Buy or Don’t Buy?

[sakina96]

So I’m looking for a little advice or input from one of the many intelligent people on this site…

I’m new to the San Diego area, I have a good job and salary, and I am considering buying a house. I have no interested in overstretching myself and expect to get a standard loan product (15 or 30yr). I am also a firm believer that San Diego, like so many other places, is in the midst of a bubble as evidenced by rising inventory, reduced sales and some price reductions. I also believe that prices will also come down over time. I’m not quite convinced that housing prices will drop 40-50% as some people assert. However, 20% seems quite likely.

Likewise, I also expect that long term interest are only going to rise. I must admit that I’m not smart enought to understand all of the influences on long-term interest rates to the point where I can predict how high they’ll go. Anyway here is my dilemna…

Given that house prices are going to decline over the next several years and that interest rates are going to rise is it better to buy let’s say:

1. An 800,000 house now at 6.5%. Assuming 5% down giving a monthly payment of 6000 inclusive of taxes, HOA fees, etc.

or

2. Wait two-three years buy the same house for 640,000 but pay 8.5% interest. In the end it probably leaves you with nearly the same monthly payment.

Could someone point out the flaws in my logic or point out things that I have not considered. To me it seems like lowered housing prices over time favor the decision to wait it out. However this is counteracted by rising interest rates. The only difference is how much of your monthly payment is going to interest versus principle. Thanks in advance.

[powayseller]

Check out the same question in the thread titled “Same Payment After Bubble Bursts”, from a couple days ago.

[sakina96]

Thanks powayseller. I totally skipped over that forum. Very helpful insights.

[bubble_contagion]

For the same montly payment it is better to have lower price and higher interest:

– lower property taxes
– larger portion of the mortgage payment can be tax deducted
– if interest rates drop, you can refinance
– if you have extra cash, you can pay the principal faster

[Blissful Ignoramus]

Not to mention the fact that if you should ever decide to sell the house, it’s better to have bought low than to have bought high.

So, if you buy the house at $800K and find that it can be sold for only $640K in 2-3 years, you’re going to be upside-down mightily if you only put in 5% down, even if your monthly payment is the same if you buy it at the lower price. This might not hurt you if you’re planning on staying in the house another ten years, but who knows where you will find yourself at that point.

I’m also not convinced that housing prices are going to drop 40-50%, but it’s certainly within the realm of possibility, and if they drop 20% in 2-3 years as you propose, there is no reason to think they won’t continue to slide. I wouldn’t put my money into a house in San Diego right now unless I had 1) strong personal reasons to buy (i.e., kids and a very strong desire/need to make a stable home for them), 2) very high job security, and 3) fairly definite knowledge that I wouldn’t want or need to move for at least 8-10 years.

[privatebanker]

To add to what you are saying with regards to home prices falling 40%-50%. I think that will be the median price. There will be greater price drops in “hot” areas. And then there will be areas that really haven’t increased in price at the pace of all the “hot” areas. Buying a home right now for the common middle class person is essentially a financial disaster in the making.

http://www.theprivatebanker.blogspot.com/

[sakina96]

Thanks to everyone for your input. Blissful Ignoramus, If I were to buy a house now I would expect to stay in it for 8-10 years. But as we all know, no one can predict your future circumstances. My job is about as stable as it gets. I am not dying to have a house so badly that I’m willing to compromise myself financially. That being said, I’ll probably ride it out and save the extra 4,000/month for a downpayment when I need it.
Thanks again

[sakina96]

Thanks to everyone for your input. Blissful Ignoramus, If I were to buy a house now I would expect to stay in it for 8-10 years. But as we all know, no one can predict your future circumstances. My job is about as stable as it gets. I am not dying to have a house so badly that I’m willing to compromise myself financially. That being said, I’ll probably ride it out and save the extra 4,000/month for a downpayment when I need it.
Thanks again

[hs]

We are almost in the same situation as yours. We moved to San Diego more than a year ago and have been watching the north county market closely. With our savings, stable job, and good salary, we definitely could afford to buy now. But looking at the trend of this market, we decide to continue to rent for a while.
Personally I believe the price will go down, so be patient is the best way to do now.

