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.

(category: )

Submitted by Rich Toscano on January 31, 2012 - 1:10pm.

Thanks FSD... definitely going to check these out (with Seisel's on the short list :-)

Submitted by Rich Toscano on January 31, 2012 - 1:12pm.

CAR - Thank you for the kind words! And Donovan's is my favorite... ;-)

Thanks to everyone else on the thread, too, for the good wishes... much appreciated.

Submitted by bearishgurl on January 31, 2012 - 2:27pm.

There was a nice fish market down in the flats off Morena? Is it still there??

And don't forget Tio Leo's :)

Submitted by UCGal on January 31, 2012 - 5:04pm.

Congratulations Rich.

The fish market that BG mentioned might be Catalina seafood - make sure you wear close toed shoes or you can't go in the back and pick your fish.
But it's great... It's behind Pacific Sales/Sear outlet - back by the train tracks. The freshest fish in town - and reasonable.
http://www.catalinaop.com/

And seconding the rep for the High Dive. Never been - but it's been cool for at least 2 decades.

Submitted by sdrealtor on January 31, 2012 - 10:56pm.

ctr70 wrote:
I checked out Bay Park a lot myself looking, the one thing that bothers me about that area is you hear the freeway from everywhere. I'd look at these houses with great views, but then you would step out on the deck and hear that wonderful roar of highway 5. Same thing with a lot of Mission Hills down by the 5. I just have a major pet peeve that I can't stand sitting in my house trying to relax or read and hearing the freeway, major road noise, or being in the airport jet path. Bugs the crap out of me. Other that that I think Bay Park is a great spot.

Bonsall

Submitted by Jazzman on January 31, 2012 - 11:28pm.

Rich Toscano wrote:
Jazzman, the issue in the bubble was that people were taking out debt that they couldn't actually afford to service (via teaser rate loans, exacerbated because so many people were lying about their incomes). This is a completely different situation from taking out a fixed rate loan that one can afford to service.

(Another difference is that they were taking out these loans to buy grossly overpriced assets).

ctr70, I loathe traffic noise too. That was on my very short list of instant disqualifications. There are places in Bay Park without it, you just have to go higher up the hill.

Yes, I am aware of that, but I'm not going to be the party pooper here. Congrats are in order and I wish you the best.

Submitted by sdduuuude on February 1, 2012 - 11:48pm.

ctr70 wrote:
I checked out Bay Park a lot myself looking, the one thing that bothers me about that area is you hear the freeway from everywhere. I'd look at these houses with great views, but then you would step out on the deck and hear that wonderful roar of highway 5. Same thing with a lot of Mission Hills down by the 5. I just have a major pet peeve that I can't stand sitting in my house trying to relax or read and hearing the freeway, major road noise, or being in the airport jet path. Bugs the crap out of me. Other that that I think Bay Park is a great spot.

I'd trade in the crows in Clairemont for some freeway noise any day. Anyone else find there are more crows in their area than seems reasonable?

Submitted by sdduuuude on February 1, 2012 - 11:47pm.

bearishgurl wrote:
There was a nice fish market down in the flats off Morena? Is it still there??

And don't forget Tio Leo's :)

Went to that Tio Leo's twice last year. I'll never go back. Nearly everyone was unhappy with their food. It was just - blah.

My wife lived in a condo just off the 15 for many years. You get used to the freeway noise because it fades into the background ... unlike crows.

Submitted by JPJones on February 2, 2012 - 12:28pm.

sdduuuude wrote:
ctr70 wrote:
I checked out Bay Park a lot myself looking, the one thing that bothers me about that area is you hear the freeway from everywhere. I'd look at these houses with great views, but then you would step out on the deck and hear that wonderful roar of highway 5. Same thing with a lot of Mission Hills down by the 5. I just have a major pet peeve that I can't stand sitting in my house trying to relax or read and hearing the freeway, major road noise, or being in the airport jet path. Bugs the crap out of me. Other that that I think Bay Park is a great spot.

I'd trade in the crows in Clairemont for some freeway noise any day. Anyone else find there are more crows in their area than seems reasonable?

