San Diego Housing Bubble News and Analysis

No buyers!

The overwhelming majority of the population is either a current/former FB'er, unemployed (or about to be) or already tied to a mortgage.

I've said for years that the real scarce commodity is buyers, not land, when discussing RE investing.

The miserly Pigg's like myself with cash, job stability and good credit are going to wait for the absolute bottom. I also prefer renting for the moment as I'm busy with enough projects that I don't have time to tend to a house.

My prediction for the last couple years was to watch for 1997 pricing as a bottom, if it keeps dropping watch for 1989.

If its *still* dropping on the low end I honestly have no idea how far this is going to go. Maybe the IE is going to get plowed under, like Cramer has suggested.

For san diego, it is a clusterf*ck this spring, people are crawling out of the woodwork shopping for houses, it doesn't seem like 97 prices will be any time soon :(

IIRC Fannie and Freddie want 30% down for most investment properties. Plus it's reasonable to assume that rents will stay flat or decline in many markets.

Still it sounds like a good deal ... just not an absolute no-brainer IMO.

Your own words are the clue to your quandry. I've read enough of your posts to know that you TG, are an analytic type of guy. You like to look at the numbers, the data and make rational decisions. (You like to drink good wine and make wise guy remarks late at night which make us all laugh too!) All good and well, but you and most economists today suffer from the belief that most people are like you. They are not. They listen to what they hear at the hair salon, or what they hear while watching Johnny play soccer, and they trust that. Data just confuses them.

The point being that the vast majority of people are not "rational consumers" and any analysis or economics based on that is deeply flawed. This expectation that people would be rational is what is hindering your understanding of the bubble going up, and why you're going to misjudge the overshoot that is coming.

XBoxBoy

Got data? Some of the more-slummy areas seem to be getting fairly beat up from what I've seen.

So what do you suggest? You are quite right, numbers are my friends, they give me comfort. Numbers never confuse me, people do. I made compelling arguments to people why 2003-2007 was not a good time to buy, yet they did so in droves. I can make a compelling argument why 2009-2012 will be a good time to buy, but they will run away. 2005 had great employment numbers and the economy was roaring, that was bad for buying, good for selling. 2009 will have high unemployment and a tanking economy, bad for selling, good for buying. Good is bad, bad is good, whatever the talk is at the soccer field is, do the opposite.

Let's just say you paid cash, remove the leverage play. When that house was 260k in 2003, the rent was the same, lets say 1200 x 12 months, 14,400 a year return, lets go 4,400 for taxes, maint and emergencies. The return was 10k on 260k, about 4% return for a lot of risk and work, in 2005 it was probably worth over 300k, rate would be closer to 3%, at that time you could get those returns many other places. They were buying the appreciation potential, usually losing money for the right to bet on it. Now the cash outlay would be 110k, same 14400 annual return, the 4400 should be more than enough (1k taxes, 600 insurance, leaves 3k a year for maint or even a 10-15% drop in rents) so the net return is closer to 10% and that return cannot be found as easily today other places, certainly not in stocks or bonds today. Completely ignoring location, future appreciation, etc. the pure return exceeds other available investments and the leverage return is twice the cost of money. You used to pay them to leverage, now they pay you to leverage, how does that make it to the hair salon gossip agenda. If it were in texas or arkansas, I'd look at it. I have a similar feeling about stocks these days, when the dow breaks below 6k, I think I'm going "all in." But back to these ever present cash positive rentals, they have another potential positive beyond the pure return, they are a hedge against the very real posiblity of inflation, something I think will be more likely to
happen than guns, riots and canned foods, but that's me, I'm a betting man.

You make a good case. You should buy it.

The only thing I can see that might be holding that property back is the large powerlines along the back fence.

But if its going to be a rental, who cares? That only might come into play if you ever try and sell it down the road.

If your numbers are right, go for it. But I'd do a test run on renting it out first. Perhaps ads in Craigslist for the amount and area...see how much interest it generates. And also take an honest look around at the local employment sensativity to more lay-offs.

