Piggington Jumps the Shark

I have bought a house in San Diego.  I’m also going to start
putting up guest posts by Ted McGinley.

This (the house buying part) shouldn’t be a huge shock for people
who’ve been reading the site of late, because I’ve talked a lot
about how it makes sense to buy in certain situations.  That
said, I will briefly outline my thought process here.

After the recent leg down in interest rates, monthly payments are
the lowest compared to incomes and rents than they’ve been in the
history of the data, and are quite dramatically below their median
historical levels:

I frequently point out that when it comes to determining whether homes are
overvalued or undervalued, the price-based ratios are far more
important than payment-based ratios.  However, as I discussed
in this

article, an individual buyer should be more interested in the
expensiveness of the monthly payment, rather than the purchase
price, if he or she is financing most of the purchase and intends to
(or is at least able to) keep the home indefinitely.

A buyer in these circumstances is not only locking in rock-bottom
monthly payments, but, crucially, is
doing so ahead of what I believe will be a period of unusually
high inflation.

Now, I don’t want to turn this into a big discussion on the
something-flation debate, because that topic been thoroughly beaten
to death elsewhere on this site as well as on my “day job” site, and
it is beside the central point of this article.  Suffice it to
say that I consider it a high-confidence forecast that the dollar is
going to lose a lot of purchasing power in the years ahead, because
nominal incomes — and thus prices, including those of rents and
maybe even houses, a little — must
be made to rise (in excess of any plausible level of
economic growth, i.e., via inflation) if the country is to be able
to continue servicing its tremendous and growing debt.

If this outlook is correct, as I believe it is, then today’s
ultra-low rates make this an ideal time to take out a chunky 30-year
fixed mortgage, and to sit back and let inflation hew away at the
real value of the mortgage and the monthly payments over the years
to come.

So, the missus and I went out looking for homes.  We only found
one in our price range, a single family house in Bay Park, that we
thought was awesome enough to be a long-term home.  So we made
an offer, got a loan with as low a down payment as we could get away
with, and have now re-joined the ranks of the titular Landed Poor.

And now I will attempt to anticipate some questions:

Q:
Does this mean you think this is the bottom for home
prices?

A. Not really.  I
don’t know when the bottom will be, but it really doesn’t matter all
that much as I’ve financed most of the property and I’m more
interested in minimizing monthly payments than the purchase
price.  For what it’s worth, my (not very high-confidence)
prediction on home prices is that valuations
will continue to slowly decline for a while, but nominal prices will kind of bounce
along and not do anything too dramatic in either direction any time
soon (barring an interest rate spike… see 3 questions down).

Q:
OK, does this mean
you think this is the bottom for monthly payments?

A. I suspect that it’s
awfully close, at least in terms of level (I have less of an opinion
on duration).  But my investing philosophy is that you
shouldn’t get too caught up on catching the exact top or bottom,
because it’s impossible to do so with any reliability.  If
something is a great deal, you can be greedy and wait for it to
become a super-great deal — but there’s a good chance that’s not
going to happen, leaving the possibility that the train will leave
the station without you.  I believe that long-term investing
success (and far lower stress levels) will come from being
disciplined about buying things that are cheap and selling things
that are expensive, not by getting overly worked up about whether
you caught the exact peak or trough.

I sat out an inflation-adjusted home price decline of almost 50%,
and now I’m buying at a time when prices are cheaper than normal and
monthly payments at 45% below their historical median.  That’s
close enough for me.

Q:
Monthly payments
may be cheap, but homes are still overpriced.

A. Not so.  Not in
the aggregate, anyway:

As of November, San Diego homes were 10% undervalued based on the
historical ratio of home prices to San Diego incomes.   Of
course, individual markets may vary from this aggregate figure, and
there are always issues with even the best price indicators, so
buyers should (and we did) verify that their target homes are
reasonably priced compared to area rents.  On the whole,
however, the argument that San Diego homes are overpriced is not
supported by the data.

Q:
Won’t interest
rates go up a lot, and won’t that push down home prices?

A. Yes, it’s certainly
possible that rates could rise a lot, possibly to a shocking
degree.  And this could indeed put downward pressure on home
prices.  There’s actually very little correlation between
interest rates and home valuations, and if anything, homes have
tended to get more expensive in rising rate environments (due to
rising rates typically being accompanied by rising wages, as well as
other external factors).  However, I think that a sufficiently
steep and abrupt rate rise could really hurt home prices.

But recall that I am more concerned with minimizing monthly payments
than the purchase price.  If rates rose enough to really impact
prices, it’s likely that those higher rates would have affected
monthly payments even more.  So for a long-term, heavily
leveraged purchase, the threat of rising rates is a reason to act
sooner rather than later.

Q:
Ted McGinley was
president of the Alpha Betas.  Don’t you think you’re more
Tri-Lamb material?  Consider the following:

A. That’s just mean.