4.) Prices plunge enough to wipe out multi-year gains.
5.) I/O and O/A borrowers get wiped out at reversion time.
6.) Hello to the massive new megalopolis of Foreclosure City.

All of the above must occur for Bubblehead reality to come to pass. ALL of the above.

Of course, all of the above is assured due to the physical law of gravity or “what goes up, must come down”, “what has been will always be”, or the new and improved, cool techie sounding post modern phrase of “revert to the mean”.

Let’s suspend reality and ignore the fact that interest rates aren’t now, nor are they going into the ozone, nor is the heavy hand of government regulation going to kill current lending practices. Both of which are vital to your fantasy.

I agree generally that markets tend to revert toward the mean. However, the key question is determining the mean value. Market “means” shifts with time as the underlying fundamentals evolve. What was a valid mean a few years ago at higher interest rates and lower GDP will no longer hold true today.

Look at some other areas for comparison — medical expenses have risen faster than GDP and inflation for decades. Must these costs collapse in order to revert to the mean? Not likely. The economics have evolved – the mean value has shifted. How about college tuition, which has increased even faster than medical costs? Will there be a collapse in tuition prices to revert to the mean? No. There are sound economic and demographic reasons for the continued real increase in tuition prices. The mean value has shifted. This same scenario could be repeated for many other economic trends, both above and below what was once the mean.

People who currently forecast serious housing price declines do so based primarily on the fact that prices have gone up so much, along with easier credit and speculator activity. These are all significant considerations. However, it is not enough to focus on the imbalances that come with the temporary exuberance near the cycle peak. One must also examine the evolving nature of the fundamentals that drive real housing demand. There will be a decline, but how far depends not only on the current hype but also the underlying enduring fundamentals.

While the easy credit and flippers have been getting all the attention, nearly all of the bubble trackers have neglected to look at the shifts that are taking place in our economy and our population.

If you study the demographic profile of our country you would see that the age distributions are such that Boomers started entering their peak earning years in 1990, just as the job market and economy were tanking, taking the housing market down with it. What we are is a result of that demographic, and an accelerated shift toward higher average age of the population. The propensity to own goes up with age, as does income and wealth. This means that we will have significant growth of real demand for owner-occupied units in the coming years. So the mean value has been rising underneath this frothy market, and will mitigate the magnitude of any decline.

The housing-price declines that are sure to come will be short-lived and less severe than usual, and a mild correction will be followed by an unusually strong market thereafter.

Is the most disastrous economic event since the Great Depression, according to you Bubbleheads, going to be caused by 4.9 months of inventory and 6.25% interest rates? Come now. Pull yourselves together. And yet, you must answer yes to that question in order to live in Bubbleville.

It is always helpful to take a look around you and see who is in the foxhole with you. If they are primarily true-believing zealots who have been 100% wrong for years and years on end, you may want to reconsider the very basis of your beliefs and check them against reality, whether or not that reality fits with your preconceived notions of what should be.

You know its right.

Deal with it.

12/08/2005 5:57 PM  
Blogger blueskies said...

OP don't do it!
wait 1 month.... 30 days
this weekend you will see a couple of new listings in YOUR neighborhood....
first week in Jan. your current choice will have a reduced sticker on it...

wait it out!!

BTW entertaining troll :)" should we feed it?

12/08/2005 6:20 PM  
Blogger Idaho_Spud said...

Interesting. The angry troll and the last poster ended all their accusatory comments with "deal with it". That's usually what someone says when their arguments are fundamentally flawed. Not unlike a child turning their away from you when you're trying to straighten them out :)

Hmmm. Sounds like someone just had their punch bowl taken away.

Back to the "buy or wait" question though... I *wish* that I were in this renter's situation! It's like knowing that a car manufacturer will offer "employee discounts" to everyone next year, but you want (but don't really need) a car right now.

I'd hold off - and watch the market carefully for clues as to the direction of RE prices. Housing *does* go down!!! I was held prisoner in a lousy job and a starter house for 10 freaking years when RE tanked in California the last time. Yep, that's right - upside down on a dinky house for 10 years. I unloaded the damn thing in 2001 for a $250 profit. That's right, two hundred and fifty bucks.

Trust me - being upside-down on a home is the worst feeling in the world. Especially when your neighbors all declare bankruptcy and turn their homes over to the bank, driving your property values down further yet. Been there, done that - never again. :)

12/08/2005 6:44 PM  
Blogger Lou Minatti said...

There are sound economic and demographic reasons for the continued real increase in tuition prices.

This is wildly off-topic, but what sound reasons would those be?

12/08/2005 6:58 PM  
Blogger ReardonSteel said...

