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 spdrun on February 1, 2015 - 10:05am.

Why would I want to sell my homes and "fire" borrowed money from Fannie that I currently "employ" to work generating income for me, when I wouldn't be able to "rehire" borrowed from Fannie (or any other source) to "work" in a 10% CD?

You're not thinking like the average homeowner, who thinks in terms of resale value, not rental income. Values are dictated by the market. Most people don't buy with cash, and won't qualify at a higher rate at current price levels.

Whether rates will rise is a different question, but there's certainly a lot of political pressure against further QE at this point, and things like 3% down are also being brought into question. Yay GOP!

Submitted by Coronita on February 1, 2015 - 10:37am.

spdrun wrote:

Why would I want to sell my homes and "fire" borrowed money from Fannie that I currently "employ" to work generating income for me, when I wouldn't be able to "rehire" borrowed from Fannie (or any other source) to "work" in a 10% CD?

You're not thinking like the average homeowner, who thinks in terms of resale value, not rental income. Values are dictated by the market. Most people don't buy with cash, and won't qualify at a higher rate at current price levels.

Whether rates will rise is a different question, but there's certainly a lot of political pressure against further QE at this point, and things like 3% down are also being brought into question. Yay GOP!

Actually, that might be true. Until they start relaxing lending standards again. And reality is, you know that will eventually happen.

Submitted by FlyerInHi on February 1, 2015 - 11:25am.

Lots pressure from the GOP against the Federal Reserve? It's all meaningless political talk for simpletons.

Push comes to shove, Wall Street and business groups want QE and an environment that is conducive to consumer spending and growth.

Submitted by kev374 on February 1, 2015 - 12:20pm.

flu wrote:

I remember not to far ago, you were mentioning how ridiculously high rent prices were.

And then also, you were considering moving to Atlanta.

You're partially right. Rents are high in certain places because the market seems to be divided into two groups - recent investor landlords and long time landlords. These properties that are seeing a runup in rents have been taken over by recent investors and they are trying to jack up the rents like crazy. However there are also landlords who have owned the property for ages and are more interested in keeping rents low and having low turnover. There are plenty of deals to be had if you look more closely.

Let me give you an example I found on craigslist:

http://orangecounty.craigslist.org/apa/4...

Now, the rent in Irvine is supposed to be north of $2000 for a 2bd per the media and "common knowledge" but the above 2bd can be had only for $1475. A friend of mine owns a 2bd as well in the heart of Irvine and he rents it out for only $1550.

There are also plenty of places charging over $2000/mo for similar apartments (similar in terms of size, location and quality of facilities).

There is a HUGE disparity among properties in the rental market just like there is a HUGE disparity in the price people pay for new cars. One person may pay invoice and the other person may be $5000 over MSRP because they are not able to negotiate and research. The spread can be as much as 30% of the cost of the new car which is simply amazing but many people simply pay it because suckers exist whether it be renting homes or buying cars.

My own case is that I recently moved. My old apartment complex was purchased by an investor who immediately jacked up the rent by 25%. I told the investor that they can go F themselves and moved and i'm glad I did because I found a much better deal. However they know that many people stay put for a while because moving is difficult. But just because people don't move immediately does not meant they will not eventually.

Now regarding the market for purchase that is not the case at all. People throw all sorts of statistics around but the bottom line is this. MYSELF and many many people I know with various types of jobs are able to afford to rent comfortably in Mid and South Orange County but are absolutely unable to buy because the cost of buying an equivalent place is 2X or 3X what it would cost them in rent. In my opinion that is a concerning disparity and not sustainable.

It is common fact that first time buyers have been completely absent from this market solely due to sky high prices. That is not what I call a normal market. And to say that incomes are supporting these price levels is laughable.

Marketwatch recently had a piece where they stated that half of American homeowners can't even afford the current house they are living in which is a pretty telling statistic:

http://www.marketwatch.com/story/over-50...

The claim is that renting and owning are somewhat in parity. That is pure nonsense. First one needs the downpayment. If the downpayment is going to be 5% then the mortgage is going to be higher. A 2bd that rents for $1500/mo. has a list price of around $500,000 in Costa Mesa, CA with HOA fees of around $350/mo. That is the typical listing.

Now compute: 5% down on $500,000 is $25,000, plus closing costs, probably $35,000 out of pocket to start with, then PITI alone on $475k at 4% is $2270, plus $350 HOA, that's $2620. Oh yes, I have not added PMI as well. In addition all the maintenance that comes with owning a home, who is going to pay all that? When all is said and done you're looking at over $3,000 or double what a rental can be had for - not even close to parity. If you had to move and rent the place out your cash flow would be highly negative.

