San Diego Housing Bubble News and Analysis

Completely agree with you Perry,

I can buy that same home in Fort Collins, CO and my mortgage payment would be the same as the mello roos, property taxes and HOA in Temecula, not including the mortgage! I don't quite understand all the talk about now being a great time to buy either. A friend in the new home business told me that last week, as did a relative. Once the first news reports came out about falling prices they must have immediately thought "prices are going down, now is the time to buy".

It is possible that we are all wrong and everything could turn around next Spring. But who on earth would buy now at a time when news reports can't even keep up with price reductions, the selling season is over and the market is in a virtual freefall! At least wait until next February or March and see what the market looks like before the beginning of the next selling season. Really, what are the chances that everything is suddenly going to take off again next Spring when nobody can afford to buy, the economy is softening and the psychology of the market is dead.

I think the "it's always a good time to buy" statement is true, but only if you add to it:

"with a 30 year fixed rate mortgage and 20% down."

If you can find a home where you can afford to put 20% down, and can afford the payments on a 30 year fixed mortgage, plus property taxes, plus insurance, then by all means buy it.

Once you have to start changing any of those factors in order to afford it, then it's probably not a good time for you to buy.

And once most people have to start changing any those factors, then it's probably not a good time for most people to buy.

noone, I don't quite understand your logic. It sounds to me like you're falling into the real estate trap.

For example, even if you could afford to comfortably pay $3,000 in interest, property taxes, insurance, HOA and maintenance, why would you want to? That is especially true if you can rent a similar home for $1,500 all inclusive per month. If you could save $1,500 each month by renting, your house would have to increase $18,000 in value a year to make the purchase worthwhile. I think that, in addition to reporting on general trends, the press should have compare and contrast examples of buy and rent decisions. That will help educate readers on real estate and personal financial management. I'm not sure what kids were taught in school decades ago, but I feel that few people in the general public undertand this issue clearly.

Previously, posters on this board have determined that it costs about twice as much to buy than to rent (inclusive of tax implications). I think this issue should be re-examined periodically as the market evolves. New readers of Piggington might also like to discuss the issue. I'm sure that as the market deteriorates, Piggington will attract many more lurkers and contributors.

I agree that you probably should not buy a home unless you can reasonably afford the payments (P&I, taxes, and insurance) on a 30yr fixed mortgage, but I don't believe the 20% down is completely necessary.

I've owned two homes so far, and could barely scrape together enough for 5% down pmt. In both cases, I sold at a fair gain. In both cases, I ended up financially better off with purchasing rather than renting.

Obviously, the 20% down helps you if you plan to sell in the next few years, and you're concerned about declining prices, so the initial equity you paid for will cushion that a bit.

But for some of us who are trying to raise a young family, saving is difficult. If I waited until I had 20% down, I'd probably never purchase a home.

Perry -

This doesn't apply to someone who may have purchased their first home between 2003 and 2006, but in general, buying a home has always been a good investment, and will be again soon. If you bought a home today, or in two years, with a 30 year fixed, your payment will always be the same, vs. renters who will probably see their rent increase every year. And isn't the eventual goal of most homeowners to have their house paid off when they are retired?

Steve B, buyers who bought between 2003 and 2006 may see all their equity evaporate in a downturn, thus substantially or completely eliminating their net-worth.

There are many ways of saving. It doesn't help to have a house paid-off if upon retirement you have no savings.

I'm not saying never buy. I'm saying don't buy unless your debt service and costs of ownership are about the same as rent for a similar home. If cost of ownership is more then rent, then rent and invest the difference. You'll have much more money in the end than if you bought at inflated prices. To me that should be basic home-economics that every head-of-household should understand. Unfortunately, some people would rather be making offerings to the real estate God.

Just a slightly different spin on what's been said... 

Rent vs Buy is a complicated decision and no simple monthly payment analysis is sufficient.  So, while I'd generally agree this isn't a terribly good time to buy, when I return to SD next year we might just buy another house (we're renting one out right now).  Why?

There are some subtle advantages to buying as well if you expect to stay for some time.  One, the mortgage will generally stay the same (save the small property tax increases).  While THIS year might be cheaper to rent, if you are going to remain in the house then you should generally expect to pay less than renting eventually.

Two, renting is a yearly gamble.  If I don't decide to buy again, then the poor family that's renting from me now is not going to get his lease renewed.  Bummer if he's got kids in school, a job, doesn't feel like packing up all his stuff, etc. 