Let us all admit that we are all engaged in speculation. We don't know what will happen, so we assimilate the data and place our bets. I've owned a significant amount of real estate in my lifetime and have some good stories and some bad ones. I vote with my wallet and I'm not buying right now. I don't know for sure that prices will go down, and I won't be surprised if in a vast portion of the US they continue a steady slow rise, but some areas have had home prices raise far to quickly compared to salaries. It wouldn't have happened to this degree if interest rates hadn't plummeted down. I'm guessing that eventually interest rates will settle back near historical norms (8% for a 30 year fixed)....give me a compelling reason why they wouldn't? When that happens, there will be areas of the country that will be hard hit, the lax underwriting will be front page news everywhere when it happens. Expect a bailout, because it won't only be the homeowners who loose, ask where the money comes from that is being lent out to these poor risk borrowers.....you likely hold some of their paper in mutual funds, pension funds, etc.....
one comment on the troll/exuberant buyer posts that this thread has attracted. They speak of a new era, don't worry about past normal appreciation, interest rates, conviction that the government won't step into the regulation of these mortgages, " Market “means” shifts with time as the underlying fundamentals evolve". I heard these same arguments a few years ago as friends of mine convinced themselves that Lucent and Sun Microsystems were a good buy at 80.....a new era indeed........

12/08/2005 7:12 PM  
Blogger Tyler Durden said...

zoovisitor:

I think you greatly underestimate the impact of the speculators. Too many people have been playing the market with money that was temporarily very easy to get.

Some people know what time it is, some don't. In the past week we've seen signs that the top realtors are unloading their inventory. The chumps that got to the party late or unprepared are due for what's coming to them.

12/08/2005 7:17 PM  
Blogger Idaho_Spud said...

There are sound economic and demographic reasons for the continued real increase in tuition prices.

Lou_Minatti wrote:
This is wildly off-topic, but what sound reasons would those be?

Perhaps it's because all of our state-funded institutions prefer to have foreign students and their higher tuitions over resident US students.

Unfortunately for the excluded US students, their parents taxes are mostly funding the schools :)

Anyway, this of course reduces the available number of openings and raises the price of the remaining ones. Assuming an essentially fixed number of seats and an increasing percentage of foreign students, the price can only rise.

maybe those are the sound demographic and economic reasons referred to?

12/08/2005 7:33 PM  
Blogger Lou Minatti said...

Perhaps it's because all of our state-funded institutions prefer to have foreign students and their higher tuitions over resident US students.

Foreign students remain a small percentage of the student population.

The fact is college tuition has far outpaced the inflation rate and has for at least three decades. Even during the 1980s, when many colleges were facing declining attendance.

12/08/2005 9:01 PM  
Blogger BKlawyer said...

Great thread- kind of the consumer version of Ben's Blog. I can't add much more than Lou and the others have other than to say that I am seeing a growing trickle of this scenario ending up with client losing house and/or trying to refi out of hardship. 80/20 loan will end badly as most 20 loans are tied to shot term rates or Libor+, meaning that when short term rates rise so does your payment and/or the amount you are backloading. Important question is how much other debt are you servicing?

12/08/2005 9:27 PM  
Anonymous rent_boy said...

according to this post on another blog
Mish
Banks will continue to make crap loans as long as they can sell them to someone else.

Who is buying these loans?

12/08/2005 10:06 PM  
Blogger Idaho_Spud said...

http://www.ailf.org/ipc/ipf0203.pdf

"The number of student visas issued by the State Department has steadily increased over the last three decades from 65,000 in 1971 to 315,000 in 2000. Last year, half a million foreign students were enrolled at American universities and colleges."

That's half a million US kids *displaced* by high tuition paying foreign kids.

I'm not at all disagreeing with you that tuition is ridiculously inflated, and it's certain that there are a number of different causes. OTOH I wouldn't be quite so dismissive of the foreign student factor. It's very likely only one of many factors.

That said, I'm not for or against curtailing foreign students (certainly not at private schools!)- but it would be nice to see taxpayer-funded shools pay a bit more attention to those who actually foot their bills.

12/08/2005 10:32 PM  
Blogger desi dude said...

Last year, half a million foreign students were enrolled at American universities and colleges.

I know for a fact that lot of students from India do come here for graduate school and many of them come here with either scholarship or tution assistence. hardly any one bring $$ from home to pay for the university

12/08/2005 10:43 PM  
Blogger SoCalMtgGuy said...

Rent boy...

That topic has been discussed quite a bit on ben's blog and on some comments on this one.

The short answer is china/japan, hedge funds, pension funds, etc.

Here is a good article about it that is very timely...

Bloomberg Article

12/08/2005 10:49 PM  
Blogger ajh said...

This comment has been removed by a blog administrator.

12/08/2005 11:03 PM  
Blogger Out at the peak said...

6:11, it sounds like you should rent a house. I'm in a 1200 sqft house now which I'm renting. It's in a nicer neighborhood, closer to work, and cheaper than the house I owned (even from a mid-2000 price basis).

