So Cal Housing Blues…

[precurser]

Let me start off my topic by saying that I am a 24 year old living in Chino Hills with my girlfriend in a decent house that is completely paid for. The house is my girlfriend’s parent’s house and is to be used as a big chunk of their retirement when that time comes. We have improved the house quite a bit and looks 10 times better than it used to, but the only problem is that we will never buy or reap any benefits from this because of her parents using it as part of their retirement.

Combined my girlfriend and I make roughly $64,500 annually and we have come to the conclusion that we could probably afford (although things would be very tight) a house at around $250k and we would be very well off with a house just under $200k. We got really serious about wanting to buy a house about a year ago and prices were expensive then, and they just got even more expensive. Lately it seems as though prices have cooled off but again, they are still too expensive for us right now. Will prices continue to drop or will they drop 10% and level off like a lot of people around me say? Hearing that prices will just level off seems to ridiculous to me, how on earth are first time home buyers like me and my girlfriend supposed to own a house? The “American Dream” of getting married, starting a family, and purchashing a nice home seems completely out of reach for us.

I really respect the views and opinions of people on this blog and forum and would greatly appreciate any insight you guys might be able to offer. Will my girlfriend and I ever be able to live our dream? Are we just looking at the market at the wrong time? Should we just sit back for another year or two?

[technovelist]

Wait. Prices will have to come down a great deal, for exactly the reasons you have stated: almost no one can actually afford the current prices. When something cannot continue, it won’t continue.

You’ll know when it is time to buy, because no one will be discussing how much money they have made in real estate. Instead, they will be discussing who has the best bankruptcy lawyer.

[Carlsbadliving]

It also sounds like you’re in a good position to wait, living in the in-laws house. Take advantage of the situation and save up for a down payment. You’ll be very happy you waited in a few years.

[VCJIM]

Just be patient and study the market and the ins-and-outs of buying real estate, so you’re ready when the time comes. Work on saving money, lowering expenses and earning more money.

I was fortunate that I hit my mid-20s right in the middle of the last housing downturn (mid-90s) and was able to purchase. You are hitting your mid-20s just after the greatest housing peak in history! Buying now could severly damage your long-term plans if you end up in foreclosure, or owning a depreciating asset.

You are in a great situation in your current rental; there is no need for immediate change. Remember, owning a house = renting it from the bank, unless it is completely paid.

[waiting hawk]

Don’t buy until you can put down 20% and EASILY rent it for ur payment. Simple. $225750 is the max you should pay. Thats x3.5 of ur gross. Most people say -10% because THEY HATE seeing their paper wealth vanish. It is going to come down and come down good. People only make and can spend so much.

My website tracking Temecula and South Riverside County

[barnaby33]

Come on Waiting Hawk, if the couple makes 65k a year thats likely not going to happen. There is alot of good advice to be had about waiting and learning to time the bottom of the market on this board. Then the best advice is earn more money, 65k will be cutting it close, even when things do melt down.

A condo is a more realistic first purchase at that income level, if as the poster says he doesn’t want to get down to no free income.

Josh

[surveyor]

I recommend the following:

1. Educate yourself about the real estate market, its ups and downs, its potential. Read a lot of books.

2. Save your money, pay off any loans, and minimize expenses. Keep track of your credit score and try to improve it.

3. Upgrade yourself and keep trying to get better at your job and try to get more pay.

4. Study up about taxes and how to reduce your taxes.

After that, everything will take care of itself and you’ll be able to do it. Good luck! This is the easiest country in the world to get rich and do well.

[zk]

I totally concur with surveyor’s recommendations. Those are very solid ideas.

Also, when trying to guess the future of the market, keep this in mind:

The same force that drove it into the stratosphere will drive it into the basement: market psychology.

The only reason prices are as high as they are is that people thought that prices would keep going up and that buying a house, the biggest house you could make the payments on (even if you could only afford the payments temporarily), was the easiest way to make lots of money. It didn’t matter what you paid for it, just buy it at any price; it would be more next year. Now, the psychology has started to shift. It’s shifting even faster than a lot of gloom-and-doomers thought it would shift. Human beings in general follow the herd. This negativity on the part of buyers will increase as more people get caught up in the herd, and before long the negative feelings will be as dominant as the positive feelings were on the way up. Then most people won’t want to buy a house at all, for fear of paying more for it than it will be worth next year. Demand plummets, and with it, prices.

Anyway, that’s how I see it.

Good luck.

[masayako]

Welcome to the forum.

Home price:
First, I want to give you my honest opinions. My research (and based on historical data) shows me that housing price has a high chance to decrease at least 30% within 5-7 years timeframe. Some boldly predict 50%. I have reserve about that prediction. I am not saying it’s not possible, just not likely. Given the wage factor, general affordibility of San Diegean, I just don’t see it dropping so much unless we have some kind of nationwide disaster, massive job loss or $200 oil per barrel.