Three... if you don't keep treating your home like an ATM, eventually it'll be paid off.  Mine will be paid off in 2018; that sure makes retirement that much easier to program.  So, while the renter is paying higher and higher rents, I'm down to property tax (and at 1998 appraisal).

Finally, renting is never your house.  Granted, I wouldn't pay 5k/mo to buy a house I could rent for 1k, but there is certainly some value to being home at night.  Paint it, improve it, get to know your neighbors... I could live in an apartment if I just wanted to keep the family out of the elements; let's not completely discount the advantages of owning ones own home.

Beebo, you're missing the point. At today's prices, a typical single family detached home in the IE is running $1400 a month in TAXES, Insurance, Mello Roos and HOA payments.

That $1400 is $16,800 a year in TAXES and fees. It is in Riverside, where the median household income is less than $56,000 a year.

That means Taxes and HOA fees alone on these houses exceeds 30% of the Gross median family income for the county.

I purchased my first property in South Mission Beach in 1991. The cost of ownership was substantially more than what I was renting for. Now I own the property free and clear. It was, along with some other property purchases, one of the best financial decisions I have ever made. The argument that "If cost of ownership is more then rent, then rent and invest the difference. You'll have much more money in the end than if you bought at inflated prices." is merely conclusory in nature and is just plain bad advice. I'm not advising all renters to run out and buy property tomorrow, but I am saying be careful who's advice you listen to.

(Sorry for the long post)

Perry, you are probably right. But there is some truth in the B.S. that the real estate industry is shoveling. That extra $18,000 is not all gone. You have paid down some of the principle on the loan, and you get some tax breaks for the interest that you have paid.

Obviously it's all about the amount of time that you spend in the house before you sell, and what happens in the market during that time. But I would imagine that even an overpriced $500k home today (probably really worth about $350) will be worth about $500k in 10 years.

Between now and then you haven't completely lost that $18,000 each year. About $4,600 of that has paid down the principal in the first year (this increases each year). Since the payment is "affordable", you are probably in a tax bracket where you will get a tax break of about $8,000 the first year.

Example:
Purchased $500k house with $100k Down and a loan of $400K.

At the end of a year, and in the current market, the buyer is in bad shape compared to the renter.

Including the down payment, you've paid $136k, with a tax break of $8k, that can be reduced to about $128k. On top of that you still owe about $396k on the mortgage, so your total liability is about $524k (I'm not an accountant, so I don't know if "liability" is the correct term here). Anyway, you would need to sell for about $506k + comission in order to be out the same $18k that the renter is for that same year. Not likely in the current market. Hurray for the renter!

At the end of 5 years, the buyer is doing a little better, but the renter is probably still winning. Including the down payment, the buyer has paid $248k, minus about $36k in tax breaks over the past 5 years, $212k. The buyer still owes about $374k on the mortgage, for a total liability of $586k. The renter in the same 5 years (if rent did not rise), would have been out 90k. So at the end of 5 years, the buyer would need to sell the house for $496k + comission to still be in the same boat as the renter.

Aha! At 10 years, the buyer has paid about $395k but got $70k in tax breaks. The buyer owes $338k on the mortgage, for total liability of $663. The renter has paid $180k in rent, if their rent never went up! So the buyer could sell for about $483k + commission and be in the same boat as the renter. I think this is about the break even point. If the house can sell for $500k in 2016, that ought to cover any commissions. Right?

The buyer does have some additional benefits at this point though. If the renter is just buying the house at that point, they will just be starting the 30 years it will take to pay off the mortgage. The buyer only has 20 years left on their mortgage. They could probably even refinance the $338k with a 15 year mortgage, and possibly lower their payments depending on the interest rates at that time.

That was a rough 10 years for the buyer, but at the end they seem to be better off than the renter, and it only gets better from there. Was that gamble worth it?

I'm still renting, because $3,000 is not affordable to me. That would stretch me to the limit. If anything happened in that first 10 years and I needed to sell, I would be in dire straits. Besides I have not found any house selling for $500k that I would really want to spend the next 10 years in.

Does any of that make sense, or am I still out in left field?

Oh yeah, I also don't have $100k for the down payment!

But I sure hope that I'm not the guy that MH is about to evict!

noone, truth to the BS? I think not.

Nothing prevents you from renting now, save the difference between buying and renting and invest it. You can earn nearly 6% per year risk free on a CD. Can you say the same for a house that you buy today?

Then you can buy 5 years from now, when the cost of owning is closer to that of renting.