12/09/2005 12:07 AM  
Blogger ajh said...

I feel a sudden urge to replace my 11:03 post with a stylistic analysis of zoovisitor's 12/08 5:57 effort.

Seems to me we have 4 paragraphs of standard trollabuse, ending with;

Both of which are vital to your fantasy.

Then there is 6 paragraphs of temperate and rational bull argument , starting with;

I agree generally that markets tend to revert toward the mean.

and ending with;

... will be followed by an unusually strong market thereafter.

Finally another 4 paragraphs of trollabuse, starting with;

Is the most disastrous economic event since the Great Depression, according to you Bubbleheads ...

Now it might be purely coincidental that the middle section bears an uncanny resemblance (4 paragraphs are word for word) to a 10:39pm 12/07 post on patrick.net's forum by a regular poster titled 'Zephyr'.

But it might not.

12/09/2005 1:42 AM  
Anonymous Anonymous said...

Zoovisitor said:

If you study the demographic profile of our country you would see that the age distributions are such that Boomers started entering their peak earning years in 1990, just as the job market and economy were tanking, taking the housing market down with it.What we are is a result of that demographic, and an accelerated shift toward higher average age of the population. The propensity to own goes up with age, as does income and wealth. This means that we will have significant growth of real demand for owner-occupied units in the coming years.

My parents are boomers, ages 59 and 60. They have owned their home since 1976. The idea that boomers just started to buy homes in 1990 and become owners at that time is just wrong. People my parents' age, and even 10 years or more younger than them (including many people in my hometown) have owned since the 1980s at least for the most part. And I'm not just talking first homes - I'm talking move ups and second homes as well. The "owner occupied" units that they will might buying will be townhouses and maybe condos. I would venture to guess that most of the boomers are holding the pricier homes right now, such as McMansions. What happens in a few years when they all start to downsize, even if they're not retiring? It will happen - no one wants to take care of a 3500 sq. ft. house when they're in their late 60s. The point is is that if smaller homes, which are generally starter homes and homes to downsize into, are so expensive as to prohibit people from entering the market, who will be trading up to buy the boomers' empty homes? They may be the ones who buy the glut of condos right now, but on the other hand, when you sell your home, you want to take something away right? They won't be buying condos unless the prices will allow them to do that. The boomers could hang onto their homes longer, sure, but what about property taxes? I just don't think baby boomers will keep the boom going - I think they will be the ones to bring it crashing down.

12/09/2005 5:57 AM  
Anonymous iron56 said...

Been there, done that, got the t-shirt...

We bought in the Seattle area in 1981, as the late 70s boom was topping out. When real estate was skyrocketing and everyone knew it would keep going “’cause real estate always goes up” and “they’re not making more land” and [insert cliché of your choice] ...

Then the market tanked. We managed--barely--to get out of that house four _years_ later without bringing money to the table. (Nothing new about folks being upside down on mortgages, either.) We had _no_ equity; a scam artist merely assumed the payments (and nearly landed us in bankruptcy when he didn’t pay for months; fortunately, he came thru when we waved our lawyer over him.)

We’d’ve done better to rent--but the clichés about homeownership were as prevalent then as now, “and we had to get in while we still could.” As it was, we had no more to show for 4 years of payments than if we’d rented--and we damn near trashed our credit rating too.

I am reminded of a quip of Ben Franklin’s: “Experience keeps a hard school, but a fool will learn in no other.”

12/09/2005 7:46 AM  
Blogger zephyr said...

The boomers will bring the housing market crashing down. But that will be around the year 2025, when the average boomer will be about 70 years old.

12/09/2005 7:55 AM  
Blogger zephyr said...

We are at the beginning of a typical cyclical downturn. There will likely be two more typical full cycles before the the big demographic housing crunch comes.

12/09/2005 7:58 AM  
Blogger zephyr said...

zoovisitor, You lifted my post from Patrick.net and included it in yours.

The original comments were posted there by me on December 7th at 10:39 PM.

http://patrick.net/wp/?p=129#comments

12/09/2005 8:03 AM  
Anonymous San Francisco renter said...

It's never good to feed the trolls, but I can't resist. Zoo visitor said this:

"or the new and improved, cool techie sounding post modern phrase of “revert to the mean”."

The phrase "revert to the mean" is not new, improved, cool, techie, and especially not post modern. Mean reversion is a very basic tenet of probability and statistics. You would have learned about in Prob Stat 101 had you taken that class. But then you'd also have more of a clue of what you're talking about and wouldn't have to cherry pick the postings of others. It's best not to bite off more than you can chew Son, but I have the feeling you already have. Good luck offloading your condos!

12/09/2005 1:59 PM  
Anonymous Moman said...

