Would you purchase or wait in my position? – Piggington's Econo-Almanac

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January 18, 2015 at 8:41 PM #21379

KristopherSD
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Hello all, first time poster here at Piggington with a question that’s been racking my brain for several years now. As an intro I am 26 years old with a very secure $100k year job, pension, maxing out 401k, zero debt, excellent credit, and $110k in savings. I’ve been very fortunate to find a great job and kept a low overhead which has allowed me to save quite a bit over the last 4 years. Unfortunately I missed the boat timing wise for purchasing at discounted prices as the bulk of my saving has been done in the last 2 years.

I’ve watched single family home prices climb and climb over the last few years as i’ve been saving and am starting to get worried that they will never come back down to what I consider “affordable” levels. I would love even a 10% correction in SD housing, and would ideally purchase a $425k-ish complete fixer upper with 20% down and fix it up from there. The worst house in the nicest neighborhood I can find (La Mesa, Allied Gardens, South or North Park, Ocean Beach)!

Currently I rent a small but nice 1 bedroom apartment 2 blocks from the ocean with my significant other with a total cost of $900 to me after rent and all utilities. I love the area we live in and although the apartment is very small I can see myself doing this for a few more years and continuing to save at a slower rate. My only concern is that prices will continue their upward march and all my efforts will be wasted in the long run.

Prices seem crazy to me and flipping activity is rampant in the areas I look at. My initial inclination is to keep saving and keep a low overheard and wait for a potential correction. It’s always nice to get an outside perspective though. If you were me, would you bite the bullet and buy now, or hope and pray for a correction while continuing to save? I appreciate the input.

Thanks,
Kristopher

January 18, 2015 at 8:50 PM #782155

spdrun
Participant

I’d buy a 2/2 condo for low $200k’s with $50k down in your position.

(a) You’ll still have $50-60k cash in the bank for other investments, repairs or fun.
(b) HOA is only $200-300/mo (equivalent to $40-50k of loan) and covers a lot of things that you’d have to pay for yourself in a house. Pool maintenance, exterior maintenance/roof, water bill, etc.
(c) You can use the leftover cash to buy another rental to help pay the bills. Not necessarily in San Diego. But if prices do drop (people here will tell you they won’t), you’ll be ready to jump on something in San Diego.
(d) Condos are nice — the HOA takes care it to some extent if you (say) decide to travel for a month or two. No hiring landscapers, etc.

January 19, 2015 at 1:10 AM #782159

CA renter
Participant

Full disclosure: I’m a long-time deflationist who sold to rent (bubble sit) in 2004, buying again in 2011.

IMHO, and this is only an opinion, I think that prices and speculative activity are far too high to call this a “normal” market.

That being said, Rich Toscano, the brilliant and very well-respected owner of this blog, has some information that can be found on the home page of this site indicating that housing prices are not in bubble territory at this time. There is no doubt that prices are high, though, and Rich’s graphs and data will show you how today’s market compares to markets in the past.

I would highly suggest that you read all of Rich’s articles as a starting point. It might help you decide whether or not this is a good time to buy, and what you might gain or lose depending on your choices.

It sounds like you’ve been very responsible with your money. That makes it more difficult to think about losing significant sums.

Best of luck!

January 19, 2015 at 6:59 AM #782162

svelte
Participant

What you don’t mention is how long you plan on keeping the home and/or staying in San Diego.

I think you have to go into a home purchase with the mindset that you’ll keep it at least 5 years, and hopefully 10. Property values will be higher in 5 years in most cases, and will surely be higher in 10 years.

If you’re planning on selling in 2, 3, or 4 years – well then it all depends on how much risk you are comfortable with. There certainly could be a temporary price dip in that time period.

Another reason to buy: sounds like mortgages will be easier to get in 2015, which means more folks will buy, which means more demand on the housing market.

http://www.10news.com/financial-fitness/4-reasons-buying-a-home-in-2015-will-be-easier

January 19, 2015 at 10:40 AM #782164

spdrun
Participant

A more balanced take from WaPo, basically saying more of the same this year:

http://www.washingtonpost.com/realestate/in-a-changing-mortgage-landscape-will-it-be-easier-to-get-a-home-loan-in-2015/2015/01/15/bd6ca14e-7fda-11e4-9f38-95a187e4c1f7_story.html

Even if you’re planning on holding, make sure to get a good price. There are still people who bought in 2006 who are underwater.