Plus owning has a MAJOR disadvantage of the inflexibility of it. If there is a life situation when renting you can simply give your notice and downsize or move out to another area which you can't when buying. This necessitates that one has a huge buffer for unforseen circumstances, how many first time buyers have that much in reserves?

The truth is that the market is being solely supported by investors/speculators and move up buyers. This is solely because interest rates are at ridiculously low levels and there is no money to be made anywhere else for investors. Once interest rates rise to a more historic level of 7-8% (which may take a while) the rental market is not going to look attractive anymore and capital is going to flee from the housing sector and housing is going to be collateral damage.

People act like houses are intrinsically worth the ridiculous sums that investors are willing to pay for them. No, investors don't care a damn whether it's a house, a tulip, gold, silver, copper or whatever the heck it is that can make them some money. When the asset can no longer make them money they will just trash it and move on to the next asset that can generate them an income.

Shiller himself has stated many many times over that housing over the long term just does not generate that great a return compared to the overall market. Even now we are at the tail end of this speculative runup and I am seeing strong signs that it is fizzling out.

Without continued investor support I doubt this housing run-up has any steam left in it and all I see is a downward drop.

As for various predictions by economists, just look at UCLA Anderson's forecasts during the previous housing bubble. They were saying at the time that the prices were sustainable! LMAO! They were 100% wrong and this is supposed to be the best business school in the country? Laughable.

Submitted by spdrun on February 1, 2015 - 12:52pm.

Lots pressure from the GOP against the Federal Reserve? It's all meaningless political talk for simpletons.

Push comes to shove, Wall Street and business groups want QE and an environment that is conducive to consumer spending and growth.

You're both over- and under-estimating human rationality. On the one hand, a slowdown right now will make the sitting President look bad and make it less likely that anyone from his party will be elected in 2016. On the other hand, the wealthy profit most from a pump-and-dump, boom-and-bust cycle. Buy assets low, wait till the chumps start buying, driving prices up, dump the assets, repeat when the cycle repeats.

Wall Street loves volatility, whether they care to admit it or not. Especially if said volatility is somewhat predictable and can be timed well.

Submitted by FlyerInHi on February 1, 2015 - 5:57pm.

Maybe Wall Street likes volatility. But I can't believe that business executives would want policies that negatively affect the revenues of their companies, from local auto dealers to the Koch brothers selling their products.

Are Republicans are politically craven enough to want a recession to affect the wealth of the country?

Submitted by spdrun on February 1, 2015 - 6:06pm.

I'd argue that smart business leaders love a recession, since it's just an opportunity to outlast or buy weaker competition. They understand that it's part of a cycle which can be timed for maximum growth of their business.

It's like seasonal change for farmers. Winter provides a time to rest, repair equipment, purchase new equipment, etc compared to the frenetic activity of the other seasons.

Submitted by FlyerInHi on February 1, 2015 - 6:44pm.

How many of those "smart business leaders" are there compared to the total numbers of voters.

I doubt political pressure moves the Fed much. They will do what they do.

Remember when Bush lost to Clinton, many Republicans blamed the Fed for not lowering rates. In 2016, they'll probably blame the Fed for not raising rates fast enough.

I agree with Flu, rates won't shoot up to 7% overnight. OMG that's seems high.
I remember back in 2009 with monetary easing and stimulus, some people were thinking 10% plus, the markets will get ahead of the Fed, run away inflation, blah blah blah.

Submitted by spdrun on February 1, 2015 - 6:55pm.

Even 5-6% would do it, since affordability in San Diego sucks at present. A little bit is enough to gently nudge people into not qualifying, unlike in other markets where median income and price are more in line. As well as reduce the spread between income from holding property and income from interest, making property less attractive.

And if you don't think the Fed is a political animal, you'e kidding yourself. How do members of the board get appointed and confirmed? :)

Submitted by joec on February 1, 2015 - 6:55pm.

In the UT Business section today, they are saying 1st time buyers are coming back in large percentages from before due to easier lending terms from fha/fannie/freddie...

Also, as these mid to late 20 somethings hit 30s-40s, there is huge pressure to settle down, get married, have kids. From the article, these is also talk of worst neighbors, constantly raised rents, roommates, etc...

Bottom line I took and my own view is that for a married couple, family...renting an apartment generally sucks and as we get older, having to deal with renting just sucks (for me). I "get" the single guys here loving renting and all that and can defend it all day, but I feel for most families with or without kids, renting is just ghetto.

