Piggington Jumps the Shark

Submitted by Rich Toscano on January 29, 2012 - 11:39pm
I have bought a house in San Diego.  I'm also going to start putting up guest posts by Ted McGinley.

This (the house buying part) shouldn't be a huge shock for people who've been reading the site of late, because I've talked a lot about how it makes sense to buy in certain situations.  That said, I will briefly outline my thought process here.

After the recent leg down in interest rates, monthly payments are the lowest compared to incomes and rents than they've been in the history of the data, and are quite dramatically below their median historical levels:



I frequently point out that when it comes to determining whether homes are overvalued or undervalued, the price-based ratios are far more important than payment-based ratios.  However, as I discussed in this article, an individual buyer should be more interested in the expensiveness of the monthly payment, rather than the purchase price, if he or she is financing most of the purchase and intends to (or is at least able to) keep the home indefinitely.

A buyer in these circumstances is not only locking in rock-bottom monthly payments, but, crucially, is doing so ahead of what I believe will be a period of unusually high inflation.

Now, I don't want to turn this into a big discussion on the something-flation debate, because that topic been thoroughly beaten to death elsewhere on this site as well as on my "day job" site, and it is beside the central point of this article.  Suffice it to say that I consider it a high-confidence forecast that the dollar is going to lose a lot of purchasing power in the years ahead, because nominal incomes -- and thus prices, including those of rents and maybe even houses, a little -- must be made to rise (in excess of any plausible level of economic growth, i.e., via inflation) if the country is to be able to continue servicing its tremendous and growing debt.

If this outlook is correct, as I believe it is, then today's ultra-low rates make this an ideal time to take out a chunky 30-year fixed mortgage, and to sit back and let inflation hew away at the real value of the mortgage and the monthly payments over the years to come.

So, the missus and I went out looking for homes.  We only found one in our price range, a single family house in Bay Park, that we thought was awesome enough to be a long-term home.  So we made an offer, got a loan with as low a down payment as we could get away with, and have now re-joined the ranks of the titular Landed Poor.

And now I will attempt to anticipate some questions:

Q: Does this mean you think this is the bottom for home prices?

A. Not really.  I don't know when the bottom will be, but it really doesn't matter all that much as I've financed most of the property and I'm more interested in minimizing monthly payments than the purchase price.  For what it's worth, my (not very high-confidence) prediction on home prices is that valuations will continue to slowly decline for a while, but nominal prices will kind of bounce along and not do anything too dramatic in either direction any time soon (barring an interest rate spike... see 3 questions down).

Q: OK, does this mean you think this is the bottom for monthly payments?

A. I suspect that it's awfully close, at least in terms of level (I have less of an opinion on duration).  But my investing philosophy is that you shouldn't get too caught up on catching the exact top or bottom, because it's impossible to do so with any reliability.  If something is a great deal, you can be greedy and wait for it to become a super-great deal -- but there's a good chance that's not going to happen, leaving the possibility that the train will leave the station without you.  I believe that long-term investing success (and far lower stress levels) will come from being disciplined about buying things that are cheap and selling things that are expensive, not by getting overly worked up about whether you caught the exact peak or trough.

I sat out an inflation-adjusted home price decline of almost 50%, and now I'm buying at a time when prices are cheaper than normal and monthly payments at 45% below their historical median.  That's close enough for me.

Q: Monthly payments may be cheap, but homes are still overpriced.

A. Not so.  Not in the aggregate, anyway:



As of November, San Diego homes were 10% undervalued based on the historical ratio of home prices to San Diego incomes.   Of course, individual markets may vary from this aggregate figure, and there are always issues with even the best price indicators, so buyers should (and we did) verify that their target homes are reasonably priced compared to area rents.  On the whole, however, the argument that San Diego homes are overpriced is not supported by the data.

Q: Won't interest rates go up a lot, and won't that push down home prices?

A. Yes, it's certainly possible that rates could rise a lot, possibly to a shocking degree.  And this could indeed put downward pressure on home prices.  There's actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors).  However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.

But recall that I am more concerned with minimizing monthly payments than the purchase price.  If rates rose enough to really impact prices, it's likely that those higher rates would have affected monthly payments even more.  So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.

Q: Ted McGinley was president of the Alpha Betas.  Don't you think you're more Tri-Lamb material?  Consider the following:



A. That's just mean.

(category: )

Submitted by dimmer on January 30, 2012 - 1:10am.

I appreciate you coming out of your mortgaged closets about the purchase. Congratulations. I bought in June 2011 for the same exact reasons and I will probably refinance soon in order to get the current lower rates. It's comforting to know that whatever happens to rent prices or the value of the dollar, my mortgage will never increase.

And Bay Park is a great neighborhood, I wish I could have afforded a house there.

Submitted by CA renter on January 30, 2012 - 3:38am.

A big congratulations to you both! :)

How do you like being homeowners? Is it better than expected after all these years (like scaredy's purchase)?

Nobody can ever say that you didn't do your homework regarding your purchase, and you were smart to mortgage as much as possible, whether we get inflation or deflation -- locking in payments if we get inflation, and having money on the side if we get deflation.

