[DaCounselor]

It’s a good point and the underlying theory also illustrates how one should approach purchasing property for the long haul. In a blazing hot market such as we have seen in recent years in SD, buyers could seemingly do no wrong. The mantra was “buy anything – just get in the game”. That philosophy only works over the short term and during a red hot market. As the market cools, it is likely that the least desireable areas and properties will get whacked the worst. To insulate oneself, one should always looked for properties with what I call a “hook” – such as an ocean view, or an end unit, or on a cul-de-sac, a vibrant walkable neighborhood, a well-situated lot, etc etc. Adhering to the first 3 rules of real estate will protect you and always serve you well over the long haul. Guess I’m just rambling and stating the obvious, but so many people have bought so much junk over the past several years that I thought it was worth saying.

[DaCounselor]

“It’s hard enough to estimate what will happen in the next year or 2, much less 10 years down the road.”
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Thank you for reinforcing my general point. It’s all guesswork. That’s why trying to time markets is so difficult. Anybody who has a crystal ball and can see the future sure isn’t wasting their time on this forum. It’s fun to debate the “what if’s”, though, isn’t it?

[DaCounselor]

Good input so far on ways to tweak the analysis. Since Mr. Wrong’s analysis is predicated on the fact that he intends to stay in SD for the long term, a fixed rental expense cannot be used. I’m quite sure a 3 bed/2.5 bath 1500 sq ft condo did not rent for $2200-$2500/mo 10-15-20 yrs ago. My old neighbor rented her very nice 3 bed/2.5 bath townhouse in PB for $1250/month in ’93. Rents will be up up up in SD over the long term, and that must be factored in to get an accurate picture. Also, Mr. Wrong don’t forget the income tax you will have to pay on your interest income if you invest your down payment money.

[DaCounselor]

“I would like to ammend my statement to say, “I believe that the buyers will be forced into foreclosure in 5 years, unless interest rates are back to 5% AND they can qualify for that $780K loan for a house which will at that time probably be valued at $480K. So in all likelihood, they will be forced into foreclosure”. Does this satisfy you?”
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It doesn’t – and here is why: almost the entire hypothesis is based on numbers that are simply being pulled out of thin air. In addition, there is simply no way to know what the personal financial situation of each homeowner is going to be. Every gloom and doom prediction is fatally flawed by these problems. The variety of scenarios that may play out in each individual household over the next five years is immense. I won’t even waste my time to hazard guesses as to these unknowns.

As for the earlier post, the class act who calls me a “fool” and makes this discussion personal, that is just indicative of someone who does not want to listen to opposing opinions. Now I did indeed feel like a fool in ’89, when I bought a property for $155,000 at the apex of the housing run-up, only to watch the market tank over the next 5 years. My timing could not have been worse. Understanding from family experience that all investments are best measured over the long haul, I held on and am now sitting on a property worth – well, let’s just say a whole helluva lot more than $155K.

I am certainly not saying all is well in real estate. Inventory is dramatically higher, buyers are on the sidelines, sellers are reducing prices and there seems to be a general feeling of waiting for the other shoe to drop. I think sale prices are going to end up down 15-20%, depending on the micro-area, where there will be support from the buyers on the sidelines. So long as there is no significant spike in mortgage rates and the SD economy does not tank, there is no reason to believe there will be a massive implosion in values. Mortgage rates are up, but in my mind relatively insignificantly when considering 17 straight upward modifications by the FED. The FED has already indicated that they are at or nearing the end of their anticipated increases. So if mortgage rates have increased minimally in relation to the ongoing Fed raises, I am guessing that when the Fed lays off the mortgage rates will stabilize, not skyrocket as some on this forum have assured me. And again, the critical component is each homeowner’s personal financial situation, which is impossible to know or predict.

All I’m doing here on this forum is responding to what I believe to be a “sky is falling” mentality and trying to create some balance by interjecting my 2 cents. If opinions that do not fall in line with “the sky is falling” are not welcome, I (The Fool) will happily spend my time elsewhere.

[DaCounselor]

If his business ends up making him a ton of dough, it will be a great parlay. If it fails, maybe not such a great move. Who knows how it will play out?

[DaCounselor]

“Great perspective! I’m selling my house for around $800K, we’re in escrow, and the buyers are getting a 5/1 ARM w/ 100% financing! With 80% of loans in CA reported as I/O, and some combination of no doc, neg am, and no down, these people will have to sell in 2006 – 2008 when rates go up. They won’t want to, but will have to.”
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Will they really be forced to sell? What inside information do you have as to where interest rates will be or how the buyers’ personal financial situation will evolve?

I’m sorry, but I am continuously baffled by the gloom and doom prognostications based on that which is not known.

[DaCounselor]

There are certainly an awful lot of factors that may have an impact on what happens to the valuation of SD real estate in the future. I really don’t know what precise path interest rates will take. I’m not sure how the SD economy will perform or how everyone’s personal financial situation will unfold in the coming years. I don’t know if Hezbolloh is going to blow up the Convention Center (but I hope not!). What I do know is that for the SD real estate market to implode 50-80% we will have to have years and years of vast amounts of sellers (not fishers, but those who really must sell) and a relatively miniscule number of buyers. Unlike 1990-95, I think the economy is strong enough to support buyers, who will in turn support pricing well before a 50-80% deflation. Just a guess, like what is set forth by everyone else on this forum.

[DaCounselor]

I don’t know of a singular reference that compiles downtown condo defects/homeowner complaints. My sources of information regarding these issues are those that live in various condos as well as information from lawsuits filed by condo homeowners against the developer. I have heard of pretty terrible ongoing problems with elevators at Harbor Club, plumbing at Cityfront Terrace and hot water (as in none) issues at Treo. As many of the downtown condos have recently been built, the full extent of problems is yet to be known. I also understand that noise is quite a factor for many downtown condo residents – the train and Gaslamp revelry overflow have been cited to me as sources of complaints.

