nesting young 4s Ranch experiences and puzzling questions

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Submitted by nestingcouple on December 20, 2006 - 10:39pm

When we decided to buy a house in November, because of the dropping price, I was not certain if it was good time to buy or not, so I started to do research and found this forum and found it to be very educational and many posts were insightful. I delayed the buying until now. I've been mainly interested in new houses in 4S Ranch because it's only 2 miles away from both my wife and my offices. The prices have dropped about $100K from June (I still have the price lists back then for exactly the same houses) to today (including about $50K free upgrade, and about $50K incentives). From Nov to Dec, basically I went to the builder offices about every 2 weeks to check out the prices. Today I visited some buliders in 4S ranch again and was told some year-end incentive is gone! and the next release prices may increase!
We're what you called nesting young, really have the urge to buy a house as soon as possible. The houses we're looking at are about $730K for about 3100 sqft, we can afford the mortage, but the price is still very high compared to similar houses some friends bought 3 or 4 years ago ($500K) in Carmel Valley. Our current apt rent is $2000. We looked at the choice of renting a house, it's about $2800 a month. Using a Rent-to-Buy calcuator, considering possible downpayment earning/tax benefits/princal reduction, the diference between buying and renting is less than $7K yearly. From this comparison, it does not seem the bubble is as big as it was discussed in the forum, but the forums's disucssions have been all convincing in general, so I'm really confused. Is it just that we have to accept that we have to pay $200K more than our friends who bought the house 3 years ago and we just missed the best time?
My wife really wants to buy, I'm the guy who have been opposing it, but after looking at the comparison, we think it's good to buy and plan to make a deal in this weekend.
Any suggestions will be greatly appreciated!

Submitted by lendingbubbleco... on December 20, 2006 - 11:17pm.

You should be able to buy in 4-Closure Ranch for a hell of a lot less next year. Don't believe the builder hype.

Forget the McMansion, anyway....you'll be able to find a nice older home on at least a quarter acre within a 5 mile radius of your offices for LESS than those ugly stucco sh*tboxes are going for now, soon enough.

Or...go ahead and buy...we really do need greater fools to continue to buy these pieces of crap at lower and lower prices, thereby destroying the comps used for future home sale prices.

Just out of curiosity...do you really need 3100 square feet??

Submitted by lindismith on December 20, 2006 - 11:51pm.

This is a really good question that comes up a lot on here. There are some very good threads from over the last year, especially during the summer, with all the answers.

You would have to do a search on Piggington....

The bottom line is you should still wait. Another 6-12-18 months is not going to kill you guys.

If I can recall the names of the threads, I will post them, but you would be very smart to wait a little longer.

Submitted by SD Realtor on December 20, 2006 - 11:54pm.

In my opinion it is a risk verses reward scenario. Personally I believe that there is alot more risk of depreciation then reward. If you do purchase now, and you are going to be living in the home for several years then you will be okay. Basically no matter what the market does, you don't care because you are not planning on moving. However, I think that you would be well served to hold off at least another year.

One thing that I consistently see as a Realtor is that buyers (especially first time buyers) feel as if they will miss once in a lifetime opportunities when they pass on various homes. I have seen that the builders have done a good job reducing thier inventory over the last few months. They have also been prudent and slashed thier prices and adjusted thier books for wall street. So yeah it doesn't surprise me that they have reduced incentives.

Again though, try to be patient if you can. I think this spring will provide us all with some very important data. If the inventory does what we think it will do, you may run into some great opportunities by the middle or end of the summer. There is another wild card involved as well and that is the possibility of foreclosure. How would you feel if you bought your home but then read about foreclosures in your subdivision where the homes are offered at 50k or 100k less then you paid.

Yes the difference you are seeing now is only 7k ( I assume the rent verses buy calculator factored in property tax, mello roos, homeowners insurance as well correct?) however the potential for lucrative savings is very real. Also before going in and striking a deal with the builder consider getting representation from a Realtor. They not only could negotiate a better deal for you, but they can rebate you commission they get from the builder.

