San Diego Housing Bubble News and Analysis

You may want to re-think the spring/summer time frame. Even in down markets, there is more buyer competition and higher prices during that time. If I was in your position, I would guesstimate the difference in payments you would have by waiting until next fall/winter, including likely higher interest but also possibly a substantially lower price (depending on the area). I would personally wait, even if it means paying 8%. I don't want to get into a spring bidding war on top of already inflated prices.

Some time ago I had a similar idea of providing cash to a lender as collateral to lend back to me. Although I didn't need a mortgage, I wanted the interest as a deductible. The bank thought it was a wonderful idea, but of course in those days they were falling over backwards to lend under any terms. I think if I'd said my income is derived from selling rocks from Mars, once I've built my space ship, they would have giggled delightedly and said "why of course you can have a loan". Seriously though there are better qualified people here than me on how to structure a loan, and I echo above that you may want to wait a little longer.

Omega that is an interesting strategy and I have been pondering about whether to pursue a similar plan when I buy as well. I watched my parents invest alot of money in bonds in the 80s. Every few months they would put as much in as they could to purchase 30 year bonds and those were fantastic income generators for them. So your strategy makes alot of sense in an environment where you sense double digit inflation rates in the future.

By the same token, putting a buku downpayment and paying off the home early is not bad because of all the money you save in not paying any interest. One simply needs to plot the data to see what works better for them.

Anyways, not a bad idea.

smart. also purchase money in ca is non recourse, which means if prices go way down you could give the house back to the bank and they couldn't come after you (not that, as a mortgage broker, i am recommending or would ever recommend that to any prospective buyer), but with little or no $ down you would have very little risk, of course your credit would be ruined for awhile...

you can do 100% financing if you are a vet, or if the property is located in certain areas, 100% with usda rural, otherwise fha with 3.5% down is your best bet right now.

just make sure you don't overpay for the house; your monthly payment with 97 - 100% financing, after the write off, should be close to what the property would rent for...

"just make sure you don't overpay for the house; your monthly payment with 97 - 100% financing, after the write off, should be close to what the property would rent for..."

There's the rub. Depending on where you want to live there is little to no chance at all that you will finance 97% of the home and your payment will match the rent. If you are going to set that as a parameter then you more then likely will be waiting a long long time at best.

Thanks for all your replies.

We are likely to buy in Rancho Bernardo - 4S Ranch.

SD Realtor - I like your suggestion of plotting this out. I will do so and if possible post the results.

Finally, although I know CA is non-recourse, I could not, in good cconscience, walk away from the home when I have the means to continue making payments. For me, that is what is wrong with our country right now, everyone is a victim and wants something for nothing.

sd reator, aren't prices getting close to that level, when you consider the tax deduction and principal reduction, as i said in a recent post, as follows..

"scaredycat, the fundamentals suggest there is still some downside in the san diego market, but if you are sure you want to live there for 10-20 years, and you find a home you really love, go ahead and buy it if your monthly payment on the purchase would be close to what you could rent it for, for example: purchase price 400k, loan amount 400k @ 7%, payment is 2646 plus 480 tax and insur for a total of 3126. say you can write off 30% for a net payment of 2188; if this home would rent for that much, i would say it will be a good investment."

sd realtor don't forget on a loan of 400k fully amortized 30/30 you have a principal reduction of about 320 on your first payment also, wouldn't a 400k house usually rent for 2000 p/mo?

No.

Everything I am handling right now is using FHA loans where the loan to value is 96% or more.

Also, several of the neighborhoods I am handling have cap rates (that's net income over purchase price) of about 8-10%. You are right that this is more rare with houses.

EG: Several properties in North Park or Normal Heights are worth 120-140k. They net rent for 1000/mth or 12000/year. Playing cards right could mean positive cash flow with 4000k of skin in the deal. It means mortgage and combined monthly costs lower than rent.

My reference was for neighborhoods such as Carmel Valley, 4S Ranch, Encinitas, and for homes in a 2500 sf range. Somethign where many people I work with who are looking for a place to live that is commuter close and decent school districts. No way I see an FHA based mortgage payment on a 97% financed loan approaching a rent payment in these neighborhoods. Now if you want to use other neighborhoods as an example then yes there is an opportunity.

Now I also have two friends who have FHA loans and have had an inspector come to the house to make sure they live there. So if you are planning on using an FHA loan and not being honest about primary occupancy of the home, that is your risk to make.

