San Diego Housing Bubble News and Analysis

Um, how to put it kindly ...

1) The amount of money you lose by spending 5 years in grad school (instead of working) vastly exceeds any potential benefits of buying vs. renting.
2) If you were concerned about money, the smart thing to do would be to stay in subsidized student housing for the following 5 years.

Rent

It's always a great time to buy. Housing only goes up in value so you really can't lose. Besides, if you don't buy while you can, there is a good chance you'll get priced out of the market forever.

Love,
2005

What about grad student housing? I know people at UCSD who live (as a couple) right on campus in a 2br and pay $600. So instead of $80k you're paying $36k. I know there's a waiting list but have you looked into it? If you can't get in this year get on the list for next year... It will save you a bundle.

What area are you looking at buying in? Since you're going to be going to UCSD, I would assume you'd be looking for a condo in UTC. Not sure how much shopping around you've done but for $200k you aren't going to be able to buy much. Only recently have condos in UTC broken the $200k mark and then you're looking at a ~600 sqft 1 bedroom condo conversion. I'd rent for a few years and then worry about buying when you graduate.

You need to compare the cost of purchasing vs. the cost of renting. If you buy now, no one can really say what you will be able to sell it for in 5 years. But for the sake of argument, let's say you sell for the same $200k.

Since you will be buying outright, you won't be paying interest, but you will need to pay for the following at least:

HOA: $5k ($80/month)
Homeowners Insurance: $2k ($400/year)
Property Taxes: $9k (assuming 20% tax bracket)
Maintenance (plumbing, electrical, appliances, carpeting, etc.): $5k ($1k/year)
Commission when you sell: $12k (6% selling at $200k)

Plus you lose out on any interest income that $200k could be earning if invested elsewhere: $45k (4%/year compound)

Total cost of ownership $78k

Compared to the $80k in rent you estimated, it's pretty much a wash

Are you sure you'll have the cash flow to handle association dues, maintenance, taxes, special assessments, and so on? If so I think you might be able to make the case for buying.

I think the condo market has a way to go before hitting rock bottom, but even so I'd imagine it would recover within a five-year time frame. And there's always the risk that inflation will eat up whatever investment return you can get on $200K over five years.

Plus it would really suck to move in the middle of grad school. Spoken from the POV of someone who gave up after losing all his thesis notes.

As others have mentioned, there's not much in that part of town in your price range. Investigate your transportation options carefully -- parking isn't so great, the trolley doesn't go there, and the nearest Coaster station is a 20-minute shuttle ride away.

I pray to God you arn't an economics or business grad student.

Student housing for the win.

The cost of student housing nostradamus....

for a grad student at UCSD for a 2br apartment ranges from just under $1,000 to over $1,200 a month, so either your friends are sharing that apartment with someone else or they're paying much more than they're saying.

The rent for comparable apartments and condos in the area range from $1,300 to over $1,800 a month for the nicer condo complexes.

But renting is still by far the best option, at least in the immediate vicinity of UCSD. Prices are still dropping and will probably continue for the forseeable future.

The condos and apartments in the penasquitos and scripps ranch area are more affordable and seem to have hit a plateau over the last couple months, probably closer to the bottom. And there might even be something available in the $200K range that is more than a converted apartment.

Noone's analysis demonstrates that even accounting for opportunity cost buying and renting are fairly evenly balanced. Normally, I would think that this would make a strong case for buying. However, the 200K purchase would not buy the kind of place that rents for 1333 per month (80K over 5 years), so the comparison is not exactly comparing the same kind of unit. That would imply a gross return of 8% on rental property. I am not seeing anything close to that in San Diego.

Anyway, I think it rarely makes sense for a student (even in grad school) to purchase versus rent. There are simply too many variables in your future. Will you complete the program. Will you after 2-3 years and a Master's degree have made some contacts and decide to pursue PhD somewhere else. Will you come to a self-realization mid-way through the program that what you'd really rather do is to join the Peace Corps ?

