Home Buying Math Question...

[Don Plumley]

Originally posted by Wayne at Pelican Parts
I agree 100%, and it does include a factor. Believe me, if the numbers were closer, it would be a decision to buy - I am waiting for the numbers to get closer (and the laws of supply and demand would seem to dictate that the market will rebalance itself again, either through rising rents, or a decrease in housing prices).

Trouble is, we cannot afford a house right now that would be long term (20+ years), so it's a bit of a moot point. Any house purchased right now would be a "intermediate" (indeed a step up from our previous townhome / condo), but it wouldn't be the end place for us to end up. Unfortunately, we also have a special-needs child now, and that is a huge constraint on which areas we can live in, as the school districts must be good for her.

So yes, I agree, there are a lot of intangibles that cannot be placed merely on a spreadsheet. I just wanted to make sure that the numbers I was seeing (hugely skewed towards renting) were 100% accurate, and that I wasn't missing anything.

-Wayne

The school district is a huge priority (similar boat here) - and why I commuted to West LA from Irvine for many years. Anyway, I'd be curious how the numbers work out with real-world numbers for the neighborhood you want to rent/buy in.

Ultimately, how sharp is your crystal ball? You are betting on a contraction in RE values because that's the single biggest factor in the analysis.

[einreb]

Originally posted by Wayne at Pelican Parts
My biggest concern at this point would be buying a home, and then losing hundreds of thousands of dollars in equity as the market corrects. I'm not sure about you guys, but hundreds of thousands of dollars is a LOT of money to me...

When I do my annual 'Personal Financial Statement', I've always put my house equity on a separate line item from what I consider my 'net worth' since at my age (35) with a young family I look at housing from a cash flow position, rather than an equity/net worth position. Your calculations would not provide for the same clear buy/rent decision here in Chicago. That being said, paying $900k for a townhouse and then having its value drop to $550 would make me want to vomit... even if I moved it to a different tab on my excel sheet.

One minor thing to note that while prices may be inflated, if the house is truly a long term situation... locking in a historically low fixed rate may offset some of the inflated price. I just can't imagine that your market is anywhere near that point yet. My gut feeling is that we're going to need to see a rise in the unemployment levels before we see the big dropoff in price. But again, these downward slides take five years or so.

Unless of course, its a 'new paradigm' in which case you're going to be priced out forever and will end up living in a tent city or a Honda.

[turbo6bar]

Housing prices in CA are making it a have vs have-not society. You need only view housing affordability statistics to realize it's not a matter of if but when. Perhaps if we had strong wage inflation things would be different.

I have been following this bubble for some time, and things have taken a sharp turn. It started last fall. There was an article covering Washington DC real estate. It mentioned a couple that bought several DC townhouses for $410k each. They immediately relisted for $475k. Reduced to $440k. Reduced to $410k and still no sale. The builder just did a sale for identical floorplans: $385k. That's gotta suck.

Wayne, ya gotta stay tough. When the last remaining bears go bullish, you know the peak is past.

jurgen

[artplumber]

Originally posted by Don Plumley
Ultimately, how sharp is your crystal ball? You are betting on a contraction in RE values because that's the single biggest factor in the analysis.

There's the rub. I'd love to see a contraction as well, but historically, it's been rare in Kali. AFAIK, the only one in recent memory was OC dropped by 15-20% in the early 90's, and they've recovered and then doubled since then.

Frankly Wayne, it sounds as if you're pretty much set on renting for all the reasons you've mentioned. Do what you are comfortable with. When you are ready to buy, do it then. The market is too unstable for anyone to come to clear conclusions about it.

[snowman]

Wayne, stop the whining. If you had just bought, like suggested, 5 years ago, you whould have how much? How much would your rent have returned to you??

Just buy something and get it over with for crying out loud.

You will NEVER be able to AFFORD it, you will always be a renter and never have a lot of money. Real estate appreciates better than old Porsches.

[CarreraS2]

Originally posted by artplumber
There's the rub. I'd love to see a contraction as well, but historically, it's been rare in Kali. AFAIK, the only one in recent memory was OC dropped by 15-20% in the early 90's, and they've recovered and then doubled since then.

There were plenty of previous contractions before the one starting in 1990 in So. Cal.

And LA/OC went down roughly 40% between the peak in '89 and the bottom in '97. Not 15-20%.

[CarreraS2]

Originally posted by snowman
Wayne, stop the whining. If you had just bought, like suggested, 5 years ago, you whould have how much? How much would your rent have returned to you??

Just buy something and get it over with for crying out loud.

You will NEVER be able to AFFORD it, you will always be a renter and never have a lot of money. Real estate appreciates better than old Porsches.

Didn't Wayne SELL his house a couple of years ago??

[snowman]

That would explain the whining.

[jyl]

Historically, busts in CA real estate prices are about as frequent as booms. CA RE has a boom-bust cycle going back to the 1970s or earlier.

In the long run, last 30-40 years, CA RE has appreciated roughly inline with the SP500. But both have had booms and busts. There are good times to get out and stay out of the SP500 (one was not so long ago), and there is a good time to get out and stay out of CA RE.

Of course, the emotional - sense of security and ownership - aspects are important. Especially as you get older, with a family. To me, these could justify buying even at a price when the strictly financial "rent vs buy" comparison was still "somewhat" favoring rent.

But only "somewhat". After all, struggling with the mortgage payment as your house tumbles into negative equity has some emotional impact too.