Yes. Around this time last year, they started squaking outside my bedroom window at around 5 AM. They're just starting to do it again this year. This link might interest you, though I can't say I've taken advantage of it yet:

http://www.dfg.ca.gov/hunting/

ctrl-f crows

I should throw in the obligatory congrats to Rich, as this home purchase is big news for sure. Like so many others, this site helped to save me from myself.

Submitted by CricketOnTheHearth on February 2, 2012 - 2:43pm.

Congratulations, Rich!!!

I am so, so close to making the pounce. Scanning my neighborhood, there are some nice condos in my range now, and a duplex or two that is so, so close to my price-reach...

I want to hold out for something with a yard so that I can garden, so I guess now it is a race between my ability to save up that down payment, and the end of the bottom (if this is indeed the bottom for monthly payments, as you suspect.)

Will you still be doing this blog?

Submitted by afx114 on February 2, 2012 - 6:02pm.

I live across the street from a high school, and they're currently re-doing the football field. Monster tractors came and tilled it up about 3 feet deep, and that day we had probably 100-200 crows picking off the scurrying vermin. It was a sight to see.

Be careful fucking with crows. They have been known to memorize faces and mess with people who mess with them. They don't call a group of them a MURDER for nothing.

What you need is a pet hawk. They'll keep the population in check. We have a lot of those as well, living near canyons. It's always a good show seeing a hawk vs crow battle. It's like Maverick vs the Migs up there.

Submitted by Rich Toscano on February 2, 2012 - 10:35pm.

CricketOnTheHearth wrote:

Will you still be doing this blog?

Most definitely...

Submitted by Hambone on February 2, 2012 - 10:55pm.

Haven't checked that one out but Bay Park Fish Company is top notch.

Love the blog, Rich, and congrats on the purchase.

Submitted by xiv014 on February 3, 2012 - 12:23am.

How low of a down payment % can you get away with these days? Did you have to get PMI?

Submitted by creative_cpa on February 3, 2012 - 10:47am.

I do not see where you figured in the total cost to own the home. If mortgage rates are 4% and annual depreciation of the house is 6%, then cost to carry the home is 10%, and renting looks a lot cheaper.

Why buy a home just because mortgage payments are cheaper than rent, if you eventually have to pay the piper and lose your downpayment and principal reductions on the mortgage?

It seems to me you did a monthly cash flow analysis and just ignored the balloon payment at the end. Isn't that the same group-think that created the housing bubble?

Submitted by Rich Toscano on February 3, 2012 - 11:05am.

creative_cpa wrote:
I do not see where you figured in the total cost to own the home. If mortgage rates are 4% and annual depreciation of the house is 6%, then cost to carry the home is 10%, and renting looks a lot cheaper.

Why buy a home just because mortgage payments are cheaper than rent, if you eventually have to pay the piper and lose your downpayment and principal reductions on the mortgage?

It seems to me you did a monthly cash flow analysis and just ignored the balloon payment at the end. Isn't that the same group-think that created the housing bubble?

A long-term 6% annual depreciation of home prices is, imho, an absurd assumption. (ref: price valuation chart + Ben Bernanke and his printing press).

In any event, it's irrelevant because, as I explained in the post, I intend to hang onto the home indefinitely.'

BTW: I think you need to look up what "group-think" means.

Submitted by paulflorez on February 3, 2012 - 2:49pm.

Being a piggington lurker, this is very encouraging for me to hear. I purchased back in 2011, but as a guy in his late twenties, I couldn't afford even a median priced home due to the down payment and ridiculous monthly payment (considering my income and that I was supporting my partner while he finished grad school). I ended up buying in a community redevelopment area with a CRA loan that allowed me to put down 10% without paying PMI.

Needless to say, getting loans isn't "easy" anymore. The mortgage brokers and real estate agents desperately want it to be easy, and are constantly pushing unreasonable loans, but the hoops you have to jump through are crazy. The loan assessors care about little details, even a few pieces of wood that are leaning against the house (couldn't get the loan until I, well, all I'd have to do is knock the wood over and let it lay on the ground instead). I personally am glad this is happening. The commission system of selling houses and giving out loans is perverting the process where the long term viability of the loan and thus the investors is unimportant and thus dangerous. I am lucky that my income qualified, but part of that is I am buying a house that actually has a 20% lower total monthly payment than the rent I was paying. My realtor and mortgage broker were both selfish people who tried to convince me that I could afford a $2,600 a month loan, an almost 100% increase from my rent.

