Would you purchase or wait in my position?

User Forum Topic
Submitted by KristopherSD on January 18, 2015 - 9:41pm

Hello all, first time poster here at Piggington with a question that's been racking my brain for several years now. As an intro I am 26 years old with a very secure $100k year job, pension, maxing out 401k, zero debt, excellent credit, and $110k in savings. I've been very fortunate to find a great job and kept a low overhead which has allowed me to save quite a bit over the last 4 years. Unfortunately I missed the boat timing wise for purchasing at discounted prices as the bulk of my saving has been done in the last 2 years.

I've watched single family home prices climb and climb over the last few years as i've been saving and am starting to get worried that they will never come back down to what I consider "affordable" levels. I would love even a 10% correction in SD housing, and would ideally purchase a $425k-ish complete fixer upper with 20% down and fix it up from there. The worst house in the nicest neighborhood I can find (La Mesa, Allied Gardens, South or North Park, Ocean Beach)!

Currently I rent a small but nice 1 bedroom apartment 2 blocks from the ocean with my significant other with a total cost of $900 to me after rent and all utilities. I love the area we live in and although the apartment is very small I can see myself doing this for a few more years and continuing to save at a slower rate. My only concern is that prices will continue their upward march and all my efforts will be wasted in the long run.

Prices seem crazy to me and flipping activity is rampant in the areas I look at. My initial inclination is to keep saving and keep a low overheard and wait for a potential correction. It's always nice to get an outside perspective though. If you were me, would you bite the bullet and buy now, or hope and pray for a correction while continuing to save? I appreciate the input.

Thanks,
Kristopher

Submitted by CA renter on January 24, 2015 - 7:12pm.

wallers wrote:
I am wondering who the buyers are as well. If someone here makes an above average living (for here) but still has to stretch to afford an average or less than average small home (with the last few years increase) it makes me wonder what is going on and if a price correction will be coming. Looking at incomes and housing prices it does not pencil out unless it's all driven by outside investors. Who will come and go but when they go prices go down. From what I see it is cheaper to rent than buy now (much cheaper) so that seems off as well.

+1

Submitted by moneymaker on January 24, 2015 - 7:54pm.

As Suzy Orman would say DENIED! No sorry, BUY BUY BUY! You've got the down payment and rates are at historical lows, so if you can get the house you want where you want, then you have my blessing.P.S.-Suzy would probably want you to have 6-8 months of cash in reserve, so if you are planning on not paying PMI that would mean you can afford a 250k house, which we all know doesn't get you much today in San Diego. Actually I don't really know if she means 6-8 months of income or living expenses, could be a big difference.

Submitted by scaredyclassic on January 24, 2015 - 10:20pm.

there is something to be said for going with your gut.

Submitted by CA renter on January 24, 2015 - 10:48pm.

moneymaker wrote:
As Suzy Orman would say DENIED! No sorry, BUY BUY BUY! You've got the down payment and rates are at historical lows, so if you can get the house you want where you want, then you have my blessing.P.S.-Suzy would probably want you to have 6-8 months of cash in reserve, so if you are planning on not paying PMI that would mean you can afford a 250k house, which we all know doesn't get you much today in San Diego. Actually I don't really know if she means 6-8 months of income or living expenses, could be a big difference.

Should be 6-8 months of living expenses, IIRC.

Submitted by masayako on January 27, 2015 - 2:43pm.

Here's what I see: SD housing market is not in a bubble phase right now. Last buyer's market was in 2010/2011 timframe. With my ballpark guessimate, the cycle goes between 8-10 years, so it will make sense to start looking around or so. We are in 2015 now, and from what I see, there's not much good deal out there, I'd recommend to "monitor" and search for good deal, if you find someone reasonably price and fall in love with, make an offer. Don't overbid. In the meantime, keep monitoring for good deals and keep saving in low risk investment vehicles. Stock market (despite many optimistic folks out there) is quite a bumpy ride ight now and housing market is always a lagging indicator of that. Good luck. Just my .2 cents.

Submitted by an on January 27, 2015 - 3:16pm.

wallers wrote:
I am wondering who the buyers are as well. If someone here makes an above average living (for here) but still has to stretch to afford an average or less than average small home (with the last few years increase) it makes me wonder what is going on and if a price correction will be coming. Looking at incomes and housing prices it does not pencil out unless it's all driven by outside investors. Who will come and go but when they go prices go down. From what I see it is cheaper to rent than buy now (much cheaper) so that seems off as well.
I think it's more important to compare mortgage vs rent instead of mortgage vs income. Rent tells you how much people in a particular area are will to pay for shelter. So, if you want to live in that particular area, you have to compete with other people in your area. There are a myriad of reasons why people are will to spend different amount for shelter and people in different areas spend differently.

