Thursday, February 26, 2009

Whose Guidelines?

On the internet, calculators abound for "how much house can you afford," or "rent versus buy."

But there are many many ways to do these calculations. Recently the government has come out with some guidlines, suggesting that payments of 31% of pre-tax income are manageable. But even in that case, what exactly is a "payment"? PITI (principle, interest, taxes, insurance)? Or just P&I? Other guidlines I have seen are PITI no more than 28% of take home pay.

Most of the sites with these calculator are trying to sell you something banking or financing related. They also tend to have much looser guidelines and built in assumptions, so it's tough to find a non-biased opinion about the best parameters. Some of the calculators I have seen go so far as to obscure biased assumptions, i.e. using a default tax rate of 31%.

When I compare rent verus buy, I look at PITI, minus tax deductions (interest and taxes), plus maintanence (varies by the age/condition of the house). Yesterday's WSJ article on renting versus buying suggested that only PITI is compared to rent.

So I am curious what guidelines others follow?

Wednesday, February 25, 2009

A New Obsession?

So I will confess, housing data just isn't as interesting as it once was. One of my new obsessions, checking on California rainfall data here.

Agriculture is a vital part of our state's economy (my mom was employed at a family owned fertilizer company for almost 30 years)....three years of drought will make a bad recession even more painful. Ironically, the NY Times picked up the story this weekend.
  • "The country’s biggest agricultural engine, California’s sprawling Central Valley, is being battered by the recession like farmland most everywhere. But in an unlucky strike of nature, the downturn is being deepened by a severe drought that threatens to drive up joblessness, increase food prices and cripple farms and towns."

It's not Just Me

According to today's WSJ, rent/own ratios in Sacrmento are back in line with historical averages.

Lander also has a post, showing Sacramento area affordability is now up to 66%, from a low of 7%.

The economic fundamentals are lining up. Is there still downside risk, yes. However, if you buy a home as a place to live, fundamentals are a good indicator for the long term.

Historical Price and Sales for El Dorado Hills and Folsom as of January 2009

Not much time to ponder the latest data.....still unpacking....and getting way behind on my day job. Enjoy.

Friday, February 20, 2009

Hometown Hero

I make a very concerted effort to stay away from political topics (aside from housing, which has become very political in the last couple years). But I will tiptoe into that territory today, as I want to acknowledge my hometown representative Abel Maldonado. Santa Maria rarely takes the national stage (save the Michael Jackson trial). So I was very pleased to see that he helped get us out of our ridiculous budget stalemate, and also delighted to see his proposal for open primaries, which should foster less extreme candidates, and hopefully lead to fewer ideological standoffs.

I have been disgusted and appalled at the behavior on both sides. It is the one primary responsibility of make sure the State has can pay its bills. If they pass some laws, that is gravy. By stalling the budget, and related measures, many costs increase for the state, wasting more money. Interest is owed on contracts, overtime is paid for employees who take a day off on furlough day, then work over the weekend, etc. For example, Mr. BT is now subject to the furloughs, so he has to cut back his work to 40 hours (from 55-60) in order to drop 8 every other Friday. This will slow down his contract progress considerably, and will end up costing the state more $$.

Personally I do not believe that government workers should be unionized (save perhaps teachers). For example federal air traffic controllers make mid six figure salaries, with only a high school education, and get full retirement at a very young age. I was glad to see our governor try to trim back on state worker benefits (fewer holidays). Few in the private sector enjoy such job security and nice benefits.

The stalemate between the Dems and Reps was absolutely embarrassing and unnecessary. In a normal household, when times are tough, people look for additional revenue (take on second jobs), and cut back on expenses. With the Reps not wanting to raise taxes, stalling the budget, people lose jobs and revenue (reducing revenue further). If I had to guess, most would rather have a job, and pay a little more taxes. With the Dems not wanting to cut services, stalling the budget, people lose jobs, thus adding to the rolls of those who need services.

So this is my long winded way, of saying, thank goodness this is over.....for now.

