San Diego Housing Bubble News and Analysis

This idea may not be met with applause but I say stay put. You pay 2k and get the tax benefit, 2k rent would actually cost you more. You've got a hedge bet in case we are all wrong but if we are not and you lose 20% value, so will your move up house. If things really tank, you can get the move up house without a jumbo and keep the starter as a rental. I say all three scenarios are covered by staying put and selling now may be a little late and placing all your bets on one scenario, a year or two ago it was a good play but sales are slower now. The other thing to consider is that you don't have kids yet and you both work, getting abigger house and then having kids doubles your expenses and halves your income, if you can afford your current house on one earners income you may want to extend your stay in the starter home. Having kids can be stressful enough, better to do it with a comfortable payment. Move up if things get real cheap and don't worry about it until they near school age, it's irrelevent to a baby where it lives as long as it has someone with them and that someone isn't pulling their hair out and taking meds because of the stress.

One of the problems with trying to sell now is that you are very likely to have to price your home below the current 'market' price to get it to move. That's not an easy thing for most people to do -- especially when you will be selling voluntarily. It's much easier psychologically to sell on the way up as you can price your home at the current market and then sell at an above market price.

You're in a tough situation. The housing market could still drop 40% from here. However, you may have to price your house 10% below market to get it to sell. I'm not sure what I would do in your spot. Probably stay put.

I recommend that you go to Borders and read the book called The Paradox of Choice to give you some great insight into the mechanisms that are at play when we humans make decisions. You may come away convinced that buying a new house will not really make you that much happier in the long run. Considering your situation, I would recommend doing everything possible to remain content where you are, especially in light of the current market conditions.

For you, selling now is like going to a poker game with acquaintances you think you might beat. You figure you have a 75% chance of walking away with more money than you bring. So you bring $300. Maybe you'll bring back $600, maybe $100. You're not too worried.

Now multiply the numbers by $1000. Do you feel just as unworried, and as ready to play the hands and make the bets and enjoy the game?

You have to think about your own tolerance for risk.

Patient renter in OC

At this point,given your described scenario, I like the idea of saving this property for a long term rental/part of your nest egg, as long as you can stave off a period of under-employment or your jobs are really secure. Buy your home of choice when timing is good. The current house can be leveraged or sold to pay off your prefered houses if prices rebound. If they don't it will become a better and better source of income over the years. On the other hand banking more than a couple of grand looks pretty good. I would not sell and buy more house right now.
Best wishes

As bad as things might get, market timing is a tough business and generally not recommended with your primary residence.

Anecdotal story: The most risk tolerant person I know suggested to someone that they do the sell/wait/buy tactic for a vacation rental (Myrtle Beach, I think), when the prospective seller mentioned doing the same with his hugely appreciated NYC co-op the comment from Mr Risk Tolerant "You gotta be f--kin nuts!" (That's NY-speak for "I think that is a bad idea, my friend."

-one muggle

On the other hand banking more than a couple of grand looks pretty good.
Meant to say couple hundred grand.

Let me propose another scenario:

I suspect that you think your present house is worth around $450k because you say you have $270k in equity and your payments are only $2k per month including PITI and the kitchen sink.
If you hold on to your present house while the $700k dream house falls to the $420-$490k range over the next 3 to 4 years, your present home will then be worth $270k- $310k and your equity will be down to $100k-$125k.

If you can truly get $270k in clear equity out of your present home, I would run, not walk, to the nearest computer and get in touch with Redfin and aggressively price your house to move ASAP, even if you have to go $15-$20k under the competition in the neighborhood to do it, you will be far ahead in the long run. You can put that money in a CD and earn some safe interest while you're waiting to see how low the housing market will fall. One thing is for sure: Housing is NOT going back UP in SoCal anytime soon (with the possible exception of super-luxury homes that are bought by the very, very rich). When all of this finally settles, cash will be king and you will have a large amount of $$$$ to purchase that dream home.
BTW: I did part of this in 2005 when I was convinced that what is happening now......would happen. The only difference is that since I retired at the age of 54, I didn't have a job to keep me in CA so we moved to South Carolina where we're sitting comfortably and watching the mess unravel itself. When we're convinced it's done, we will sell our home here and move back. South Carolina and the majority of the south did not get caught in the high-house price frenzy like San Diego and the other bubble markets did so houses are relatively inexpensive and appreciate at a rate of 2-3% per year.

