Last week I discussed housing
valuations — how expensive local homes are in comparison to their
historical relationship with rents and incomes. To sum up the
conclusions, San Diego homes in aggregate are right in the middle of
the valuation range that has prevailed for the past thirty-odd
years. However, due to super-low mortgage rates, monthly payments
on San Diego homes are substantially below their typical historical
levels.
This article will deal with whether it makes sense, financially
speaking, to buy a
home in a market characterized by middle-of-the-road prices alongside
dirt-cheap monthly payments.
The answer, as you might imagine, is that it depends on whether you
care more about future
change to prices or to monthly payments. Below I’ll discuss
different circumstances under which buyers might care more about one or
the other. But first, I
actually want to describe prospective changes for each.
continue reading at voiceofsandiego.org
I expect you to pay me my
I expect you to pay me my royalties in the next day or two for stealing my thoughts exactly. Very well written.
So Rich! When are you going
So Rich! When are you going to buy? I know it is a personal decision that depends on many factors, but I just have to ask, as I’m sure others are curious as well. I have a friend who has the means to buy, he will be financing, and I’m not really sure why he seems to be dragging his feet. It’s not about the down payment, job security, FICO score, or anything else I can think of that might make some hesitate.
threadkiller wrote:So Rich!
[quote=threadkiller]So Rich! When are you going to buy?[/quote]
I won’t be buying any time soon, but that really doesn’t mean anything. I own a business, with employees, and have significant potential for income fluctuations. I want to be able to rapidly scale back my expenses if needed, and it’s just easier to do that as a renter.
So for now I’m not interested in owning a home, and that’s the main reason why. That primary consideration has nothing to do with the market.
However, adding somewhat to the decision is that fact that I like living in Cardiff, which still seems to be pretty overpriced. So there’s a bit of a sub-market consideration there. And it helps that I rent a house that I would be perfectly happy to live in forever.
Rich said:
“And it helps that
Rich said:
“And it helps that I rent a house that I would be perfectly happy to live in forever.”
Well, that’s the tricky part. I would love nothing more than to stay in my current rental forever because I love the location and the rent is cheap. However, the landlord has decided to sell the condo I live in so now I have to look for a new place to live. Your article has convinced me to look into buying right now, though.
Rich, there is one big issue right now that complicates things in regards to your post. By putting as little down as possible in order to take advantage of low rates (think FHA financing), the PMI payment has been increased significantly. For a 350,000 mortgage using FHA financing the monthly MI is approximately $270. Then once you factor in HOA fees (and Mello-Roos?) that reasonably low priced home is now very expensive to own and much more expensive to own than to rent the equivalent.
speaker said:
“By putting
speaker said:
“By putting as little down as possible in order to take advantage of low rates (think FHA financing), the PMI payment has been increased significantly.”
I agree. I am in the same dilemma … I think if you DONT have some savvy investment plan; where you can really invest the cash (that you saved by NOT putting towards a higher down payment), and generate some decent returns (atleast 5%) with minimal risks, then it DOES make some sense to move this cash towards down payment and lower your PMI. It sounds better than letting it sit in some savings/CD account yielding around 1%.
researcher9, a CD may yield
researcher9, a CD may yield 1% right now but what do you think the average CD rate will be over the the next 30 years? Quite a bit higher, I am guessing. You need to compare prospective return on that saved money over the life of the mortgage, not over the next year or whatever. (Not that a CD is an optimal approach over 30 years anyway… I know you weren’t suggesting as such, but I want to make sure people don’t think I am suggesting as such either!).
Anyway, your and Speaker’s points about PMI are valid. Of course, you have to add up the numbers in your own area, including MR, etc. But 20% down would get you 80% financed at these low rates, and that is a hefty chunk of LTV, so if the prices were reasonable that would probably be a good approach.
On the other hand, the % that PMI adds is not too high, so in the grand scheme of things you are still getting a very low rate (ie low historical monthly pmt) EVEN if you take the PMI route.
How close does the PITI have
How close does the PITI have to be to the rental value of a particular house for it to meet the criterion below from Rich’s article?
“You are buying a home that is reasonably priced on a historical basis compared to area rents.”
What are the risks and benefits of continuing to rent, waiting for prices/monthly mortgage payment in the more overvalued areas to fall?
Should I be getting myself used to the idea that there are some neighborhoods where I might be better off renting versus buying over the long term (more than 10 years).
It would be awesome to have the historical data for rent vs monthly payment for specific neighborhoods.
MostlyLurk wrote:How close
[quote=MostlyLurk]How close does the PITI have to be to the rental value of a particular house for it to meet the criterion below from Rich’s article?