Assume that real estate prices stay stagnant for the next 5 years. Do you 10-year analysis and see if buying now or buying in 5 years will be most beneficial.

Dacounselor, I bought in 1989 and now I'm sitting pretty. But I still think that it was a great mistake because 1989 prices were inflated. I could have rented (a similar house and enjoyed the same lifestyle) and saved the difference between 1989 and 1996. Had I done that and bought in 1996, I would have more money today. But at that time, there was no Internet for me to get information. I was young and stupid.

Yes, for good financial planning, it makes sense to buy. It's good to have your house paid-off by the time you retire. The key is not to buy at the wrong time at stupid inflated prices.

Good points Perry.

That message started as kind of thinking out loud. I started putting numbers in a spreadsheet, but I knew I was forgetting some things. On my drive home from work, I was thinking about the fact that the renter could invest the extra money. Of course that takes discipline ;-)

And I did not take into account that as things are going, the renter could probably buy the place in 5 years for less than the $500k instead of waiting 10 years for the house to come back up.

The $20 Cabbage Patch dolls that once sold for almost $1000 are slowly coming back down their original market price. Ther e's a ton of inventory and nobody's waiting in lines out the door to purchase one. High supply, low demand = lower prices.

Buying now would not be prudent in my estimation. Truly, I say to you, that there have been and will be many more, attempts by various factions to keep home prices from declining too fast and keep home sales strong. There are too many people that depend on it staying this way. Interest rate deductions, continued soft-landing arguments and rhetoric in the media, reduction in other commodities such as gas, etc. Yes, it sounds like a conspiracy theory, but those that can have some control of the markets by sheer purchase or production power have it in their best interests to keep the American consumer machine from seizing up.

I find it ironic that all of a sudden the effects of Katrina, the corroded pipeline in Alaska, and Mid East turmoil have had no effect on oil prices. It's as though they have all been swept under the rug. For a number of years there it seems that if a bee farted in a whirlwind, the price of oil increased due to fears of a refinery going down. Now everything is hunky-dory. I think that there is interest by some groups out there to use this to offset the effects of the cooling housing market, improve Republican standing before the mid-term elections, and boost savings prior to the upcoming Christmas season. They've got to keep the ol' consumption pump primed...can't let the fuel (spending)levels get too low.

The best way to combat high, slowly-decreasing home prices in your market is to do business with their competition: rental units or moving to another market. As I've said before, we plan on giving the SoCal market a couple years to come back down to affordable levels. If is does not, we will move to Colorado or some other more affordable market where we can raise a family in a nice home with a nice yard and wave to our neighbors as we are mowing our big backyard.

Perry -

If someone is renting right now, I'm not suggesting that they rush out and buy a house or condo. Certainly, they could get a better deal next summer or the summer after, even if prices were only to slip a little. I'm just saying that they need to buy at some point, because in the long run, it's better to have a mortgage that you are hopefully paying down, eventually to zero (assuming the mortgage can be afforded). The strategy of renting now, and investing the difference can work in theory, but the reality is that Americans as a whole, whether they are renters or property owners, really don't save very much, and some renters will not actually be investing and saving the difference.

I agree Beebo, the "enforced savings" of a house is very good for many people. I think few actual put the difference between renting and buying (right now) into savings or investments. Also, moving is expensive. The stability of a home, preventing someone from moving every few years, is generally a positive.

The strategy of renting now, and investing the difference can work in theory, but the reality is that Americans as a whole, whether they are renters or property owners, really don't save very much, and some renters will not actually be investing and saving the difference.

I completely agree, except that I would say that it's "most" renters that don't save the difference and not just "some". On this forum we're the exception. Most people will see the extra income and just spend it! New car, big TV, and so on. A mortgage payment is a forced saving mechanism, and if you don't "save" you lose your home, go bankrupt, and so on. There is no equivalent motivation for saving in a bank account. No, the future is not motivation enough for most. :)

I have to add that people in this country seem to be generally bad at managing their money. I'm from England originally and over there you get paid on a monthly basis, and a lot of bills are quarterly and not monthly like they are in the states. When explaining this to to my new American co-workers, they were amazed that you could live like this! The surprise was that you could easily just spend all your paycheck in one week and then have nothing for THREE weeks as opposed to spending all your paycheck in one week and then only having to scrimp for ONE week! It's a sad fact that most people live paycheck to paycheck and so things are made easier when the paychecks are closer together.