OP - you're crazy if you buy that house just to buy. It's called 'hedonic adaptation'. You think you'll be so much better off when you own a house but will soon settle in and find it's not true. If you make a little money that is different but the odds are clealy against you. I hope you're grateful to have SoCalMtgGuy present such a clear cut unbiased case - disregard his excellent advise at your own risk.

I'm not sure if it's bommers or the younger YUPPIES that are driving the bubble. People my age buying $300k homes - give me a break! I have friends that spend every penny of a 2-week paycheck on a housing payment. A couple missed paychecks and BK it is.

SoCal - great site; I too have watched this 'event' unfold for the past three years. It's going to be rough and sad when the eventual correction does come (and it will, anyone who thinks it won't should read a couple books I have listed in my blog).

12/09/2005 3:22 PM  
Anonymous Anonymous said...

OP -- Please take some advice from one who has two kids and a similar family income.

First, that is absolutely not enough space to raise a family for 10 years. In that tiny house, you and your wife will come unglued in short order! You don't need a mini-mansion, but sub-1200 feet is just too small.

Second, I know you think that $3k is reasonable at this stage of your life, but that's an enormous chunk out of your income, especially for someone who is planning to have children. You'll be pretty tight after you fund your 401k's and the kid's 529's. I know children create tax deductions, but they're still expensive, really expensive. The tax deduction doesn't make up for it. Trust me on this one.

And, what if one of you wants to stay home to look after those tax deductions? Never say never. It could happen. What then?

I understand that you've waited a long time, but don't allow your frustration to goad you into a bad decision. SoCal and the others are sharing some valuable advice. You'd be wise to heed it.

12/09/2005 8:52 PM  
Anonymous Anonymous said...

Op here - I'm definitely heeding the advice but I have a really hard time believing a 30-40% drop is possible.

As a poster above said the 'relative mean' has gone up. I guess that means that San Diego got more 'expensive' to be considered 'expensive'. I am originally from Long Island NY and my parents house costs the same money, is about the same size/lot (comparatively for the area) and is about 400-450k. Only diff is there is NOWHERE you can make 100k without a 1hr+ train ride to NYC. La Mesa is 15 minutes to my job in Miramar.

I definitely am concerned about the 10% drop and I believe it is almost a certainty in most of SD. However I do believe it's a long-term investment and in the absolute worst case I am forced to live there forever.

I also understand the other people's concers re: home size, but a 1200 square foot detached house is completely out of my range in this town. I grew up in a small house, it's not a bad thing. You need a garage and a backyard to make it work.

I'm not saying this is 'the house' but it's pretty close to what my options are at this point.

If I wait 2 years who knows what will happen. You are saying that the house I live in (650k-700k) will be worth 400k? That seems insane to me.

No one can predict the future... and in general, those who predict catastrophes are wrong, it's the story of Chicken Little.

12/10/2005 9:18 AM  
Blogger Karen said...

OP

I have a suggestion. For six months, bank the difference between your current rent and the $3k estimate for a mortgage payment. A year would be better, but I understand the stress of waiting by the sidelines. Make the money inviolable. If you can get by comfortably without touching it, you know you can make the mortgage work.

You have a significant amount of money in the bank. Good for you! Take $1500 or so and find yourself a reputable financial planner (CFP). Tell him/her all of your dreams and work out a plan. It's a small investment in planning that can have a huge impact on your future financial security. Do this now before you make any big decisions.

I wish you the best.

12/10/2005 9:57 AM  
Anonymous op said...

Karen,

Thank you for the insight. Actually we already do this on some level.

My concern is that I am being seen as a 'fucked borrower', but given the stories of people using houses like ATM machines (and my co-worker saying he'll leave his house mortgaged to his kids).. I think I'm in good shape to buy a place in SD.

After everything (including some minor bad spending habits) we still typically have well over the diff between the mortgage and the rent. We plan to really cut back on our spending as well and have been more and more sensitive to this in the past 6-8 months.

When the kids come my wife can stay home with the kids for 6-12 months and then work part time for a while. We have friends and family that can help with childcare as well.

I have kept track of income vs expense over the past 28 months and we have come out way, way ahead, about 30% of total income (after taxes) saved over that period.

To put it mildly, I am getting clobbered on taxes, and it's not getting any better.

I see people here trying to convince me NOT to buy a home, under any circumstance? Is there any 'right time'?

12/10/2005 10:27 AM  
Blogger Karen said...

OP

I don't think that you are a "FB." Hardly! You're obviously very smart, and the fact that you're expending so much effort evaluating the pros & cons of this purchase indicates to me that you are quite savvy.

Now, go find yourself a financial planner ASAP! You get what you pay for, and you are not paying for our advice. A CFP will look objectively at your particular situation and help you achieve your financial goals, including, but not limited to, buying a house in which to raise your children.

"Pay the people who will make you rich, not the people who will make you poor." That's the best advice anyone ever gave me, and it has served me well.

Good luck.