I am in a similar dilema as you. We currently rent a home but we desperately need and want a bigger home. I have been the one holding out and my wife really has been pushing. Try to not let emotion factor into your decision.

Submitted by lindismith on December 20, 2006 - 11:59pm.

That is good input SD Realtor.

There is a thread called, "Thinking about buying..Am I crazy?" Do a search for it. (left nav) It is only from November. Time flies on this forum.

There are a few other good ones. I will try to find them for you.

Submitted by PerryChase on December 21, 2006 - 12:34am.

I find it hard to believe that the difference between buy and rent is only $7k per year on a 700k house. There's something wrong.

Give us the rent and buy numbers and your tax rate and I'm sure that posters here will find what you're missing.

Don't trust the online calculators. Design your own spreadsheet.

Submitted by surveyor on December 21, 2006 - 9:16am.

By my very rough calculations, I am getting a difference of about $1860 per month difference between buying and renting, which adds up to a screaming $22k per year.

I have family who live in 4s ranch, and while I do like the area myself, I really dislike the mello-roos.

I recommend at least renting there and don't choose a huge condo or house. Just choose a modest place. I'm sure if you showed your wife the hard numbers, she'd agree with you that buying a house at 4s ranch at this point of time is not a good idea. Continue to examine the numbers every year around this time.

Submitted by no_such_reality on December 21, 2006 - 9:37am.

The big swing on the calculators is always the assumption on home appreciation.

If you finance the whole thing, the difference is as previously pointed out, ~$1800/month. Not including Mello Roos, Maintenance, Insurance...

Submitted by sdrebear on December 21, 2006 - 9:54am.

What's missing in the rent vs buy calculations is what type of loan you are talking about. I don't believe you ever told us. Is it an Interest only, Option-ARM, 30 yr fixed, etc? That is ultimately the most important factor here.

I truly understand the pressures to buy, but you need to take a hard look at the consequences in buying now versus waiting until prices come back closer to a realistic level. Even if you can afford the mortgage, being literally "locked" into your home due to being upside-down for many years (unless you can come up with a huge chunk of cash to get out) can be pretty scary.

Also, if you've been in there every 2-weeks, they probably know you and are trying to scare you into buying to help their 2006 numbers. I'd personally call their bluff and wait until spring when they are competing against hundreds or thousands more new sellers coming onto the market.

Submitted by PerryChase on December 21, 2006 - 10:01am.

Sign up on ziprealty.com (free) and see the resale listings for yourself. There are plenty of upside-down sellers at 4S. Combine your research on ziprealty.com with zillow.com and sdlookup.com. If you peruse the listings every week until this time, next year, you'll get a good feel of market and no builder or seller will be able to pull a fast one on you.

Submitted by juice (not verified) on December 21, 2006 - 10:02am.

If you do buy, demand that the builder give you the previous discounts plus more. Show them that you are willing and able to buy and factor in at least a 5% decline for next year. If you find a home already being built without a buyer/a buyer dropped out, you can demand even greater discounts as builders are eager to sell these homes and often offer huge discounts to do so. You are in the drivers seat my friend. Instead of stopping by every two weeks to see what the prices are, why not stop by today and set your own price. Most builders are very eager to sell homes by the end of the month due to business planning, tax and public reporting reasons etc.

EG: Factor in the previous discounts for the home, subtract an additional 5% and tell them you will buy it tomorrow. Instead of an additional 5%, maybe they work out some kind of financing where they pay your mortgage the first year, some of it the second etc, or perhaps upgrades instead. If you have to, threatening to just walk away can often work. For example, when you present your offer, tell them that if this deal doesn't go through this week, you plan to just rent for the next two years and wont come back again. Tell them that you will be leaving town next Tuesday and that you need an answer this week. Lastly, make it clear that you are not interested in half ass couterproposals that they will surely try to present you. Do all of this in a tactful manner and I think you might have some luck!

Submitted by PerryChase on December 21, 2006 - 10:20am.

Juice, that's lousy advice. We're supposed to talk him out of buying and not into buying. Unless the buyer is up to the negotiating task, he doesn't stand a chance against the experienced salespeople. Remember, they've seen and dealt with all sorts of offers already so they are prepared. Most people can't negotiate a car much less a house.