The reason I like using rent as a barometer is because people don't put an ownership premium on rent. So, you tend to get a more pure view on how much people in the area are will to spend for shelter. If your mortgage is less than rent, then I would say, go ahead and buy, especially if you're intending this to be your forever home. Worse comes to worse and you have to move, you can always rent it out for more than your mortgage.

Submitted by deadzone on January 27, 2015 - 7:12pm.

What areas in San Diego is mortgage with minimal down payment less than rent? Probably only undesirable areas.

Submitted by Coronita on January 27, 2015 - 7:38pm.

deadzone wrote:
What areas in San Diego is mortgage with minimal down payment less than rent? Probably only undesirable areas.

Mira mesa was....

Submitted by utcsox on January 27, 2015 - 8:17pm.

I will recommend buy vs. rent calculator from NY Times. This is an excellent tool for you run different scenarios.

http://www.nytimes.com/interactive/2014/...

Submitted by an on January 28, 2015 - 10:49am.

deadzone wrote:
What areas in San Diego is mortgage with minimal down payment less than rent? Probably only undesirable areas.
Mira Mesa. This house: http://www.sdlookup.com/MLS-140064625-10... @ $450k with $90k down, P+I = $1600. PITI would be around $2100. Rent for that house is currently going for ~$2100. So, yeah, it's still out there.

Unless you mean minimal down as in <20% down. In that case, I would suggest not to buy if you can't afford to save enough to have 20% down. It doesn't matter if it's cheaper than rent. It's better to save enough for 20% down and still have some set aside for a rainy day before considering making such a big purchase.

Submitted by deadzone on January 28, 2015 - 11:02am.

If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.

Submitted by an on January 28, 2015 - 11:14am.

deadzone wrote:
If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.
I don't see why it's not apple to apple comparison? PITI - tax deduction would be less than rent. You're also paying ~$600/month toward principle, while rent, it's all gone. I guess if you want to have a pure rent vs mortgage, then compare ITI - tax deduction vs rent. This particular house, ITI with 20% down is ~$1500/month. ITI with 10% down is ~$1600/month. That's $500-600< than comparable rent. Depending on your tax bracket, you can add ~$200 to that number as well on the buying side for tax deduction.

As for Mira Mesa being borderline undesirable, then I guess >50% of San Diego is undesirable. If you're the type of think Mira Mesa is undesirable and can't come up with a big down payment, something is wrong with your perception and your finances.

Submitted by livinincali on January 28, 2015 - 12:02pm.

AN wrote:
I don't see why it's not apple to apple comparison? PITI - tax deduction would be less than rent. You're also paying ~$600/month toward principle, while rent, it's all gone. I guess if you want to have a pure rent vs mortgage, then compare ITI - tax deduction vs rent. This particular house, ITI with 20% down is ~$1500/month. ITI with 10% down is ~$1600/month. That's $500-600< than comparable rent. Depending on your tax bracket, you can add ~$200 to that number as well on the buying side for tax deduction.

Probably need to include transaction costs and maintenance if you're going to give yourself the benefit of realizing the principal part of the payment.

Submitted by an on January 28, 2015 - 12:32pm.

livinincali wrote:
AN wrote:
I don't see why it's not apple to apple comparison? PITI - tax deduction would be less than rent. You're also paying ~$600/month toward principle, while rent, it's all gone. I guess if you want to have a pure rent vs mortgage, then compare ITI - tax deduction vs rent. This particular house, ITI with 20% down is ~$1500/month. ITI with 10% down is ~$1600/month. That's $500-600< than comparable rent. Depending on your tax bracket, you can add ~$200 to that number as well on the buying side for tax deduction.

Probably need to include transaction costs and maintenance if you're going to give yourself the benefit of realizing the principal part of the payment.


Transaction cost only apply if you sell. You're, right, there is maintenance cost. If you add that, you should also add appreciation as well.

Submitted by Jazzman on January 28, 2015 - 1:37pm.

Kristopher, you are only 26 so renting has many advantages. If you have a good salary and prices seem out of reach, then homes are clearly over-valued. Whether you believe we're in bubble depends on your definition of a bubble.

