A reader sent in this question:
I have seen a house I am really interested in, but my husband is concerned about getting back in the market right now. He feels prices are going to go down more and that there is going to be a big increase in REO houses coming on the market. Do you have any advice for us? I follow your site and you are very knowledgeable about the market, especially in the area where we are looking. I don’t want to miss out on a great opportunity, but I definitely would not like to buy and see the market slide even more. We can rent longer if that would be the best thing to do at this point. Any information and advice you can share with us will be greatly appreciated.
The decision when to buy will be different for everyone. Do like Ben F. did, and draw a line down the middle of a sheet of paper and list all the reasons to buy on the left, and reasons not to buy on the right. I don’t have an algorithm to use, sometimes it just helps to see all of your reasons in writing.
Will there be more trouble ahead? Consider what we know:
1. There are thousands of people in San Diego County that either can’t afford, or don’t want to afford their house. Those properties will show up the for-sale inventory in a variety of ways over the next 3-5 years.
2. Baby-boomers will be downsizing over the next 10-20 years, keeping the supply channels full.
3. The government has a history of throwing trillions at the housing/banking problems, and it’s doubtful that they’ll stop now.
4. Mortgage rates are very low, around 5% today, and buyers with big money keep stepping up.
To answer your husband’s question – yes, we should see more REOs making their way to market. But if the government provides enough cheese to stretch out the pain over several years, and there are enough buyers, we’ll have an artificially-low sales volume for years to come, and no big price dumps because of foreclosures.
The wild cards are the baby-boomers; that’s where we could see floods of new, unbridled inventory. The areas are predictable too, they’ll be the neighborhoods with houses more than 10 years old, and they’ll be the ones that need work. These owners are the empty-nesters with higher equity positions and a lower desire to spend money on upgrading, so most will be considered fixers – the list prices will need to be attractive to find a buyer.
I have more concerns about the baby-boomer inventory than REOs. The banks/government will manipulate the timing of the REOs nicely, but the baby-boomers will sell when they feel like it, and several could hit a local market at once. The fixers will be tough sales too, and with more equity, pricing could be volatile – some sellers will hold out, others will need to dump.
You need to assess your own willingness to risk. If you can comfortably afford today’s prices, and can find the right house to buy at the right price, then your concern is whether you could buy a better house, later for less than you could today.
If you like 1970’s-style fixers, stay tuned – you should see plenty for sale.
The government and lenders are conspiring to keep foreclosure activity manageable. The REOs should trickle out, and those in newer communities will be in higher demand, which might keep prices reasonably afloat.
There are no sure bets. For some, the thought will be either too much to consider, or the negatives keep winning, and they’ll always rent – for them it’s a good choice.
If you’re going to buy sometime, it looks like there will always be a complex set of variables that’ll make the decision very tough – you’ll never feel totally comfortable.
Once you make the decision to forge ahead, there’s more.
Trying to secure the right house at the right price is very elusive, and the hunt will test your resolve daily. Try it on for size by making some offers, and see how close you come to buying a house. You’ll be surprised by how hard it is to get what you want. Will it get easier later? I don’t think so – if prices keep trending downward, I think it’ll bring more buyers in, making it tougher.
If you wait, the ideal scenario for you is a flood of supply, combined with higher mortgage rates – that would cast doubt in all buyers, and bounce a few out of the game. But don’t be surprised if sellers are slow to lower their price. You can judge for yourself how likely that is to occur, and how it would impact your target areas.
You can also hold out for more items on our list of desired features – the more of these you have, the better chances of your house holding value:
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One-story
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Great school district
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Ample privacy and sunlight
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Good condition and floor plan
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Low or no monthly fees
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Manageable yard
Best of luck to all, and hopefully we’ll have a few commenters chime in with their thoughts!
Woot! My house has everything on that list except one-story. 🙂
Everything that Jim said seemed right on the money.
We’re going for it and trying to buy, but we’re being very patient and picky. It really is hard to find everything you want in a property at a great price. The “everything” properties are the ones that are bid up.
We’re neverous about prices going down another 5-10%, but I don’t see another huge drop for all the reasons that Jim gave. If you’re ready to buy, and you’re planning on being in the house for a number of years, then I wouldn’t stay out of the market because you think that there will be another drastic price decrease. Shop the short sales, the REOs and the well priced regular listings, be patient, and make offers. Even after you start trying to buy, if you’re intent on getting a great price then it’s likely going to take a while. It has for us.
Great post Jim 🙂 I feel exactly the same way.
I’ve seen charts that show a ~5% drop from summer to winter. Makes sense, buy when most other people aren’t.
More and more first time buyers will be entering the market (unless someone figures out a way to stop time), and doing so without bubble equity to play with. Although I’m sure the gov incentives will continue forever in an attempt to offset that fact.
As one who bought a year ago, and have seen my value drop by 5 or 6%, I would still say to buy IF!!! you are going to stay in the home for at least 5 years and likely 10 years or more. When we bought our downtown condo (at a sale from the developer) we knew it would likely come down another 5%, but we found the place we wanted (with the ammenities), at the price we could afford, and liked everything about it. The reason we bought is selection. The same reason you might buy a sweater at Macy’s when you know it might go on sale in a week. By the time it goes on sale, they might be out of your color an size.
Do you think a house will be worth more in 10 years? If you are staying for 10 years, then it is a “no brainer.”
Uh, you’re so smart but you forgot location. Location is extremely important to me. I want central location. Look at all the people that jumped ship in Temecula and Chula Vista.
Good location close to work, beach, or freeways.
I struggled with this and came down on the side of buying, largely because of the risk of serious inflation in 5-10 years.
It’s not a slam dunk, though, and it’s not a given that prices will be higher 10 years from now. We are still at extreme price-to-income and price-to-rent ratios.