(In other news...our local BofA was robbed on Tuesday, the suspect looks a lot like my old Sac roommate who used to chip cable boxes).

Thursday, February 12, 2009

The Appeal of a Depreciating Asset

I am compelled to respond to a recent comment, about why one would purchase a home now, knowing the purchase will be worth less in the future, and still feel good about said purchase. The person called this behavior non-coherent and illogical. I thought I would explore this concept a bit. My reasoning may not be solid, but I think I can make a bit of a case.

If one thinks about a home purely as an investment, I somewhat agree with the commenter. I say “somewhat”, because this line of thinking can lead to irrational behavior (bubbles), based on current expectations of future value. It is hard to predict the future, there are many variables and actors involved. This summer everyone thought oil was headed for $150 a barrel….now it’s less than $40.

On the other hand, almost everything we purchase is a depreciating asset (cars, electronics, computers, clothing, furniture etc.) In theory, just as I currently rent my home, I could also lease a car, electronics and furniture. Taken to its extreme, one would never purchase anything given the above logic (except perhaps food and jewelry).

If I do not plan to use an asset for most of its useful life, then leasing makes more sense. But in reality, we typically purchase most items (weighing utility versus price). It’s often a matter of convenience, not having to worry about preserving the condition of the item, less billing etc. Sometimes our life circumstances change, and force us to sell things earlier than we would like. However, Craigslist is an excellent tool for recouping some of the residual value.

That said, I still try to be prudent in my purchasing of depreciating assets. Do I buy the latest and greatest electronics/computers when they first debut? No. I typically wait until I feel they are reasonably priced. Do I have time to shop around at every possible store to make sure I am getting the best deal possible? No. I usually check consumer reports to make sure I am getting a good value, and often purchase at Costco.

Of course some assets lose all value, but people still buy them. I bought a computer at Incredible Universe (now Fry’s) to use for grad school applications back in 1997. It cost me $2000 for the setup, and 6 years later was worth almost nothing. That computer was an enormous purchase for me, as I was only making $10.50 an hour (ah the joys of working for a not-for-profit in the public interest). Yes there were alternatives (library perhaps), but I chose to purchase the computer.

Given current macro/micro economic factors, are home prices where I live likely to depreciate. Yes. Do I feel making a purchase now is a good alternative to leasing given our current time horizon. Yes. Did I do much more homework and due diligence for my home purchase, since it is likely the largest purchase I will ever make? Once could argue either way. Is this illogical and non-coherent behavior? Perhaps, but humans are not always the rational actors economists assume (although some of that is changing).

P.S. I spend a disproportionate amount of time in my home (as a full time teleworker) so my utility of a home is perhaps greater than most.

Tuesday, February 10, 2009

Form, Function, or Eco Friendly

I am at that point in my life, where I tend to sacrifice form for function. Instead of purchasing a charming old farmhouse or bungalow, we purchased a new tract home. My husband and I both work 40 hours a week, and don't want to spend our limited free time maintaining our home or other possessions.

When we tell folks we are buying a home, the first question is 1) are we getting a dog, or 2) are we going to put in a pool.

Answers, no and no. Both of these require lots of $$ and maintenance. I discussed my swimming pool concerns last spring in this post. Dogs, while wonderful, must be walked, fed, can't be left along for long periods of time, and can tear up your house/yard. I already have two young munchkins that have many of those same traits, so I don't need to add more work for myself (we have fish instead).

So this brings me to the issue at hand.....grass. In our rental the HOA maintains our front yard, and both front and back use recycled water. We currently have a nice patch of grass in the backyard that Mr.BT faithfully mows. But we never really play on it.

As we contemplate what to do with our backyard, I am leaning towards a "no grass" yard. We won't have recycled water where we are moving. In my opinion, grass seems a rather irresponsible choice in a drought plagued state. It also must be mowed on a regular basis, which pollutes the air. No grass, means a lower water bill, and less time mowing/edging. This seems like a win/win since the kids don't really play on it much. If they really need some grass to play on, there is a very large grassy park area within a couple blocks of the house.