Honestly, I'm waiting for the day when you get billed daily through some kind of low overhead "micro billing" system. Paychecks would have to move to this kind of system too. It might not be a bad idea actually - it would prevent people feeling rich when they got paid, when in fact they're as poor as they were the day before.

Beebo, you make a great point about not saving enough.

The problem is that with HEW/MEWs & HELOCs, people are not saving anyway. The savings come from appreciation (not from paying down debt), but as well all know, many have already spent that appreciation by cashing out. If debt is not paid down, the "forced savings" you're alluding to is illusory.

Public policy should be to encourage/teach the public to save, not to buy overpriced assets.

Assuming housing prices stay constant for the next 3 years, a middle class family in San Diego could save enough to pay for the college eduction of a child by opting to rent rather than to buy. They could then buy in later years when prices are sane. I wish the public would carefully consider their options rather than blindly follow the herd.

carlislematthew, your comments make me recall a situation when I was a financial manager for a company where I proposed that we have monthly pay for salaried employees and bi-weekly pay for hourly employees to save the trouble of weekly payroll processing. I proposed that we pay IN ADVANCE, then adjust differences in arrears as necessary.

I had a revolt and we had to scrap the proposal. Can you imagine that people did not like to be paid IN ADVANCE (like getting paid on the 1st of October for the whole month of October)?!

With that kind of logic, I'm not surprised that our politicians and businesses can pull the wool over our eyes.

Perry - That is exactly what I am doing myself. I was in a 7 year interest only ARM and sold earlier this year. I'm now earning 6%+ on my proceeds and sending the earnings into 529 plans for my kids and maxing out our IRAs. I caught flak from family for selling and people generally considered me a fool at the time. Even when I explained about the college and retirement savings I received no love.

Further validation that I made the right decision came this week in the form of a reduced price on my old neighbors house. It is directly next door to the one we sold, 150 sqft. bigger with similar upgrades and is now selling for $100,000 less than our sales price.

I had a revolt and we had to scrap the proposal. Can you imagine that people did not like to be paid IN ADVANCE (like getting paid on the 1st of October for the whole month of October)?!

Wow. I guess this points to the admission of these people that they would be less able to manage their finances if you made the change? Did the employees give a reason why they didn't like the proposal? Please don't say it was "we don't want to get paid less"!

Rules of thumb for media.

The back and forth between Perry and noone was good, but if someone as thoughtful as noone forgets to include important parts of the make vs. buy analysis (e.g. opportunity cost of down payment), I think we can all understand that others are likely making financial decisions in the dark.

Now that some in the industry are arguing that the market is getting back to "normal," I'm reminded of some rules of thumb from many years ago, when things were "normal." If there are any journalists reading, you can probably repurpose some stories from ~25 years ago with the following rules of thumb:

1. Don't buy a house unless you plan to live in it for at least 7 years. Otherwise, there's a good possibility you won't make up for your closing and other transaction costs. Noone's analysis above more-or-less cooroborates that this is in the ballpark.

2. Don't spend more than 25% of your after-tax income monthly on housing. Otherwise, you won't have enough money to have a life, let alone a safety net. This was later raised to 30%, I believe in the late 1980s or early 1990s.

3. The full monthly cost of owning a house is roughtly 1% of the price of the house. This should be the starting point for your rent vs. buy analysis. This includes mortgage payments, taxes, insurance, maintenance, lost opportunity cost of down payment, tax benefits, transaction costs, etc. Don't be blinded by one or two financial benefits of owning a house, e.g. tax benefits or "throwing away money," without considering all dozen or so factors. Perry's analysis above more-or-less corroborates that this is in the ballpark.

----

There are some reasons why these rules of thumb might be too conservative for this millenium. On the other hand, there are other arguments why these might not be conservative enough given the current environment. Taken together, I think all-in-all they're probably good for their purpose as rules-of-thumb. On the one hand, for example, real estate had been going up faster lately. And, the market might be more competitive in some regions because of a larger population and easier credit. On the other hand, from about 1980 to 2005 (25 years), interest rates had been almost consistently decreasing to a point (~1%) where they realistically couldn't go any lower. Also, the baby boomers for the past 25 years have been in their peak money making years. Beginning in 2008 (2011?), they'll be retiring in larger batches.

Even if the (7, 25, 1) rules-of-thumb aren't the exact numbers, having similar rules-of-thumb would be helpful for many people. And, debates about the exact figures could more easily be translated to have mass appeal. Worth having as a separate, new forum topic?