“You are buying a home that is reasonably priced on a historical basis compared to area rents.”
What are the risks and benefits of continuing to rent, waiting for prices/monthly mortgage payment in the more overvalued areas to fall?
Should I be getting myself used to the idea that there are some neighborhoods where I might be better off renting versus buying over the long term (more than 10 years).
It would be awesome to have the historical data for rent vs monthly payment for specific neighborhoods.[/quote]
Sigh, I have so much to learn. Great article Rich.
Lurk, check this thread: http://piggington.com/historic_rent_prices – Not sure what you mean by monthly payment though?
MostlyLurk wrote:How close
[quote=MostlyLurk]How close does the PITI have to be to the rental value of a particular house for it to meet the criterion below from Rich’s article?
“You are buying a home that is reasonably priced on a historical basis compared to area rents.”
What are the risks and benefits of continuing to rent, waiting for prices/monthly mortgage payment in the more overvalued areas to fall?
Should I be getting myself used to the idea that there are some neighborhoods where I might be better off renting versus buying over the long term (more than 10 years).
It would be awesome to have the historical data for rent vs monthly payment for specific neighborhoods.[/quote]
Yes, it would. Unfortunately it’s a pretty subjective exercise. In some neighborhoods, it’s probably not reasonable to expect rents to equal PITI (not after adjusting for opportunity cost of down payment anyway). But in some places it is, and in some we are already there. Sorry I can’t be of more help on this question, as I just don’t have the data… this is an area where everyone needs to do their own research. (Though anyone is welcome to share their research here. 🙂
Rich Toscano wrote: the
[quote=Rich Toscano] the future is fairly unknowable. Those who depend on a specific path for home prices do so at their own risk.[/quote]
The future is always unknowable…at any point of time. But rational thinking is still pretty powerful to help guide the prediction. I only have one question on the housing market that I am unable to answer: what is going to happen to “shadow inventory”? Can it be absorbed in the normal housing up-trend or it is too big to be resolved without price drop?
Many discussions have been focused on the effects of government inflationary policy and their willingness to go further. But I have still not got satisfactory answer to whether the government can use its power to resolve the problem of “shadow inventory”…if it exists at all. Now that the stimulus money has went away and sales have dropped…I don’t care about the resulting price of the home that much…but I do wonder if the sale volume is higher comparing to the default volume?
P.S. Did some quick research and add a few more data points:
http://boombustblog.com/media/wpmu/uploads/blogs.dir/1/files/2011/02/image055.png
http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245286096914
I may not be in the majority
I may not be in the majority but I dont beleivew it is too big to be absorbed. Construction of new homes has been virtually halted. I expect the “Shadow inventory” to gradually reach the market over the next 2 to 5 years (perhaps longer) on a slowly measured basis as it has for the last 3 years. Prices should continue trading in a narrow range (+/-) for the foreseable future. Expect more of the same. Its a long road back but we are heading back in the right direction.
carlsbadworker wrote:Rich
[quote=carlsbadworker][quote=Rich Toscano] the future is fairly unknowable. Those who depend on a specific path for home prices do so at their own risk.[/quote]
The future is always unknowable…at any point of time. But rational thinking is still pretty powerful to help guide the prediction.
[/quote]
The full thought that you partially quoted was:
“with neither serious over- nor undervaluation to be our guide, the future is fairly unknowable.”
I think it’s pretty clear that I am saying that the future is a lot more knowable (though not entirely so, obviously) if there is an extreme over or undervaluation present.
[quote=carlsbadworker] I only have one question on the housing market that I am unable to answer: what is going to happen to “shadow inventory”? Can it be absorbed in the normal housing up-trend or it is too big to be resolved without price drop?
Many discussions have been focused on the effects of government inflationary policy and their willingness to go further. But I have still not got satisfactory answer to whether the government can use its power to resolve the problem of “shadow inventory”…if it exists at all. Now that the stimulus money has went away and sales have dropped…I don’t care about the resulting price of the home that much…but I do wonder if the sale volume is higher comparing to the default volume?
P.S. Did some quick research and add a few more data points:
http://boombustblog.com/media/wpmu/uploads/blogs.dir/1/files/2011/02/image055.png
http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245286096914%5B/quote%5D
I don’t think there is a satisfactory answer… I just don’t think it can be answered. Not by me, anyway… maybe by someone smarter than me.
I think there is a chance that not too much will come of it (that we’ll have slightly elevated inventory for a number of years). But it’s also possible that it will be much worse. I put this in the category of potential risks against which one would like to have a margin of safety, which (lacking said margin) weighs against buying if you care about price.