So what is the argument for grass, as I don't really see that many, aside from the aesthetic?

We still plan to cover the ground somehow. Living where we do, I feel compelled to cover the ground to keep potential asbestos out of the air.

Sunday, February 8, 2009

Some Details on our New Domicile

We signed a stack of papers on Saturday, and close this coming I feel a bit more comfortable sharing some of the details now. (The process is very different from closing in VA, where you get the keys the same day.)

For quite some time, I have been tempted by the floor plan, overall modest development size and location of our future home. We have visited on numerous occasions. Back in August we saw the lot our home would sit on. It fell out of escrow sometime in December. So the week between Christmas an New Years, we threw out an offer, 5% below asking and 15k toward closing (the 15k toward closing, if we used their mortgage company, was their standard offer for everyone who walked in the door). 5% below asking put us just beneath our 20% DP cap, and $179 a square foot.

I've never really been very good at bargaining, and house shopping is no exception. The builder accepted that day, with no counter. Of course we were thrilled, as we didn't think they would accept. After thinking about it, I felt a little lame as we must have offered too much. On the other hand, they may have been eager to report one more home pending by COB 2008, as we signed and turned in the purchase agreement on New Year's Eve. To make myself feel better, I went online to the SacBee home sales database, and as of October 2008, there had been no sales below the price we had agreed upon (since that time, I have come to find out that two homes on smaller lots have closed at prices slightly below ours, within 1%).

However when I look at comps in the area, there really aren't any homes in such good shape, with a similar lot size, and proximity to Hwy 50, at or below our price (especially when you consider we won't pay a dime toward closing). I'm sure there will be soon though. Prices seem to be dropping fast lately. In fact, there are now many upscale tract homes to be had in the surrounding area for under 400k.

All this to say, I don't feel we got any type of "deal." We put in an offer on a home that really suits us, at a price we could afford (comparable to rent when the tax incentives are included).

There also was some luck involved. When it comes to interest rates timing is everything these days. I had done my original calculations at 5.25% and we ended up with 4.625% (which now gives us a larger chunk of change to spend on the backyard). Side note: I was rather anxious about using the builders lender, thinking they would make up the 15k in marked up fees etc., but they have been very competitive, and offered good service to boot.

As much as I tried, the builder would not budge on the realtor commission, because he never came with us on our visits (especially the first one). We plan to pay him out of pocket once we close. He showed us homes on 6 different occasions, and answered many e-mails inquiring about listings.

My one current misgiving is that we may miss out on the $15,000 tax credit, as the last report I read suggested it won't take effect until enactment, which is likely a week or two away. Sigh.

Friday, February 6, 2009

Speculating from my Soapbox

To date supply side solutions offered by the government and lenders, mainly in the form of loan modifications, have not been very effective, as evidenced by the high recidivism rates. So the current proposal at least makes sense in that it tries to stimulate demand.

The two ideas being floated right now involve artificially lowering interest rates, and giving buyers a tax credit. While this may slow the decline in prices, increasing demand, it will only serve to prolong the market adjustment.

Interest rates are low right now, and I hope the government encourages anyone who is still able, to refinance out of their ARM and into a fixed rate, assuming they can afford the payment. I am relieved that at least one family member living in the LA basin has been able to do just that.

Personally, I would much rather see the government put the billion dollar subsidies towards creating jobs and infrastructure, so that families don’t lose their income and subsequently their home. There are a lot of construction workers out of work (I just met one on Tuesday standing in line to register my daughter for kindergarten). I would love to see them put to work rehabilitating our aging air traffic facilities and schools which are in an embarrassing state of disrepair.

By focusing on creating jobs and resuscitating the economy, home prices will find a bottom sooner, as there will be income to support the demand for housing once it reaches reasonable levels of affordability (which we are approaching in some areas). As a side note, I am thrilled to see that the bad press and new administration has caused banks and financial firms to cut back on bonuses and out-sized perks. The idea that they report enormous losses, take taxpayer money, yet pay themselves richly is just absurd.