Your analysis is spot-on WRT payments...not to mention the fact that the govt/Fed can prop up prices long enough to diminish the "savings" from buying at a lower price because of rent paid while "bubble-sitting."

I can't believe you actually did it!

Nerds rule!!!!!! :)

Submitted by sdrealtor on January 30, 2012 - 9:35am.

Congrats on the purchase. While you probably felt you had to include a personal justification for you choice you owe no one an explanation. Your blog has helped countless people avoid economic calamity and that makes you a bit of a hero in my eyes. You did what you feel is right for yourselves. That's good enough me, should be good enough for others and if not, that's their problem not yours. Nicely done sir!

Submitted by afx114 on January 30, 2012 - 10:13am.
Submitted by FormerSanDiegan on January 30, 2012 - 10:13am.

Traitor !
Just kidding, you can hang with the Alpha Betas if you want.

On the house thing, though, nice work. Got views ?
You ended up in my old 'hood. I miss it, want to move back to Bay Park at retirement in 10 (one can hope, right?) or 20 years.
I guess the only downside is that now when you use the term "Landed Poor" it might be taken slightly differently and you also may have lost your last shred of credibility with the perma-bears (I guess that's not a bad thing).

Good Luck !

Submitted by bearishgurl on January 30, 2012 - 10:20am.

Congrats on your recent purchase, Rich! Agree with dimmer that Bay Park is a great area for many reasons and you will not regret owning and living there!!

Submitted by speaker on January 30, 2012 - 10:50am.

It's safe to buy a house, now!?It's safe to buy a house, now!?

Submitted by speaker on January 30, 2012 - 10:50am.

NEERRRRDSS!!!!!NEERRRRDSS!!!!!

Submitted by Rich Toscano on January 30, 2012 - 11:31am.

Thanks everyone.

CAR - Thank you… yes, it's really be nice to be "in control" once again, and able to completely dial the place in. That's appealing for someone whose main goal is to never leave the house. ;-)

SDR - Thanks for the sentiment… I agree, but I've given the decision a lot of thought and I hoped it might be helpful to some people if I explained my rationale.

FSD - Yes, we have a very nice view of Mission Bay.

afx and speaker -- With the inclusion of both nuke the fridge and Ogre references, this thread is now complete!

Submitted by Rich Toscano on January 30, 2012 - 11:31am.

Thanks everyone.

CAR - Thank you… yes, it's really be nice to be "in control" once again, and able to completely dial the place in. That's appealing for someone whose main goal is to never leave the house. ;-)

SDR - Thanks for the sentiment… I agree, but I've given the decision a lot of thought and I hoped it might be helpful to some people if I explained my rationale.

FSD - Yes, we have a very nice view of Mission Bay.

afx and speaker -- With the inclusion of both nuke the fridge and Ogre references, this thread is now complete!

Submitted by FormerSanDiegan on January 30, 2012 - 11:47am.

Toscano Jumps the Shark!Toscano Jumps the Shark!

Submitted by urbanrealtor on January 30, 2012 - 1:07pm.

FormerSanDiegan wrote:
Toscano Jumps the Shark!Toscano Jumps the Shark!

The animatronic corpse of Harold Akers will come get you there.
He will show up in your living room standing behind you while you are watching tv and ask in a wheezy midwestern accent "Rich, clean up your room".

Submitted by SD Realtor on January 30, 2012 - 1:38pm.

Great job Rich!

I think we would be extremely hard pressed to find any PIGGs out there who have not yet purchased a home.

Now what are we gonna talk about?

Submitted by scaredyclassic on January 30, 2012 - 2:33pm.

I bought a persimmon tree an apricot tree and an Asian pear tree this weekend.

And also a lot of cacti.

I would not have bought those things had I not bought a house.

I suppose we could talk about landscaping.

I appreciate your q and a above.

Sounds reasonable.

Submitted by CAwireman on January 30, 2012 - 2:41pm.

Rich,

Firstly, congrats to you both.

Secondly, thanks for the website that helped me and my wife avoid the bubble, and take advantage of successfully timing the market.

In the 2003/2004 time frame I began thinking along the same lines that you were and began looking for info on real estate, because I had no understanding of it aside from buying a place in LA during the early nineties and losing about 19 % of its value. Once bitten, twice shy, and then some.

Holding off for as long as we did was a constant battle with the missus. But now, even she has come around to my way of thinking - waiting was worth it.

Best to you both and big, big thanks for creating a forum for folks like us to benefit from!

Submitted by woodrow on January 30, 2012 - 2:46pm.

Congrats Rich.

@ SD Realtor: You'd be surprised. Some of us are still lying in the weeds, waiting to pounce.

Submitted by SD Realtor on January 30, 2012 - 3:03pm.

woodrow there is nothing wrong with waiting in the weeds. As long as you know what you are waiting for then you are fine. Personally I think that for those who are heavy with cash waiting for interest rates to run up very high is a good idea. That may take quite awhile but there is nothing wrong with that strategy.

Submitted by temeculaguy on January 30, 2012 - 5:24pm.

