Buy or Don't Buy?

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Submitted by sakina96 on March 18, 2006 - 12:05pm

So I'm looking for a little advice or input from one of the many intelligent people on this site...

I'm new to the San Diego area, I have a good job and salary, and I am considering buying a house. I have no interested in overstretching myself and expect to get a standard loan product (15 or 30yr). I am also a firm believer that San Diego, like so many other places, is in the midst of a bubble as evidenced by rising inventory, reduced sales and some price reductions. I also believe that prices will also come down over time. I'm not quite convinced that housing prices will drop 40-50% as some people assert. However, 20% seems quite likely.

Likewise, I also expect that long term interest are only going to rise. I must admit that I'm not smart enought to understand all of the influences on long-term interest rates to the point where I can predict how high they'll go. Anyway here is my dilemna...

Given that house prices are going to decline over the next several years and that interest rates are going to rise is it better to buy let's say:

1. An 800,000 house now at 6.5%. Assuming 5% down giving a monthly payment of 6000 inclusive of taxes, HOA fees, etc.

or

2. Wait two-three years buy the same house for 640,000 but pay 8.5% interest. In the end it probably leaves you with nearly the same monthly payment.

Could someone point out the flaws in my logic or point out things that I have not considered. To me it seems like lowered housing prices over time favor the decision to wait it out. However this is counteracted by rising interest rates. The only difference is how much of your monthly payment is going to interest versus principle. Thanks in advance.

Submitted by powayseller on March 18, 2006 - 12:38pm.

Check out the same question in the thread titled "Same Payment After Bubble Bursts", from a couple days ago.

Submitted by sakina96 on March 18, 2006 - 12:59pm.

Thanks powayseller. I totally skipped over that forum. Very helpful insights.

Submitted by bubble_contagion on March 18, 2006 - 1:03pm.

For the same montly payment it is better to have lower price and higher interest:

- lower property taxes
- larger portion of the mortgage payment can be tax deducted
- if interest rates drop, you can refinance
- if you have extra cash, you can pay the principal faster

Submitted by Blissful Ignoramus on March 19, 2006 - 8:14am.

Not to mention the fact that if you should ever decide to sell the house, it's better to have bought low than to have bought high.

So, if you buy the house at $800K and find that it can be sold for only $640K in 2-3 years, you're going to be upside-down mightily if you only put in 5% down, even if your monthly payment is the same if you buy it at the lower price. This might not hurt you if you're planning on staying in the house another ten years, but who knows where you will find yourself at that point.

I'm also not convinced that housing prices are going to drop 40-50%, but it's certainly within the realm of possibility, and if they drop 20% in 2-3 years as you propose, there is no reason to think they won't continue to slide. I wouldn't put my money into a house in San Diego right now unless I had 1) strong personal reasons to buy (i.e., kids and a very strong desire/need to make a stable home for them), 2) very high job security, and 3) fairly definite knowledge that I wouldn't want or need to move for at least 8-10 years.

Submitted by privatebanker on March 19, 2006 - 10:18am.

To add to what you are saying with regards to home prices falling 40%-50%. I think that will be the median price. There will be greater price drops in "hot" areas. And then there will be areas that really haven't increased in price at the pace of all the "hot" areas. Buying a home right now for the common middle class person is essentially a financial disaster in the making.

http://www.theprivatebanker.blogspot.com/

Submitted by sakina96 on March 19, 2006 - 11:00am.

Thanks to everyone for your input. Blissful Ignoramus, If I were to buy a house now I would expect to stay in it for 8-10 years. But as we all know, no one can predict your future circumstances. My job is about as stable as it gets. I am not dying to have a house so badly that I'm willing to compromise myself financially. That being said, I'll probably ride it out and save the extra 4,000/month for a downpayment when I need it.
Thanks again

Submitted by sakina96 on March 19, 2006 - 11:01am.

Thanks to everyone for your input. Blissful Ignoramus, If I were to buy a house now I would expect to stay in it for 8-10 years. But as we all know, no one can predict your future circumstances. My job is about as stable as it gets. I am not dying to have a house so badly that I'm willing to compromise myself financially. That being said, I'll probably ride it out and save the extra 4,000/month for a downpayment when I need it.
Thanks again

Submitted by hs on March 19, 2006 - 7:56pm.