I think the prudent move would be as follows:

- Run your numbers through a rent vs buy calculator. Factor in EVERYTHING, your tax benefits by staying, other benefits like not having to pay HOA and additional homeowners insurance if you rent... etc...

- If you do plan to sell, be very REALISTIC about your sale. Your net will be sales price - commissions (listing side and buyers agent side) - sellers side closing costs (typically 1% of the sales price - additional credits or concessions the buyer may ask for (these are negotiable but as the market continues to tilt, buyers are asking for more) - prorated mortgage and property tax. Also the 1% estimate I gave on the sellers side are "typical" sellers side expenses such as splitting escrow 50/50, purchasing title insurance for the buyer, paying for the home warranty, paying for county transfer tax $1.10 for every $1000 of the sales price, paying for HOA doc prep, paying for natural hazard and zone disclosure... etc. You may incur more if you have major repair work or major termite damage or any sort of prepayment penalty on your loan.

The commissions you pay are all negotiable and up to you. You can go full service or you can do a for sale by owner or you can use a discount or selected service broker. I would suggest that the commission you offer to the buyers side be competitive with all of your competition in the area.

- If you do sell then take the proceeds and put them in a safe haven or at least a good portion of them. If you are POSITIVE you can make a better return then so bit it. I have a relatively large (by my standards but not by others here) sum of cash I have busted my butt for and 90% of it is in money market and cds... the other 10% is in the market. I don't get a sparkling return but I sleep at night regardless of the tilt of the market.

- I would encourage homeowners, especially young homeowners to do what Rustico said which is try to hold as many properties as you can as you move through life. Think about it. If you can do it 3 times then by the time you are 50 or 60 you have 3 rentals and they are paid off or close to it... Talk about an instant pension. Just make sure that although you will stay in the home, get to work and start saving money in as prudent as a manner as you can.

- The converse of that is that these are going to be different times. We could indeed have a dip the likes that we or I have never seen. Additionally we may be in a credit crunch situation such that leveraging your home you have lots of equity in (that is presently that you have equity in) may be difficult in the future. We don't know the lending climate and we don't know how much equity you will have in a few years.

- On a personal note I did indeed sell one of my rentals (condo in mission vallyey) a few months ago and put the cash away. In that short time the prices have moved down a few percentage points while the proceeds of the sale went into a cd.

Sorry if this post doesn't help you to decide. Just trying to throw in my two cents.

SD Realtor

I think you are too late to time the market, you had to sell itleast a year ago. Now you will just chase prices downward, and when you add that to the 6% it costs to sell including closing costs, I do not think you will be much ahead unless the biggest depression of all time hits. It could, but I am betting against it. Especially if you like your place and where you live.

Do not read those scare tactic articles from newspapers, most of those people have never made a dime, so why would you listen to their advice? I have made a nice living for awhile fading those people, as they are wrong a high percentage of the time.

Prices are coming down, there is no denying that, but for your scenario at this point you need a crash for it to pay off, larger than the early 90's one. I think we are already down 10 to 15% at this point, you will probably take a 5% hit now from where you think you can sell, to where you would actually sell. Add that to the 6% cost of doing so, and now you are more or less the equivalent of anywhere from 21 to 26% off the top. We may go further, but remember, prices are rigged upwards not downwards, so you are really betting against a very strong long term upward trend, and hoping for a greater than 25% pullback against it. Odds do not favor that happening.

Many in here think it is different this time, and they may be right, but I am not one of them.

Thanks all for your inputs.

Here are some points missing from my original post.

The equity estimate is based on most recent comps. In the past 2 months, three houses with exactly the same floorplan were sold for $550K, $555K and $567K (larger backyard). MLS shows 1 house pending (asking price $575K). Based on these comps, our home seems to be worth $550K (I am taking lowest of these comps although we have put in some upgrades).
Prices in my neighborhood have come down by 10% from the peak (summer 2005). I've considered 8% of selling price as costs (6% for agents, 1% closing costs, 1% for misc).

