Advice to San Diego Homeowners: Sell Now and Rent

[anxvariety]

I would hope that someone that insists on buying at bare minimum does a lease option.. this way they can feel like they own the house, and at least have the choice of getting away from their strike price when the lease term ends… this scenario will at lease significantly reduce their losses and might even teach them a lesson.

[zk]

I actually looked at a couple lease options after selling. The terms were absolutely horrible. There was no way it would have paid off unless prices went up considerably. The payments on the lease option were much higher than rent would’ve been, so if prices didn’t go up, that wouldn’t have worked either. I don’t know whether that’s how they usually work; maybe somebody more familiar with the business can tell us.

[zk]

“I pat myself on the back everyday for selling.”

PS, you certainly sound like a person who pats herself on the back more than I ever could. I suppose perhaps each of us could stand to move toward the middle of the spectrum which has self-doubt (which may not be fun, but which maybe provides the necessary true, deep introspection to check that you’re not making a mistake) on one end and self-confidence (which feels good but which, in doses too large, may remove us from the reality of the situation) on the other.

[powayseller]

zk, I am ahead $1,500 every month in renting.

I lost the mortgage deduction and property taxes, so those cancel out.

I earn 5% interest on the equity, instead of losing 10% per year (so far). I am debt free. I paid off my credit cards and car. I won’t count these savings in my $1500.

I save $150/month in property insurance, as renters insurance is less expensive (and I have earthquake coverage also).

I pay $2200/month rent instead of $3000/month mortgage. I save $300/month on repairs/maintenance, and $500/month on home improvements. We are the type to keep pouring money into landscaping, patio covers, fencing, and various other remodeling costs. I won’t count the $500 as savings for this example.

I live closer in town, and get gas every 6 days instead every 3 days, saving $250/month in gas.

zk, housing cannot be saved because SD lacks lucrative jobs and the prices are too high, causing 44,000 people to leave San Diego annually. This figure may be even higher this year. People just cannot afford to live here. This exodus is putting homes on the market, increasing rental/homeowner vacancies, and decreasing demand. As long as demand is down, inventory will keep rising, lowering prices.

This can only turn around when the state which caused high prices returns: a population influx. What can bring this about? What will make people want to move here at the rate of 44K/year? Jobs? What kind of jobs? Most of SD jobs are in tourism, retail, military. We have some in technology, but do you see this improving with a recession on the horizon? Short-term, I don’t. In the next 2 years, I don’t see a labor market change. Neither does Cheryl Mason, of the SD Labor Market. The only hope we had was more Homeland Security funding. I know that’s pitiful. Our expected job growth comes from government handouts. We’ve got to do something about this. But with 20% of CAs not even finishing high school, where are all our talented employees to turn this state around?

The SD civilian labor market of 1.281 million, as measured by the payroll survey, is 17% government, 15% retail, 11% leisure and hospitality, 8% construction, and 10% education and healthcare.

Add in a couple 100K people for independent contractors and illegals in construction, realty, barbershops.

Professional and Business Services is only 16%. Telecom and publications is only 3%. Manufacturing is only 8%.

Which sector shows promise for these high wage jobs you’re counting on to save housing? Regardless of inflation, how likely is it that 15% of our employees who are in retail will see their wages go to $ 150 K/year to afford the $500K median home?

zk, I think you get the picture. We just don’t have the type of jobs in SD that can support the home prices we’ve got. That is the main problem.

In Oakland, the median income is $20K higher, so their houses cost more. SD doesn’t have the wages to support these high prices. We don’t have the type of industry to allow half of our population to make $80K/year.

A drop in interest rates can revive housing. But that will be offset by tightening lending. Lenders are tightening standards. If they ever require more than 0% down, this market will go south in a hurry.

A tax change can save housing. More tax writeoffs to save housing. Can the government afford to reduce taxes, at a time of record budget deficits? If they reduce, it will be to encourage alternative energy, not housing.

[Anonymous]

I tried to do this at the beginning of the year.

I learned two things (along with not hitting the return button to lower the cursor)

1. Renting a house as nice as mine is about $2k per month more expense; and

2. No one with a nice house will rent to people with dogs.

So it’s not a easy a stated.

I still think a good idea though.

[Carlsbadliving]

scowman,

I agree about the dogs. We currently rent and had a heck of a time finding a place that would accept dogs and that had a big enough back yard for the dogs to run around. We ended up in a pretty run down place. So run down that the owners didn’t care that we had dogs because the yard was already dead and the carpet/paint in bad shape. We are good dog owners and if even we had been able to find a nice place the dogs wouldn’t have done any damage. But the stereotype of dog owners is hard to overcome. Definetly a downside to renting.

[jabrwoki]

Interesting comments. I agree with most of your comments (I am a renter who has been priced out in the current market ) and a long time SD resident (>10yrs). But I wonder who are buyers who in the past few years have pushed it to such ridiculous heights. While there has been some job growth (I am in hitech and SD has weathered the Tech recession of 2001-2002 much better than the Bay area where I worked for a couple of years). In 2001 SD houses looked a raging bargin compared to Bay area which seemed justified since the salary levels and entreprenerial levels were no match between these regions. Could it be that most of the buyers in SD already purchased in 2001-2003 time frame and have enough equity that the eventual fall in prices could be a long multi-year scenario ? What else could explain 10 houses on the same street in 4S ranch asking $200k more than they paid for just a couple of years ago.

[powayseller]

When I was looking for a rental in January 06, I called some of the places that advertised “no dogs” and some were negotiable, because although they prefer no dog, they were not getting any renters. Thus, they didn’t change their ad but were becoming open minded as they got more desperate.

