Thursday, February 7, 2008

Hubris ...

This has been a week for many of you to express your opinions about where real estate prices are headed locally. (Cheer up! BT should be back this weekend!) You have read my “guess” that maybe we’ll return to the historical affordability levels or inflation adjusted 2000 prices. But what if I’m wrong? I’ll be the first to admit that I am merely guessing and everyone else’s opinion is at least as good a guess if not better than mine. Because buying a house is at least part investment, I try to analyze a house purchase just as I would analyze an investment and that analysis includes, no matter how convinced I might be about market direction and velocity, “What if I’m wrong?” (I was certainly wrong about the magnitude of the upside real estate price move from 2000-2005.) What if, we are near or at the bottom now? As one writer this week suggested, if we as “happy renters” are as arrogant as the folks who insisted that real estate prices would never go down, we are just as likely to be as wrong as they were. This isn’t about being vindicated by not buying “too soon.” It’s about measuring the marketplace to try and determine the best point to re-enter the market. And that re-entry point is different for everyone based on their personal goals and financial condition.

So I return to fundamentals. If the fundamentals suggest to me that the bulk of the price declines are behind us, I’ll start making offers. And I will continue to watch local inventories, average home prices, average days on market, price/square foot and any other meaningful evidence that is out there, to try to gauge when that time has arrived, rather than foolishly wait (perhaps forever) for my “guess” as to where home prices are going to go, to come true. And maybe despite evidence that prices are still declining, if the “perfect” property at the right price comes in my morning real estate email, I’ll still make an offer.

15 comments:

doggy style said...

Prices are stil too high around here.I have seen a couple decent buys lately though.Things are getting back to normal as all the speculation fizzles out of the market.I don't see how investors are makeing any return around here.They must have went to that online real estate school called nova riche or something like that.Casey serins old stomping grounds.Dr phil kicked his pathetic ass a couple weeks ago.

mcb44 said...

If you feel the credit tightening has eliminated demand from people who cannot affort homes with the financing available now, then a return to more historical values based on rent to buy seems logical. It's the timeline that is tough to figure. A factor adding a further push to the downside is that houses for the forseeable future are more likely to depreciate than add equity. It's a much easier decision to invest at any relative price if you have a reasonable expectation that your investment will have a positive return. For my primary residence, I'd even settle for a neutral return. Government intervention and currency devaluation are wildcards that are tough to quantify.

I will be looking to buy when a sustained increase in sales, indicates the balance between supply and demand has equiliibrated. The problem with buying before is that I think there is such significant downside risk on prices that I don't know how to value a house in such a dynamic circumstance.

Cmyst said...

Numbers, charts and graphs have always confused me. It's scary that I'm getting so good at interpreting them in the last year, and the financial fundamentals are important in the decision to buy, no question.
Back in '06, I said I'd buy when I could afford a house that I wanted. Well, I can do that now, and I still don't think it's a good idea.
I think for me, it will be a combination of price and appeal.
Fundamentals of price to income and rent to ownership costs in line, and also an honest appraisal of the neighborhood. When you look at the prices that people were paying for houses in some areas, it is stupefying.
So, if I go on a drive by and the neighborhood is comfortable for me, and the asking price for the house is within my range, and the house is my preferred style and in good basic shape, I begin to think a lot about that house. Lately, I can afford MOST of them, and it all boils down to "is this neighborhood REALLY worth that price?"

kmm said...

Since we've moved to Sacramento 6 months ago, we've seen prices in the neighborhoods we like slide $150-200k below their 2005 highs. We'd love to sit back and wait to see what will happen overall, but we've found houses we love and the prices extend us at about 20-25% in full costs of our total income.
So do we delay our life plans (starting a family... something we will not do in a rented apartment) and hope that prices will drop below construction costs?
It's only when home buying becomes a choice and not primarily an investment that the market will truly stabilize.

Patient Renter said...

"if we as 'happy renters' are as arrogant as the folks who insisted that real estate prices would never go down"

we're the ones who insisted they WOULD go down.

"This isn’t about being vindicated by not buying 'too soon.' It’s about measuring the marketplace to try and determine the best point to re-enter the market."

agreed, though it's safe to assume that "too soon" for most people would be any time after which a buyer would still lose a significant amount of money on their purchase.

"So do we delay our life plans (starting a family... something we will not do in a rented apartment)"

kmm: they rent houses too, you know :)

smf said...

"and hope that prices will drop below construction costs?"