He can rent a brand new house at 4S and save the difference. Then buy a newly-built house a few years from now (with better design, applicances, etc..) for a lower price.

nestingcouple, redo your rent/buy calculations. Once you see the real numbers, you won't want to buy anymore!

Submitted by SD Realtor on December 21, 2006 - 10:53am.

Well nesting you sought feedback and have received plenty!!

A few last thoughts from myself. I do agree that I think your calculations may be overly optimistic unless you are plunking down a ton of cash on the deal. If that is the case I bet that renting for another year, sticking the cash in a CD and sitting tight could be fairly lucrative. Also if you want to post your calculations including the details of your loan, downpayment and sales price, mello roos, property tax and homeowners insurance estimates, there are lots of inquiring minds here that will proof your work.

I have accompanied several clients on trips to the builders the past few months. Personally I have seen that builders have very much tightened up on concessions and even negotiations compared to the late summer. I think Juice's advice is well intentioned however I do not know if the builders would bite on that. Still though it never hurts to ask right?

One thing I detected in your post is that emotionally it seems that you and/or your wife have already made the choice by stating that you are ready to go in this weekend and make an offer. This means that even if there are numbers staring you in the face that imply waiting may be fiscally correct, emotionally it may be to much to overcome. It may also cause strife with you and your wife and that is never fun. I see this more then anything else in my line of work. If you can stick with logic then great, if not then try to do what Juice said and get the VERY best deal you can. I do heavily agree with Perry's post.

DEFINITELY do not look at how well people did in 2002 or 2003 and think I HAVE to buy now. Moreover thank your lucky stars you did not buy in 2005!

SD Realtor

Submitted by ibjames on December 21, 2006 - 11:06am.

While some say that if you stay there for many years the odds are that you will be ok. There is a lot of money to recoup if it costs you 22k a year during those years.

My wife was the same way, in her eyes we are two white collar professionals with good jobs and we should be able to have a house. That is one of the reasons she went to college, to have things like a house, decent car, etc.

I showed her the forums, the numbers. The people that participate in these forums are not barely making payments on houses or struggling for money. Most are doing well and not only discuss things as objectively as possible but provide statistics to back it up.

I'm waiting because of this. I am going to follow these forums, look at the statistics, and rent/own ratios, and when they finally make sense, buy. My wife won't even look at places that are avail. now with the price decreases, she won't even look till the end of summer next year or 2008.

We have friends that bought before the boom, we moved out here last year, put some bids in and finally woke up and realized that no matter how much sun, waves, california burritos, and sunsets we have here. It is not worth it to live here if Real Estate is that much.

(I'm not really that knowledgeable about RE, but I know enough that it still isn't time to buy)

Submitted by juice (not verified) on December 21, 2006 - 11:15am.

Perry,

I forgot to add:

"I do not recommend that you buy right now, and in fact think it is one of the worst time ever to buy a home in San Diego"

I'm just going off the assumption that this couple has already decided to buy. If they truly feel like they have a handle on prices in that area (comps, actives that are discounted, foreclosures etc) and they are going to buy, my advice is to take advantage of the end of the year and try to drive home a huge discount.

Submitted by lindismith on December 21, 2006 - 11:17am.

we moved out here last year, put some bids in and finally woke up and realized that no matter how much sun, waves, california burritos, and sunsets we have here. It is not worth it to live here if Real Estate is that much.

What a great line! I love being a Piggington!

Submitted by ibjames on December 21, 2006 - 11:22am.

Thanks! While I am trying to get better on the statistical portion, at least I can bring colorful commentary to the table ;)

Submitted by sdcellar on December 21, 2006 - 11:55am.

If I wanted you to buy and I thought it would motivate you to do it now by telling you that prices will be going up on the next phase, I'd do that (well, I personally wouldn't, but not being a salesman, I'm thankfully not put into that position).

Heck, he might even believe what he's told you or has been told that by the developer he works for. Too bad the market doesn't appear to be supporting price increases.