Your instincts are sound and you seem financially responsible. If you choose to wait, the macro things I'd be watching are interest rate rises, increased inventory, and investor activity. If prices wobble, I'd focus on price reductions, list to sales ratios, number of days on market, Cash Shiller index, and median prices. I believe there is fair to good chance a convergence of factors will happen to bring about a correction in prices and when that happens you might expect the excessive 2013/14 gains to be wiped out. Those gains did not come about as a result of wage growth or a post bubble over-correction, so it is entirely reasonable to assume they are unsustainable.

While measures of value help explain 'normal' prices, over-inflated values are more explained by buyer behavior (irrational exuberance etc), IMO. The buy now decision ultimately boils down to whether you are eager to be a home owner and are prepared to take a risk and make compromises, or whether you are concerned about fair value and believe you can time the market. It seems to me your post has already answered that in part.

Submitted by bewildering on January 28, 2015 - 3:12pm.

deadzone wrote:
If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.

Mira Mesa is undesirable to single folks, but very desirable to families. Schools are great and easy to get around. Newer as well, so not as many ghetto houses as North Park, South Park, Clairemont etc.

As mentioned above, use the New York times rent vs. buy calculator. And remember when markets work everyone can spot a bargain. I doubt their are great deals to be had in this market.

Submitted by bewildering on January 28, 2015 - 3:16pm.

Jazzman wrote:
I believe there is fair to good chance a convergence of factors will happen to bring about a correction in prices and when that happens you might expect the excessive 2013/14 gains to be wiped out. Those gains did not come about as a result of wage growth or a post bubble over-correction, so it is entirely reasonable to assume they are unsustainable.

I think Rich believes that the 2013 gains were not unreasonable in relation to rents, or income. Just a return to a normal market because few short sales/foreclosures. At least that is my reading of this blog.

Submitted by spdrun on January 28, 2015 - 3:21pm.

Foreclosures and short sales may have been a symptom of a return to normal pricing, not caused the return to normal pricing.

Submitted by an on January 28, 2015 - 4:01pm.

bewildering wrote:
deadzone wrote:
If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.

Mira Mesa is undesirable to single folks, but very desirable to families. Schools are great and easy to get around. Newer as well, so not as many ghetto houses as North Park, South Park, Clairemont etc.

As mentioned above, use the New York times rent vs. buy calculator. And remember when markets work everyone can spot a bargain. I doubt their are great deals to be had in this market.

Unless deadzone is rich and anything less than Carmel Valley/Del Mar/etc is undesirable.

Submitted by deadzone on January 28, 2015 - 5:18pm.

Mira Mesa does not have a great reputation, it is what it is, don't blame me for being the messenger. If that is the only place I could "afford" to purchase, then I would probably be inclined to rent elsewhere.

Submitted by deadzone on January 28, 2015 - 5:27pm.

AN wrote:
deadzone wrote:
If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.
I don't see why it's not apple to apple comparison? PITI - tax deduction would be less than rent. You're also paying ~$600/month toward principle, while rent, it's all gone. I guess if you want to have a pure rent vs mortgage, then compare ITI - tax deduction vs rent. This particular house, ITI with 20% down is ~$1500/month. ITI with 10% down is ~$1600/month. That's $500-600< than comparable rent. Depending on your tax bracket, you can add ~$200 to that number as well on the buying side for tax deduction.

If you are calculating total costs over long period you can compare, but even that is only a rough estimate because you have to take into account estimated appreciation (which could also be significant depreciation given today's high prices).

For simple comparisons of affordability, you have to accept that for most folks monthly payment is the only thing that matters. If I have to put 20% down on a 500K house, then that is 40 months of rent payments assuming 2500/month rent.

Submitted by deadzone on January 28, 2015 - 5:26pm.

bewildering wrote:
Jazzman wrote:
I believe there is fair to good chance a convergence of factors will happen to bring about a correction in prices and when that happens you might expect the excessive 2013/14 gains to be wiped out. Those gains did not come about as a result of wage growth or a post bubble over-correction, so it is entirely reasonable to assume they are unsustainable.

I think Rich believes that the 2013 gains were not unreasonable in relation to rents, or income. Just a return to a normal market because few short sales/foreclosures. At least that is my reading of this blog.

There is nothing "normal" about a market that is being fully sustained by the Fed's zero interest rate policy.

Submitted by Coronita on January 28, 2015 - 5:27pm.

AN wrote:
bewildering wrote:
deadzone wrote:
If you have to put 20% down then it is not an apples to apples comparison (rent vs. mortgage) in terms of affordability. I would say Mira Mesa is borderline undesirable.