Affordibility
Second, with $64,500 combined annual income is really tough to buy any decent home at this point. My wife and I have a combined income at low 6-figure and we’re still having a hard time buying a decent size newer house in Rancho Bernardo. In San Diego, we are competitive with many other high paid employees from telecom companies, biotech companies, financial companies. I recently talked to my friend from Microsoft in Seattle. They live about 20 minutes drive from Microsoft site and they house is in around $450000. Even they knew about the crazy housing price in San Diego and told me to relocate. =)

My suggestion to your situation: Try to get a better paid job in anyway you can. On average salary get you on average house. The nature of economics do not change.

[smfj]

I agree with all of the advice above, and I’ll add my two cents.

I’m 27. I always thought I’d own a home by now- I wanted to do it on my own before getting married- striving to be an “independent woman” I suppose. But it just hasn’t worked out that way. By the time I was ready to buy a couple of years ago, prices were already out of control. So I’ve happily remained a renter. There was a point about a year ago when I got a little stir crazy and started to question whether the market would ever cool off. But I came back to my senses and realized I was a lot happier enjoying my life and saving for the future instead of stretching to purchase a home I couldn’t afford.

There’s plenty of hard data supporting that we are indeed experiencing a housing bubble in Southern California, and as a finance junkie, I love analyzing it. But the way I first knew about the bubble was not through this analysis, but by realizing that even with a relatively healthy income and savings account, I could not comfortably afford a 2 bedroom condo (and maybe not even a 1 bedroom, depending on the neighborhood). If someone like me is not able to afford a condo like this, than who is going to buy it? An investor when the rent can’t cover his carrying costs? That may have happened for a while, but it’s just not sustainable.

Housing prices are cyclical. Hang in there, and you’ll be happy you did. Enjoy being 24. You have a lot of time to be a homeowner.

[NateK]

My advice goes along a different route: Why are you planning on buying with your girlfriend? Buying a home is a very very long term investment. DO NOT BUY WITH YOUR GIRLFRIEND!!!!! It’s a waste of time and if you buy right now…It’s going to be a big waste of a whole lot of money. I know you guys are in love right now. But you are only 24 years old and I can guarantee that the way you look at life is gonna change in 5 years and your relationship will change too. I’m pretty sure everything is awesome now. But do you know that 2 out of 3 marriages in Southern California end up in a divorce. That is HUGE. And you aren’t even yet ready to jump into that boat yet either, But you’re ready to buy a home together??? But think what’s going to happen on the high possibility when you break up 2 or 3 years down the road. Imagine what would happen if you bought a home now and after your home depreciates 25% in 3 years. You think you guys are gonna keep that house. While she kicked you out and you have to crash at a friends place…Hell Nooo..You have to sell it and gonna sell it for a big fat loss.

So just live at your in-laws. I’m assuming you aren’t paying rent…You know how many of us would kill to live rent free and how much money we’d save not paying rent. You have it pretty good. So save up your money so you can purchase a home on your own and worry more about trying to get that FICO score up. And wait for 3 years or so and you’ll be very pleasantly surprised on how prices on homes are a lot more affordable compared to now.

Did I mention…DO NOT BUY WITH YOUR GIRLFRIEND!!!!

[Anonymous]

Good point Nate. That is a disaster waiting to happen buying a house with your girlfriend. For that matter, buying a house in partnership with anyone is stupid. If you can’t afford the payments based on your own salary, then you shouldn’t even be considering buying a house, that is common sense. What is the rush anyway? Most 24 year olds in California don’t own their own houses so why should you? What makes you different?

Wait a few years until you start making better money, and home prices are lower. In 3-5 years you should be in a better position.

[VCJIM]

I concur. Don’t buy a house with your girlfriend. I’m not as pessimistic as NakeK about your relationship (especially not knowing any details), but owning a house together before marriage is not a good idea regardless of how strong you feel about the relationship.

[PerryChase]

I would agree with not buying with your girlfriend. Just get yourself ready to buy; and buy only after you guys get married.

[Bugs]

Buying a house right now could easily kill your relationship.

Better to spend your time and effort upgrading your career. Pursue your education a little more. Roll the dice with the lower paying job that offers more opportunity for long term payoff. Do a little traveling and become a more well rounded person. There’s no good reason to rush into a home right now because doing so will make you less secure, not more.

[vcguy_10]

I agree with the relationship advice given here. Regarding the financial situation, consider this. A house’s price should fluctuate between 90 and 120 times its monthly rent. (Meaning, a house that rents for $1800 a month should be worth about $200K, give or take 10%-15%). That relationship has held historically in California, the rest of the country, and in most non-communist countries as well. Today, house prices in So Cal are at a ridiculously high 290 times monthly rent. As it happened in 1990-1996, house prices will drop and continue dropping (and rents will increase somewhat) until they get to a resonable level.