We have a 30yr fixed loan, so the $2K monthly cost is pretty much guaranteed for next 30 yrs if we stay put in current house (exceptions: small increments in PTax, Ins & HOA).

If we don't sell now, our concern is we might loose a big opportunity to cash out and invest it somewhere else rather than loosing equity.

Accidentally replied twice..

" If you can truly get $270k in clear equity out of your present home, I would run, not walk. "

I agree with ex-sd. Rent for a while then buy your dream house.

Your holding costs are still higher than comparable rent, so you would save money by renting PLUS you'll have a growing downpayment to put towards your "forever" home which you'll acquire at great discount, perhaps close to the selling price of your current home.

The only reason for owning is if your holding costs are subtantially LOWER than comparable rent making it a savings to own.

I did the calculation myself, that's the simple answer to that question. You want to preserve your standard of living while saving money. Think of it as "how can I have the same standard of living for the lowest cash outflow."

"If we don't sell now, our concern is we might loose a big opportunity to cash out and invest it somewhere else rather than loosing equity."

I think you just answered your own question no???

Also, watch the Lose Loose thing...undermines credibility.

sd_resident, it sounds like your analysis is conservative which is good. If you want it may be wise to built in more margin to your estimates given the fact that the lending climate is substantially more difficult now then it was 2 months ago. Also the fact that these closings occurred in the past two months indicates the homes were on the market in the spring or at least late spring. Are there any actives on the market currently?

Do you mind if I ask what part of town and if you are in a condo or a home? (Don't answer this part if you don't want to)

Chris made a valid point about chasing the market down. So you have to ask yourself what side of the downturn we are in, the beginning, middle or end. Also that question will vary (at least in my opinion) on where you live and what type of home you have. Also how fast has the neighborhood appreciated? Do you think many people around you are susceptible to distress (risky loan vehicles) etc? Another thing to remember is that there is time you need to account for to recover after the market bottoms out. So that time is also opportunity cost with respect to your investment. One thing you may want to do is run out some scenarios. Say over the next 3 years plot out a 7-10% depreciation and then a 4% appreciation to see how long it takes to get back to where you are. Play with the numbers (maybe 2 years instead of 3 and maybe 4 instead of 3. Also vary the depreciation rates) and see where you end up. Also compare that to say a very conservative investment of say 5% and then vary that investment... 3% to be ultra conservative and go up if you want to be risky...

It is one thing to ask opinions but when you run the numbers and have it in front of you sometimes that makes the decision easier.

We all have varying points of view here as you know. Is it conceivable for homes to go back to 2002 or 2001 prices? It could happen. Again it depends on where you are and what you have. I have seen 2003 prices in some areas already. In others I have seen much stronger resistance to the depreciation cycle.

"So you have to ask yourself what side of the downturn we are in, the beginning, middle or end." --SD R

Does anyone really believe this is anything but the beginning?
I know SD has been flat or negative (on some measures) since April 05(?), but the main body of the exploding souffle (aka the housing economy) has yet to arc over and succumb to the harsh mistress of gravity, let alone land with a satisfying splut. Me, I'm waiting for the splut.

(But I still worry about anyone gambling with their primary residence--especially people who need to ask for advice from a blog--no offense intended, but I know some fairly savvy people who still won't gamble their own home. If you still want to do it, just make sure that you can survive, financially and personally, any downsides--then good luck to you.)