January 20, 2015 at 1:59 PM #782193

sdsurfer
Participant

You mention you’d appreciate a 10% correction. How about you just tell whoever you are working with that your offers will be 10% below the market value and that you are only looking for fixers. The most well known realtor in town might be too busy for that kind of arrangement, but there are tons of Realtors that are competent and would not mind one bit as long as you are qualified to follow through and have the intent to do so if/when you get one. Let them know you only want to see properties that have been on the market for 30 days that have the equity to come down a bit or something along those lines to increase your chances.

I also agree with the others that asked if you are looking to hold the property and for how long because there is a tendency to have less risk if your intentions are long term.

January 20, 2015 at 3:14 PM #782200

Anonymous
Guest

Your post is a perfect example that demonstrates that we are once again in a housing bubble. Your comments are verbatim what we heard throughout the 2001-2007 period.

My suggestion, wait it out. You are in no hurry, no kids on the way, live by the beach. Sounds like a good life. Keep saving your money and be happy you can spend your weekends on the beach instead of doing home repairs and remodeling like all of the homeowners.

Keep in mind that the primary (only?) reason home prices are still high is the near zero interest rates. Well mathematically they can’t get much lower so there is limited upside to buying right now in terms of price appreciation.

On the other hand, when the next housing crash occurs, it will coincide with higher interest rates but by that time you could have a few hundred Gs saved away. Guess what, not many other people have or will have that kind of liquid cash laying around to make a big down payment so you will be in the drivers seat.

Never been a more obvious time to be patient.

January 21, 2015 at 1:56 AM #782228

scaredyclassic
Participant

shacking up by the beach sounds good to me.

youd be nuts to give that up!

dont get married or buy a house till youa re really really ready to stay.

January 21, 2015 at 10:42 PM #782255

Escoguy
Participant

If the median home is about 500K now and you can save 30K/year, on balance you won’t be too far behind even if the market goes up 2-3%/year for next five years. Worst case over 5 years, you lose 50K in appreciation but save about 150K plus earnings (from work) on the investment (say 20K more). Then you would have 270K to work with even if prices are at 550K, they will still be fairly affordable to you. And when you buy, you can buy what you really want and not worry about trading up. One negative is, the property taxes will be higher by 1% of that amount (difference) for all years going forward.

I think the mistake many make is thinking the patterns of the past will repeat.
It is much harder to get loans now and investors who get used to monthly steady rent payments probably don’t want to sell out and put their money in CDs or govt bonds which pay less. Stocks are close to an all time high, so that’s not so appealing too from a value standpoint. While there are some negatives out there like low wage growth, on balance low energy prices, low inflation, low interest rates and other commodity prices should allow for reasonable growth in the US in the next few years.

A good realtor should be able to find you a short sale, there are still some out there or a pre foreclosure. It may take some work, but if you want your 10%, that’s how to do it.

January 22, 2015 at 12:23 PM #782261

UCGal
Participant

[quote=svelte]What you don’t mention is how long you plan on keeping the home and/or staying in San Diego.

I think you have to go into a home purchase with the mindset that you’ll keep it at least 5 years, and hopefully 10. Property values will be higher in 5 years in most cases, and will surely be higher in 10 years.

If you’re planning on selling in 2, 3, or 4 years – well then it all depends on how much risk you are comfortable with. There certainly could be a temporary price dip in that time period.

Another reason to buy: sounds like mortgages will be easier to get in 2015, which means more folks will buy, which means more demand on the housing market.

http://www.10news.com/financial-fitness/4-reasons-buying-a-home-in-2015-will-be-easier%5B/quote%5D

I agree the timeframe you plan to hold the home is key. If it’s a home you plan to stay with for 7 years or longer – that helps amortize the transaction costs associated with buying/selling. If you plan to “move up” in a few years… keep renting.

Is your job likely to stay here in San Diego – or could you be transferred?

There are opportunities out there- especially if you’re ok with something that needs some work. My block had two houses sell for a $200k difference within 2 months of each other. One was fixed up and fancy, one was dated. Buyer of the cheaper one is in process of spending about $50k for new kitchen/bathrooms/flooring. But most buyers don’t want to bother.

January 23, 2015 at 11:10 AM #782276

kev374
Participant

That being said, Rich Toscano, the brilliant and very well-respected owner of this blog, has some information that can be found on the home page of this site indicating that housing prices are not in bubble territory at this time. There is no doubt that prices are high, though, and Rich’s graphs and data will show you how today’s market compares to markets in the past.

I hope Rich is only referring to SD real estate. Here in Orange County things are in a full fledged bubble. Even Trulia rates OC as 20% overvalued and they are usually conservative.