12/10/2005 10:43 AM  
Blogger Karen said...

OP

A CFP can help with your taxes, too.

12/10/2005 10:51 AM  
Anonymous SoCalMtgGuy (from remote site) said...

(I'm posting this from a remote site...just had a minute to check for comments...wanted to reply here. It is the REAL Socalmtgguy)

OP

You are definitely NOT an FB! ...and even if you buy the house, you won't be an FB.

You have already done more research on just THIS website than most people ever do before making a purchase.

I just hate to see good people like yourself, have to pay more for a house because the floodgates were opened, and people with HALF your income are able to compete for housing with you.

If people had your though process, did your due dilligence, and used the same "economic standards" you are applying to a home purchase...this "bubble" would not exist.

Best of luck to you and your family. Feel free to contact me via e-mail if you want to talk privately.

socalmtgguy@gmail.com

thanks!

SoCalMtgGuy

12/10/2005 10:59 AM  
Anonymous San Francisco renter said...

OP -

I'll give you my advice, but of course in the end you must draw your own conclusion on this matter and make your own decision.

First, you are not at all likely to become an FB if you buy this house, and your own given worse-case scenario of being forced to live there forever is also unlikely. It does indeed sound like you can afford to buy this house now. Therefore, my opinion is that the worst case scenario for you is that you overpay for this house.

Why would you overpay? Because of the timing of your purchase. You ask "is there any 'right' time to buy a house?" The answer is yes, given normal market conditions, most of the time it is better to buy vs. rent if you can afford it and have a long enough time horizon.

Now the issue here is that the present circumstances are not normal market conditions; we are at the point of change in the market (what stock investors call an "inflection point"), and this change has clearly already begun which you can and will discover for yourself as you continue to do more of your own research which would be prudent given the size of the purchase you are planning.

Market cycle changes are very normal, they are not a "catastrophe" as you say, in fact they are inevitable. Look at the historical pricing chart of any asset market and you will see a sine wave of boom cycle followed by bust cycle (the good news is that this sine wave is tilted up, so one can theoretically hold their assets through the cycles and see appreciation). Our current real estate market has been on a boom cycle for at least the past 5 years. There is no way to know for certain exactly where the top of the cycle is except in hindsight. What is certain is that the National housing market, and the San Diego housing market in particular have been slowing more in the past 3 months than they have at any point over the past 5 years. Here are the stats from San Diego so that you may see for yourself:

http://www.benengebreth.org/housingtracker/location/California/SanDiego/

You are correct that no one can predict the future. But understand that a cyclical market downturn is by no means a catastrophe touted by a bunch of "chicken littles", on the contrary it is the normal life-cycle of any asset market. People have short memories. You hear them say "real estate never goes down." They say this based on their own limited worldview--they have not personally seen San Diego real estate prices fall in 15 years, therefore San Diego real estate prices never go down.

It is also true that San Diego real estate will likely always command a premium over real estate in other parts of the country and has seen its intrinsic value increase throughout this boom cycle. It is highly unlikely that 15% annualized growth over the past 5 years is the intrinsic value of this real estate. By comparison, the historical annualized real estate growth rate over the past 200 years in America is roughly 3.0% (also roughly the long-term inflation rate).

Decide for yourself: are prices more likely to rise for the next two years, or are they more likely to continue to fall as they have already begun to for the past three months? Don't take my opinion as gospel--scour the web. There has been a HUGE upsurge in media attention given to the real estate bubble over the past 6 months. Another thing I will tell you from my experience in researching speculative bubbles is that increased media attention given to the "bubble debate" has occurred at the peak of every historical case of speculative bubble. What is happenning now has happenned many times in the past and will happen again many times in the future. Those who do not understand history are doomed to repeat it.

In closing, as you can most likely deduce from the above, I believe the most prudent course is to wait 6 months to 1 year to see what happens with the current change in the market. I am also in the position to buy a condo here in SF if I wanted to, but everything in my experience and past education says now is the time to watch this market from the sidelines.

12/10/2005 3:44 PM  
Anonymous San Francisco renter said...

OP -

Lot of good RE media links are posted here daily:

http://patrick.net/housing/crash.html#links

Pour yourself a cup of coffee and get reading!

12/10/2005 3:57 PM  
Anonymous Anonymous said...

In 1994 I bought my first house. It was 770 sq. ft., 2 BR, 1BA on a quarter acre lot with a detached shop/garage (actually it was larger than the house). It was a definite starter house, but tidy and clean. Aesthetically and structually (save for the much larger lot) it was very similar to the SD house being discussed here.

The big difference -- I paid $54,600 for it. It was in Salem, OR, a state with an ever-increasing wave of CA transplants come looking for more house for the buck.

I held it for 2 years while I fixed it up and sold it w/out a realtor for $63k. Thought I made a killing!

It really is a crazy real estate world we live in...

