Thursday, May 15, 2008

HOAs, the Good, the Bad, but not the Ugly

I recently discussed the merits of HOAs with another Serrano mom who knows we are looking for a home. She mentioned how there is a foreclosure across the street from her, but you would never know because the Serrano association does all the front yard maintenance. This in in contrast to the REO we are trying to purchase in an older neighborhood, which now has weeds taller than my kids in both the front and back, as well as a lawn that is dying from lack of water.

This week the WSJ had a good article that laid out all the pros and cons of HOAs in a real estate downturn. While HOAs help maintain the appearance of REOs, they also run into cash flow problems if people aren't paying. In newer communities, many of the promised amenities may not materialize since the HOA collections can't sustain them if homes aren't selling (this is a big reason we are still not purchasing new at the Lennar Blackstone development off Latrobe).

Even in good times, HOAs are a hot button issue for many.....some love them, and some hate them. In bad times, the the good and bad attributes seem to be magnified even more.


bob said...

I kind of stumbles across this blog today because like yourself, I'm slightly obsessed with housing in California. I've lived here for 9 years so far and came from the Southeast.

My comments in regards to trying to buy now is why now? I've been studying the MLS, Dataquick, and the monthly reports and frankly, Sacramento is the absolute white-hot spot for prices falling, and doing so dramatically. This is not going to abate anytime soon. Take a look at this chart from just last month:

There's a huge number of drops in both sales and prices.

The area got heavily overbuilt. We live in the Bay Area and anytime we drive through Sac, the amount of brand-new homes as well as homes that are still being built is staggering. So there's a few things going on all at once. Prices and sales are falling. Inventory is still extremely high, and there is less demand. I think that anybody saying that we're close to a turnaround is doing some wishful thinking. At the very earliest, 2010 might be at least a stabilization, and even then- this is the best case scenario.

Waiting another 2-3 years in my mind could potentially lop an additional 150-200k off the final price. I think a decent home going for 250k in Sac is a fairly realistic scenario.

So my advice from someone who's been studying this for years is to hold out and wait for the dust to settle. The game is still way too early to start making bids.

Just some friendly advice.

Buying Time said...

Thanks for the thoughts Bob. We have been renting for 18 months nows.

The home we are looking at is under 350k, so I don't belive there will be 150-200k off the price at this point. This home fits all our "needs" and is priced around 100k below others we like. Fully loaded costs would also be less than we pay each month in rent.

In my mind, the only reason not to do it would be if we had to sell in the next couple years....which we don't plan to.

bob said...

Me and my Wife have been renting for over 7 years. Renting may psychologically seem 'bad', but what still matters is doing some extremely simple mathematics. There are two parts to this equation: Does it make sense to buy, and When to buy.

Both of these are extremely, stupidly simple. First, compare rent to own ratios. As it is in the Bay Area, buying is still over 50% more expensive than renting. I'm not sure what it is in Sacramento, but I bet it isn't all that different.

Now for the second part- and this in my opinion is where people sort of goof. When to BUY. Most people seem to be making attempts to call the bottom, or in other words- buy when they think that the prices have fallen as far as they're going to fall.

This is impossible. You cannot call the bottom. It is just like the stock market. While you cannot call bottom, you can very easily call the start.You do this by watching the numbers. After a solid quarter of regional home appreciation, then you will more than likely be closer to the bottom than if you guessed it. While you might not get the price that was at the absolute bottom, you will still be saving more than if you guessed.

You seem fairly well versed with Dataquick and the MLS. So you already know how to use these tools for this analysis. Enough to see that sales and prices as of last month are still cratering at a massive rate. That alone aught to be enough to indicate that the slide downward is far from over. 350k still seems fairly overpriced. I'd say my initial analysis wasn't that far-fetched. This was the biggest bubble in US history, and Sacramento is at the very heated core of it, with one of the highest foreclosure rates in the country, the biggest declines in prices, the largest amount of unsold inventory, and so on. I think there's still a lot of downward pressure in that market.

Anyhow, I'm just throwing my advice out there. Me and my Wife plan on leaving California altogether and buying for cash elsewhere. But I wish everyone who plans on staying the best of luck.

Good luck on your future purchase.

Buying Time said...

If I were looking at a home as an investment, as opposed to a place to live, I would be more interested in trying to time my puchase. Your strategy of one quarter of appreciation is exactly what I would do if I were planning on waiting that long.

However, the home we are looking at is more suited to our needs than our current rental and it would be considerably cheaper as well. If it were purely a financial decision, waiting is obvioulsy the better choice.

30% off 2005, and inflation adjusted 2001 prices seem very reasonable to me. I tend to look at fundamentals, like local income, and rent equivalents to figure out where the long term trend line is. There is a very good chance we will overshoot that trend line on the downside, the way we overshot on the upside.