Future housing purchase – trading up when rates are higher?

[Jazzman]

[quote=The-Shoveler]
Also I think it’s funny that people think that were going to start suddenly building 500 to 1000 high rise downtown condo buildings for the next 100 million in population we are expecting to grow in the next 30 years.
Sprawl , get used to it, even in NY most people live out in the burbs and commute via train etc…[/quote]
Not sure you can compare NY with LA.

[spdrun]

They’re more similar than you think — both metro areas are heavily suburbanized, though NY doesn’t sprawl quite as far inland since it has Long Island and CT on the other side. It basically can sprawl into 3.5 quadrants rather than two like coastal Californian cities.

NY also has a larger hard core of “I’ll leave the city over my dead body” types.

[Jazzman]

I think the OP is making a very relevant point, and he/she is right and we all know that. It is the risk that was taken for short term gain, and the rest is being left to fate. To deny otherwise is a bit like leaving the rice on boil overnight and praying the pan doesn’t scorch.

One answer may be to postpone buying until rates and prices have “normalized’, which if the last few years has taught us anything, it may never happen of course. But as someone else is suggesting the so-called move-up market is an invention of the last few decades, fueled by the massive increases in household debt.

Take heart. Every cloud has a silver lining. The smaller your home, the less stuff you need to buy to fill it. It sounds inane, but little truths have broader overtones.

[carlsbadworker]

[quote=matt-waiting]Keeping it as a rental may work (or maybe just rent to the baby mamas), but I imagine that on the macro level, most people will need the equity to purchase the larger house.
[/quote]

I agree with your overall logic, but the assumption is wrong. People need equity to purchase the larger house because they cannot save enough down payment. That unable-to-save mentality is wrong.

We have almost the lowest mortgage-payment/income ratio in history right now. And the mortgage is likely even lower than the rent. So you should be able to save for a larger house and be ready to come up with new down payment when you are ready to buy.

You are worried about higher rates due to inflation. Rental property is a good hedge against inflation. It is likely better than housing price itself. So I am afraid that is going to be the best answer that you can get.

Also, I completely agree with sdr earlier. Now is probably the best time for upgrade. So if you can afford it, go buy your dream house now and forget about trading up later.

[Jazzman]

^^^Not sure I follow the logic of this. FTBs are already buying the best they can afford. The definition of trading up is buying a better, more expensive home when you are in a better position to do so. How can you bring forward the future? A low interest rate environment doesn’t mean buyers are able to save, it just means affordability is enhanced with over-inflated prices.

[bearishgurl]

[quote=Jazzman]^^^Not sure I follow the logic of this. FTBs are already buying the best they can afford.. The definition of trading up is buying a better, more expensive home when you are in a better position to do so. How can you bring forward the future? A low interest rate environment doesn’t mean buyers are able to save, it just means affordability is enhanced with over-inflated prices.[/quote]

Jazzman, I don’t think current prices in SD County are overinflated. In fact, in many areas, the current asking prices are less than today’s build-cost with the lot thrown in for free and certainly selling for less than current salary and interest-rate fundamentals would dictate.

However, I do agree with you and CW about recent buyers’ (who purchased at low prices and with low-interest mtgs) inability to save. I think this stems from the feeling that the property they just bought “needs everything now” and “has to be remodeled ASAP.” In addition, I believe the vast majority of the current crop of homebuying families won’t buy anything used to place inside that home. All furnishings, appliances, electronics and window and floor coverings must be new and unused, preferably in the exact model, color and style that they want. This includes the preference for new and near-new vehicles.

It’s more than a little difficult for a family to put $$ in savings every month when their consumer debt service is as high as it is and/or they spend all of their income (no matter what their income level) on consumer debt service (incl student loans) and enhancing their lifestyles (ie very expensive daycare and pre-K, private schools, HOA’s, etc). They just “grow” into the their available discretionary income, which is higher, due to low mtg rates.

There are LOTS of cheaper options for consumer goods and “lifestyle choices” which would enable young families to save money but they are unpalatable to the vast majority of homeowners who are currently in “family-raising mode.”

Yes, Jazzman, most FTB’s are already buying the best they can afford and often much more than they can afford, given all the well-known uncertainties that can befall people in this “station in life.”

[bearishgurl]

matt, how many sf does your “smallish house” have? And how big is your lot?