Mira Mesa is undesirable to single folks, but very desirable to families. Schools are great and easy to get around. Newer as well, so not as many ghetto houses as North Park, South Park, Clairemont etc.

As mentioned above, use the New York times rent vs. buy calculator. And remember when markets work everyone can spot a bargain. I doubt their are great deals to be had in this market.

Unless deadzone is rich and anything less than Carmel Valley/Del Mar/etc is undesirable.

you rift rafts in Mira Mesa need to stay in your hood AN...

Submitted by spdrun on January 28, 2015 - 5:27pm.

What's wrong with Mira Mesa assuming you have a job within ~5 miles or so? It might not be as culturally interesting as more trendy areas, but it's still within spitting distance of the beaches.

Submitted by Rich Toscano on January 28, 2015 - 5:31pm.

bewildering wrote:

I think Rich believes that the 2013 gains were not unreasonable in relation to rents, or income. Just a return to a normal market because few short sales/foreclosures. At least that is my reading of this blog.

I don't think I'd characterize it that way... 2013 saw prices go up quite dramatically in comparison to incomes/rents. I push back on the idea that it's a "bubble" (fwiw with such a squishy term), or that it's anything like what it was during the mid-2000s bubble. But, homes are substantially more expensive than has been historically typical, and most of that happened in 2013.

BTW, they went up in 2012, but that was mostly just going from "somewhat cheap" to "reasonable"... so I would say 2012 was the reversal of a" post-bubble overcorrection," to use jazzman's apt phrasing. But 2013... that was a different story.

In fact let me put some numbers on it, for giggles. This is using my little valuation index thinger, and comparing it with the historical median valuation:

Dec 2011: 8% undervalued
Dec 2012: 2% undervalued
Dec 2013: 13% overvalued

(Haven't done the 2014 numbers yet... it's on my list ;-)

(but, I suspect that 2014 saw the valuation go up another few %... creeping a little higher but nothing like the 2013 frenzy)

Submitted by CA renter on January 28, 2015 - 6:26pm.

livinincali wrote:
AN wrote:
I don't see why it's not apple to apple comparison? PITI - tax deduction would be less than rent. You're also paying ~$600/month toward principle, while rent, it's all gone. I guess if you want to have a pure rent vs mortgage, then compare ITI - tax deduction vs rent. This particular house, ITI with 20% down is ~$1500/month. ITI with 10% down is ~$1600/month. That's $500-600< than comparable rent. Depending on your tax bracket, you can add ~$200 to that number as well on the buying side for tax deduction.

Probably need to include transaction costs and maintenance if you're going to give yourself the benefit of realizing the principal part of the payment.

Agreed. It's also questionable to deduct the principal payment from the expenses (or add it to equity) because that doesn't determine how much equity one has in the property. The market determines that. You can pay $1,000 toward principal every month, yet still lose $500+ each month in equity. OTOH, you can have an interest-only mortgage and see your equity shoot up $2,000/month. With real estate, timing is everything.

Submitted by CA renter on January 28, 2015 - 6:29pm.

spdrun wrote:
Foreclosures and short sales may have been a symptom of a return to normal pricing, not caused the return to normal pricing.

Exactly. Foreclosures were not the problem; they were the solution to a housing bubble.

Submitted by joec on January 28, 2015 - 7:26pm.

One thing that may throw a monkey wrench in your planning is when you and your significant other decide to get married/have kids, then there will be a massive nesting instinct and you will be "forced" to buy no matter what.

There were reports from plenty of people who knew it would keep going down earlier from 2005-2008, but bought anyways since it was only money and less painful than to fight with the wife.

The good thing with buying is it's a load off your mind and all the time you spend researching can be spent doing other things. Also, if you buy in places, as mentioned close to what it cost to rent, you aren't paying anymore than the renter and in a high income bracket like you, you get the government helping out too...

Having a fixed known housing cost is great too...I've also noticed renters in the area tend to not be as "friendly" ,etc.. since they don't feel as much is in the game, etc...

Submitted by spdrun on January 28, 2015 - 8:08pm.

Thank G-d for birth control!

(And who says that a future wife will like what one buys before marriage?)

Submitted by svelte on January 28, 2015 - 9:44pm.

joec wrote:
One thing that may throw a monkey wrench in your planning is when you and your significant other decide to get married/have kids, then there will be a massive nesting instinct and you will be "forced" to buy no matter what.

True, true.

On the other hand, unless he marries whomever he's buying this current place with, they will force him to sell and buy something else anyway.

Brides who marry a man who already owns a home usually don't want to make their nest in the place he spent his bachelor days in.

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