Investment vs. Shelter

Adjusted for inflation, a home is not a very good investment, especially if you consider transaction costs and maintenance. So if you are looking for long term gains on investment, there are many other relatively safe alternatives that offer higher returns.

This is why I have never been very concerned with when the bottom of the cycle occurs. If I were looking at a home as an investment, the buy low, sell high, would be the rule to follow.

So if it's not an investment (as many were led to believe during the boom), then what exactly is it?

• As long as you don't have a neg-am loan, a home is a forced savings account. With each payment, your equity grows (in a normal market).
• If you do have equity, a home can also be a source of emergency cash in times of crisis (medical bills etc.).
• It could also be a hedge against inflation should it spiral out of control as it did several decades ago.
• And of course most importantly, buying is an alternative to renting.

Hence, I always get a chuckle out of the "now is a great time to buy," which I have heard countless times since we bought our home in Feb. This is part of an investment mindset. When I meet people who are thinking of buying a home because "now is a great time to buy," I always bring up the analogy that they aren't stocking up on gas, since it is now half off what it cost last summer. Why is a home any different?

3 Month Mark

Well it has now been a little over three months since we moved into our new home. Several have inquired, so I thought I would post an update on our life as happy homeowners.

So far, we really adore our neighborhood. We have a community e-mail chain, which is helpful for getting the word out on different events and issues. At the Easter Egg hunt the neighborhood organized, we met at least 6 other families who will have kids starting kindergarten next year along our daughter. There was even an impromptu block party this weekend which was very enjoyable.

To be fair, I am not sure if our neighborhood is that much more friendly, or if we are just more apt to participate and get to know the neighbors now that we own, compared to when we rented. In general we are rather outgoing. I crave human interaction, being couped up all by myself for my day job, so I am inclined to believe that former rather than the later.

As for our house itself, we have done our part to boost the economy. Pier 1 has been a big recipient of our funds, as we have purchased (okay, let's be honest, I have purchased) drapes and some decor. Surprisingly, I have not had the urge to paint just yet. Instead, I prefer to put my efforts into the yard for now. I am pretty new at gardening (except for the container garden we started last year), and have purchased some books on landscape design and irrigation systems. Speaking of the yard, we went to the home and garden show in Placerville last month. Our magnificent valley oak tree has had all the mistletoe trimmed out, and we spend lots of time watching the many critters that call it home.

The builder has been very responsive regarding our concerns and issues (they even patched the hole Mr. BT drilled in the wall when trying to install wiring).

As a planner, its been a huge mental relieve for me. No more, putting life on hold in case our offer goes through, no more wondering if we will have to move the kids out of their preschool or find a new doctor/dentist etc. if we moved a distance from the rental. These benefits are sometimes overshadowed by my concern that our neighborhood could be awash in foreclosures in the near future (homes in our development started selling in early 2006....these loans are just starting to go bad).


However, all in all, things are going well so far.

You can see the kids and I in the June edition of Sacramento Magazine. Speaking of the media, the NYT contacted me for their Sacramento housing story a couple weeks back. As much as I would love to do something important enough to land on the front page of the NYT, not sure buying a house should qualify =) I also don't think I have thick enough skin for national scrutiny.

Housing Market Stress Indicators - Folsom & El Dorado Hills

As many had predicted, homes in more desirable areas are now defaulting at an increasing pace. All three markets have surpassed previous highs. However the number of foreclosures has diminished as a result of the legislation passed last year (moratorium on NODs....so the pipeline dried up).

We haven't been in our new neighborhood long, but already we are hearing some of the stories (Bay Area lawyers abandoning their home etc.) and seeing some of the fallout it creates (tensions among otherwise very friendly neighbors).

Note: I have removed the period where foreclosures in Folsom shot up, by approximately 100 units, then just as suddenly went back down. I believe it was a data issue, and not a big bank purchase.

Folsom & El Dorado Hills Historical Sale Data

At long last, below is the historical sales number and price data from two separate sources. Astute observers may notice that the name of the second data source name has been omitted as the actual source of the data has changed. Note that all four charts have the same scale for sales number and price for easy comparison between the markets and data sources.

Hard to tell if we are on a elongated spring ledge or if the market is starting to level itself out a bit. Only time will tell. Last I checked pending sales were at one of the highest levels I have ever seen. Now that more homes meet my criteria, this is much more indicative of the broader market.