I'd known "Asian" people (again) who looks down on renters or feel it's pathetic that you can get knocked up with a kid, but can't even afford to buy a house...(it's viewed shamefully).

Just how it is...

Submitted by spdrun on February 1, 2015 - 7:00pm.

New York Times said the opposite last week:
http://www.nytimes.com/2015/01/24/busine...

Considering that lending terms were (only slightly) eased last month, there's unlikely to be much data on how the market is affected by it for another month or two.

Submitted by joec on February 1, 2015 - 6:58pm.

spdrun wrote:
Even 5-6% would do it, since affordability in San Diego sucks at present. A little bit is enough to gently nudge people into not qualifying, unlike in other markets where median income and price are more in line. As well as reduce the spread between income from holding property and income from interest, making property less attractive.

And if you don't think the Fed is a political animal, you'e kidding yourself. How do members of the board get appointed and confirmed? :)

The problem is that it probably won't even hit 1% fed funds until past 2020+. There are a few people who believe this on Bloomberg, but with the world at negative, the fed is in no rush to raise it anytime soon.

The only rate hike I can see is if they decide to just get off 0%. Maybe park it at .5 or 1 tops, but that's it.

Submitted by joec on February 1, 2015 - 7:00pm.

spdrun wrote:
New York Times said the opposite last week:
http://www.nytimes.com/2015/01/24/business/home-sales-increase-but-first-time-buyers-remain-few.html

Yeah, it's just starting to thaw now from what the article said...Maybe we hit the bottom for 1st time buyers last week and it's up and up now!

Submitted by FlyerInHi on February 1, 2015 - 7:02pm.

So far the evidence is that's the Fed is independent, especially compared to other central banks around the world.

Greenspan was clearly right wing, for less regulations, and he acted on it. But he was pretty independent. If anything, he was one of a group making policy.

Spd, the Fed doesn't care about San Diego real estate. They care about economic growth.

Submitted by spdrun on February 1, 2015 - 7:06pm.

joec- Fed funds rate has been at 0% since, what, 2009? Yet the 30-year has fluctuated between 3.5% and 5.2% during that period. 5.5 to 6% is easily possible with a 0.5 to 1.0% Fed funds rate.

FlyerInHI- exactly my point. SD real estate could be affected by any change in policy more than property in cheaper areas.

Submitted by spdrun on February 1, 2015 - 7:29pm.

Yeah, it's just starting to thaw now from what the article said...Maybe we hit the bottom for 1st time buyers last week and it's up and up now!

Hopefully it will be a brief thaw and the twitter-twit generation will keep renting for life, as is their proper place :)

One week of data don't make a trend. U-T was rather skeptical about first time buyers last week:

http://www.utsandiego.com/news/2015/jan/...

Submitted by FlyerInHi on February 1, 2015 - 7:09pm.

svelte wrote:

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.

That seems odd. Don't women dream of marrying a prince and move into his castle?

Submitted by spdrun on February 1, 2015 - 7:15pm.

Ever cleaned a castle of the detritus of ten years of partying, sex, coke, and booze? Easier to clean out the Aegean stables.

Submitted by CA renter on February 2, 2015 - 6:23am.

FlyerInHi wrote:
svelte wrote:

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.

That seems odd. Don't women dream of marrying a prince and move into his castle?

Not if his former princess was living and "nesting" there.

Submitted by CA renter on February 2, 2015 - 6:27am.

flu wrote:
Quote:

Yes, you'd be right to hold on to your real estate if CD rates are <1%, but what if rates were to skyrocket to 10%, or higher? How would you feel then? And what if housing prices were likely to decline at the same time that other investments were offering much higher returns (and the potential for much higher capital gains, too), particularly if rates rise significantly?

I think you need to step back and not think in terms of "doom" and "gloom". I think the Fed has proven it likes to intervene. The "powers" won't "let" rates "skyrocket" to 10% really very quickly. Afterall, they are really good at "fixing" things. And if they did let that happen, it would end up wreaking havoc on the financial markets, on businesses,etc, and then the majority of Americans would have a much bigger problem at hand than thinking about buying real estate. Just ask the Russians.

Any sort of rate move would mostly be a slow and steady trickle up, so that it causes a little discomfort, but manageable and tolerable for most people. Just like the how rates on mortgages have already risen 1% since the bottom, slow and steady.
Has that 1% rise thus far caused a real estate meltdown?

Second, what happens with CD rates might be good for my own money (or maybe not), but it doesn't affect the money from fannie I borrowed for 30 years to finance the home purchases. What does matter is my tenant's ability to help me build equity and generate some cash flow. It's not like fannie would directly lend to me money to invest in dividend stocks or 10%CD. That's what I use my own money for.