Not trying to scare you off – I will likely be purchasing a downtown condo myself in years to come – just passing along what I have heard.

[DaCounselor]

My advice is to always hold onto your properties as you move on (and up!) and rent them out if at all economically feasible. I know of very few folks in SD who purchased properties over the years, traded up, and held onto and rented prior homes that wish they had done otherwise.

As for purchasing downtown – two issues there: first, downtown has been the focal point of speculators local and world-wide – yes, world-wide speculation on downtown SD condos. Several of the newer developments are stalling in pre or early construction phases due to financing, lack of pre-sales and the downtown condo glut. Second, many downtown condo buildings have significant construction related deficiencies that are really impacting residents’ lives. You really need to do your homework on these buildings to find out what is going on and what the solutions are, if any.

Of all the SD micro-markets, downtown is by far the shakiest. It is one of the few markets where I would advise a wait and see approach or a rental approach before purchasing.

[DaCounselor]

The best source of finding out how people feel when they are underwater or upside down on their homes is to talk to those of us who purchased property in San Diego in the late 80’s and then watched the local economy tank and real estate values follow. It was not a pretty time. Even the first of the newfangled downtown luxury condo towers (Harbor Club) came out of the gate right into bankruptcy. Most people who bailed on SD did so because of lost jobs – mostly defense budget cut related. I can tell you, though, even being upside down on real estate and a shaky job market, there was a sense that SD was special place. Many of us in the construction/real estate/lending world believed that we would ultimately find ourselves in a situation akin to LA, NYC and SF as to real estate prices in the future.

Many of us bought property at the apex of rising prices, held on, refinanced multiple times to get lower rates, and now have seen even more remarkable increases over time. The long term story of places like those mentioned above, and SD, is that values are going up. So for those of you who have recently purchased that $650K condo and are freaking because your neighbor can’t sell his for $595K – take a deep breath and think about the guy who was freaking in the early 90’s because he bought the same condo in ’89 for $155k and there were no buyers to be found. If you’re in it for the long haul, you will make money, period. If you’re out to make a quick buck, you will likely suffer the fate of most quick buck artists. And anyone waiting for a 50% value implosion should sit down and get real comfortable because it is not going to happen in SD.

[DaCounselor]

“I am simply advising to take your equity while it is still there, then pounce on the bargains that will inevitably present themselves when the factors I listed in my last post come into serious play.”
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Doesn’t this advice conflict with the position that using a home as an investment/retirement/ATM is unhealthy and is part of the reason why the sky is about to fall? And why pull out of the game now, when interest rates are at the very low end of a 40 year spectrum? When money is at its cheapest, shouldn’t that be taken advantage of? Why not lock into a low fixed rate now? Especially if interest rates are indeed going to “skyrocket”?

If you like your home, would like to stay there if you can, are not intending to use it as an ATM, have built up a cushion of equity and can lock into a fixed rate loan at historically low levels, why sell? You will be disembarking from an environment where you know the variables into the great unknown if you do so. Is this really the smart play?

[DaCounselor]

I would advise you to not try and “time” the market. Regardless of what you read on this site or elsewhere, there is no one and I mean no one who knows precisely what is going to happen with San Diego real estate, how interest rates will move, how lending practices may evolve, etc etc. The true rules of purchasing real estate have not changed. Purchase when you are ready for the committment and can afford the payments without exotic financing, and then start enjoying your home.

[DaCounselor]

“Make no mistake, what is coming is no ordinary downturn; it will change our live’s forever. Many people who lose their homes will simply slip from the middle class and will never return. Sadly, I fear most will not realize what is upon them until it is too late. My advice: get out while you can and get as liquid as you can. Now.”
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Who is this advice directed to? The thousands and thousands of San Diego families who love their homes, already have built a cushion of equity, have good jobs, kids are in school, are part of the community, etc etc? The throngs of young executives who love the San Diego lifestyle and have no intention on going anywhere? The masses of older couples who have significant assets? Is the advice for these people to simply pack up and move to Boise? Or sell their homes or condos and rent an apartment? Is this what you are advising them to do? Everybody sell their homes, right now? Surely this cannot be your advice.

My guess – and yes it is a guess – is that the vast majority of homeowners in San Diego will not take such action. My guess is that interest rates will not skyrocket but instead stabilize, property values will not plunge but instead stabilize, the San Diego economy will not collapse and there will not be a mass sell-off of real estate and mass exodus out of San Diego.

The days of the quick buck in the San Diego are clearly over, for now, but if history tells us one thing it is that they will return someday. Until then, I for one am content to enjoy this great, growing area, fabulous weather and lifestyle, and simply hold onto my real estate as a long-term investment. My guess – and yes it is a guess – is that I will be very happy I did so.

[DaCounselor]

“All hell is going to break loose”….wow. I’m almost as stunned by this brand of “the sky is falling” prognostication as I was by the countless folks who believed the housing market would continue its unprecedented meteoric rise (the same folks who believed they were investing geniuses in the late 90’s because every tech stock they added to their portfolios was up 300%) Fact is, markets move in cycles – always have, always will. They are tied to personal, local, regional, national and international events in varying degrees. Many, many real estate markets have been driven up over the past 5-8 years by speculation, exotic lending, fear-mongering peer pressures, pack mentalities and slick marketing. The inevitable slowdown and outright corrections have started and it is happening in far more markets than just San Diego. So where do we stand now in San Diego? Well, anyone who jumps into this market intending to make a quick buck is probably going to be disappointed. But is the sky falling? Unlikely. San Diego real estate has tremendous appeal. Is anyone betting against San Diego real estate over the long haul?

[Author]

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