I follow several very popular RE investor groups. All of them are doing exactly what you're contemplating here. All over the country. NorCal, SoCal, Phoenix, Florida....

The only caveat is being a landlord and keeping a house rented out. A few empty months or FB tenants can ruin your ROI calculations as well as make your life not fun.

i have been following the low end of temecula to lvie in, not to rent out. I really love the idea of having a tiny mortgage payment on a house that is around 1:1 with my income. i am seeing other100k type houses around temecula but theya re all much older houses, and small. in terms of generating future wealth, i think the possibilities ofliving a housing-spartan lifestyle ina small old house and saving the balance in a down 6k djia market outweigh the poential from riches being a landlord. if only i can talk my wife into it...

Isn't there also a huge glut of inventory in Temecula due to over-building?

i suppose. if prices were halved, there probably wouldnt be a glut though. it's only glutty because of the price.

TG. I've been doing the same sort of research in Temecula (I'm a Temecula guy also). I am intrigued by some of the numbers as well. I'm eager to get into the game and own a small income property or two, but I don't want to be hasty either.

One of my concerns is the rental market and vacancy rates. It is definitely a buyer's market for renters since there are many new ~3000 sq ft houses renting for under $2K/month. So I don't know if $1100-$1300 for an older 1300 sq. ft. property will be a sustainable rate in the long run. But budgets are tight and there are not as many smaller properties, so it may turn out that your example may hit the sweet spot for income investments.

I've done quite a few spreadsheets of my own. If you'd like to compare notes, email me at: M8R-0ak7dg [at] mailinator [dot] com

From What I have been seeing all the decent ones get snapped up as soon as they hit the MLS as REO (have offers over list) (were talking hours here as well).

the old homes hang out awhile as it's not something most are looking for to buy (to rent maybe) but not to buy.

Also I just heard Earlier this week Temecula is still one of the fastest growing area’s in SoCal (not much over building going on right now)

My two cents, (grab the bargains while they last) oh and I think I used to hear the same things in 1990 , you know Japan going to rule the world, U.S.A. to become Mexico. world to end in 2000 the list goes on.

Oh I think Gold was 1000/oz in the eighties as well before it dropped down to around 300/oz .

I'm not suggesting anything as far as buy or not buy this property. (And to be honest I don't know that my opinion on that would be worth anything anyway, or that you would need it)

If I'm suggesting anything, it's that you step back and learn to consider more than the numbers. Yes, I fully understand, in business numbers are the most important thing. (Trust me on this, I ran my own very successful business for several years and I'm just as enamored with numbers and data as you are.)

But business and economics is ultimately driven by people, their emotions and their relationships. If you don't consider just how irrational people can be then you aren't getting a complete picture. That might have little bearing on your immediate concern about whether to buy or not buy this property, but if you start considering people more, you would be better at understanding whether or not we will overcorrect on the way down. And that is what I thought you were really asking. Sure the numbers currently pencil out, but will we overshoot and will you be able to do better in a year or two? There's the question.

XBoxBoy

I hear that!

Whenever someone talks about China becoming our new overlords, I always remember that it was supposed to be the Japanese first.

Maybe its a cultural thing?

"My prediction for the last couple years was to watch for 1997 pricing as a bottom, if it keeps dropping watch for 1989. "

Re Prices were most likly lower in 1997 than 1989 in So Cal.

I was thinking more about nationally, but I appreciate the insight!

I think you have the right focus TG,
I bought a house in Normal Heights in 92 that with 10k in materials and some elbow grease rented for nearly twice the mortgage w/impounds.The point there is to show how far it was before the trough.People thinking comfort homes were getting in trouble and people thinking economics were doing O.K. and in some cases they were doing what I was doing many times over, with crews doing the grunt work.