The house we bought was a small Craftsman that needed only cosmetic repairs. We bought at 50% below the price it sold for at the peak, and although I probably could have brought it down to 60%, I wanted the house and so didn't push back hard. In the end, this is a house we expect to own the rest of our lives, so we are not worried about short term losses in price. If inflation takes off, as you believe it will, this will be a hedge for us.

Submitted by FormerSanDiegan on February 3, 2012 - 4:17pm.

creative_cpa wrote:
I do not see where you figured in the total cost to own the home. If mortgage rates are 4% and annual depreciation of the house is 6%, then cost to carry the home is 10%, and renting looks a lot cheaper.

Why buy a home just because mortgage payments are cheaper than rent, if you eventually have to pay the piper and lose your downpayment and principal reductions on the mortgage?

It seems to me you did a monthly cash flow analysis and just ignored the balloon payment at the end. Isn't that the same group-think that created the housing bubble?

Even if you use current values for a ~2000 square foot house in Bay Park and compare rent to buy, and assume 6% depreciation, it might still make sense to buy.

See the rent versus buy comparison below. If someone were to hold for 21 years it would make sense to buy, even with the ridiculous assumption of 6% depreciation over 30 years.

The below is a rent/buy comparison based on 6% annual depreciation and 3% annual rent inflation. I plugged in the list price for a remodeled 5BR ~2200 sf house for sale in the upper part of Bay Park that had Bay and Canyon views, and the advertised rent for a 3BR house in the same part of Bay Park (with only a canyon view). So I skewed these in favor of rent.

Assumption was a 4% interest rate. Note that this also includes 0.5% per year in maintenance costs PLUS 0.5% per year in upgrade costs (~$6000 in the first year, indexed for inflation thereafter)..

D'Oh!

Submitted by creative_cpa on February 3, 2012 - 5:10pm.

Well, it's hard to make your chart large enough for me to read, but a 21-year time frame for breakeven on a rent vs. buy analysis is far beyond the time horizon of most mere mortals. The average first time buyer stays in his home about 5 years before moving on. The second time buyer stays longer, in the range of 11-12 years.

If you say the breakeven is 21 years, the only logical conclusion is to rent.

p.s. The annualized depreciation rate of the San Diego MSA housing stock since the bubble burst in the Fall of 2005 has been 6.5% per year.

Submitted by Rich Toscano on February 3, 2012 - 5:27pm.

creative_cpa wrote:

p.s. The annualized depreciation rate of the San Diego MSA housing stock since the bubble burst in the Fall of 2005 has been 6.5% per year.

I guess that means prices will fall 6.5% per year forever (just like the permabulls thought prices would rise 15% annually forever, just because they had been rising 15% annually for a few years leading up to the bubble peak).

Submitted by an on February 3, 2012 - 6:14pm.

Rich Toscano wrote:
creative_cpa wrote:

p.s. The annualized depreciation rate of the San Diego MSA housing stock since the bubble burst in the Fall of 2005 has been 6.5% per year.

I guess that means prices will fall 6.5% per year forever (just like the permabulls thought prices would rise 15% annually forever, just because they had been rising 15% annually for a few years leading up to the bubble peak).


At 6.5% depreciation a year, I can buy a $1M home today at ~$510k in 10 years. If I wait 15 years instead, I can buy that house for $365k. I can't wait to buy something like this: http://www.sdlookup.com/MLS-110054255-96... in 15 years for $365k.

Submitted by FormerSanDiegan on February 3, 2012 - 6:46pm.

creative_cpa wrote:
Well, it's hard to make your chart large enough for me to read, but a 21-year time frame for breakeven on a rent vs. buy analysis is far beyond the time horizon of most mere mortals. The average first time buyer stays in his home about 5 years before moving on. The second time buyer stays longer, in the range of 11-12 years.