As for creating the spreadhseet to determine the analysis correctly you should take a few different loan scenarios and plot them out over say 20 years. Do the same thing with your projected investment of the unused downpayment money to see what kind of return you get. Your assumptions on the return you will make is the biggest unknown here, not just what the return will be but for instance when will the high interest rate environment become a reality. So this portion of the estimations will be challenging but useful.

lonestar yes for certain homes/condos in certain areas and yes considering the write off, there are some areas getting close. Again, my reference (and sorry for not stating clearly) was for neighborhoods that are not close yet. Also again, and you can correct me on this, FHA loans are for owner occupied housing. So anyone eluding to grabbing an FHA loan and converting they property to a rental is essentially committing fraud.

Urbanrealtor: Several houses in North Park and Normal Heights for $120k to $140k that will rent for $1000 a month?
I know that area well and I doubt it.
Examples please?

Hi Econ -

I did a quick search on the MLS for 92104 under 150k. 28 listings came up and all are attached homes except for 1 detached home on Polk. Now whether they will fetch 1000 a month is something I am not sure of as I am to lazy to run rental rate comps AND work in HOA/Property taxes to calculate the true cap rate. Anyways I would imagine UR was referring to these homes

Thats right.
I would also expand the zip to92116 and some very select parts of 92102 (though that is really more like south park).
I am sure of the rental rates because recently, I have been engaged to assist buyer in getting them rented.

Like I said that type of equation is harder to match in houses but here are some examples

Here is a conversion project that fell apart halfway through (its at 35th and Meade):
The cheapest 1 bedroom closed at 52k
080042852
The cheapest 2br closed at 80k
086017289
There were about 30 units in this complex that closed at similar prices.

In the resale (non-developer) department, here is one currently being rented out for more than 8% Cap.
081018371

As far as houses, here is one at 37th and Polk
086036982

Here is a house in a nice area west of the 805.
086017417

Like I said, the houses are rarer and somewhat more expensive.

However, as investments or homes go, they are not bad deals.

Barring true economic meltdown, they are fairly safe as investements.
All get at least 8% return consistently.
If such a meltdown occurs (no, I don't buy that the current crisis qualifies) then foreclosure will be the least of our worries.

Regarding FHA loans, inspectors rarely ever show up and never after a couple months.
I use these loans pretty exclusively and I have more familiarity than many of the loan officers I deal with (eg: how many lenders understand 203k loans?).
I won't help anyone do anything sketchy (like lie on a loan app) but I have had a few decide that renting made more sense after they closed on purchase.

On a side note:
As an agent, this means one can still make a living but the days of universally enthusiastic buyers and easy lending are way gone. For me this is great because I am better at discussing investment options and offer/negotiation strategies than I am at being a salesman in the classical sense.

sd realtor i am not talking about renting these places out (i thimk urban realtor got on that track), i am making a rent vs buy comparison, ie can you buy for around what it would cost you to rent, and suggesting that if you can it would probably be a good move to buy if you know you are going to be there for a long time and you can find a home you really like. i understand all that projected rate of return on $ invested stuff, just trying to keep it simple...

so prices haven't droped that much in CV and some other upper middle class areas?(rich's graphs say the same) i say they will get there, prices are still too high in those areas and the reason they haven't come down is simply the sellers are better off with more staying power, just don't buy until they do, what say you?

lonestar I got ya. Using the rental price as a barometer for the mortgage payment is not a bad idea. You may want to adjust for taxes but I get the general idea.

I agree that the higher priced areas will drop, the only question is by how much. That is pretty much how I felt since day one. I do feel it all depends on employment and interest rates. Patience will definitely be required. Denial runs high in these areas and people still just don't get it for the most part and they are positioned better to throw more money away for a few more years rather then rip the bandaid off and take it now.

Yes though, there is no doubt the higher end areas will come down and how hard is subject to debate. They will come though.

so prices haven't droped that much in CV and some other upper middle class areas?(rich's graphs say the same)

True they haven't dropped as much, but they didn't rise as much, either. If you look carefully at Rich's charts (particularly the one copied below), you see that high-priced homes were not as overvalued during the bubble as the low-priced homes.
Therefore, by the time housing bottoms I don't think you will see the same percentage decline in the high end as we will see on the low end, for the simple fact that the price distortion was not as great at the high end.

Rich Toscano HPI data

good point

agreed, i do put taxes in that comparison but they got lost somewhere in blog land...

Thanks SDR and urbanrealtor for the examples. Values have fallen farther than I had thought.
However, I'd be wary of condos with underwater HOAs. No telling what the true cost is if most units vacant or not paying monthly dues & deferred maintenance building up.
Also, expect higher vacancy periods & turnover in such neighborhoods along with more maintenance costs on those older buildings.