And if you didn’t have “5 kids” or “baby mommas” in the future, would YOU stay put because you like your house and neighborhood?

Just wondering. Your answers may reveal you should just enjoy your 3.5% fixed rate mtg and don’t really need to be worrying about this.

As far as current borrowers with low mtg rates having a “disincentive” to “move-up” in the future, I don’t see it this way.

The way I see it, the buyer under these favorable rates bought the smaller house for a reason and, contrary to popular opinion, it probably wasn’t the price. It was because they wanted to be in a certain coveted or “hip” area and did not want to live in the stix or in a lower-income area such as Lemon Grove or Spring Valley, where they could have gotten a 5/2.5 with large garage/lot for the same or less amount of money. So the buyers buying “move-up” properties now are not necessarily “move-up” buyers. Due to the low interest rates, likely half are actually FTB’s stretching to buy a property which, under a more normal 6.5% to 7.5% fixed mtg market, would be out of their league. Many are doing so without full knowledge of the monthly cost of maintenance and utilities on such a property.

There are buyers who buy for location and/or charm/architectural details and then there are buyers who buy for purely size and/or “uniform look of a planned community.” However, these buyers are not typically one and the same person.

I have bought and sold several properties in my lifetime and never once did I pay any attention whatsoever to the prevailing mtg interest rates … not even when FHA was at 15.5%. We qualified for whatever we did and that was our shopping point. There are more than nine ways to skin a cat.

In other words, ALL interest-rate environments, and ESPECIALLY high interest-rate environments are GREAT for buying property!

[matt-waiting]

[quote=bearishgurl]

In other words, ALL interest-rate environments, and ESPECIALLY high interest-rate environments are GREAT for buying property![/quote]

Not if you have to finance most of the purchase. I agree that it is best to buy once and stay put. I agree that most people would be fine with living in 1200 sq feet…etc.

The reality is that most people don’t follow this sound advice and trade up. My question is do the Piggs think that the move up type market (properties >600K) will soften in the future because of the disincentive for FTB to close out a 3.5% loan and take on a 7% loan (or whatever it is in the future).

I generally don’t like to trade a good investment for a bad one. I would think that other FTB would not want to also.

[The-Shoveler]

I think it will have a lot more to do with if you (or you spouse) are moving up in your career or you have a stagnate career,

I can tell you that you may think you are satisfied right where you are forever, but unless you are working in a dead end career you will most likely get the yearning to live like the other half lives.
Also if you are moving up you are more likely to be experiencing 15-20% increases than 3-5%, that puts a whole other perspective on where you want your family to live.
I know people, who are Mechanics and construction workers and live in the same house forever,
I know people starting out as Product verification people and work their way to Director of engineering.
Different ball games.

[spdrun]

I’d rather have the extra cash, and be able to spend 4-6 weeks a year traveling than own a bigger house that’s a chore to clean and maintain.

I know a wealthy property investor who built himself a big mansion. Only problem is that both him and his wife are from a small village in Croatia — neither is comfy with the thought of hiring servants, which makes things “interesting” for them.

[The-Shoveler]

Ha!!
Maybe if you live in Europe or own you own biz.

Anyway good luck with that.

[spdrun]

Speaking for myself:
(a) I’m a dual citizen by birth, and therefore can legally live and work in any of the EU/Schengen countries (as well as Switzerland after 2014). I can take or leave the US, though the woman whom I love does happen to live in NY. For now, anyway.

(b) I’m freelance and DO spend 4-6 weeks per year traveling. As did my mom when she was working — nominally W-2, but really a project-based contracting engineer who could take time off after an assignment was done.

(c) The one large organisation that I’d consider working for is the U.N. Very humane about vacation time (3-6 wks/yr + holidays) as well as reimbursing Americans’ income taxes in full. And based in New York!

[Jazzman]

BG, do you think if the tax credits, low interest rates, foreclosure moratoriums, HAMP and other govt. efforts, and the continual prop marketing/lobbying of the RE industry were absent, prices would be where they are now? If you look at S&P’s Case Shiller index over a twenty year period, it’s hard to see how today’s prices are justified in terms of increased incomes. For as long as debt is the cause of price inflation, then it seems doubtful home price appreciation is creating wealth. If a martian was watching, it/he/she would be saying their (humans) problem was debt related, and they are trying to solve it with more debt. I wouldn’t blame them for invading us.