I am not saying it absolutely isn't the end of the world, but if it is what difference does it make that you dumped some change into a few rentals? The odds are against the end of the world and favor you in every other way with that kind of initial cash flow.

svelte-actually that isn't the one I'm looking at, but the math is the same, I never actually post the exact ones, I'm too afraid another pigg will beat me so I post ones that are as close as possible then modify the numners when I post the analysis, but thanks for the heads up anyway.

peter-I'm shocked that supported the idea, you are one the bears and if yo support it, then i may be onto something. I did what you said and did my due diligence and decided to wait. Rents are pretty much the same but I drove by my old rental, it's still vacant after two months. It's a different management company that had the sign out front and I'm pretty sure someone moved in just after I left so I'm not sure what happened. I do know what my landlord had paid and they were losing money at the rent I was paying them, lots of it, so I'm not sure if they can lower it even $100 to stay with the trend. It was the only one vacant out of a hundred units so the jury is out, but I obviously need to look into this further.

scardeycat-I almost did the same thing, sometimes I wish I had. I remember finding ubercheap places and calculating a 5 year mortgage, I just couldn't get the kids to get out of the car and look at it, I don't have a spouse to convince but in the end couldn't convince myself, yet I loved the idea. I think you need to get a bunch of friends together and take over a cheap neighborhood, the biggest drawback wasn't the age and the size, it was the neighbors.

kewp, there hasn't been hardly anything built in a while, new construction has pretty much been shut down for a year. Forbes listed Temecula and Murrieta as two of top 5 markets in the country for the high sales due to the price drops, Nor is right about the activity, bread last longer at the store than houses these days, listings can't be measured in days, but should be in hours sometimes. The point of the thread was the smaller places in cruddier hoods more than 20 years old without hoa's are being overlooked and as Russell pointed out from his past experience, sometimes that is where the better investments are located. If you look at my example, prices are more than half off, that is why the glut isn't there. I ran my old three car garage monitor formula, inventory is falling. Waiting hawk, as always is right, there really is no difference between mid 90's and late 80's here.

My biggest fear is maintenance on a 20-30 year old low end house that probably wasn't built well to begin with, combining all the factors, I think I'll just watch this for the next year and not act to hastily and I'll e-mail pri-dk and compare notes, or rather just steal his, since i have only just begun taking notes.

Nor is right about the activity, bread last longer at the store than houses these days, listings can't be measured in days, but should be in hours sometimes.

How many of those homes are being "snapped up" by other investors who are looking at the same numbers you are? I'm hearing enough stories to believe that many of today's sales are NOT to owner-occupants, but to investors. This is potential "pent-up" supply, either as rentals or new foreclosures/sales down the road that will drop the value of your new rental. This could reduce rents, too, because people will opt to buy the new, cheap houses instead of rent.

The point of the thread was the smaller places in cruddier hoods more than 20 years old without hoa's are being overlooked and as Russell pointed out from his past experience, sometimes that is where the better investments are located. If you look at my example, prices are more than half off, that is why the glut isn't there.

Agree that these homes are the bread-and-butter of the smart investors. There will ALWAYS be a demand for low-priced housing, no matter what the economy does, and dollar-for-dollar, even if prices do drop, your potential loss is less than if you would have bought a $500K house.

I think it's a good idea to wait. Good luck, either way. :)

I've made very good money in RE. My bearish sentiment is only when the numbers or the trend stinks. The trend is against you right now. But if the numbers are good enough, you can beat the trend. If you can cash flow enough positive each month...you've got a fairly good cushion for future problems. Being a landlord is a WORLD unto itself. You've got your analysis down, so I'd start learning the tricks to being a LL, if I were you. A guy named Mike Cantu is the best I've seen. You may want to Google him to see if you can learn from him.

Again, I'd really sus out the market to make sure you can keep the unit occupied with reliable tenants for the next 5 years. Few people are good at being LL's and the end-game is usually to sell the place at big profit. Some want to own free and clear and have a cash cow for decades. But that's a real long-term strategy you may not be willing to live through.

You might do OK with renters at that level: what many renters in my hood are doing is renting out a house using (1) room, and then sublet the rest of the house.

So in my POS ghetto hood we now have at least (3) dorm houses along our street.

