[RottedOak]

Having too much of your credit in use at present can adversely affect your credit score, but I’ve never heard of high credit use in the relatively distant past having such an effect. They are talking about buying in 2009, so if they pay the car off now using a credit card it shouldn’t be an issue. As long as they stick to the plan of paying the card off right away (an important caveat), the rewards card approach should be a good plan.

I’d also suggest targeting any other high-interest debt for early repayment. Basically anything with an interest rate higher than what you would reasonably expect to earn from normal investments. That typically means credit cards, personal loans, and the like. If you have any loans with unusually low rates, such as student loans, it is probably better to invest the money rather than use it for early pay-downs.

[RottedOak]

I’m not going to reply directly to the majority of the latest responses, because most of them are exactly the sort of thing I dismissed earlier: claims of “it’s different this time” (sometimes even using that phrase) with nothing more than generalities in support. I give these claims about the same credence I give to “we’ve hit bottom” and “subprime problems won’t spread” statements from real estate bulls.

Bugs,

The history suggests that the downslope isn’t exactly a mirror of the upslope. The price drops are generally slower than the rise — this is the commonly-cited “stickiness” of prices in a downturn. However, the price drops are stronger in the first few years than they are later in the bust. I will try in a subsequent post to make some more specific comparisons between the last bust and what has happened so far in this one.

SD Realtor,

I want to emphasize that the Case-Shiller data are not the same as the MLS data, and it is risky to mix statistics between the two. The Case-Shiller index shows a 5.3% decline from peak as of January 2007. I believe the 8% drop cited by Bugs is reflective of the MLS data. I assume your comments about drops in specific areas are also based on MLS data, or perhaps just on anecdotal instances. The Case-Shiller data is collected for all of San Diego county. I don’t believe they provide any breakouts for zip codes or other limited areas.

No matter how strong or weak the downturn, there will undoubtedly be some areas that perform better than others. A given area may have experienced gentrification, infrastructure improvements, etc. that help shore up prices, while another area may have the opposite pulling prices down. I assume this was true during previous busts as well, so I don’t see it as something distinct this time. As I imagine you realize, individual buyers and sellers should be looking at the specifics for the property that interests them, not just broad economic numbers. Even in a strong downturn, a specific property may be worth more if it has been thoughtfully renovated. And a property might be worth a lot less even during a strong upturn, if the previous residents used it as a meth lab, or if a canyon wall collapsed taking the back yard with it. So I don’t make any pretense of trying to predict what will happen in highly localized areas. Making county-wide predictions is sketchy enough!

[RottedOak]

blackbox,

Agnosticism is an entirely valid stance in situations where there is not enough information. But I do ask for consistency. If someone says, “we don’t have a good basis for making predictions, and therefore I refuse to make one,” then I have no objection. They are being consistent with their agnosticism. If someone says, “we don’t have a good basis for making predictions, so I predict X,” then I object. It looks like the supposed agnosticism is really just an excuse for not having a better justification for the prediction.

By the way, to answer your (presumably rhetorical) question about the stock market: in the stock market crash at the start of the Great Depression, the Dow bottomed at about 89% below the peak. So in fact there was a historical example to use. If you have historical data about a bigger housing bust, I’d be happy to take a look at it. I’m just using the best data I have handy.

[RottedOak]

lurkor,

It is a bit cliche to pull out the old saying, “Common sense is not common,” but I’ll do it anyway. During the boom, lots of people’s common sense told them “real estate always goes up,” “San Diego is a highly desirable place to live,” etc. Common sense may suggest a point to consider — and in fact I acknowledged your own point in my original post — but it isn’t necessarily reliable.

I also want to take exception to your comment about “an arbitrary percent decline.” I did not apply an arbitrary percentage. I applied the historical pattern from the last bust. This might or might not be the most accurate approach, but it is not arbitrary.

[RottedOak]

Although it is certainly possible that the drop will be bigger this time, what I’m hearing in the responses so far is just “this time it’s special,” with no strong basis for believing it. I do not consider it convincing when someone makes general statements about ARMs, how much prices have risen, etc., and then moves from those disconnected references to a specific prediction about future SD home prices. It sounds rather similar to all the special pleading from those who argued that prices wouldn’t drop because everyone wants to live in SD, we haven’t had big job losses like in the 90s, etc. In this case the exceptionalism is just aimed in the other direction. I don’t give either side a free pass on making a case that is backed up with sound analysis.