I've been looking for a year or so myself and I've heard about summer incentives that would go away (and didn't). Heck, early on and in a brand new development, the guy told a bunch of what turned out to be non-buyers that prices would be going up every phase around $8,000 (he was just responding to a question). Turns out, they haven't sold many to date, and they've continued to lower their prices (i.e. more than once). And this is actually 4S Ranch that I'm talking about.

Don't let a builder's end-of-year sales drive push you into buying a house you will almost certainly be able to buy for less next year.

Submitted by bubble_contagion on December 21, 2006 - 3:07pm.

So the $730,000 purchase that may be made this weekend is based on an on-line Rent-vs-Buy calculation. The crazy things young people do!

Submitted by CardiffBaseball on December 21, 2006 - 3:14pm.

To the Original Poster at least tell me you have read the 4-Closure Ranch series on one of the SoCal Bubble Blogs?

Submitted by ibjames on December 21, 2006 - 3:38pm.

link of that blog?

Submitted by ocrenter on December 21, 2006 - 3:44pm.

nestingcouple,

there are a lot of neestingcouples like yourself, some make upward of $2-300,000/year combined, most are all holding off because we know the credit bubble is bursting. don't jump until you read these:

4Closure Ranch Part I
4Closure Ranch Part II: Don't Catch the Falling Knife
4Closure Ranch Part III: I Think I Smell a Rat
4Closure Ranch Part IV: What's a Motivated Seller To Do?
Update: 4Closure Ranch Rat on Auction
4Closure Ranch Part V: Flip to Flop in 5 months

Submitted by PerryChase on December 21, 2006 - 4:31pm.

ocrenter, I love your blog. I read it periodically.

Submitted by nestingcouple on December 21, 2006 - 10:11pm.

\I should have described my rent-buying calculation. I downloaded a spreadsheet template from Microsoft's website, here is the detail:

Home Rent or Buy Analysis

Initial Assumption

After-tax rate of return on investments 5.00% (CD rate)
Marginal tax rate 35.50%
Estimated annual appreciation of home 0.00%
Down payment on home $140,000 (20% downpayment)
Estimated closing costs $5,000
Estimated purchase price of home $730,000
Monthly rent $2,800

Cost of Renting
Annual rent $33,600

Renter's annual insurance premium
Total annual cost of renting $33,600

Cost of Buying
Mortgage loan amount $590,000
Annual interest rate 5.750%
Term of mortgage (years) 30
Monthly mortgage payment $3,443
Annual mortgage payment $41,317
Property taxes 12906 (=1.75% * loan * 1.25%)
Homeowner's insurance $2,000
Maintenance $1,200
Opportunity cost of buying $7,250
Total cost of buying $64,673
Less Adjustments:
Principal reduction in mortgage $7,392
Tax savings of interest deductions $12,043
Tax savings of property tax $4,582
Total adjustments $24,017
Annual after-tax cost of home ownership $40,656
Less:
Estimated annual appreciation in value of home $0
Net annual cost of home ownership

Rent-Buying different is $40,656 - $33,600 = $7K

As first time buyers, I may have missed something, but I looked the formula behind the calculation and they seem reasonable. I really hope someone can correct some errors so the buying won't look so reasonable/attractive so that I can convince my wife not to buy right now.
I'm so glad and thankful to see so many insightful comments, and I'll tell my wife to read the forum and hopefully bring reasonable doubts to her.

Submitted by no_such_reality on December 21, 2006 - 10:49pm.

As first time buyers, I may have missed something

Yep, your current rent is $2000. Not $2800. That's $9600 a year more. Your place versus buyer = $16,600 a year and counting.

Also, any chance of moving? Cost of selling... 6% plus carpet, paint, etc. ~$42,000+ or $6000/$7000 over 7 years. Possible $25,000 a year more if you move in 7 years or less.

Also, maintenance seems light. That's $100 a month. It might be a new place, but as a home owner, a $100 run to Home Depot seemed to be common.

Does the wife want to "decorate" ... $$$

Got all the Christmas, Halloween, decorations? $$$ Not as easy not participating if all the neighbors do.

Got furniture for new space?