So each person/family probably has to come up with $300-400/month (if that...) - I'm sure even welfare will cover that.

Temecula = the future Escondido.

A little on these so-called investors: Around 1930-1931 many were urged to buy or invest in houses at "historically" low prices, and many did.

By 1932/1933 many of those buyers were on the streets and in soup lines...

Don't know much about Temecula, but the decline in rents seems to be accelerating in my area. A month or so ago, two bedrooms seem to be about $150 or so cheaper than comparable places last year. Now it seems more like $300 cheaper.

It wouldn't surprise me to see some of the apartment complexes get foreclosed upon.

I will say one thing, I follow Craigslist as a gauge for asking prices and number of available units. I have noticed a marked increase in rooms for rent within homes, "studios attached to homes" and a general lowering of rents all over CA. There's a definite increase in density of people/unit of rental housing going on. Hence the lowering of rents as well. I think this is way more than a seasonal adjustment.

In my humble opinion, this is definitely not 1990. More like 1929. Or God help us, 1873.

This is the very beginning of a global synchronous downturn which much of the global media is already calling a depression.

All bets are off, guys and girls. I would counsel holding onto cash at least through the fall, and keep an eye on your banks stock price and balance sheet.

IMHO.

My point, exactly, Paramount.

Some of the recently built for sale complexes are already being rented with agreement from the lender that financed the project. Instead of closing out the loan with sales, or more likely foreclosing, the lender is getting payments from rents.

TG, I will start my reply with words from Warren Buffett in his latest shareholder letter: "The investment world has gone from underpricing risk to overpricing it. ... Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns."
That all said, I don't understand why you don't stick with your original mid 2010 timeframe and are eager to invest in a rental property. I'm in the same boat as you (i.e. bought last Dec and look to average down in the future), but I'm definitely not interested in buying a rental property right now.
For primary residence, I intentionally pulled the trigger earlier because I heard that inventory at the price bottom is usually terrible. The house that we bought met our top 5 criteria, and 8 out of 10 top 10 criteria. So I don't mind over-paying it a little bit as affordability is not an issue for me. (So far, it is working out OK. I have not found a single house that satisfy our top 5 criteria 2 months after a purchase. Inventory is not looking good here in Temecula) But for investment, you really want to squeeze the last potential profit, so why not wait until the bottom is formed?
Also, I don't agree the number in your post and I think you are clearly under-price the maintenance and management costs given it is a 20 years old house. Using my method, I think it yields 6% real return or 10% before inflation return. Yet, you omitted the costs to put the unit into habitable condition, so it could be lower. In this economy time, you could potentially just loan the money to the best companies in US at 10% (take GE as an example) and it is arguably much less headache. My personal opinion is that "real estate investment" is the wrong term. It should be called "real estate business". So on the minus side, the real estate is definitely less attractive than the index funds given it is a business that you have to manage (unlike the maintenance free index funds). It is only attractive because it produces a more steady income streams than the stock market, but if you are only in your early 40s, you shouldn't value steady income stream that much (I am in my early 30s, so I put even less weight on that).
The other thing to consider is liquidity in your own financial plan. I favor a financial plan that has modest near-term and middle-term financial obligations over one has excessive near-term obligations even though it promises higher potential return. After all, it is better to be safe than sorry. In my primary residence purchase, I could potentially lower my mortgage to 1x income or comfortably afford 15 years mortgage, but I choose the 30 years mortgage at a higher mortgage balance to lower my near-term obligations and increase my liquidity. That leaves the room for future rental property purchase, but still I don't think I have enough liquidity to support a rental property right now (assume the case the property failed to rent out at all, and one need enough emergency cash to carry both properties (PITI + maintenance) for 1 year). You may have more cash reserve than I do, but you should definitely pay attention to your cash flow given that you just forked out a large amount of cash in the last few months on the primary residence.

JMHO.

TG- Take a listen to this podcast:
http://www.tngacademy.com/mp3s/111-TNGRa...

Ward is a sharp guy with a plan that may be what you're looking for and dove tail into your area quite well.