We are almost in the same situation as yours. We moved to San Diego more than a year ago and have been watching the north county market closely. With our savings, stable job, and good salary, we definitely could afford to buy now. But looking at the trend of this market, we decide to continue to rent for a while.
Personally I believe the price will go down, so be patient is the best way to do now.

Submitted by farbet on May 22, 2006 - 6:26pm.

Sakina Blissful if you are stable as you say:
Its May 22nd. Has the prices drop yet to your satisfaction?. Just make an offer for the house you like. The agent is duty bound to take it to the owner.
DEAL or No Deal. It seems as if buyers are scared of being insulted by the realtors. DO your homework and offer is my advice.Is it a buyers Market? or ni. Go for it.

Submitted by sakina96 on May 22, 2006 - 8:47pm.

I don't think that prices have dropped significantly enough to my satisfaction. Clearly there have been some decreased prices. However, at this point it seems random. As an example there is one neighborhood that I've been watching. There is a house (~3600sf) that has been on and off the market since October. It started off at 995,000; the current asking price is 840,000. Unfortunately I don't care for that particular house. One street over another house just came on the market. It's a good sized house (3700sf) with a fairly large yard (important to me) and ocean view (way off in the distance). There are absolutely no upgrades in the house (linoleum floor, ugly carpet, no granite). Asking price 1.1 to 1.3 million. You are absolutely right that I can offer whatever price I want. However, I am doubtful that the owners would be willing to accept (at least at this point) the 850,000-900,000 that I'm willing to pay. My feeling is that perhaps by next wintertime prices will have universally dropped and sellers expectations will have adjusted accordingly to make it worth it for me.

Submitted by farbet on May 22, 2006 - 10:50pm.

farbet
Sakina. I still think you should do some lowball offers. Once you are prequaliied they will jump at it. These sellers are sitting on over a 100 % equity.Try the Aviara,LA Costa areaa.

Submitted by powayseller on May 23, 2006 - 6:07am.

A seller may take a 5% haircut in the offer. I know if a house in foreclosure, and they finally got an offer 3 days before auction. The offer was 4% below asking price.

Sakina was right about seller expectations. They are still high, based on current sales.

The longer you wait, the more desperation is in the air, the more you can negotiate.

If you must have a house now, make an offer, but if you can wait, time will reward you.

Another thought: before making an offer on a house, make sure you have picked 4 houses you like. NEVER get yourself married to a particular house. That destroys your negotiating ability, your willingness to walk away. If you have 4 ready offers, and the 1st one doesn't accept your offer, go on to house #2, and so on. Let each seller know you have 4 houses you like, and that will keep them from making a counter. The seller will know if they make a counter offer that you don't like, you can abandon their house and go on to one of the others.

Submitted by sdduuuude on May 23, 2006 - 6:49am.

I think saving is the most important thing.
If you just rent, but aren't putting extra cash away, you won't be in a position to buy a house when the price is right.

Part of the "don't buy now" strategy has to include saving for the down payment.

Submitted by Chris J on May 23, 2006 - 7:54am.

If you are going to buy a home to live in for awhile, you need to put itleast 20% or more down. 5% down, is just another max leverage scenario. You are going to pay more over time than the house is worth anyway, even on an after tax basis.

If you are concerned about rising rates, the way to address that is financing less principle. If you can only afford 5% down, then you cannot afford the house you are buying. If you cannot afford a 30 yr fixed with 20% down, and 30% of income towards the payment, do not buy a house now or ever. People have gotten away with this gambling in recent years, but the music is about to stop on this type of thing in my opinion.

Whatever selloff that is going to occur, is going to clear out the max leverage fools. I also do not believe that 50% will occur. If it were to occur on a national basis, that would wipe out 10 Trillion dollars of assets. It would create a wordwide depression unlike any that has ever occurred.

It is human nature to get caught in the hype at the very worst time, right before the markets turn. This is going to happen in commodities also. This happens in every economic cycle. As long as you approach this from a long term standpoint, with good ratios, you will not be subject to the clear out that is in process.

Buy a home to enjoy it and forget about becoming the next real estate mogul. My favorite quote of all time is from Larry Williams, "Leverage is for people that do not have any money."

You have money it seems, so be prudent.

Submitted by powayseller on May 23, 2006 - 8:01am.

Hey Chris, as always, great commentary from you...On another thread, a poster argued that leverage can be used to your advantage to make money, and he gave some examples how he made money in RE using leverage. However, as you noted, people with money don't use leverage. Look at Warren Buffett. He uses cash to buy billions of dollars worth of shares in the companies.