-one muggle

In the end, only you & your wife can decide what is best for you but I think you already are aware that prices are going to fall. How much they will fall is up for debate. IMHO, the prices in SoCal will probably fall 30%+ in some areas like La Jolla, Del Mar and the other coastal towns................ 40%+ in areas like Tierrasanta, Chula Vista, San Marcos............and 50%+ in places like Temecula, Riverside/San Bernadino. I may be dead wrong but all the signs are there. Too many foreclosures that will eventually be sold to new buyers will set the standard for comps in the various areas and much tighter requirements for borrowers will weed out many people who "want" a home but simply can't afford it. If you read the various blogs and statistics from some of the bubble markets, you will see the same problem that San Diego is experiencing:
*Rising inventory of unsold homes
*Rising foreclosures
*Lower sales each month

All of these will force prices lower and lower until they reach a level where people can qualify for a mortgage. That's the way the market is supposed to work and it will eventually correct itself. The median priced house must be affordable by the median income or the market stops dead in it's tracks. Presently, it is not. Prices must go down. If not, there will be a much larger problem due to the majority of households being priced out of buying or renting if the exaggerated prices were to remain in effect. The median income household won’t even be able to rent anything more than tiny hovel in Bonsall if prices had continued the way they were. And for the investor: The rent has to cover the mortgage, insurance, and taxes................ AND show a profit.

BTW: You can sell your home in CA for a flat fee of only $4k + closing costs through Redfin. You don't have to pay a realtor 6%. If they had been in SD when I sold in 2005, I would have used Redfin. Back then, houses were selling within days of listing (if you had a really nice property) so I negotiated with several realtors and listed mine for only 4%. Of course, things have changed now with a glut of inventory on the market so if you didn't use Redfin, you would probably have to pay 6%. Good luck with your decision.

I would stay.

I agree with temeculaguy and Rustico.

Your timing on purchase was good. You bought a house you will own 24 years from now for less than monthly rent. Whatever it is worth at that point is a great bonus. If you had to move, you could rent it out and cover the expenses.

If you wanted to sell and buy back cheaper you have to have good timing two more times. Unfortunately you already missed the first mark, and by the time you sold (assuming this fall) you could easily be down another 5%, making it 15% off the peak, plus 8% selling costs. If prices drop only 25% off the peak you will have gone through a lot of hassle AND would have to time the bottom correctly to make this pay off.

Or, just to posit a third (and likely unpopular on piggington) option, you could shop around and see if there is a house available right now that you would want, and that you could strike a decent deal on, and sell your place and simply buy the new one.

ie No market timing, the move is simply lateral at current market conditions for both the sell and the buy, for better or worse.

Of course, interest rates now are just a bit funky.....

I have noticed a trend. Many of us ,who have decided to keep at least one San Diego property, say "keep it". Of course we have good arguments too:).
It's is a tough one. All our opinions have some element of speculation.

You could list it to test the waters. I think you will find them to be quite cold, but who knows. There could be a renter in the area that has had enough and is just hoping your property would come up for sell . You could try to sell it yourself. Discount it,from comps, the price of commissions + another 3%-5%percent and pay someone to do the paper work for you.If that is not your thing, you could give a short listing period to an agent. Try it again in March if the market hasn't collapsed.

Ex-SD, we are considering relocating in SD county and Tierrasanta was one of our thoughts. I noticed that you lumped Tierrasanta in with Chula Vista for comparable price declines. CV is going to be foreclosure city, I'm sure, just wondering what your take is on Tierrasanta that you put it in a category with CV and San Marcos. It seems like a nice neighborhood, closer in than the other two, albeit aging a little.

Anybody else have thoughts on Tierrasanta for family of three? (10 year old daughter)

sd_resident, I am glad you posted this, you saved me from having to start a new topic. We are almost in identical situations. I bought my 3 bedroom house in north county in the early 2000's with 20% down before the bubble got completely out of control. And yes, I acknowledge the timing is all luck, believe me I'm no real estate genius. Anyway, like you I'm in a good spot assuming a nightmare scenario (for owners) where the market drops another 50% I still can still sell with my head above water. My mortgage is less than 20% of my take home income, so I can put alot of money away, which is nice. With the recent drops though I have felt "the itch" to get into a bigger house as my family grows. But as I've learned from these great brains on Piggington the market still has a lot left to give for buyers, so try to resist the urge. But like you I am thinking "What about my current house?", should I keep it and rent it out eventually, sell it before the market drops even more and rent, or do the standard sell/make contigent offer on new house, or stay put? The choices are overwhelming.