Anyway, if it was me, here's what I would do:
Run the numbers on 3-4 bedroom single-family homes in the North Clairemont or similar area. (Not too far for the commute, not too expensive) See if it's feasible to purchase with 25% down, lease out a couple of bedrooms to other students and get effectively cheap rent.

Example:
350K purchase
25% down
262,500 loan @ 6.25%

P&I: 1616 per month
Prop Tax: 330
Insurance: 54

Monthly PITI: $2000

Charge 800 each for 2 roommates, so your monthly nut is about $400. Your remaining 110K or so from your 200K should net you about $350 per month and/or could provide a cushion for repairs/vacancies.

After a few years of this you will probably be sick of college students as roommates, but you would have figured out how to market and lease the property to college students and actually making a monthly profit on the place, when you are ready to move into nicer digs. This is even better if you have some decent income while going to school (e.g. if you have a TA or RA and can make enough to actually have taxes to pay.

Anyway, I would at least run the numbers.

You do not have the time to worry about homeowners issues, and you want to be mobile at graduation. It's good to have the freedom. Also, advisors move, and grants expire. Having $200k in cash instead of none and a mortgage is a big advantage while you're preparing for candidacy.

Financially, the best thing is either to get UCSD subsidized housing (if you get married you can get a bonus and skip up in line). Or rent a 3-4 bd house with other grad students/postdocs.

Also if you go to the UCSD housing office you may find good deals, e.g. long-time professors who have a nice place, maybe a guest house in the back that they want to rent. grad students are generally viewed as more responsible than the undergrads, and are preferred. These deals will probably be below market rate.

I don't think you'll be able to charge $800 a month for a room on a $350k place.

$200k at 4% interest is $8k a year, right? Consider that too when you consider your housing costs.

in my opinion, i'd never buy in this circumstance.

One consideration with respect to the financing is the fact that it changes your eligibility for federal financial aid. By being house rich and saving poor you are eligible for far greater assistance in the form of grants and Sbsidized Federal Stuent Loans. Under the federa Loan Program you are eligible for up to 8500 in subsidized funding each year of school and up to 12000 om unsubsidized. The larger your saving are the less you would be eligible for.

Additionally you could simultaneously open up a HELOC on the home so that you still ahve access o the capital if needed.

If you are considering an entrpreneurial path the ability of borring 20500 dollars now with extremely easy terms and conditions might give you well need capital for when you graduate.

Just a consideration.

Thanks all for the comments. To clarify a few points, I am committed to finishing a PhD. To make myself sound stupid, I signed a scholarship deed which basically deeds my life out to this company (6 years of indentured service), in exchange for full funding for undergrad through grad school. They will be paying be 50K a year during grad sch in addition to sch fees and stuff so yeah. Btw I'm not an economics/business student but an engineer.

Grad school housing is notoriously hard to come by. Currently the wait list is between 3-4 years so that basically kills everything. Median cost of renting a 2 bed pad is $1400 for a decent place near school.

Noone, good point about the cost of home ownership vs renting. This are the way I figure the numbers.

HOA over 5 years (200/mth) : 12k
Insurance (400/yr) : 2k
Property taxes : 9k
Maintenance : 5k
Investment opportunity cost : 21k (2% from a money market acct/fd, I'm no financial savant)
Comission cost : 13k (assuming a 10% recovery in the property market in 5 years)
Cost of ownership = 41k (offset by 20k appreciation)
Cost of rental = 84k

This 200k represents my easily disposable assets, and I have other assets currently under investment.

FormerSanDiegan, I don't think I'd be able to charge $800 per person. Market rates are about 600-700 per pax. I'm currently not too keen on taking up a loan due to mobility reasons. I'll need to uproot after grad school, and I don't want a loan from grad sch days to come back haunting me when I start my new job.

Once again thanks all for the helpful comments! (btw I cant believe I got myself into this whole grad sch business >.< should have followed everyone into banking or cunsultancy.. =p )

Wow, the company deal is pretty sweet! Full ride through undergrad, plus a much better stipend than the typical PhD student. I hope you like your PhD area. PhD is super tough even if you love your work; it becomes just about impossible if your heart isn't in it. Good luck!