[farbet]

Sakina Blissful if you are stable as you say:
Its May 22nd. Has the prices drop yet to your satisfaction?. Just make an offer for the house you like. The agent is duty bound to take it to the owner.
DEAL or No Deal. It seems as if buyers are scared of being insulted by the realtors. DO your homework and offer is my advice.Is it a buyers Market? or ni. Go for it.

[sakina96]

I don’t think that prices have dropped significantly enough to my satisfaction. Clearly there have been some decreased prices. However, at this point it seems random. As an example there is one neighborhood that I’ve been watching. There is a house (~3600sf) that has been on and off the market since October. It started off at 995,000; the current asking price is 840,000. Unfortunately I don’t care for that particular house. One street over another house just came on the market. It’s a good sized house (3700sf) with a fairly large yard (important to me) and ocean view (way off in the distance). There are absolutely no upgrades in the house (linoleum floor, ugly carpet, no granite). Asking price 1.1 to 1.3 million. You are absolutely right that I can offer whatever price I want. However, I am doubtful that the owners would be willing to accept (at least at this point) the 850,000-900,000 that I’m willing to pay. My feeling is that perhaps by next wintertime prices will have universally dropped and sellers expectations will have adjusted accordingly to make it worth it for me.

[farbet]

farbet
Sakina. I still think you should do some lowball offers. Once you are prequaliied they will jump at it. These sellers are sitting on over a 100 % equity.Try the Aviara,LA Costa areaa.

[powayseller]

A seller may take a 5% haircut in the offer. I know if a house in foreclosure, and they finally got an offer 3 days before auction. The offer was 4% below asking price.

Sakina was right about seller expectations. They are still high, based on current sales.

The longer you wait, the more desperation is in the air, the more you can negotiate.

If you must have a house now, make an offer, but if you can wait, time will reward you.

Another thought: before making an offer on a house, make sure you have picked 4 houses you like. NEVER get yourself married to a particular house. That destroys your negotiating ability, your willingness to walk away. If you have 4 ready offers, and the 1st one doesn’t accept your offer, go on to house #2, and so on. Let each seller know you have 4 houses you like, and that will keep them from making a counter. The seller will know if they make a counter offer that you don’t like, you can abandon their house and go on to one of the others.

[sdduuuude]

I think saving is the most important thing.
If you just rent, but aren’t putting extra cash away, you won’t be in a position to buy a house when the price is right.

Part of the “don’t buy now” strategy has to include saving for the down payment.

[Anonymous]

If you are going to buy a home to live in for awhile, you need to put itleast 20% or more down. 5% down, is just another max leverage scenario. You are going to pay more over time than the house is worth anyway, even on an after tax basis.

If you are concerned about rising rates, the way to address that is financing less principle. If you can only afford 5% down, then you cannot afford the house you are buying. If you cannot afford a 30 yr fixed with 20% down, and 30% of income towards the payment, do not buy a house now or ever. People have gotten away with this gambling in recent years, but the music is about to stop on this type of thing in my opinion.

Whatever selloff that is going to occur, is going to clear out the max leverage fools. I also do not believe that 50% will occur. If it were to occur on a national basis, that would wipe out 10 Trillion dollars of assets. It would create a wordwide depression unlike any that has ever occurred.

It is human nature to get caught in the hype at the very worst time, right before the markets turn. This is going to happen in commodities also. This happens in every economic cycle. As long as you approach this from a long term standpoint, with good ratios, you will not be subject to the clear out that is in process.

Buy a home to enjoy it and forget about becoming the next real estate mogul. My favorite quote of all time is from Larry Williams, “Leverage is for people that do not have any money.”

You have money it seems, so be prudent.

[Author]

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