12/14/2005 9:50 AM  
Anonymous Anonymous said...

OP,

It looks like you can well afford the little house and you have done excellent research on it. You might as well go ahead with the purchase.

Yes. The house is small, but what small children need most is attention, not a big house with lots of stairscases to fall down and closets to trap themselves in.

A house is more than a roof over your head. It is a piece of stability. If the school district is 10x better, then it is well worth it.

I would bargin with a 10% reduction to begin with and you might end up with 5% reduction. A 5% reduction can be quite good if the market price is 400k. That will pay your closing costs.

As you are well aware off, nobody can predict the future. The market might level off in 2006 or it might increase 5% , or maybe increase another 3% in 2007 then come down 15% in 2008.

Why put your life on hold when you can afford the house !

1/09/2006 1:38 PM  
Anonymous Anonymous said...

OP,

I am anon at 1:38 pm.

One more consideration, being close to work is priceless ! You said 15 min. commute time to work.

1/09/2006 1:47 PM  
Anonymous SquirmingCoil said...

Here is an interesting link for you that seems somewhat compelling for the wait and see approach - http://www.listingssandiego.com/search/homeview.asp?id=1428436&p3=-1&ix=8

What you have here is another home in that same neighborhood, much larger, reduced from $499K to $439K with the caveat in the MLS stating that the owner says "get the thing SOLD!!!" It will be VERY intereting to see this type of mentality play out over the next 2-3 years. Things are changing VERY quickly and this spring will be VERY intereting indeed.

BTW, I also live in San Diego and have for 5 years now. The RE market here is way over priced and WILL Correct...I think that the 30-40% is unlikely, but 10-25% over a couple of years or flat with some depreciation due to inflation is very possible.

Your stated ability to save is fantastic and highly commendable...you are far from an FB...I think that many are just hoping to help you avoid flushing your $40-80K down the toilet for the sake of a FAD market.

Cheers.........SquirmingCoil

1/16/2006 10:59 AM  
Blogger close2bk said...

The math has failed in more than just the realestate market. Consider equities.
CSCO-5.5 billion in TTM net income-
with 6.14 shares outstanding, and a 120 billion mkt cap, your buying earning's at yield of 4.50%- that's less than the majority of the yield curve, not to mention the RISK free 3month bill-
your not being paid to take risk, as it implies the earnings are GUARANTEED.
- other great examples include QCOM-BRCM-all with worse ratios than CSCO
- if our best and brightest minds(supposedly) buy with FUND(funny) money using these MATH ratios, what hope is there that the average homeowner(buyerwannabe) is to make the right decision.

2/16/2006 1:56 PM  
Blogger close2bk said...

The math has failed in more than just the realestate market. Consider equities.
CSCO-5.5 billion in TTM net income-
with 6.14 shares outstanding, and a 120 billion mkt cap, your buying earning's at yield of 4.50%- that's less than the majority of the yield curve, not to mention the RISK free 3month bill-
your not being paid to take risk, as it implies the earnings are GUARANTEED.
- other great examples include QCOM-BRCM-all with worse ratios than CSCO
- if our best and brightest minds(supposedly) buy with FUND(funny) money using these MATH ratios, what hope is there that the average homeowner(buyerwannabe) is to make the right decision.

2/16/2006 1:57 PM  
Anonymous Anonymous said...

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2/21/2006 9:47 AM  
Anonymous Anonymous said...

I just posted this on the main blog page but I'm also putting it here since it applies to the question the original poster asked.


I've scanned through a fair amount of this blog's history, as well as the thread about "the math of buy vs. wait".

My impression is that there is a fair amount of invective, fuzzy thinking and irrationality mixed in with the good advice and valuable data around here.

Disclaimer first: I sold my home in NoCal a few years ago because I had outgrown it, and have been renting since with the intention of re-entering the market when circumstances cooperate. Thus, I am mostly in agreement with the idea that real estate *could* see a correction, and is unlikely to accelerate from here.

BUT, these facts do not in my mind indicate that one should "absolutely, positively" defer a purchase that is within one's means and represents a home that the buyer intends to occupy for a long time.

Yes, there are many overextended homeowners right now. Yes, there is a possible (maybe probable) ARM squeeze pending. Yes, there were an unconscionable amount of spec buying, flipping and other silly games over the last few years.

Even so, telling somebody to wait "just one or two years" before buying amounts to attempting to time the market. As a professional equity investor, I find that advice very troubling.

One possible scenario is that we see a massive price correction in real estate. This would likely stem from a full-economy recession. Another possibility is that housing prices flutter in a tight trading range for the next 5 years, while inflation and salaries catch up. A third possibility is that houses actually *appreciate* a little more for 5 - 8 years, and there's a correction at that time.