On the other hand, instead of thinking of your 6 years of commitment as indentured service, I'd think of it as a secure job, especially as they're probably paying much more than what the average junior faculty make, not to mention the academic jobs are hellishly impossible to get.

Anyway, since I was one of the "lucky" people who did just land a tenure-track position at UCSD, I'm paying close attention to this thread to see what you house market junkies think about this area. I have similar financial circumstances as rEQ. We want a 2bd condo, or a modest house on a modest lot. BTW, there's no subsidy for faculty housing, and my husband is not up to rooming with grad students/postdocs. We plan to have kids at some point but probably no school-age kids in the next 6-8 years. Oh, and I'm not in economics or finance, I study decision-making. ;)

What do you all think would be the best time to buy into the UTC condo market? The N. Clairemont area seems a little shady. How are the Scripps Ranch & Pansquitos neighborhoods? What about Ramona? What do you expect the PPSF to bottom out at for these respective areas?

Thanks in advance for your input!

Yeah feraina, the company deal is really sweet. We all like to complain and moan about it from time to time but the resources, guidance and freedom over our jobs that they give us is amazing. Been working here for a year since graduation and will be headed back for further studies in a bit.

In response to earlier posts, my annual costs of rental is down to 11k. Factoring cost of ownership with HOA, insurance, taxes etc, the per annum differential between renting and owning is only 4k, an amount that could be easily wiped out with a further downturn in the market, so my current position is to wait for 6 months to a year before buying. Then again is a property comes along with a large enough discount over current market valuations, who knows..

How did you manage to get a 2Bd rental down to 11K?

I wonder if the SFR's in Penasquitos would ever come down to around 300K (our target). The cheapest right now seems to be this little 2/1 at 350K:
http://www.sdlookup.com/MLS-071090425-13...

Congrats on the grad school, I think you'll find that UCSD ain't easy. I went there me self.

I just spoke to my friend who lives in grad student housing. They pay $768/mo for a 2br/1ba in the Mesa apartments. This covers ALL UTILITIES as well. She said, though, that newer students are being asked to pay more to "bring the rents up to market value".

Suggestion.
Don't just jump in to the area and buy. Rent first. Grad students are the preferred over undergraduates... use that to ask for a little price break. Ask your advisor's present students if they know of any good places that might be opening up (aka grad students graduating).

Once you have rented, Walk around the complexes and find a few that you like. Complexes have different characters Wander around complexes on weekdays and weekend night and days (and during commute hours). Find out when the board meetings are, and attend them. See how the uscd/public transit system to the complex works. This can save you about $70/month.

While the area around campus is not as distressed as other areas, there are still distressed properties, and those affect some complexes more than others. Prices have not fallen in line with rents... but they have dropped a good deal. Odds are they will continue to drop... and if they don't then they should stay flat.

If you were a grad student at Wash U in St. Louis or at Duke, I'd definitely take a look at the markets there to buy, but you're in San Diego and it's not a cheap market by any stretch of the imagination.

As someone noted above, PI's do move. My sister's advisor almost went from NYC to LA. I have a number of friends who moved with their advisors (from NC State to Columbia, from UVA to UC-Irvine) What are you going to do then?

You're a grad student. While I applaud the homeowner mindset, I still think there's something to being flexible as a grad student. To rent one place and move somewhere else if you like a different neighborhood. Why anchor yourself at your age?

rEQ,

I think the argument to buy falls apart because of these two reasons:

1) Your breakeven/make a little money scenario hinges on it recovering 10% in the next 5 years. I think the absolute most optimistic case is that the condo you buy today remains flat in value for the next 5 years, in which case you were better off renting. I think the realistic scenario is that the value continues to drop for a couple years and then remains flat in value for several years. There is absolutely nothing putting pressure upward on prices, especially in condos right now, and there is so much pushing it down for so many years to come.

2) The place you could buy for 200k is nowhere near as nice as the place you can rent for the same monthly cost.