Seems all these housing related proposals, do nothing but buy time. (Of course if the government plans to throw $15,000 at me for buying a home, I certainly won’t turn it down.)

Wednesday, February 4, 2009

Out with the Bubble, in with the Recession

My last post wasn’t properly framed. What I was really trying to get at was two things: 1) The desirable areas, which many feel still have a long way to fall, have more or less fallen to pre-bubble levels (at least for the two zips I track), and thus 2) housing market declines from here on out, will be primarily driven by a sagging economy.

To respond to some of the comments……

“Under demand or over supply equal the same thing right?”

Same result (price drops), but they have different solutions. For example, in aviation, delay from weather, versus delay from wanting to land at an airport everyone else wants to land at, has very different implications and solutions.

“The excess housing out there has NOT been dealt with, and there are LARGE amounts still out there.”

I don’t agree. Based on my calculations Sacramento Metro area is under 5 months inventory, and has been for quite some time. Yes there are vacant homes, and foreclosures waiting to be put on the market, but I it’s not enough to get us back up to last year’s 12 month's inventory levels.

“So is this a case of using data to form an opinion, or now that you own you have an opinion and will see proof in everything and find stats to back you up?”

Probably a little of both. We wouldn’t have pulled the trigger if I felt we were still at bubble pricing levels. We had been eyeing this development for a long time and had plenty of opportunities in the past year and a half, but didn’t feel comfortable buying till now. Back when I started this blog, in April of 2007, my inflation adjusted calculations called for a decline from peak of 39% and 41% (in Folsom and EDH) to be back at “reasonable levels”. Two years later, we are very close to those levels (inflation adjusting for those additional two years).

Update: Regarding the last point, there is only a small amount of manipulation possible in my actual calculations. I primarily gather existing data and report on it. Manipulation can come from monkeying around with inflation adjustments. But for yesterday's post, I actually went to to calculate inflation over the period of my data.

It's the interpretation of the data that can be biased...hence I try to publish it all, so everyone can come to their own conclusions. I have always welcomed comments from both sides of the debate. It's how I learn to be a better analyst. Groupthink, and biased interpretation on either side is undesirable.....and is largely responsible for this mess in the first place.

Seriously, another 20%?

Some are of the opinion that we have another 20% drop left in the more desirable zip codes. There have been suggestions that we could potentially lose 100k on our house value (which would be over 20%). While anything is possible....I'm not sure it's probable.

Below is a graph of inflation adjusted prices for Folsom and EDH, using two separate data sources. I inflation adjusted backwards (from the most recent value) since my data does not go back as far as I would like. Looking at the charts, it sure seems to me that we have squeezed out the majority of the bubble.

This is not to suggest we are at the bottom of the market cycle, as we are likely to over-correct due to the deteriorating economy. But I am rather doubtful we are going to drop another 20% from here. If that does occur, we would have much bigger problems on our hands than home values.

It is my opinion that we are no longer in an over-supply situation. It's now an under-demand situation (lack of qualified borrowers given current lending standards). The home purchase chain is still broken due to all the foreclosures. In a healthy market, a purchase allows the owner to "move-up," which is rarely the case in the current market (hence the "move-up" markets lag in their recovery).

In terms of the larger metro area, the last time I ran the month's inventory data, Sacramento metro was down to 4.6 months. It’s been below 5 month's inventory for the last 5 months. According to my same data, in 2007 it was between 7.8 and 12.4 month's inventory. This is considerable improvement.

Of course, we could probably wait for another year and find something just as nice for less. But the future is uncertain. Right now we have convergence. Interest rates are low, the rent/buy numbers work out, and so does the home (I still have to pinch myself to believe what a nice home we are able to afford). I am a firm believer in the saying: A bird in the hand is worth two in the bush.