If a buyer can afford a home without being forced to engage in "creative financing", if the home represents a home that the buyer would be happy in for a long time, and if the buyer can comfortably say that he/she wouldn't regret the purchase even if the economy tanked and they were laid off, there's really not a good reason to hope for a price decline next year. You may get it, you may not.

Just a few considerations that I haven't seen mentioned, although granted I haven't read everything here:

CONS
- when comparing renting with buying, don't forget to account for the opportunity cost of your down payment. If you put $40k down, you're forgoing the annual interest of anywhere from $2-4k, depending on your investment returns.
- with home ownership in SoCal, you bear the risk of natural disasters (i.e. earthquakes) that your landlord bears when you rent
- Plan on spending about .5-1% of your home purchase price each year in maintanance and improvements

PROS
- if you buy now and the housing market doesn't change for 3 years, you have reducing your mortgage obligation by 3 years over buying in the future
- consider the intangibles as if they were tangible; if buying a house represents an improvement in your quality of life (which can be true even buying a house that's not as nice as the one you rent), give that improvement a dollar value. How much is it worth to you? That's an asset that you're acquiring with your home purchase.
- consider how likely it is that your landlord needs you to leave your rental, and how big of a disruption that might be (esp with kids)
- the people selling today have all read the articles and heard the stories about the "real estate bubble". They may have some irrationality themselves as a result, which works to your advantage. Find a motivated seller in a house that is visually unappealing but could be fixed up, and you might actually be able to make a bargain purchase, even at today's prices

In my opinion, the current market is one in in which a buyer should be largely more picky. Prices are probably more likely to be flat or down than up. But as I'm attempting to spell out here, that logic isn't enough to make waiting an "obvious choice". Financial markets, housing included, are just not that easy to exploit.

Take your time and buy the house that doesn't feel like a compromise to your lifestyle and needs. Offer low. Finance conservatively.

Waiting for one - four (or who knows how many) years) when you could comfortably buy now amounts to trying to time the market, and though it hasn't been said much on this blog, that is a game that can be lost.

Even though I personally believe that prices are ahead of themselves right now, I would still buy a house today if it represented the home I wanted for the next 10+ years and I could conservatively afford it.

2/21/2006 10:53 AM  
Anonymous Anonymous said...

From a previous comment:
>Consider equities.
>CSCO-5.5 billion in TTM net income-
>with 6.14 shares outstanding, and a
>120 billion mkt cap, your buying
>earning's at yield of 4.50%- that's
>less than the majority of the yield
>curve, not to mention the RISK free
>3month bill-your not being paid to
>take risk, as it implies the earnings
> are GUARANTEED.

If only investing were this easy. The above facts do not even come close to making a case for CSCO being a bad investment.

While I wouldn't buy CSCO today, there are a couple reasons while plenty of smart people are. CSCO is the 800 pound gorilla of their industry. If the industry grows, they should grow at least as fast.

If CSCO's earnings continue to grow at anythink approximating the 12% growth of the last 4 years (yes, that includes stock options and dilution) then today's price is fair to cheap.

Nothing is ever as obvious in the stock market as "the current P/E is ridiculous, that company's stock is a rip-off".

2/21/2006 11:18 AM  
Anonymous OP said...

wanted to let everyone know that I did go ahead and make the purchase. Actually found a bigger, nicer place in a better area and went for it. The place had an accepted offer in but that deal fell through. We had to fight to get our offer accepted as there were 2 other buyers. The property was only in the MLS for a total of 5 days. I didn't get the lowball offer I wanted but I did get some credit for minor repairs.

We are excited, nervous, but hopeful and really are looking forward to moving in. I want to thank the people on here (esp SoCalMortgageGuy) for their opinions and help.

I am not one to tell other people how to live their lives or spend their money, but for me and the wife this was the right choice at this time. To be honest I am more worried about something going wrong with the deal and me not getting the house than the market crashing :-)

2/24/2006 8:02 AM  
Blogger mOOm said...

IMO the correct calculation is the interest on the entire value of the house - some of this is interest paid on the loan and some opportunity cost of the capital tied up... This "rent" does go up over time. Not a fair comparison to compare actual mortgage payments to rent.

OTOH in California from what I understand the property tax doesn't.

2/24/2006 7:31 PM  
Blogger mOOm said...

BTW I grew up in a 700 sq ft apartment in a London suburb + back and front garden and garage (like a single floor townhouse). Now it seems so terribly small (living as a single person in a 600 sq ft apartment now) but it was OK...

2/24/2006 8:28 PM  
Anonymous Che Guevara said...

Bad news my greedy American friends. This real estate "bubble" you've experienced is not so much a question of home values going up but instead the value of your dollar sliding inexorably downward.

Small wonder with a government addicted to printing paper money as fast as it can crank it out while spending billions more on bombing women & children in it's valient world-wide struggle against "terrorism". Kinda makes one miss the nazis. At least they were forthright about what they were doing.