If you say the breakeven is 21 years, the only logical conclusion is to rent.

p.s. The annualized depreciation rate of the San Diego MSA housing stock since the bubble burst in the Fall of 2005 has been 6.5% per year.

The fact that the average homeowner moves after 5 years (first time) and 12 years (second time) does not significantly change the outcome in this scenario.

Consider the following:
Person 1 rents for the next 30 years

Person 2
A. buys house #1 and moves after 5 years
B. Buys house #2 and moves afetr an additional 12 years
C. Buys house #3 and is still living there in year 30.

Who is ahead in that scenario, using the same assumptions above ?

Submitted by speaker on February 4, 2012 - 9:02am.

creative_cpa wrote:
Well, it's hard to make your chart large enough for me to read, but a 21-year time frame for breakeven on a rent vs. buy analysis is far beyond the time horizon of most mere mortals. The average first time buyer stays in his home about 5 years before moving on. The second time buyer stays longer, in the range of 11-12 years.

If you say the breakeven is 21 years, the only logical conclusion is to rent.

p.s. The annualized depreciation rate of the San Diego MSA housing stock since the bubble burst in the Fall of 2005 has been 6.5% per year.

I sense the troll is strong with this one...

Submitted by outtamojo on February 4, 2012 - 2:09pm.

Rich, now that you've apparently bought the last house for sale on this planet, when can we get this bubble started: http://www.mobilemag.com/2012/02/03/scie...

Submitted by ltokuda on February 7, 2012 - 10:52pm.

Congratulations Rich! I'm so happy for you and your family! It's been such a long, slow grind waiting for house prices to become reasonable again. It must be a relief to finally get to pull the trigger after all these years.

Submitted by jandieB on February 7, 2012 - 11:09pm.

There was really notable changes. It was dramatically rigid that makes me think no constant changes really happens.

Submitted by Myriad on February 7, 2012 - 11:19pm.

Congrats Rich! Your website/posts has helpful for all of us who try to make sense of the housing market the past few years.

Also the posters assuming a 6%/year decline need to check their math and history.

Submitted by ltokuda on February 9, 2012 - 3:19pm.

Myriad wrote:
Also the posters assuming a 6%/year decline need to check their math and history.

This is classic! Now we have people claiming that "house prices only go DOWN!" :-)

Submitted by willjovi-homese... on February 14, 2012 - 4:56pm.

Hello, I have been reading up and trying to play catch-up to the current opportunity that the market may be creating. We are looking in NE Orange County and have found a home there that we are in negotiations with the bank on. I am still trying to figure out if pulling the trigger on a ~1900 sqft, 4-3-2 (car garage) in east yorba linda is the best bet, or if waiting another 6-12+ months will bring the ~2200-~2500 sqft 4-3-3 car garage in the same area down to current short sale prices. My realtor had this to say,

Thought you might be interested to know:
In January 2012, in Northeast Orange County (AH,YL,PLA,BREA,FUL combined)
Active Inventory hit the lowest point in over 5 years! (783)
New Listings hit the lowest point in over 5 years (376)
Pending Sales hit the HIGHEST point in over 5 years (376)
Our current available inventory is only a 2.2 month’s supply!
We could be facing a summer real estate market that is hotter than 2004! Supply vs Demand is getting that tight!

Do these numbers add up to what you are seeing in your analysis? Is this a bunch of nonsense? Any insights would be greatly appreciated.
Thanks.

Submitted by sdrealtor on February 15, 2012 - 3:53pm.

Ironically I did a short in Yorba Linda a year or so ago. I think the same thing is going on up there as down here. Lots of buyers want in on great houses at today's prices but they wont overpay based upon comps. Its a bit of a stand off. Dont see any signs that prices are gonna take off but good luck finding a house you like at current prices. Discretionary sellers are emboldened to stick to their inflated asking prices because inventory is down. Its hard to convince a seller to come down when 10 to 20 people are coming to see their homes each week and telling them how lovely it is even though they arent writing offers at asking. The sellers think its just a matter of time and it is. Just a matter of time till they lower their price to meet the market.

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