San Diego Housing Market News and Analysis
Piggington Jumps the Shark
Submitted by Rich Toscano on January 29, 2012 - 11:39pm
I have bought a house in San Diego. I'm also going to start putting up guest posts by Ted McGinley.
This (the house buying part) shouldn't be a huge shock for people who've been reading the site of late, because I've talked a lot about how it makes sense to buy in certain situations. That said, I will briefly outline my thought process here.
After the recent leg down in interest rates, monthly payments are the lowest compared to incomes and rents than they've been in the history of the data, and are quite dramatically below their median historical levels:
I frequently point out that when it comes to determining whether homes are overvalued or undervalued, the price-based ratios are far more important than payment-based ratios. However, as I discussed in this article, an individual buyer should be more interested in the expensiveness of the monthly payment, rather than the purchase price, if he or she is financing most of the purchase and intends to (or is at least able to) keep the home indefinitely.
A buyer in these circumstances is not only locking in rock-bottom monthly payments, but, crucially, is doing so ahead of what I believe will be a period of unusually high inflation.
Now, I don't want to turn this into a big discussion on the something-flation debate, because that topic been thoroughly beaten to death elsewhere on this site as well as on my "day job" site, and it is beside the central point of this article. Suffice it to say that I consider it a high-confidence forecast that the dollar is going to lose a lot of purchasing power in the years ahead, because nominal incomes -- and thus prices, including those of rents and maybe even houses, a little -- must be made to rise (in excess of any plausible level of economic growth, i.e., via inflation) if the country is to be able to continue servicing its tremendous and growing debt.
If this outlook is correct, as I believe it is, then today's ultra-low rates make this an ideal time to take out a chunky 30-year fixed mortgage, and to sit back and let inflation hew away at the real value of the mortgage and the monthly payments over the years to come.
So, the missus and I went out looking for homes. We only found one in our price range, a single family house in Bay Park, that we thought was awesome enough to be a long-term home. So we made an offer, got a loan with as low a down payment as we could get away with, and have now re-joined the ranks of the titular Landed Poor.
And now I will attempt to anticipate some questions:
Q: Does this mean you think this is the bottom for home prices?
A. Not really. I don't know when the bottom will be, but it really doesn't matter all that much as I've financed most of the property and I'm more interested in minimizing monthly payments than the purchase price. For what it's worth, my (not very high-confidence) prediction on home prices is that valuations will continue to slowly decline for a while, but nominal prices will kind of bounce along and not do anything too dramatic in either direction any time soon (barring an interest rate spike... see 3 questions down).
Q: OK, does this mean you think this is the bottom for monthly payments?
A. I suspect that it's awfully close, at least in terms of level (I have less of an opinion on duration). But my investing philosophy is that you shouldn't get too caught up on catching the exact top or bottom, because it's impossible to do so with any reliability. If something is a great deal, you can be greedy and wait for it to become a super-great deal -- but there's a good chance that's not going to happen, leaving the possibility that the train will leave the station without you. I believe that long-term investing success (and far lower stress levels) will come from being disciplined about buying things that are cheap and selling things that are expensive, not by getting overly worked up about whether you caught the exact peak or trough.
I sat out an inflation-adjusted home price decline of almost 50%, and now I'm buying at a time when prices are cheaper than normal and monthly payments at 45% below their historical median. That's close enough for me.
Q: Monthly payments may be cheap, but homes are still overpriced.
A. Not so. Not in the aggregate, anyway:
As of November, San Diego homes were 10% undervalued based on the historical ratio of home prices to San Diego incomes. Of course, individual markets may vary from this aggregate figure, and there are always issues with even the best price indicators, so buyers should (and we did) verify that their target homes are reasonably priced compared to area rents. On the whole, however, the argument that San Diego homes are overpriced is not supported by the data.
Q: Won't interest rates go up a lot, and won't that push down home prices?
A. Yes, it's certainly possible that rates could rise a lot, possibly to a shocking degree. And this could indeed put downward pressure on home prices. There's actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors). However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.
But recall that I am more concerned with minimizing monthly payments than the purchase price. If rates rose enough to really impact prices, it's likely that those higher rates would have affected monthly payments even more. So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.
Q: Ted McGinley was president of the Alpha Betas. Don't you think you're more Tri-Lamb material? Consider the following:
A. That's just mean.
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