I'm wondering how long it takes the main stream media or a clever real estate marketing firm to capatalize on this development. Diana Olick should write an article with the title "pioneer housing bubble blogger buys home." Since I'm sure she reads this blog and has a secret crush on me, I'll consider it a wink my way if that is the title of the article.

But seriously, how many NAR types have you mowed down over the years, at the very least Chamberlain will mention this on the radio as evidence that it's now time to buy. Only this time, the data will be on their side.

Congrats on the purchase! It's been a long road, thanks for letting us ride along.

p.s., I emailed Diana a link to this thread, I couldn't help it.

Submitted by sdduuuude on January 30, 2012 - 5:56pm.

This is such big news, someone told me in the hall before I read it here ! I didn't even know this person was a reader.

I have been shopping for move-up properties in Carmel Valley lately. Still likely 6 to 24 months away for me, but I'm seeing plenty of things I could both live in and afford.

There is something to be said for the addage that "The right time to buy a house is when you are ready." so whether or not you timed it perfectly is not significant. It's close enough and, it seems, you are ready.

I love Bay Park. Most people in Clairemont wish they lived in either Bay Park or UC.

By the way, "Revenge of the Nerds" was filmed on campus at the University of Arizona.

Submitted by CafeMoto on January 30, 2012 - 6:46pm.

you should let all the piggs take you for a drink to celebrate at the HighDive (tho i've never actually been in there)! congrats man

Submitted by desmond on January 30, 2012 - 7:12pm.

Rich, in your situation that was a great buy. Here's a tip, before you call somebody to do some work on your house, ask yourself if you a smarter than the guy you are calling. btw, I asked McGinley what he thought of your purchase:

http://www.youtube.com/watch?v=Sm02Rbd7vVM

Submitted by ocrenter on January 30, 2012 - 11:15pm.

Rich, this is awesome news!!! This Piggington Indicator is probably the best buy signal than anything else out there. Especially the neighborhood as well. A view home in an established coastal neighborhood is much harder to find at a good price too. This is exactly how Piggs have acted over the last few years. Piggs in temecula started buying first, then gradually selected new but hard hit areas within the county, now penetrating into established highly sought after neighborhoods. I can almost envision a map of gradual movement of Pigg purchases from the inland/suburb moving toward the coast/center.

Now it is time to get to know your local home depot really really well. :) btw, does this also mean home improvement stores are now a "buy"?

And lastly... The Nerds do eventually triumph!!!

Submitted by sdrealtor on January 31, 2012 - 2:13am.

CafeMoto wrote:
you should let all the piggs take you for a drink to celebrate at the HighDive (tho i've never actually been in there)! congrats man

I'm taking Rich to Donovan's for dinner next December. The best part is I wont be picking up the tab. Another Pigg will have that honor on the losing end of a bet made about 5 years ago. Sometimes the realtors win too :)

Submitted by CA renter on January 31, 2012 - 3:32am.

sdrealtor wrote:
CafeMoto wrote:
you should let all the piggs take you for a drink to celebrate at the HighDive (tho i've never actually been in there)! congrats man

I'm taking Rich to Donovan's for dinner next December. The best part is I wont be picking up the tab. Another Pigg will have that honor on the losing end of a bet made about 5 years ago. Sometimes the realtors win too :)

LOL! We'll see about that. It's not over, yet!

I think all the bears have now jumped off the fence. Where will all the buyers come from? ;)

It would be my pleasure to pick up Rich's tab, no matter who wins. He's been the source of sanity over the years, and we are forever grateful to him for all the effort he's put into gathering and analyzing the data and maintaining this blog.

Submitted by moneymaker on January 31, 2012 - 4:13am.

Can I come park my RV in front of your house? Just kidding. Guess you'll be going to Costco ,Home improvement stores a lot. Do you have a pickup yet? Congratulations Rich! A house 2 doors down from me just went into escrow the other day. Makes one wonder with rents above mortgages in some places if silent seconds might be coming into fashion.

Submitted by bake on January 31, 2012 - 9:56am.

Congrats Rich! I lived in Bay Park for years and loved it, hope you do too!

Submitted by FormerSanDiegan on January 31, 2012 - 11:29am.

My Bay Park favorites:

Same Old Grind (Coffee)
Mountain Mike's Pizza
Siesel's Meats
Summer Nights @ 9:50 pm

... and that Italian place that used to be at Burgener & Clairemont Drive (next to 99 cent store), but I think it closed down a few years ago.

Submitted by Jazzman on January 31, 2012 - 12:45pm.

I'm not sure what qualifies one to be a Pigg, but I certainly haven't bought a home yet. However, I have no reason to malign anyone who has. I guess it's all about taking advantage of the unusual circumstances, rather than about principles. Being able to buy a home with very little down payment, with very cheap credit was what everyone railed against during the bubble. Now it's OK because we have a better handle on it? I can't help but keep asking myself how it's all been made possible.

Good luck Rich. I also owe a debt of gratitude.

Submitted by ctr70 on January 31, 2012 - 12:54pm.

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

Submitted by Rich Toscano on January 31, 2012 - 1:08pm.

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

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

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

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