Any analysis based on a faster decline (as suggested by Kev) requires some type of assumptions about what the decline curve would look like. Any future projection based on price/rent or price/income ratios (as suggested by jg) requires making an additional projection of how rents and/or incomes will change. I don’t have any methodology I consider especially trustworthy for projecting these items. However, I did an off-the-cuff analysis (borrowing some assumptions about income from Rich’s own analysis in “Risks of a Serious Home Price Decline“) of a price/income-based model with a somewhat accelerated decline. This analysis suggested a bottom in 2015 at about 30% below peak, which corresponds to mid-2003 prices.

This latest analysis is a bit fast and loose for my tastes and I’ll see if I can come up with something more supportable. But even this approach comes up much less drastic than some predictions, such as those calling for 40-60% declines, pre-2003 pricing, etc. If someone who believes in these types of predictions has a well-grounded methodology for supporting them, I’d love to hear an explanation. But if you want to convince me of something, please heed what I said above: a wave of the hand in the direction of ARM resets, etc., is not a well-grounded methodology.

I want to be clear that I’m not arguing in favor of buying now, “soft landing,” etc. What I am doing is challenging those who declare a belief in a historically unprecedented drop to back up those predictions with more than “it’s different.”

[RottedOak]

I’ve been looking at the latest Case-Shiller data for San Diego home prices, and they back up the idea of a long wait for the bottom. From their data, the previous peak (before this last boom) was July 1990. Prices didn’t hit bottom until March 1996. The peak for the latest boom was November 2005. Using the prior bust as a guide suggests the bottom will be sometime in 2011. Recovery to current prices, keeping in mind that we’re over a year into the drop, would be around 2013.

[RottedOak]

Debt as such cannot be inherited. However, the creditors have the right to claim their share from the estate before it is passed on to the heirs. If the value of the estate is greater than the debts, then the heirs get whatever is left over. If the debt is greater than the value, then the creditors get to fight over the scraps and the heirs get zip. (It’s more complicated than that, but that’s the gist of it.) That’s assuming it is a straightforward inheritance of an estate. There are more complex ways to structure an inheritance, with trusts and such, that would change the process. Your lawyers, tax advisers, etc., can fill you in on those.

For a secured debt such as a home mortgage, it isn’t a big deal because there is a known asset that can be sold to cover the most or all of the debt, and there are only one or two creditors involved. Where it gets messy is if there are lots of unsecured credit cards, etc. The executor has to sort out who is owed what. I had to do this for my mother’s estate, and the most annoying part wasn’t the amount of debt (she was pretty careful about that), but the number of different creditors. Older people tend to have lots of store credit cards and such, plus medical bills, car note, etc. There were at least 20 credit cards alone. I decided it was better to pay a lawyer to process most of it. It cost money to do that, but it was worth it to me.

[RottedOak]

One strategy you might want to consider is buying the $500K unit across the street and getting the builder to throw in the “extras” from the house you like. Of course that will depend on what those extras are. If they are things like nicer appliances, light fixtures, or other easily replaced items, then it should be no problem getting them. Even something like better flooring or countertops isn’t out of the question. But if it is a three-car garage vs. two or something like that, then obviously there isn’t much they could do. And of course the view isn’t a negotiable item, so if that is really important to you it might be a deal breaker.

Other items you could stick them for:

• If there is anything left to do in terms of finishes (carpet, paint, trim, appliances), then go for the highest-end items the builder offers. From your descriptions it sounds like these might be “fully finished,” so maybe there’s nothing to do here. But see below for some items you could ask for even if the builder considers the unit done.
• Interest rate buydown – since interest payments don’t contribute anything toward your equity, getting your rate lowered is a big plus if you plan to stay in the house. Since you plan to stay put, I would go for points to lower the long-term rate, not just a 3/2/1 shorter-term buydown.
• If any appliances are not included, such as refrigerator or washer/dryer, get them thrown in. Of course make sure to get quality brands.
• If you plan on re-painting any rooms, decide on the colors and have the builder do it.
• Have the garage (if present) finished out. Garages are often “unfinished” in terms of painting, sealants for the concrete, etc. We had this done on a place we bought and it made our garage look lots better than the neighbors.
• Nothing says a “finished” house can’t have trim added for baseboards, crown molding, etc. – assuming these aren’t already present and are something that suits your taste and the style of the home. This will be easier to get if the builder is still working on similar units in the area (whether in the same development or nearby).
• Pre-pays of HOA fees and Mello-Roos are OK, but these don’t really add to the value of your house they way physical upgrades do, and they create “adjustment shock” later when you have to start paying. The big exception would be if you can get the builder to completely pay off any Mello-Roos, so that in the future you can market the house as “no Mello-Roos.”