The Nasdaq was at an extreme P/E ratio 10 years ago. It’s a lot lower today than it was then. See also property prices in Japan.
20 years down in Japan, indeed, because, as Varones said, the P/I and P/R… why should it be different here? Because the tremendous upswing in salaries and immigration?
IF!!! you are going to stay in the home for at least 5 years and likely 10 years or more.
I’ll second the “10 years or more”. The biggest risk is interest rates, but if you are staying put long enough the payment would be essentially the same.
http://shewalkssoftly.files.wordpress.com/2008/11/truck.jpg
I *think* there is also property tax transfer situation. If you are 55 or over, you can do a one time buy of a home of equal or lesser value and pay the same property tax you currently pay. So if you are a few years shy of 55, you might want to wait.
It’s a weird rule since it discriminates against buyers that want to upgrade their lifestyle and are willing to pay some incremental tax to do so but can’t afford the retail property tax rate given the approaching retirement.
That it even discriminates against people under 55 is questionable. There aren’t suppose to be laws that discriminate against certain types of people.
My advice is that you buy asap. Looking at where the jobs numbers are going
To your reader: don’t underestimate how hard it is to find a house you really love. If you’ve managed that, don’t be afraid of acting if you know you’re likely to be there a while.
In my mind, it was obvious starting around 2005-6 or so that it was a miserable time to buy in SD county. Blanket statement, full stop. But I don’t think that applies as a general rule any more. It’s a much more nuanced question. For some people it will be the right time.
You hit the nail on the head, Jim.
It’s very difficult to judge prices, but since interest rates are bounded below by zero, they have to go up, which means that house prices will come down to keep the same monthly payment. This would have already happened by now except for the extend-and-pretend policies of the government. The criteria Jim (and others) give is solid but the main thing is not to consider housing as an investment, but rather as an expense.
If inflation skyrockets, then theoretically it is good to have a lot of debt that will be inflated away. However, this only works if inflation causes wages to commensurately increase. If not, then there will be some version of stagflation. Underemployment in California still approximately 22% and the state is still broke — this puts pressure on schools and other government services that help drive house prices.
Having said all that, I’m still consistently impressed by the resiliency of the Carmel Valley area and some of the other areas that Jim profiles regularly. I guess some people in San Diego (or who come to San Diego) have lots of cash or other private financing.
“It’s very difficult to judge prices, but since interest rates are bounded below by zero, they have to go up,”
Mortgage rates are still quite a bit above zero. Since the government has taken over the mortgage market the risk premium has been removed from the equation. Thus I would not expect in the long term mortgage rates to be significantly higher than the 30 year treasury which they currently are not. Treasury yields are currently dropping not rising.
If it was my money I would be charging 10% interest rates and requiring 30% down right now given the current default rate. However, the government has a printing press and I don’t.
More on seniors and housing:
http://lansner.freedomblogging.com/2010/05/01/why-seniors-will-change-real-estate/64145/
“In fact, California’s 65+ population will grow from its current 4.5M to 6.4M by 2020 and to 8.3M by 2030.”
“The stat that 1/3 of all boomers are spouseless and childless, along with the fact that more people will work past the 65 year old retirement age will definitely have a major impact.”
since interest rates are bounded below by zero, they have to go up, which means that house prices will come down to keep the same monthly payment.
#16 and I agree that prices would have to come down to keep the same payment.
But saying that anything has to go up or down is applying historical norms. There is no guarantee that will happen.
I think it’s possible that mortgage rates could get into the 6%-range and prices not budge.
If that happened, a buyer’s purchasing power goes down $100,000:
$700,000 @ 5% = $3,757/mo
$600,000 @ 6.5% = $3,792/mo
or payments go up:
$700,000 @ 6.5% = $4,424/mo
Here are some new homeowners who have to be thrilled they bought now!
Aviara at 2001 prices!
http://www.sdlookup.com/MLS-100006337-1340_Corvidae_Carlsbad_CA_92011
Low rates, crazy market, chase your dreams!
Finding the right house at the right price is not trivial (as I can attest). Getting a good deal, as noted in #20, is easier when you have more to spend. In the $700k area it’s a darn bit harder (I’m starting to thing near impossible). Below that I think it gets really competitive and things get bid up, so it’s harder than impossible.
While I’ve never taken Econ 101, it seems the market has yet to determine prices. For many reasons, the slow release of properties from the banks and gov intrusion, it seems we are not seeing a true supply/demand environment.
When the videos/stories of folks living mortgage free for years end, I’ll think about a purchase. Also, in 92103 and 92116 they are still listing for $300-400/sf. If I were to see pricing 200s it would be much harder to sit on the sidelines.
Waiting to fell the Magic-
If you can think outside the box here is a real value under 700k
We live out here and its worth a look! Jim knows our hood here well.
http://www.sdlookup.com/MLS-090051838-2411_Anderson_Ln_Vista_CA_92084
doughboy,
Thanks for the tip. It looks great, especially for the price. However we have to stay in the Poway School District, so it’s not going to work (excellent school districts are something that I’ll pay for).
If that happened, a buyer’s purchasing power goes down $100,000:
$700,000 @ 5% = $3,757/mo
$600,000 @ 6.5% = $3,792/mo
You’ve touched on this before, but it’s not quite as simple as this. Down payments factor into this equation. For some people the ability to buy a house depends more on the down payment amount than the monthly payments in the end.
We’ve decided to buy because we found a nice place that [after tax write offs] will cost us the same as renting. So as long as rents don’t drop substantially, it will make sense financially.
I’ve been a homeowner for so long that I’m not familiar with rent patterns. Do rents stay pretty stable in San Diego? Would you expect them to increase or decrease over the next couple of years? How do they respond to inflation?