Anyway I digress. Check the value of gold in 1995 @$250.00 oz to todays value of $500.00 oz. Your dollar value has gone down 50%. And that's just ONE of many similar indicators, all of which pointout a MAJOR devaluation of the dollar

However, that's actually the GOOD news. The bad is that your credibility as a just and moral nation has been devalued 3,173%.
You're not only financially but morally broke as well. The constant pics of tortures didn'tt help much, you know.

In ending, don't worry so much about buying or selling real estae at this point. Instead you should wile away the few months that separate you from standing in a soup-line towards something useful, like learning Chinese for example.
After all once they decide to cash in the trillions of dollars in U.S. Treasury bonds & bills they possess it'll all belong to them anyway.

You yanqui bastards will be sucking Chinese won-ton LOOOOOOOONG TIME.

Putos.

3/21/2006 5:32 PM  
Anonymous Che Guevara said...

Ooops, I meant to say "Your dollar value has gone down 100%".

3/23/2006 3:49 PM  
Anonymous Anonymous said...

Not sure if people/potential buyer are still reading this blog as it is a few weeks old. Believe me, if your hopes to have 2 kids in a couple of years in this 800 sq. foot home, you'll regret it. Secondly, you won't be able to afford 2 kids on your salary with your mortgage payment. My husband and I make the same salary as you with one child and live in Phoenix (definite bubble here), much cheaper area and are o.k. financially, but I could not picture how we'd be if we had a large mortgage like you'll have, even with just one kid. We live within our means, have zero debt and pay cash for everything. Have you thought about how much day care will cost, and what are the day care options in your area? If you are a hipster you may find yourself very uncomfortable with your children in a typcial suburban day care and schools, etc. I'd say you deal with the realities of having kids first, without the added headache of a larger mortgage in a smaller house.

4/08/2006 11:56 PM  
Anonymous Anonymous said...

Also, don't forget that you can put the 40K down payment in a 100% safe CD at 5% and have it grow $2000 a year.

4/09/2006 11:41 PM  
Blogger Hapto said...

OK.. the OP probably bought the house... BUT! I say, If you can afford to save 40,000/year.... do it. Year 1, rent and save, Year 2 rent and save, Year Three, get the family started, and while your family is gestating, and you are renting and saving take your 120+grand downpayment and parlay that into some affordable payments that will afford you downtime/vacations with/from your kids, in a nice neighbourhood.

I guess I see it like you're just 'saving' but you are investing in quality of life, not quantity of ownership... and that, for family-folk is the most important variable -- because you are no good to your wife and kids as a stressed out-worker monkey.

4/27/2006 9:48 AM  
Anonymous devilbush said...

I think the OP just wants everyone to hold onto their money so he can buy up all the houses himself and become the biggest slumlord EVER.

5/17/2006 9:26 PM  
Anonymous Anonymous said...

Not sure if people/potential buyer are still reading this blog as it is a few weeks old. Believe me, if your hopes to have 2 kids in a couple of years in this 800 sq. foot home, you'll regret it. Secondly, you won't be able to afford 2 kids on your salary with your mortgage payment. My husband and I make the same salary as you with one child and live in Phoenix (definite bubble here), much cheaper area and are o.k. financially, but I could not picture how we'd be if we had a large mortgage like you'll have, even with just one kid. We live within our means, have zero debt and pay cash for everything. Have you thought about how much day care will cost, and what are the day care options in your area? If you are a hipster you may find yourself very uncomfortable with your children in a typcial suburban day care and schools, etc. wow gold opportunity! I'd say you deal with the realities of having kids first, without the added headache of a larger mortgage in a smaller house.

7/17/2006 8:17 PM  
Anonymous NotAnFBYet said...

So did the OP buy the house? How much is the similar house in the picture worth today? Has it gone down in value?

It's interesting reading through this thread today and seeing how right SoCalMtgGuy was. I know the condos I have been looking at are seeing very steep price declines. I'm thinking 2007 will be even worse (or better if you are a buyer).

11/30/2006 7:17 AM  
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12/24/2006 4:47 PM  
Anonymous Anonymous said...

Please!!! if you would pay that much for that home your a nut job, if you were caught up in the sub prime your a nut job, use your freekin head, if you can not afford it DON'T BUY IT.What makes you people think you can afford a house, i am 60 owned my house for 7 years, my parents bought their FIRST HOUSE when they were in theirs 40s.but just like illegals you all want it today, if you can afford it or not, what the hell someone will come along and help you right?

1/21/2008 11:06 PM  
Anonymous Anonymous said...

Apart from the last post, this blog is 2 years old. In hindsight it looks like the OP should have waited.

4/01/2008 9:58 PM  
Anonymous QUALITY STOCKS UNDER 4 DOLLARS said...

Great blog

1/09/2013 11:18 PM  

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