With record vacancies, I think landlords will get more open minded.

[Anonymous]

Where are these record vacancies?

[powayseller]

Downtown condos,houses, apartments, all over town.

With 44K people leaving annually, you’d have about 15K households per year leaving.

Don’t you have any vacancies on your street? Maybe we need a survey on this forum. How many rentals, and how many vacancies are on your street?

I have 6 rentals on my street that I know of, and I’ve only met 12 of the neighbors. So half the people I met are renting.

Two homes in my neighborhood are for sale, and they are vacant. One belonged to a deceased man, and the other to a landlord whose tenants just moved out. Neither of these is due to a family leaving the area.

sdrealtor may know where all these vacancies are, as it sounds you are looking for a cluster or pattern?

[Anonymous]

I believe that if we had record vacancies, that instead of rents increasing…they should be getting cheaper. A pattern that could be considered as an indication of record vacancies would take time to develop. Just as one house in a neighborhood decreasing their price does not signal a “declining market” one landlord open to dogs does not signal a pattern of desperate landlords. I personally know many landlords that have successfully increased the monthly rent on their units in the past few months.

[powayseller]

I didn’t say that rental units have record vacancies. I said record vacanies. That’s homes. SFH.

I don’t know how rental rates are on SFH. Apartment rents went up from spring 05 to fall 05 and have decline since. Check the last UT article. The online version missed the graph. The prices now are only slightly above the spring 05 prices. Why did they drop since fall? Article didn’t say.

This is for the person who thinks our wage increase can save housing. Do you really think employers will raise wages just so we can buy houses.

If you follow that logic, we would never have recessions, all we need to do is raise wages and all is fixed.

What do the homes on the market do while we wait for the wages to go up sometime in the future, wait for that day? The ones that sell at lower prices set new comps for future sales.

Future wage increases can set the stage for a potential recovery in the future but for now the prices will go down as long as our current supply/demand situation remains.

You also need to look at the employment scenario. Do we have the types of jobs in San Diego that are likely to see 50% wage increases? Movie making, biotech, nuclear power plant production, alternative energy R&D, Mayo Clinics/best medical centers in the country, auto manufacturers with booming market share? NOPE! We are a low-wage city!

I pulled this data together last winter. From the Employment Development Department, the SD County snapshot. The 3 larges growth sectors are construction, retail, and government. Small hope for wage gains with jobs like that!

Since 2000, SD Cty gained the following numbers of jobs
1) 17,800 in Natural Resources, Mining, Construction.
It turns out that 17,700 of those jobs are in construction. 12.000 of those jobs are in “specialty trade”, and I assume that would be granite fabricators, plumbers, and those who build and remodel homes.
2) 11,900 in Trade, Transportation, and Utilities. Now ask to break it down! It turns out that 10,500 are in retail, mainly due to consumers pulling money out of their homes to go shopping. It would have been great if this growth would have been in utiltiies or transportation, or in investment in new infrastructure, but unfortunately it is not.
3) 8,100 government jobs, with 7600 of them being local.
Those are the 3 biggest growth sectors for SD County since 2000.

A last point: the bulls say that each asset bubble is justified, that the fundamentals will catch up. zk, do you remember during the technology stock bubble, the permabulls said the earnings don’t matter, or that they will catch up. The companies have so much promise, the earnings will catch up to match the stock price. Why do people not learn? Asset bubbles pop on the nominal side.

This is an important point that Rich might want to address. Has there ever been an asset bubble in recorded history that violated this principle? Has any asset bubble popped by the price of the asset staying flat, while the fundamentals caught up?

Schahrzad Berkland

[ybc]

Maybe it’s not a big percentage, but wireless industry is strong in SD because Qualcomm is here and it’s doing well, and I heard that they pay very well. There are many many small biotechs in San Diego, and scientists there get paid quite well too. Still, in aggregate, SD doesn’t have a high wage level.

Regarding why people don’t see that a big price correction is coming — by definition, bubble exists when a majority of people believes that the existing price trend will continue. It appeals to human’s basic biases, and it comforts them in believing so. On the other hand, if there is no price correction later on, then people still stop calling it “bubble”. To me currently housing is borderline on being stable – anything go slightly wrong may tip the balance. Could be ARM reset, could be foreigners want to get out of dollar and dispose of dollar based mortgage based asset and drive up lending cost further… the problem is that once the process starts, it can easily escalates because of debt level, use of ARM and interest only mortgages, and real-estate dependent consumer spending and job creation.

The problem is that the tools that were available in the past to stimulate were already used. Fiscal policy — debt is already a big problem. Monetary policy – more easy money will only lead to further commodity inflation and a more leveraged economy. Not that policy makers won’t use this to provide more temporary release just to make people happy a while longer.

For disclosure, I rent. I had to move twice in the last two years – once because landlord is a real pain, another time because landlord wants to move back. Moving is a big pain, and I have to say that owning has certain quality of life advantages. But I’m sticking with renting for now.

[powayseller]

I wanted to bring this thread back to everyone’s attention. The longer we wait to buy, the less we’ll pay for a house. A long-time realtor told me to wait until the bottom, and then buy a duplex. She said, “set yourself up for your retirement. Get some rental property. If you buy a duplex, you can live in one side and let the tenant pay your mortgage.” Sounds like a good plan. Maybe I’ll buy a single family home plus the duplex. All I know is this: the longer I rent, the more properties I’ll be able to buy.

[Steve Beebo]

In a few years buying a duplex may be a great idea.

Another way to set yourself up for retirement is to keep paying down the mortgage on your existing home, keep your low property tax basis from the mid-1990’s, and have no house or rent payment when you’re retired.

[Author]

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