[turbo6bar]

Hehe, things are heating up here. Wayne, stick to your guns. Ameriquest mortgage isn't collapsing because the lending market and housing sales are great. Home builders are lowering earnings estimates, reporting increased cancelations, and offering larger buying incentives. Fixed rates mortgages are up >0.75% in the last 12 months. ARMS are up 1.0%+ over the last 12 months. New home inventory is at record high and growing. Existing home inventory is near record highs and growing. YoY median and average prices are heading from positive to negative territory in the bubbly areas. Anyone seen or heard a realtor predict healthy price gains for the remainder of 2006?

This time last year NONE of the above was true. This time last year, Californians believed RE would appreciate at 20% per year for the next 10 years. This time last year, David Lareah said housing was no longer a place to live, but a viable investment vehicle. This time last year, David Lareah said housing is the new gold standard.

The only problem, Wayne, is if you want to buy at or near the bottom, you will need to wait at least 2-5 years. When everyone is arguing that housing is a horrible investment, and one cannot ignore the spetacular gains in collectible 924s, you'll have the signal to buy. Can you minimize your wife's nesting instincts?

[artplumber]

Originally posted by SoCal911SC
There were plenty of previous contractions before the one starting in 1990 in So. Cal.

And LA/OC went down roughly 40% between the peak in '89 and the bottom in '97. Not 15-20%.

Perhaps I remember incorrectly, here are some links:

http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1011&context=iber/fcreue (Page 4)

http://www.dailybulletin.com/homes/ci_2833446

Then there are the self congratulators:

http://www.theoccoastalgroup.com/Real-Estate-Info/2006-Real-Estate-Forecast.html

In other words, the market is too complex for us to know what exactly will happen. Wayne, don't buy until your internal equation changes. You always will take a risk that any large investment of money could go sour and cost you big, that's why diversification is important.

[turbo6bar]

Originally posted by artplumber
Wayne, don't buy until your internal equation changes. You always will take a risk that any large investment of money could go sour and cost you big, that's why diversification is important.

What happened to the "RE always goes up" mantra?

[RickM]

Wayne, On your no down example I didn't see PMI.

(Needed for any loan with <20%...perhaps a more common scenario)

[JeremyD]

I don't think it's that easy. Reducing something as complex as the national housing market (and an emotional purchase) to a spreadsheet is asking for trouble IMHO.

[artplumber]

Originally posted by artplumber
I don't know about the Kali real estate market for sure, but I doubt whether things are headed down. They may be flat for a while, but unless alot of these loans start defaulting that is not going to happen. Maybe continued fuel price increase and jobs going to China will do it, but I don't think that anyone can reliably predict what will happen.

As I said, the market doesn't completely make sense. May be flat for a while. But people have been predicting its demise for some time (see prior links) without a significant pothole. Wayne, seems to be uncomfortable with buying for mathematical and other reasons, ergo he shouldn't buy. Buying a home purely as an investment is not the best business sense and could have a major negative in portfolio value. Hence diversification is important. Personally, I would buy, being careful of what I do buy, but Wayne doesn't sound like he'd be adequately sure of his choice. Frankly, I think if it's going to be an interim living solution, I'd make it a duplex, get some income to offset the mortgage and serve as a later source of income even when you don't live there. However, this takes a commitment of being a landlord which isn't necessarily something that everyone wants to do.

[Drago]

Originally posted by Wayne at Pelican Parts
Funds that would be in the bank rather than used as downpayment: $175,000

How many people with $175K in the bank are renting? I think you can safely assume that most people who are renting are doing so because they can't afford a down payment....at least amongst the people I know. Of course YMMV.

[JeremyD]

One of the other things to consider. If you go bankrupt - there are many laws in this country that are designed around you not getting kicked to the street. If you are renting - better get a big shopping cart.

[turbo6bar]

Originally posted by Drago
How many people with $175K in the bank are renting? I think you can safely assume that most people who are renting are doing so because they can't afford a down payment....at least amongst the people I know. Of course YMMV.

Your argument would be valid if buying a home required a down payment. I sold one property in January. The buyer had no down payment. I am hoping to close on a second in the next week or so. This buyer has no down payment, either. My parents are trying to rent a home for $1095. The security deposit is $1095, as well. For a person with a credit score above say 600, one can buy a similiar home with $2000 for closing costs and no down payment. In this case, renting requires more up-front cash than buying.

This market has been turned upside down in more ways than one. If you aren't in the trenches, you don't know how bad it has become.

[Porsche-O-Phile]

Originally posted by Drago
How many people with $175K in the bank are renting? I think you can safely assume that most people who are renting are doing so because they can't afford a down payment....at least amongst the people I know. Of course YMMV.

Precisely. This is EXACTLY the predicament I'm in. The choices both suck - either do "creative financing" to get into some uber-risky sucker loan like an interest-only or something or hold out and keep renting while everyone else buys and (in theory) gets equity, nice tax write-offs, etc.

Someone please explain to me how it's possible to live in Southern California (even on a decent two-wage-earner salary) and manage to save more than $5k or $10k a year. . .

I've calc-ed it out. Even if we cut EVERYTHING out except absolute necessities and bills, the most we could save is $10k a year. At that rate you're still looking at 10+ years just to save up for a standard down payment at current prices. Screw that. Not worth it, IMO. There has to be SOME kind of balance between quality of life and affording to borrow someone else's money in order to pretend you own a home.

In the meantime I'm saving what I can and waiting for the crash.

[turbo6bar]

50 yr negative amortization, negative down payment loan, PoP.

Sheesh, use your brain.