Why would I want to sell my homes and "fire" borrowed money from Fannie that I currently "employ" to work generating income for me, when I wouldn't be able to "rehire" borrowed from Fannie (or any other source) to "work" in a 10% CD? (Not to mention, as part of "firing" Fannie money, I would also have to pay capital gains taxes, depreciation recapture,etc,etc)?

Yes, the Fed can manipulate rates for a long, long time. But what if rates were to go up?

I'm also thinking in terms of speculators/investors who've paid cash, like so many have done over the past few years. You're more of a "mom and pop" kind of guy who is probably looking for ways to produce cash flow in retirement. What about the investors who have no emotional or other ties to the homes or areas? I think they would dump quickly if they thought that housing prices were going to decline and other investments were paying much higher returns (plus more opportunities for cap gains).

Submitted by Coronita on February 2, 2015 - 7:41am.

joec wrote:
In the UT Business section today, they are saying 1st time buyers are coming back in large percentages from before due to easier lending terms from fha/fannie/freddie...

Also, as these mid to late 20 somethings hit 30s-40s, there is huge pressure to settle down, get married, have kids. From the article, these is also talk of worst neighbors, constantly raised rents, roommates, etc...

Bottom line I took and my own view is that for a married couple, family...renting an apartment generally sucks and as we get older, having to deal with renting just sucks (for me). I "get" the single guys here loving renting and all that and can defend it all day, but I feel for most families with or without kids, renting is just ghetto.

I'd known "Asian" people (again) who looks down on renters or feel it's pathetic that you can get knocked up with a kid, but can't even afford to buy a house...(it's viewed shamefully).

Just how it is...

I keep say that....Most of you financially responsible people need to stop thinking about the logical/responsible thing YOU would do. Instead, you need start thinking they way that 70-80% of the other people in this country actually thinks and would do....

"So long as someone is willing to loan me money with payment terms that I can make, I don't care what the loan terms is and MSRP price is right now."

People have gotten past the "housing is evil, I'm not going to buy, banks are evil because they forced me to get bad loans" mindset. People are now back to the "banks are evil, because they aren't giving me the credit to buy the things I deserve" mindset. And banks will give what these consumers want again.

If in doubt, look at all the new cars we have on the road here in S.D. Bunch of new bimmers, mercedes, and audi's, a few porsches. You have people readily signing the papers to lease/loan for a BMW 335 that MSRP's for over $50k now. That's a 3 series BMW for $50k and it's not even an M3. And don't tell me most people driving these have $50k in cash that they paid for these things.

Clearly the credit spigot is turned back on. And it's just a matter of time before that same spigot is turned back on for housing. Buy now, borrow and pay later. Good times are back.

Submitted by Coronita on February 2, 2015 - 7:34am.

CA renter wrote:

Yes, the Fed can manipulate rates for a long, long time. But what if rates were to go up?

I'm also thinking in terms of speculators/investors who've paid cash, like so many have done over the past few years. You're more of a "mom and pop" kind of guy who is probably looking for ways to produce cash flow in retirement. What about the investors who have no emotional or other ties to the homes or areas? I think they would dump quickly if they thought that housing prices were going to decline and other investments were paying much higher returns (plus more opportunities for cap gains).

I find that planning around too many extreme "what if's" at the macro level is just hazardous to one's financial health, because most of the what if's end up not really being the case, because the end up being borderline extreme scenarios. And if they did actually happen, whether you held on to a home or didn't buy or didn't sell doesn't really matter, because that borderline doomsday scenario, everyone is screwed more or less in the same way, so it won't matter.

It's really no different than the "what if scenario" of the entire CA state falling into the ocean because of an earthquake, and you're trying to plan for that scenario to be safe, despite still living in CA. If you live in CA, no amount of planning will make you any more safer than anyone else living in the state when the entire state falls into the ocean, unless you're ultra-wealthy and can maintain a fleet of private pilots that spontaneously airlifts you out of CA at minute's notice.

Same could be said about the Fed. If we get to the point that the Fed cannot (as some of you say) "manipulate" the markets to get results, we got much bigger problems at hand, and you are in no better shape than anyone else in this country (unless you are ultra-rich perhaps with those nice parachutes). So it's meaningless to plan for these catastrophic what-if scenarios, because for almost all of us, we're equally screwed.

Mom and pop retirees aren't going to be buying $1million+ homes as "investments" to earn 4-5%. Show me many $1million+ homes that cash flows well.... Chances are, if they are buying $1million+ homes, it's either for personal enjoyment (for which they have the money) or for their John or Janny child that can't afford to buy her own home (again, which, they have the money), so they'll buy it for them.