[bearishgurl]

[quote=Jazzman]BG, do you think if the tax credits, low interest rates, foreclosure moratoriums, HAMP and other govt. efforts, and the continual prop marketing/lobbying of the RE industry were absent, prices would be where they are now? If you look at S&P’s Case Shiller index over a twenty year period, it’s hard to see how today’s prices are justified in terms of increased incomes. For as long as debt is the cause of price inflation, then it seems doubtful home price appreciation is creating wealth. If a martian was watching, it/he/she would be saying their (humans) problem was debt related, and they are trying to solve it with more debt. I wouldn’t blame them for invading us.[/quote]

If none of the RE propping-up mechanisms were ever employed by the gov’t, I believe 80% of the local market would have certainly crashed 50%+ in early 2008 and all the cash-rich flippers and speculators looking for rentals would have bought trustees deeds and REO’s in full force and leased or resold them all a few months later.

If all the these artificial props were taken away today, there would be no doubt be *countless* former and soon-to-be former long-term squatting homedebtors looking for rentals with a tarnished credit record under their belts. Those for whom chronic unemployment was the primary cause of their default would leave the area for cheaper rental pastures elsewhere. Again, the flipping teams and investor speculators would come out of the woodwork with cash to gobble up the tattered remains of the homedebtors.

Yes, I think many areas could tank, even a lot, but this sold-price-tanking would be temporary …. lasting only until 6 months after the last area homedebtor was evicted from their now-foreclosed upon property.

SD County is not only flush with foreign buyers looking for unique properties and great investment deals, it is flush with dozens of very well-organized REITs, flipping teams and investors of all types (mostly boomers over age 59.5 who have access to a lot of cash and are looking for income). You might be *shocked* as to how handy some of these individual investors are.

The blood in the streets caused from taking away the props (abruptly ending “lender-malaise”) will blow over within 6-12 months, depending on micro area. Then prices will firm up causing more “fence-sitting” sellers to list the better-maintained properties for sale. The eventual sale of these better-maintained properties will enhance the sold comps of their micro area, lifting all surrounding boats. This will happen faster in the “coveted” and “hip” areas and also areas very convenient to public transportation (with no transfers) quickly taking passengers to work centers and major shopping and entertainment.

If CA lenders are no longer paid by the PTB to sit on their hands taking 2+ yrs to work out a mod deal with their squatters, then they will follow the non-judicial foreclosure scheme (of 111/141 days) laid out for them by the CA Legislature one day after they receive word that their props are gone. Soon, the 141-day provision in the code will disappear (and/or the reason for it will) and CA lenders will be back to square one (with a 111-day foreclosure timetable + 3 biz days for a filed trustees deed).

As it should be and should have always been. I don’t mind a bit if this happens. If it happens too close to the time I want to “retire” and move away, I’ll just rent my property until a better day. There will always be a “better day” in SD Co. This is partly due to Prop 13 and partly due to its very interesting and unparalleled locale. And this is coming from a self-professed (realistic) “bear.”

In addition, a very LARGE portion of SD Co’s population is self-employed, retired or otherwise independently wealthy and does NOT depend on jobs to support themselves.

Higher mortgage interest rates would only affect those areas where the majority of buyers customarily take out large mortgages (>417K). In these areas, sold prices would likely be affected by the prevailing interest rate but I think the rate would have to be over 7.5% to affect sold prices. In any case, it would only affect the marginal buyers who probably should not have been shopping in those areas to begin with.

I believe in Darwinism, paying your dues and living within your means and that a particular piece of RE is worth exactly what someone will pay for it . . . nothing more, nothing less. The best CA coastal areas were never created to house the masses of wanna-be buyers to begin with, ESP the working-stiff FTB. They will always be available to those that can afford to live there.

[carlsbadworker]

[quote=matt-waiting]
The reality is that most people don’t follow this sound advice and trade up. My question is do the Piggs think that the move up type market (properties >600K) will soften in the future because of the disincentive for FTB to close out a 3.5% loan and take on a 7% loan (or whatever it is in the future).

I generally don’t like to trade a good investment for a bad one. I would think that other FTB would not want to also.[/quote]

OK. Let me get this straight for you first. A primary residence is a consumption rather than an investment. You move up because your income justifies higher consumption level rather than for “investment” purpose.

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