Rich,
In context of your
Rich,
In context of your article, what %age point you are taking as “very large down payment”? For a typical North County Coastal SFR price tag of around 800k, what would you consider as “very large down payment” … would it 30, 40, 50 … , 70 or 80% of purchase price (800k)?
Thanks,
There’s no specific cutoff…
There’s no specific cutoff… the lower the LTV, the more benefit you are getting from the mortgage rate subsidy. Personally I would put as little down as I could without significantly raising the rate on my loan, but that’s just me.
I agree with the shadow
I agree with the shadow inventory being absorbed over time as well. Typical forclosure timelines are what, 400 – 500 days correct. Also what many people do not have any clue about are bulk purchases. Look back at some of the loan programs that are made available to institutions for large bulk purchases of non performing assets and securities. The incentives are STAGGERING. A few weeks ago Rich had a link posted about an investment group that had just added an 800 million dollar purchase to a previous 400 million dollar purchase. Obviously not all of this is residential but some of it is.
So yes it is completely conceivable to me that shadow inventory will be less problematic then possible interest rate shock. Especially if you get interest rate shock prior to all of this inventory being digested.
We’ve heard quite a few
We’ve heard quite a few reports – predicting that house prices will drop anywhere between 5 and 15% in 2011, most around 10%. Sounds suspicious that they agree at least on the price direction. Why would that be? My thought is, they KNOW. well, kind of. maybe the banks KNOW what changes will happend – perhaps the release of the shadow inventory? or specific changes in lending and so they are pretty sure about what would do the prices. In other words, it’s not really a total guess, it’s actually a very reasonable and probable assumption based on what they KNOW. But I wouldn’t be shocked to see finally the shadow inventory put on the market and marked accordingly. I don’t think they know that well how much the rates will become, and how people will react, and how the prices will be affected. People may simply shift to ARMs rather 30 yr FMR.
Trust me when I say, the
Trust me when I say, the banks arent that on top of things and dont know WTF they are doing. All tehy know is how much they can afford to write off each year so the drip out the inventory via foreclosures and short sale approvals according to that.
Scarlett wrote:We’ve heard
[quote=Scarlett]We’ve heard quite a few reports – predicting that house prices will drop anywhere between 5 and 15% in 2011, most around 10%. Sounds suspicious that they agree at least on the price direction. Why would that be? My thought is, they KNOW. well, kind of. maybe the banks KNOW what changes will happend – perhaps the release of the shadow inventory? or specific changes in lending and so they are pretty sure about what would do the prices. In other words, it’s not really a total guess, it’s actually a very reasonable and probable assumption based on what they KNOW. But I wouldn’t be shocked to see finally the shadow inventory put on the market and marked accordingly. I don’t think they know that well how much the rates will become, and how people will react, and how the prices will be affected. People may simply shift to ARMs rather 30 yr FMR.[/quote]
I think you’re giving these people way too much credit. A more plausible reason for why they all agree is that it gives the professional forecaster comfort (and a certain level of career protection) to be in the company of other forecasters.
Rich Toscano wrote:Scarlett
[quote=Rich Toscano][quote=Scarlett]We’ve heard quite a few reports – predicting that house prices will drop anywhere between 5 and 15% in 2011, most around 10%. Sounds suspicious that they agree at least on the price direction. Why would that be? My thought is, they KNOW. well, kind of. maybe the banks KNOW what changes will happend – perhaps the release of the shadow inventory? or specific changes in lending and so they are pretty sure about what would do the prices. In other words, it’s not really a total guess, it’s actually a very reasonable and probable assumption based on what they KNOW. But I wouldn’t be shocked to see finally the shadow inventory put on the market and marked accordingly. I don’t think they know that well how much the rates will become, and how people will react, and how the prices will be affected. People may simply shift to ARMs rather 30 yr FMR.[/quote]
I think you’re giving these people way too much credit. A more plausible reason for why they all agree is that it gives the professional forecaster comfort (and a certain level of career protection) to be in the company of other forecasters.[/quote]
Dead on Rich, reminds me of this quote:
“A sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him”.