These are all ideas to use if the builder won’t give you a significant price break. I’m a big proponent of getting the lower price if possible. That lowers your interest payment and your property taxes (an important point in California, where the purchase price is critical for the tax assessment), and you can pursue any upgrades you want with the unspent money. The only item above that I would consider really worthwhile as a “hidden” concession is the interest buydown, and then only because you indicate a plan to stay in the house a long time, so that savings from the lower rate would add up.

[RottedOak]

Bankers read the latest news from NAR, etc. They hear that the market has hit bottom. Sure the unfortunate buyer can’t make his payments, but if the bank holds out they can sell the property for the full loan value during the market recovery this spring. A few months of carrying costs won’t kill them.

As long enough people at the lenders believe that, they will hold the line on short sales.

[RottedOak]

Until the bank forecloses, the owner is on the hook for the carrying costs, in theory. In reality, the bank isn’t likely to approve a short sale unless the owner is in default on at least one mortgage, which means they will be eating any missed payments. An owner in financial distress might also decide to forgo paying HOA dues/assessments, property taxes, and perhaps even utilities if the home is vacant. Unpaid HOA fees and taxes would create liens on the property, which would be cleared from the proceeds of any sale. That means in effect that the bank pays for them as part of its loss on sale. Sometimes government-owned utility districts can place liens as well. Private utility companies would send collections people after the old owner.

Once foreclosure happens, then the bank is on the hook for everything until it sells the property. That is one reason banks don’t like to carry large numbers of REO properties.

[RottedOak]

The board of the HOA would either make the contracting decisions directly or turn them over to a professional management company. Any financial shortfalls caused by defaults on HOA dues could only be passed on to other owners if the dues were changed or a special assessment passed. That would typically require a vote of the association to approve. So it would depend on the attitudes of the owners in that building. They might prefer pay more to keep all their amenities, or they might prefer to cut back to avoid an increase.

[RottedOak]

For what it’s worth, I don’t think there is any necessary relationship between prognostication and profit. I profited nicely from the bubble: sold in So Cal in mid-2004, then bought in another area, where I recently sold again. I probably got close to the peak in both areas (won’t know about the other area until the decline fully sets in here). But I wouldn’t take that history as proof I can call future ups and downs. I might have just been lucky. In the other direction, there are all sorts of reasons someone might not have jumped on RE as an investment, but still be good at calling the market.

Obviously if you are good at calling a market, and are willing and able to invest in it, then ample profits await. But one can could definitely have one without the other.

[RottedOak]

Often these lenders try to sell the loans, but if the loans are too risky then they may not be able to sell them at a profit or they may be forced to buy them back due to agreements requiring that they take back loans that default very early in the life of the loan. If they have a high rate of early defaults, then they end up with a portfolio full of non-performing crap. Say hello to BK!

[RottedOak]

GF = Greater Fool, someone foolish enough to purchase an already-overpriced property.

See http://www.investopedia.com/terms/g/greaterfooltheory.asp

[RottedOak]

I question the 7-8% figure even as historical appreciation, much less near future appreciation. I don’t have California-specific numbers, but I just did a calculation for a post on another site using Rober Shiller’s national housing price numbers. The total appreciation for 1950-2005 equates to about 5% per year, but most of that is inflation. Adjusted for inflation, the 1950-2005 appreciation is about 1.1% per year. If you take out the unusual increases of the last few years and use 1950-2001, it is closer to 4.6% unadjusted/0.4% adjusted.

Generally speaking, both housing appreciation and interest rates tend to track with inflation. Over the long term, investment in residential real estate is a great an inflation hedge, and if you want a diversified portfolio of investments then I think that’s a good thing to have. If inflation really takes off and you have loan already locked in with a low fixed rate, you win and the bank loses.

All that said, you are right that timing is important, because buying in at the top before a significant decline would create short-term equity losses so large that even the inflation-hedging aspect would be ruined. So I would suggest that now is not the best time to buy in California. Check back in a couple of years.

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