A good friend of mine, a realtor, said now is a good time to buy, because months supply is over 6, meaning it's a buyer's market. There you go, it's a good time to buy! (Never mind that prices will keep dropping as months supply rises from today's 10 to 15, 20, even 25 or beyond, and prices will keep dropping.)

Perry -

You're right that a lot of people have spent their appreciation. You wouldn't believe how many people I see who have say, bought a house in Clairemont 10-15 years ago for $150,000, which is now worth $500,000, but the problem is they owe $400,000 on it. You look around the house, and they sure haven't put the money into their house. Where did it go? Hopefully into something partially constructive or productive, like a college education or into a business, but they most likely just blew it.

I talked to a guy in his 50's, who said his house is going to be his retirement. He wants to sell it in 5 years. We've probably got millions of Americans who spent all their equity (as Steve explained), got the bigger loans to prove it, and are thinking the appreciation will continue to fund their retirement. We're going to have a wave of bankruptcies and very poor elderly.

Yep, you're right, PS.

A thought that I've always had is that Social Security has done nothing but break down the relationship between generations: I don't inquire as to my parents' finances because I pay my taxes and my taxes go to my parents (in the form of Social Security).

But, as Bernanke has been strongly pointing out, we're going to have to make choices: higher taxes, lower benefits, pushed out retirement age, etc., because the numbers just don't add up.

I think that we should scrap Social Security, means test it (i.e., only for poor folks), and call it welfare. I'm happy to be responsible for my parents, instead of the government being responsible for my parents.

Hello,

New user here. Though I've been skulking around for a bit.

What I have found interesting about this thread is that there is, after a fashion, a paradigm shift affecting even those talking sensibly about real estate. Somehow, and I don't know when, houses have become commodities rather than staples like milk, eggs & bread. Yes, property has always had it's place in the average families wealth creation. Houses during my formative years were a means to an end, and any focused discussion about 'investment' potential, would have been viewed as outright strange. A house was where you raised a family and slowly built up some equity. It gave you security and pleasure - not a lottery ticket.

But the real point I'm trying to make, is that even though a number of people (including me) wish to return housing to it's rightful place as a home rather than an investment, the paradigm has shifted beneath our feet. The 20% down - 30 year amortization mantra is now poised as the pinnacle of responsible borrowing and a prudent standard. Thus, without even realizing it, our thinking inflates prices.

To myself, a 30 year obligation is a statement that someone is either very young (& understandably stretching themselves but optimistic that their income will grow to fill the gap) or very reckless. The interest differential on a 25 versus a 30 year amortization is staggering.

For those individuals looking at a house that requires 30 years of payments, quite frankly, you're out of your league. The simple and implicit answer is: No, you cannot afford it.

Borrowing, per se, isn't bad. But the amortization is a killer. I'd suggest that the goal should be 20 years - or less if you can manage it. Taking on debt is child's play - reducing it is the work of a lifetime.

As I see things, the issue which transcends this boom is not how much we can borrow. But for how long? And why?

I agree with you jg on social security. In my view, retirement simply means waiting for death. That was fine when life expectancy was low.

I plan to work for as long as I'm healthy enough. I may not work full time, but work I shall.

Haggis, you made an interesting comment. Only when I moved to the US did I hear about 30-year loans. In France, the standard is 15 or 20 years. I do not know anyone who has a 30-year mortgage in France. Since I moved here, I bought 2 properties, 1 in FL with a 30-year mortgage, sold it when I moved to NYC, and a second one in NYC with 5-year fixed and 25-year adjustable, just sold when I recently moved to San Diego.

My point is that I was never offered a 15-year mortgage when inquiring about loans, I had to ask to get the information. People just assume that you will get a 30-year mortgage. This was probably necessary when housing was overvalued in the recent years, but I think a fair price should consider the payment on a 15 or 20-year mortgage, not a 30-year one.

Something I find interesting about 30 year loans is that they're not just aimed at young people. To me it seems that a 30 year loan only makes sense if you're 35 or much younger, otherwise you'll never pay it off! (let's not even discuss 40 year loans)

The shift in judgement is that houses are *not* just things to pay off, they are retirement savings and the bigger chunk you can get hold of NOW, the more lavish a lifestyle you will have when you retire. If you still owe money on your house when you retire, that doesn't matter because it will be worth 40 million bucks!!!

There are too many people that think their house is their retirement. They looked at the last 4 years and extrapolated that out for another 20 years.