As nesters, is the nest currently filled with Fledglings? Is it about to be? If not, in SD I find it hard to below you can't get and keep a pretty nice place for $2000 or less.

Submitted by Nancy_s soothsayer on December 21, 2006 - 10:58pm.

I just skipped over your data. I did not do detail calculation to arrive at specific numbers, but don't forget something: The tax savings are not dollar-for-dollar federal tax credits in calculating income taxes. Basically you have to spend three dollars to get one dollar tax benefit - that's the gist. Also, with the monthly rental payment, you get shelter. The principal paydown should be factored in(not ignored or deducted) because it still adds to money coming out of your wallet, though you are getting shelter (altghough cheaper) as equivalent benefit.

Counting all the excess fluff as all consumer expense, to simplify the whole thing, principal paydown should also be added as consumer expense, not an "investment". Don't ignore it because it adds to your pain.

In addition, Mello-roos is not tax deductible. But everyone does it. Since you are high-earner, you start to pray you would not get audited so that you would not get exposed.

I don't know if I am making sense to anyone - no big deal to me coz I get it. (And today I am lazy, excuse me.)

Submitted by ocrenter on December 21, 2006 - 10:54pm.

perrychase, you are very welcome.

nestingcouple,

your calculations are correct. I know exactly the homes you guys are looking at. we did the same calculations and it was very similar. let me put in this senario.

same time next year, these homes are $600,000. assuming all other variables are the same, you can go in zero down and pay the same monthly. in fact, with your income bracket, you want to go in zero down.

at the same time, you still have $140,000 + in the bank. you wait until the true bottom in 2009-2010 and use that $140,000, split into 2, and purchase 2 $350,000 properties at 20% down. $350,000 at that time would probably get you a detached condo ~1,500 sqft, which would get ~$2,400/month in rent each. you can probably brake even or be a bit positive depending on interst rate.

So now you have 3 properties, one the same SFR you are considering, and 2 rental properties to own long term.

Submitted by nestingcouple on December 21, 2006 - 10:58pm.

$2000 is for the current apartment, which is nice and we really have no complain. If we do not buy, then we probably won't take the trouble to move into a rental house. Yep, I should have used $2000 instead of $2800, but to be fair with comparison, it has to been about $2800 to rent a similar new house of similar size or smaller size in 4S ranch.

but I consider other expenses mentioned by no_such_reality like decoration/furnitures necessary and "good" expenses, since they're part of owning a house/even renting a house, and do improve life quality.

Submitted by ocrenter on December 21, 2006 - 11:06pm.

oh, one more thing. assuming I'm wrong and the price remain the same next year, you resume your original plan. One firm thing I'm sure of, the best case senario for the home builders is if the prices stay flat. there's almost zero chance you are going to see appreciation over the next year. so you have nothing to lose waiting for another year but plenty to gain.

Submitted by nestingcouple on December 21, 2006 - 11:13pm.

Hi ocrenter,

Your way of presenting the scenario, especially the thought of zero down, provides really new perspective to us, we were only occupied with the thought to pay as much as we could for downpayment and maybe pay off in 15 years instead of 30 years. I appreciate your insights very much, and my wife likes your idea a lot. Your ideas are really brilliant, though we are not certain if we will be able to handle such heavy activities. Is this what you're planning to do for the years to come?

Submitted by SD Realtor on December 21, 2006 - 11:24pm.

Here is my problem with your calculations:

The cost of renting is your annual rental which I agree with. However, if you rent you also would earn 5% on the 140k correct? So shouldn't you calculate a 7k windfall or credit to the rental calculation? Also you should be crediting another $7392 to your rental decision because you are applying that to your principal on the purchase calculation. (you sure you don't work for a mortgage broker? heheheh... just kidding)

Also as Nancy posted you really should itemize property tax seperate from Mello Roos as you cannot deduct Mello Roos. Also are there any HOA's for your home?

Okay so just looking at those factors I think I have pushed you to over 21K in savings. One thing that T really fell may help you and your wife out would be for you to have a look at the expireds, withdrawns, and cancelled listings for the 4s Ranch area this past year. Lemme know and I can send them over to you.

SD Realtor

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