Random Acts of Kindness

It's been a very stressful couple weeks lately. Lots of travel and late nights getting home. So I was tickled pink this evening, when crossing the Benicia Bridge, I learned, to my wonder and amazement, that the car in front of me paid my toll.

This random act of kindness really touched me. In these economic times, few are feeling generous. So this small, selfless, and completely anonymous act, gave me a glimmer of hope, as I often despair that service and community have been lost to selfishness and indifference.

For all their theories and equations, economists can't explain this seemingly irrational behavior. But isn't that the true beauty of it? Against all odds, these random acts of kindness still occur.

Pulse Check: The Good, Bad and Ugly

There has been a lot of speculation as of late, in both the media and on the blogs, that some sort of bottom is in sight. To paraphrase Calculated Risk, there are actually two housing bottoms, sales and price. I think Sacramento hit the sales bottom a while ago, with a fimly established year-over-year increase in sales trend.

So the real question is, "When do we hit a price bottom?" I can see why the debate has been lively. There are good arguments to be made for both sides.

Personally, I think we are seeing some seasonal firming, due to usual spring activity, coupled with a reduction in downward pressure from foreclosures (not as many foreclosures due to the effects of earlier legislation), BUT come this fall, we will see additional price declines as the backlog of NODs turns to foreclosures.

So now for the summary:

Good -

• Inventory is way down compared to the last couple years.
• Sales are up (which also helps bring inventory down).
• Pending sales in my (now monthly) screen scrape are close to a high.
• Interest rates have been hovering at an all time low making homes more affordable in monthly payment terms.
• Anecdotally, in some lower priced areas bidding wars are becoming common again.
• There are fewer foreclosures on the market (at least where I had been looking), due to the legislation that was enacted last Fall.
• People are saving money again and using less credit.
• Homeowners who are able (i.e. enough equity), have taken advantage of low interest rates and refinanced out of ARMs and into fixed rate loans.

Bad -

• Rents are falling, increasing the bar for the rent/buy break even calculation.
• Fewer people qualify for financing due to underwriting standards and lack of down payment.
• People are afraid to commit to such a large purchase in times of economic instability.
• Interest rates are likely to rise, which will reduce affordability and lead to stagnation.
• Tax credits (both Federal and State) artificially inflate demand.

Ugly -

• For the markets I track, NODs are reaching all time highs, now that the foreclosure moratoriums have been lifted.
• Alt-A and Prime loans are now starting to go bad. This is especially true for certain products like Option ARM and Neg_Am loans, as well as homes with a 2006 & 2007 vintage.
• Sacramento unemployment is in the double digits, with no reason to believe will abate any time soon.
• The state of California is in a massive budget crisis, which means cutbacks and furloughs, disproportionately affecting the Sacramento region.
• The full impact of the commercial real estate bubble are yet to be felt by the economy.

Hoping I will have time to put up the latest numbers in the coming days (things have been a little hectic for me lately on the day job...but I figure it's good that my skills are in demand).

Changing Horizons

Times have changed. Homes are no longer thought of as a sure fire "flip to get rich quick" investment, they are back to being a place to actually live and perhaps a store of wealth for retirement.

A lot can happen in the 20+ years someone plans to live in a home. Nearby fields are developed, secondary roads are turned into main thoroughfares, infrastructure can deteriorate etc. These are things, humans have control over.

But there are also many things we can't control. One of my early posts examined how parts of Sacramento would fare against some of the the woes mother nature can cause. In those cases, people can try to avoid high risk areas in the first place, or build to resist these problems (i.e. the wood we are considering for our deck has a very high fire rating).

I somehow forgot to mention drought in that post, which is one of the most common of our woes here in California, and is becoming more and more serious this cycle. Living in Northern California, I don't worry about this as much as I would if I were in down south, but I have been increasingly concerned about its impact on our already weakened economy.

I digress...back to long term changes that affect where your chose to live. What I am wondering about.....is this drought, and all the odd weather patterns we are seeing across the U.S., just a part of our regular climate cycle, or are they the result of a larger shift due in part to climate change? Not sure anyone has the answer...but the thought of Sacramento getting hotter and drier is not a reality I want to face over the next 20+ years.