And finally for concrete proof..my friend bought his condo in Ladera at the very peak of the last bubble for $600k and sold it last month for $585k.

So, Rich is saying that we are not in a bubble this time but somehow prices are back to where they were at the peak of the largest asset bubble in the history of the United States? Respectfully, His argument does not make much sense to me.

I hope Rich can substantiate his claims. I bet he will say something to the effect of inflation and rents but that is nonsense. My rent is lower now than I was paying in 2005 and in a nicer area.

January 23, 2015 at 1:32 PM #782287

Anonymous
Guest

San Diego is also in a real estate bubble right now, not just OC. If the near peak prices aren’t enough to convince you, the fact that we are even having this “buy now or be priced out forever” conversation again seals it.

January 23, 2015 at 1:35 PM #782289

Rich Toscano
Keymaster

CA renter, you are far too nice to me! 🙂

To the OP: if you haven’t seen it yet there’s some hopefully helpful info here:

Shambling Towards Affordability: Housing Valuations Surpass Pre-Bubble Peak

Yes, houses are pretty expensive, but nothing like during the bubble.

The “catch” is that interest rates are super low. So if you are planning on financing most of your purchase, and you are able to keep the house indefinitely (because the low financing costs are only beneficial over the long haul), then buying could make sense, depending on your situation/goals/etc. Effectively, the abnormally low financing cost is offsetting a high price in this scenario.

That said it’s also reasonable to not buy. Given where prices are, I don’t see enough price pressure to invoke the dreaded “priced out forever” scenario. So waiting could make sense. You could miss out on the super low rates, if/when they rise, but that could be offset by prices becoming more reasonable.

FWIW I don’t anticipate another home price “crash” as we saw last decade, because the valuation situation is just night and day. The current level of over-valuation could pretty easily be normalized by several years of flat or slightly down prices while incomes and rents continue to grow. Not predicting that scenario, just saying that it’s not like the bubble when a crash was basically the only way out.

Anyway, the bad news is there is no clear cut answer, but the good news is that it’s reasonable to go either way. I don’t feel like you should feel pressured to buy right now “or be priced out forever,” but at the same time, if you found a place you loved and wanted to buy (especially if you are financing), I think it would be perfectly reasonable to do so.

Hope this helps a bit.

January 23, 2015 at 1:47 PM #782291

Rich Toscano
Keymaster

[quote=kev374]
I hope Rich is only referring to SD real estate. Here in Orange County things are in a full fledged bubble. Even Trulia rates OC as 20% overvalued and they are usually conservative.
[/quote]

Yes I am referring to SD but everything I’ve seen indicates that the situation is very similar in OC. As it happens, I also show SD as being 20% overvalued. Expensive, for sure, but there is a difference between expensive and a “bubble.” By comparison, SD housing became 80% overvalued during the bubble.

[quote=kev374]
And finally for concrete proof..my friend bought his condo in Ladera at the very peak of the last bubble for $600k and sold it last month for $585k.
[/quote]

This proves absolutely nothing. At this point, the bubble peak was almost a decade ago! Rents and incomes, which are what support home prices, are much higher now than they were at the peak.

[quote=kev374]
I hope Rich can substantiate his claims. I bet he will say something to the effect of inflation and rents but that is nonsense. My rent is lower now than I was paying in 2005 and in a nicer area.[/quote]

Ah, so here is the heart of the disagreement. You feel that rents are lower now than at the peak. If this were true, you would have a point — but it’s not. There is no chance that OC-wide rents are lower now than they were in 2006 or wherever you want to mark the bubble peak.

As for substantiating my claims, I have done so via graphs like the one below that are based on sourced, publicly available data… how about substantiating yours?

January 23, 2015 at 2:21 PM #782295

Zzz888
Participant

If I were you, I’d buy a 2 bdrm condo in an up and coming area that is attractive to young people and renters. For instance Barrio Logan, still some opps in North Park & Golden Hill, College, Sherman Hts etc. In this scenario you can pay yourself or view your condo as both a savings account & tax saving (in lieu of renting) and you can also hold this property indefinitely by turning it into a rental when or if you want to buy something bigger or SF that will either yield a positive cash flow or break even and will leave you with a leg up on retirement.

I wish the timing would have been right for me to have started investing in potential rental properties at that age. Many professionals I know have done that and now own 5-10 properties that just bring in income in their 40s. They plan to retire by 50 and just live off retirement savings & rental income property that is paid off.
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