– John Maynard Keynes
outtamojo wrote:Rich Toscano
[quote=outtamojo][quote=Rich Toscano][quote=Scarlett]We’ve heard quite a few reports – predicting that house prices will drop anywhere between 5 and 15% in 2011, most around 10%. Sounds suspicious that they agree at least on the price direction. Why would that be? My thought is, they KNOW. well, kind of. maybe the banks KNOW what changes will happend – perhaps the release of the shadow inventory? or specific changes in lending and so they are pretty sure about what would do the prices. In other words, it’s not really a total guess, it’s actually a very reasonable and probable assumption based on what they KNOW. But I wouldn’t be shocked to see finally the shadow inventory put on the market and marked accordingly. I don’t think they know that well how much the rates will become, and how people will react, and how the prices will be affected. People may simply shift to ARMs rather 30 yr FMR.[/quote]
I think you’re giving these people way too much credit. A more plausible reason for why they all agree is that it gives the professional forecaster comfort (and a certain level of career protection) to be in the company of other forecasters.[/quote]
Dead on Rich, reminds me of this quote:
“A sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him”.
– John Maynard Keynes[/quote]
Yes, Chapter 12 of the General Theory… by far the most valuable chapter of the book.
In summary: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Until that changes – and it never will – we will always have boom-bust cycles. Such is the nature of humanity.
Buy a stable stock paying a
Buy a stable stock paying a dividend that is more than your mortgage payment. Dividends are taxed at 15% federal, and you get to deduct the mortgage interest at your regular income tax rate.
Jeeman
SD Realtor wrote:I agree with
[quote=SD Realtor]I agree with the shadow inventory being absorbed over time as well. Typical forclosure timelines are what, 400 – 500 days correct. Also what many people do not have any clue about are bulk purchases. Look back at some of the loan programs that are made available to institutions for large bulk purchases of non performing assets and securities. The incentives are STAGGERING. A few weeks ago Rich had a link posted about an investment group that had just added an 800 million dollar purchase to a previous 400 million dollar purchase. Obviously not all of this is residential but some of it is.
So yes it is completely conceivable to me that shadow inventory will be less problematic then possible interest rate shock. Especially if you get interest rate shock prior to all of this inventory being digested.[/quote]
You are giving institution too much credit. What are they going to do with the houses? They will not likely want to be landlord and the houses are back onto the market (even though not in form of foreclosure).
Carlsbadworker how can you
Carlsbadworker how can you say I am giving the institutions to much credit? Obviously they have weathered the storm so far. Also do you want to comment on the profits that these same institutions have presented during this recession we are in? Clearly the institutions have done fine and clearly the govt is in their back pocket.
In a rigged game I put my money with the “house” not the public.
SDR, my point was the
SDR, my point was the institutions are just like banks that who got the houses in the foreclosure process. They are not the ultimate owners of the house, so the inventory just got delayed but doesn’t disappear from the market. Their financial strength is irrelvent (we can even say that for the banks after we got rid of mark-to-market).
I understand however the
I understand however the facts are the facts regarding the way the liquidation of properties has progressed thus far. Left on their own, the institutions would have failed or been forced to liquidate. Look at all the measures that were taken to prop them up. There will be years of inventory to ultimately liquidate and there will be no rush to push it through the system.
What compelling argument can be made that shows there will be any change from the way things have gone thus far?
I recall posting back in 06 and 07 that people should not underestimate the power of those in power. Unfortunately it pretty much played out that way.
Why will it change?
SDR, I got your point. In
SDR, I got your point. In that regard, the government is successful in managing the price over-correction, but still it doesn’t prevent people from finding an OK deal for them to have a shelter for their family.
carlsbadworker wrote:SDR, I
[quote=carlsbadworker]SDR, I got your point. In that regard, the government is successful in managing the price over-correction, but still it doesn’t prevent people from finding an OK deal for them to have a shelter for their family.[/quote]
Totally agree with this, carlsbadworker.
Chunkymutt and/or Jazzman,
Can I ask what either of you were expecting to purchase and at what price when you returned to SD (i.e. 2000 sf 4/2/2 SFR for $400K in [zip code]). And why do you think you haven’t been able to place a successful offer on a suitable principal residence for yourselves and your families in your price ranges??
My second inquiry has to do with where you will be moving to if you leave SD again.
-city, state or zip code (if known)
-size house/lot or condo and price
-presumed difference in wages there from what you are making here (up or down)
Then tell us why you think you will have a “better life” if you leave SD for that locale.
Thanks for any feedback! I’m always curious as to those pesky details when someone brings up the “grass is greener” argument. Maybe I’ll be pleasantly surprised :=]
bearishgurl, I agree with
bearishgurl, I agree with your implication (unless I misunderstood) that most markets are likely to be equally high around the country. However, I feel the same level of frustration as Chunkymutt. I earn a decent living, but I am severely disgusted with the limitations of my budget. If I may, this is what I EXPECT (wanted) in a house.