Anyway, great common sense advice. If you can't buy it with 20% down, 15 yr or 30 yr fixed, at 30% DTI, you can't really afford it.

Submitted by powayseller on May 23, 2006 - 8:07am.

duplicate

Submitted by deadzone on May 23, 2006 - 11:23am.

I disagree that people with money don't use leverage. In fact, people with money should be using leverage. If the bank is going to give you a 5% mortgage (or any other loan), a savy investor can easily make much more than 5% with other investments. Why should they pay cash for a house, that is stupid. I'll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money.

The problem we are in now is that lower middle class people are leverging themselves. In the past, these ARMs and interest only loans were only used by speculators who had plenty of money, they were just taking advantage of the system. What's happened in the last 5 years is that loan standards have decreased so much that regular people are using these products. The difference is that they are using these out of necessity because they can't qualify for conventional loans.

So bottom line, leveraging is smart for people who have money and know what they are doing. But today most of these loan products are being used by people who can't afford a conventional loan, that is exactly what is going to cause the house of cards to fall (I agree with your 40-50% prediction in san diego).

Submitted by powayseller on May 23, 2006 - 2:22pm.

Docteur made millions on his last deal, and paid off his house. I think it was a wise move. I bet Warren Buffett paid off his house too. My former neighbors are $10K away from paying theirs off.

Why do people who can afford to, pay off their homes? Because they can.

Besides, where else can you get a 5% return? Maybe in a CD, but after taxes, you're easily down to 3.5-4%. In the stock market? Not risk free. You risk losing principal. As a matter of fact, many investment pros are now advising people to get out of the stock market (Bill Fleckenstein, Barry Ritholtz, Yakamoto Forecast, Zeal Newsletter, economist Joseph Ellis).

The days of the carry trade are over. No longer can you borrow at 0% from the Bank of Japan, or at 3% from your home, and hope to make more money in stocks. Interest rates on homes are high, and the stock market is overvalued.

I am curious though, where you can do better than the interest rate on your home, without taking on more risk?

Submitted by Chris J on May 23, 2006 - 5:28pm.

You will never convince someone who is inclined to use leverage to the hilt, to be careful with it. Just like the people in 99 and 2000, that I told to go to cash in stocks.

There is a time in life for leverage. That time is not at the end of a 10 yr up cycle in pricing.

Submitted by hipmatt on May 23, 2006 - 8:02pm.

My humble $.02
RENT! RENT! RENT!
Theres no way that if you believe most of what we believe(on this board) that you could even propose the question without already knowing the answer. It is so dangerous to buy a home at this time, especially a 800k home with only 5% down. Rent for about 4-6 years, save up at least 20%(20%now=160k, in five years it may be only 80k) and pay much less for your home. If you decide to move, you won't kill yourself.

Submitted by 4plexowner on May 23, 2006 - 8:11pm.

Never mind

Submitted by Raybyrnes on May 23, 2006 - 10:48pm.

You could have put 30K in an I bond and it was paying 6.71% Tax free

Submitted by sdrealtor on May 4, 2022 - 11:07am.

deadzone wrote:
I disagree that people with money don't use leverage. In fact, people with money should be using leverage. If the bank is going to give you a 5% mortgage (or any other loan), a savy investor can easily make much more than 5% with other investments. Why should they pay cash for a house, that is stupid. I'll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money.

The problem we are in now is that lower middle class people are leverging themselves. In the past, these ARMs and interest only loans were only used by speculators who had plenty of money, they were just taking advantage of the system. What's happened in the last 5 years is that loan standards have decreased so much that regular people are using these products. The difference is that they are using these out of necessity because they can't qualify for conventional loans.

So bottom line, leveraging is smart for people who have money and know what they are doing. But today most of these loan products are being used by people who can't afford a conventional loan, that is exactly what is going to cause the house of cards to fall (I agree with your 40-50% prediction in san diego).

Post number 2

"I'll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money."

Did not get 5% money from the bank, did not make 10-15% a year in the long run with stocks

"So bottom line, leveraging is smart for people who have money and know what they are doing."

Hurray! You got one! Too bad you did not take your own advice. But we all did!

Submitted by s_county on June 1, 2022 - 10:41pm.

Survivorship bias ? A lot of people were caught with their pants down in 07-09

They also got the 40% drop right- even today you can see homes bought in 2006 sell for just 100/200k more 15 years later

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