I have a client who has an in law and they want to buy a home in Tierra Santa. We have been looking at places there for the past several weeks. IMO Tierra Santa is not comparable to CV at all. Will Tierra Santa go down? Absolutely. I don't think it will have nearly the foreclosure rate of CV. Right now we have been focusing on the El Dorado Hills area which is at the edge of TS along the hillside and faces to the southwest. As far as schools and such for TS, I have not dug into that as these people are getting a place for mom.

Don't get me wrong. TS will indeed depreciate. I don't think it will get pounded as hard as CV or San Marcos but it will go down.

SD Realtor

Your housing costs will not go down as a result of renting. The cost of financing probably will go up if the pricing structure declines enough to cause you to "lose" your current equity. "Moving up" may not turn out to be an option in the long run.

You've already held this property for 6 years, which puts you that much closer to paying it off.

It's a tough call. A lot of it depends on how risk averse you are and how comfortable you are with your long term employment situation. The possibility of a job relocation between now and the time the market rebounds could easily justify a decision to get your equity out now while you have access to it.

Thanks SD Realtor,

As for the schools, we have heard about some racial tension at the high school due to busing, and it does seem like a neighborhood for "mom".

Sorry to go off topic there. Since we know want to relocate, we are definitely going to try and get sold right now, rent for a year or two or more if necessary. I don't see any way this market can stay even flat. Renting gives you too much flexibility in our circumstance. If you don't sell now, be prepared to adjust expectations for the future.

Anybody else have thoughts on Tierrasanta for family of three? (10 year old daughter)

My close friends live in San Carlos. It is one neighborhood over from Tierrasanta. They also have a ten year old daughter. The mother of the family is likely a good judge of schools because she is a teacher. She has been quite happy with grade school and other community ammenities for her daughter. The High School, Patrick Henry, gives me concerns compared to other similiar suburban neighborhoods.I am sure it is better than the public schools most of the centrally located areas. If you don't want to live in the suburban areas north of the 52, High school is going to be difficult. We moved east and our kids can go to Steele Canyon High, which recently went charter. Maybe a neighborhood like Rancho San Diego would work? So far commuting on the 94 has not been bad at all.

Sounds good Joe -

I think you guys have a pretty sound strategy. As you can see up in the thread, you should be able to calculate what you will net out of the sale. Make sure when you analyze the comps to look at the rate of expired, cancelled and withdrawn listings as well. Price your home aggressively and make sure it shows well and you should be okay. Also offer a competitive commission for the other side but don't go overboard with it. Pricing and showability/condition of the home are what is most important right now. Also knowing what your competition is doing is key.

SD Realtor

Thanks for the insight guys. North of 52 is no problem for us either. Maybe time will shave off some $$$ on Scripps. Watching the monitor. It's the wife who is really looking to cut down her commute and she works in the traffic hell that is UTC. Don't know how the commute is from Poway or Scripps Ranch, but those are still looking pretty pricey. University City is faceless and overpriced. I'm not a fan of Carmel Valley for much the same reason. We will have sufficient equity to sit on because we have owned forever and are not greedy.

It's a typical dilemma for San Diego - neighborhood with some character, not-hellish commute to UTC job, decent price. I think only time gets us back to a favorable look at that. That's why I think selling now and renting leaves the most options. For us.

We're sort of in the same boat. Well, maybe not. Our mortgage will be paid off in 2010 (we did a 15 year) so we have a ton of equity. Our house is too small for our family of 5 (my opinion, everyone else seems happy) but it's on an enormous lot 1 mile from the beach. We've also totally remodeled. So I think we are staying put for now. We'll either add on or buy up when the market tanks. By then we may be mortgage free and able to rent this place. We'll have to see how this all turns out in the next few years. But I don't feel like uprooting my family and renting in the meantime.

CBad -

An enormous lot that is only a mile from the beach and 3 years away from being owned free and clear....

If you sell that thing I am gonna ask Rustico and sdr to find you and kick your butt to Jamul...

I would hold on to that sucker forever if you can afford to...unless your sale means you get closer to the beach... then okay maybe...

SD Realtor