And if you have a nice place to live in, as you do now, what is the hurry? RE is cyclical, it has ups and downs, and right now we are at the peak. The fastest road to financial ruin is to buy high and sell low.

[JES]

The common theme that I hear is, “I refuse to believe the nightmare scenario that the bottom is going to drop out and we will lose 20-30%.” So easy to accept 20% gains for five years in a row, but heaven forbid you even suggest that the market could correct a mere 20%. Even worse when you approach them with solid facts all you get in response is the above line with nothing to back it up.

Psychology plays a huge role in this market and involves greed, denial, refusal to accept data that doesn’t back up a preconceived belief. Confirmation bias I believe it is called. Not only is the data on sales, inventory, ARMS etc. bad right now, but psychologically the market is a mess with most people either not aware or flat out denying that a crash will even happen.

My advice is to wait it out, or consider moving to a city where you can make your same combined salaries but buy a $275,000 palace.

[cabinboy]

Relax. You’re reaping the benefits right now. You’ve fixed it up and you have a nice living situation near L.A. at 24! Most people still have beer can furniture at your age. Buy her a ring. Get married. Have a kid. Your kids won’t know the difference between renting and owning until they are 10 years old. That gives you at least 10 years and 9 months before you have to impress anyone you care about by owning a house.
If you really want to see what life is like with a mortgage and property taxes, force yourse to put $2500 in a jar for 12 months. It might help you appreciate how nice you have it now.

[SD Realtor]

Common theme here eh?

1 – Wait wait and wait!

2 – Save money… save more money…put it in a CD and build up as much cash as you can. Set a goal and try to make it happen. Once you get in the habit of putting aside even a few hundred a month, you will see how easy it is.

3 – Buying a home with someone who is not your spouse is not advised. Perhaps in another 2 years home prices will be closer to the bottom of the market, but more important perhaps you guys will be married!

In the long run those with patience to make prudent investments based on pure data and market analysis rather then emotions always do better.

[Peace]

“The house is my girlfriend’s parent’s house and is to be used as a big chunk of their retirement when that time comes”

OK, are your future in-laws planning on selling the house to cash out for retirement?

If so, how bout you guys make a deal with them that you want the house as an inheritance and you will give them an advance for the value.

Could you afford the house at the time of their demise? Is this a neighborhood you would like to raise your family?

What I’m getting at is that your future wife and you can inherit the Prop 13 property taxes your in-laws are paying. If your in-laws have owned this home for a long time (and the value doesn’t crash below what they paid for it) you could set yourself up to save the proverbial sh**-load of $$ in future property taxes.

And of course as soon as they lay eyes on their grandchildren they will want to give you two a smoking deal.

[Raybyrnes]

With Your incomes you might very well qualify under the affordable housing guidelines. Builders have had to set aside 15% of new units or pay fees. Many pay the fees but there are opportunities out there in some of the most desirables areas. I would have never imagined that a family with close to 100K of income could qualify for affordable housing but they do. This is not to say there are not some strings attached but often times you will own for less then you rent and will have the tax deduction aswell. I had an opportunity at 950 square feet in Carmel Valley that would have cost me about $1400 a month to own with 5% down. This includes insurance taxes and HOA. The seller Flaked out at the last minute. I’ll wait for the next deal to present itself.

[ocrenter]

precurser, just to let you know, you are in fine company. folks with annual income of over $200,000 are also renting and waiting. yet there are still quite a few folks making $30,000 getting into homes after looking at super-low monthly payments based on 1% teaser rate that expires 6 months later. follow the smart money and wait!

[mydogsarelazy]

Hi precurser,

You are so fortunate to have found this board. You are getting some awesome advice here.

I have one sure-fire investment for you.

If it is possible, and the house you are in is large enough, you and your girlfriend should take on a boarder. I know, this can be annoying, but I used to have a place near USC in LA and I had USC students as roomates that I found in the Daily Trojan. Seriously, I had some wonderful people living in my back room.

Then take the rent (say $500 per month?) put it in a joint savings account and let two years go by.

You will have more than $12,000 saved, you will have watched the price of housing go down and when you do buy a place you will have extra dollars for movers, repairs, furnishings, landscaping etc.

In this economy dull, cautious investments are the only ones to make!

JS

[mydogsarelazy]

Hi precurser,

You are so fortunate to have found this board. You are getting some awesome advice here.

I have one sure-fire investment for you.

If it is possible, and the house you are in is large enough, you and your girlfriend should take on a boarder. I know, this can be annoying, but I used to have a place near USC in LA and I had USC students as roomates that I found in the Daily Trojan. Seriously, I had some wonderful people living in my back room.

Then take the rent (say $500 per month?) put it in a joint savings account and let two years go by.

You will have more than $12,000 saved, you will have watched the price of housing go down and when you do buy a place you will have extra dollars for movers, repairs, furnishings, landscaping etc.

In this economy dull, cautious investments are the only ones to make!

JS

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