Land prices shot up during the bubble. Material prices shot up as well due to speculator demand. As the bubble continues to unwind, construction prices will come back down as well, further screwing those who built houses at the top.

kmm said...

patient renter: we've had 5 friends who moved in the past 6 months, only to be forced out of their rental units due to foreclosures/speedy sales. That's a pretty scary scene, especially when 3/5 couples had either just given birth or were pregnant. Watching them deal with that situation has scared us out of that ever being a possibility in this rental market.

smf said...

KMM -

We have had a similar situation, where knowing what we know, we want to sell our house to lock-in our gains for a later purchase.

But in this market...I don't want that type of situation.

mbc said...

kmm makes a good point. The ownership status of most of the rental houses is shaky at best. Moving, especially a forced one, is a pain in the a**. Even if you don't time the bottom exactly, it's worth something to be in complete control of your house. Anyway, the only time the home value is important is when you buy it and sell it. If you plan to stay in place for ten years and find a good deal on a house you like I say go for it.

G Spot1 said...

Following up on kmm's comments, anyone have thoughts on how to find a stable rental home in this environment?

I think I may be ok because my landlord had just bought the house for an investment, and I paid his initial asking rent without negotiation. So I assume he can pay his mortgage. But the fear that he is a flipper who will want to unload to cut his losses or walk away after realizing his mistake hangs over my head. I check realtytrac now and again to see if there is any defaults, etc. on my street. Being forced to move quickly is a real fear.

Paul said...

Although I am happy I made the choice to rent when I did, I am tired of being a tenant. There is an entirely different mindset and comfort level in being able to say "our home" ... to be able to freely move walls, change floor coverings, light fixtures, landscaping, etc.

We have been blessed that our landlord is excellent and not on a financial cliff like so many "investors" are. I guess one factor to consider on the "stability" of a rental home is, how long has the landlord owned the home? Less than 2 years? Perhaps higher risk. More than 6-7 years, probably lower risk of a forced move. I think a tenant has every right in this market to ask the landlord how long they have owned the home, percentage of downpayment, fixed rate or ARM. Of course, diplomacy will get you farther than being as direct as I am. Perhaps merely sharing your concerns with the LL before you sign the lease, about how many LL's are losing houses because of the current financial condition and see if the LL will volunteer any information. If the LL doesn't volunteer info, that could be a sign, too. Of course, the LL can lie, but hopefully that is the exception, not the rule.

Patient Renter said...

"we've had 5 friends who moved in the past 6 months, only to be forced out of their rental units due to foreclosures/speedy sales."

That sucks, and is certainly the thing that all renters fear. One thing to note though, in California, if a home is sold and you have a lease agreement, the new owner is required to honor that agreement. Of course living in a home while the current owner is trying to sell it would be a nightmare.

As for foreclosures, there are some things you can do to catch these things ahead of time. Paul's comment's above are good. I have some other tips below.

"Following up on kmm's comments, anyone have thoughts on how to find a stable rental home in this environment?"

One thing you can do is check on your property through the county's website to make sure the owner is up to date on their taxes. You'll need your house's parcel number. I believe you can get it by calling the county clerk or assesssor (i don't remember which) and giving them your address.

http://www.eproptax.saccounty.net/

Also you can keep track of whether or not your owner has any liens against them, an early indicator of forclosure.

http://erosi.saccounty.net/

You'll need your owner's name for that, which you can also get from the clerk or assessor.

Observant One said...

Well, PR, keep in mind that a lease remaining intact for the unexpired term generally does not apply in the circumstance of a foreclosure sale, which will have the effect of terminating all interests in the property (including leases) which are junior in priority to the lien of the foreclosing lender. And I would venture that virtually all leases out there in fact are junior, either due to timing or pursuant to an express subordination agreement entered into at loan origination.

Cmyst said...

I'm renting a home that's between 20 and 30 years old and was purchased by my landlord 18 years ago. They DID take out a HELOC on this place for some reason, probably to put money down on their current home, and sometimes that concerns me a little.
I've heard about the sudden foreclosure/forced to move issues more when people are renting new construction. OTOH, with new construction you don't have as many problems with old stuff breaking down (Sig is currently fixing the disposal, and very cranky).
I think we're overpaying, slightly, for this place.
At this point, a couple of the homes on my list would actually cost less per month than my rent. However...they're not in EDH, and they don't have the gardens and mature landscaping of this place.

Patient Renter said...

"Well, PR, keep in mind that a lease remaining intact for the unexpired term generally does not apply in the circumstance of a foreclosure sale"

Right, I was referring to a normal sale of the property since you mentioned "speedy sales" above, not forclosures.