And I'd even most retirees don't have the patience or time to start being a landlord if they've never done it before. In fact, as a retiree, if one's done their financially planning right, they shouldn't be going after that maximum return anyway. They should be in their wealth preservation stage and try their best not to lose money.

Submitted by an on February 2, 2015 - 11:06am.

I actually don't see anything wrong with planning for extreme "what ifs". As long as you also attribute the probability of it coming true in your planning as well You should also plan for "what ifs" at both end of the spectrum too. Not only should to plan for the Fed completely failing and you'll get major deflation, but you should also plan for the Fed completely failing to control inflation and we'll see a repeat of the 70s/80s. Obviously, either of those scenario are very unlikely to happen, but it's not impossible. If you plan for it, then you won't be blind sided and follow the heard off the cliff.

Submitted by CA renter on February 3, 2015 - 5:33am.

AN wrote:
I actually don't see anything wrong with planning for extreme "what ifs". As long as you also attribute the probability of it coming true in your planning as well You should also plan for "what ifs" at both end of the spectrum too. Not only should to plan for the Fed completely failing and you'll get major deflation, but you should also plan for the Fed completely failing to control inflation and we'll see a repeat of the 70s/80s. Obviously, either of those scenario are very unlikely to happen, but it's not impossible. If you plan for it, then you won't be blind sided and follow the heard off the cliff.

Agree with this.

Also, it's not at all extreme to consider the possibility that other investments might become more lucrative vs. real estate at some point in the future and to think about the ways this will change investor/speculator behavior.

Submitted by ltsddd on February 3, 2015 - 8:28am.

on some rare occasions, I do hear people winning the lottery jackpot.

Submitted by bewildering on February 3, 2015 - 11:52am.

AN wrote:
I actually don't see anything wrong with planning for extreme "what ifs". As long as you also attribute the probability of it coming true in your planning as well You should also plan for "what ifs" at both end of the spectrum too. Not only should to plan for the Fed completely failing and you'll get major deflation, but you should also plan for the Fed completely failing to control inflation and we'll see a repeat of the 70s/80s. Obviously, either of those scenario are very unlikely to happen, but it's not impossible. If you plan for it, then you won't be blind sided and follow the heard off the cliff.

Fair point. But you also have to plan for "what ifs" like things continuing as they are for the next 30 years. 2-3% house appreciation/year, 2-3% rent increase per year. The economy plods along.

In this case if you are intending to stay in the same place for at least 5 years then buy.

I suspect people do not consider unrealized gains (from not investing in stock market or buying a house) as losses. This attitude is very human, and very short sighted.

Myself, I failed to follow my own rules and did not put my ROTHIRA contribution in the SP index fund last january because I thought the market was overvalued. Instead I put it in a money market acount. I LOST 20% because of that dumb decision.

Submitted by an on February 3, 2015 - 12:05pm.

bewildering wrote:

Fair point. But you also have to plan for "what ifs" like things continuing as they are for the next 30 years. 2-3% house appreciation/year, 2-3% rent increase per year. The economy plods along.

In this case if you are intending to stay in the same place for at least 5 years then buy.

I suspect people do not consider unrealized gains (from not investing in stock market or buying a house) as losses. This attitude is very human, and very short sighted.

Myself, I failed to follow my own rules and did not put my ROTHIRA contribution in the SP index fund last january because I thought the market was overvalued. Instead I put it in a money market acount. I LOST 20% because of that dumb decision.

Yes, you should totally plan for that "what ifs" as well. With all of these "what ifs" and various different probability of them coming true, the only way I see for me to be ready is to be diversified. Don't put all of your eggs in one basket. Do put all in the stock market, don't put all in the housing market, don't put all in the money market, etc. If you're well diversified, then you'll win some and you'll lose some. But you can then re-balance your various investments as the picture gets clearer.

I agree with you that if you plan to stay in the same place for at least 5 years, then buy. That's why I brought up the point that it's actually cheaper to rent than buy in some areas.

If you consider unrealized gain from not participating in the stock market, you should also consider unrealized loss as well. Since we don't have a working crystal ball, we have to wait and see which one it'll be. Then there's also the appreciation of real estate and the leverage you're taking with that capital. Lets say you take $100k out of your stock investment to buy a $500k house. Over 5 years, the stock market went up 40%. That mean you have $40k in unrealized gain from the stock market. But then, if the housing market went up 10%, you'd have a $50k gain from the house. There's no way to know at the moment which will appreciate more, which is why you shouldn't put all of your eggs in one basket.

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