2500sf, pool, remodeled, 3 car garage, ~$500k
That is doable in Chula Vista. Here is the catch, I don’t want to have to send my kids to private school. To get those features in a house near great schools, I am looking to spend in excess of $800k.
You can get that in
You can get that in Encinitas/So Carlsbad under 700K and with patience and good help under 650k.
You can get that in Mira but
You can get that in Mira but you have to settle with good school instead of great school.
This house seem to have everything you want except a pool: http://www.sdlookup.com/MLS-110016417-13212_Capstone_Dr_San_Diego_CA_92130. It was sold for $500k in Feb, 1999 and $613k in Dec, 2001. Are you expecting something like this to return to 1999 nominal price?
Carlsbad and Encinitas would
Carlsbad and Encinitas would be a long way for me to commute everyday. That house in the link above is nice but clearly out of bounds on price. For that kind of money I would rather live in Mission Hills and have a bay view. I am a little jaded on the public schools in CA after seeing my friend’s kids. He is well educated and seemed to be an available father, but his kids’ friends were less than stellar and his became unemployed teenage parents. Sorry, that was a bit of a tangent, but it worries me nonetheless.
I’m confused, if you’re jaded
I’m confused, if you’re jaded about CA’s public school, then why put good schools as one of your criteria? Without the “great school” criteria, then it open up a lot more options. Carmel Valley schools are as good as it come in San Diego. If you’re jaded enough to doubt its capability, then why not just buy a house you want but in a bad school area and send your kids to private schools?
Because its easier to gripe
Because its easier to gripe about it. The only place you cant do that is Carmel Valley. GA described the typical suburban tract house. Any other place outside of Carmel Valley that even offers homes like that in SD County with any regularity has homes available like that well under $800K. If there is only one place like that in a county of 4M people why wouldnt you expect it to be expensive? You have lower your expectations or compromise on something.
Brilliant Article. Nothing
Brilliant Article. Nothing was left out. Rich, you’re the best.
JBurkett19 wrote:Brilliant
[quote=JBurkett19]Brilliant Article. Nothing was left out. Rich, you’re the best.[/quote]
Now that’s my kind of comment. 😉
My phd economist wife read
My phd economist wife read your article and confirmed my theory, you are the man!
I’ve been lurking here for
I’ve been lurking here for about two years or so, nice blog, very informative. Three years ago my wife and I made the decision to temporarily leave San Diego for an overseas assignment in Naples, Italy. We made the decision after we both decided that the housing market in San Diego was on “Charlie Sheen”. We decided to leave, save, and return when the temperature was more favorable. Well, we’re almost there. I’m not calling it a bottom…but more so moving towards normalization. We’ve looked at about 8 properties in the Carlsbad area over the last 3 weeks, all homes overpriced, damaged, claiming sq.feet with no permit, (in one case, for 500K you get a home with a roof that is splitting away from the home, the floor is buckled inside too (MLS# 110009360)-look at the south side from Google earth. My point, there is still a fair amount of silly stuff going on out there and the realtors have just changed their tune. What pisses me off the most, these realtors are the same group who convinced some people to buy in 2005, made a profit off that sale, now making another paycheck off of the sale of that same asset in 2011 now that that asset has been put back on the market. I have realtors emailing me telling me to drop my present realtor, other realtors telling me that “this is the bottom”, “now is the time to buy”, “let me show you the comps”, “let me help you figure out what it is you want”. What realtors haven’t figured out is that buyers are onto the game. When buying a home, the buyer is trying to purchase the best product for the least amount of money. Across the table are people who need you to purchase a big heap of garbage for the highest price possible, the realtors, building inspectors, local municipalities, sellers, brokers, loan officers, banks, and any other parasite that makes money off of the sale of a property. -Buyers have figured out that everyone is against them, and if you were smart, when you hear any of the above give (you) some advice, do just the opposite.
Or find one who isnt full of
Or find one who isnt full of it. There are plenty of them out there but you absolutely need to be careful and do your own due diligence as well.
Chunkymutt, I’ve got to
Chunkymutt, I’ve got to agree. My wife and I did the same are you …we left and returned in the hope of finding some sanity, and are planning another departure …probably permanently. I think that says it all really. It seems that over the last 3-4 years real estate has been trying desperately to hold on to any lingering values from the good old bubble days. What ticks me off most is that real estate in all its forms, tries to take credit for the very obvious prop it received from the government. However, I only wish I could say people just aren’t buying it anymore. Perhaps it is true to say another major prop is that there’s always enough people who buy into it. Lucky old real estate. If you’ve been watching things closely, you either close your eyes and think of your country, or seek out pastures greener. It seems the secret to life these days is being shackle free.