What’s Your Housing Bust Strategy?

Posted by The Tim on July 2nd, 2008 at 9:50 AM · 164 Comments

One of the topics we touched on during yesterday’s Rain City Radio conversation was when and how to catch the bottom of falling house prices.

I’m not personally obsessed with catching the very bottom, but I also am not interested in buying something less than ideal that I can barely afford based solely on a false notion that prices will keep rising, only to have them drop another 10-20%. I outlined one possible strategy in this post, where one would wait for three years or 6 consecutive months of price increases, whichever comes first.

Reader Sniglet pointed out a possible flaw with this strategy in yesterday’s comments:

Personally, I would suggest waiting for more than 6 months of consecutive price increases before buying, as Tim suggested (if you are trying to time the market, and buy at the bottom). If you look at Japan’s price decline in the ’90s there were some periods where prices seemed to have stopped dropping for about a year, but yet the decline continued anyway.

One thing that is consistent at all housing downturns is that it takes years for prices to really pick up significantly. My advice would be to wait until it looks as if prices haven’t declined anymore for a couple years. There is certainly no rush to jump in once a market has hit bottom, so patience is the best policy.

There certainly exists the possibility that there will be “false bottoms” that last longer than six months. How long you set the horizon is really a matter of your personal assessment of the risk.

What it really comes down to for me is this: “can I afford a decent house that I will be happy with long-term at today’s price?” If the answer to that is yes and I am comfortable paying today’s price knowing that I could possibly get a better deal by waiting, then I’ll probably buy anyway—bottom or not. For my family, I expect that time will probably come around 2010, even if prices are still declining.

So what is your strategy? Are you waiting for a specific price point, or are you more interested the overall direction of prices? Or perhaps something else entirely? Let’s hear your suggestions.

Categories: Opinion
Tags: bottom-calling, predictions

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164 responses so far ↓

1 Buceri // Jul 2, 2008 at 9:57 am

When all monthly household expenses (plus mortgage, of course) can be paid on a single income.
2 Ichiro Vader // Jul 2, 2008 at 10:04 am

I pretty much agree with Tim’s plan on this one. Wait a few more years, if financially it is doable, and we plan to stay long term. Then go for it. And 2010 sounds about right.

However, if they increase the quality of the free women that come with houses, I might move sooner.
3 Sniglet // Jul 2, 2008 at 10:14 am

I completely agree with Tim: the time to buy is when you can find a house you like that EASILY fits within your budget. In my view, this ideally means that you should never incur debt (including credit cards, car loans, mortgages, etc) greater than 3 times your annual income. If prices keep falling, so what?

My earlier comments about waiting for a couple years was specifically around the subject of timing the bottom. Personally, I don’t plan on timing the bottom. However, if that is your goal (i.e. timing the bottom), then I suggest that patience is the best policy, and you should wait to see at least a couple years of no more price declines before jumping in.
4 vboring // Jul 2, 2008 at 10:16 am

normal market movements don’t bother me, so i’d normally buy when my family situation made it worthwhile.

this has been an unprecedented event. once the rapid price drops have passed and my family situation justifies buying, i’ll buy even if i expect slow price drops to continue.

according to the price history charts from the past several decades, house prices more or less follow the waveform you would expect from an LRC circuit responding to an impulse. it rapidly approaches the asymptote on the way up and down. so, if you miss the rapid part on the downside all you have left is slow decay towards the asymptote. and that part doesn’t bother me.
5 Joel // Jul 2, 2008 at 10:17 am

I’m waiting for the monthly carrying cost of owning (PITI plus maintence) to be roughly equal to monthly rent on an equivalent place.
6 jon // Jul 2, 2008 at 10:28 am

The strategy of looking for a certain pattern in the price history is assuming that housing prices follow a certain cycle. That’s a reasonable assumption. In the stock market there are no cycles like that, but buying stocks is still a good investment for many people. Of course a 20% or more bear market comes with the territory from time to time. If you have the risk tolerance to invest in a home, you can use the same policies for picking companies as for picking a house or picking a time to buy. The benefit is you enjoy the comfort of owning a home sooner and perhaps a financial benefit of a good investment.

So if you don’t want to arrange your life around ups and downs of the RE market, just look for a market price that a lot of people can comfortably afford in an area that has appeal to businesses starting and growing. You might lose money on paper for a while, just as you often see a loss for a while after buying a good stock. But after a few years a wise investment makes up for that.
7 The Tim // Jul 2, 2008 at 10:39 am

I should point out that while the average American family allegedly moves every five years, my parents bought their first house when I was seven, and they lived there for 21 years (paid it off entirely in about 20). They would still live there today, but the county came in and bought them out. They moved a bit further out and still have no mortgage.

So I realize that I’m coming from a slightly different perspective than most people.
8 dk // Jul 2, 2008 at 10:47 am

Shouldn’t the decision be partially based on how interest rates are expected to change? A 1-2% increase for the interest rate can easily offset equity captured by waiting for prices to bottom out. Conversely, a period of low interest rates could be more profitable, even though prices may continue to slide downward in the future.

My point is that looking solely at price fluctuations is deceiving when you’re concerned with total out-of-pocket cost.
9 jesse // Jul 2, 2008 at 10:49 am

I’m with Joel but am more cutthroat about it. Wait until rents are 5% or so more expensive than owning. Landlords make money by charging a premium to rent versus own.
10 Soda // Jul 2, 2008 at 10:53 am

My strategy is a mixture of having enough savings and gauging the market psychology (based on my subjective opinion). The basics would be to save a downpayment of at least 20% + have an emergency fund + have funds for remodeling should that be necessary. At that point, I’ll consider buying something that’s affordable for my income.

Besides that, I’m looking for the market to go through the bubble cycle through denial, fear, desperation, panic, and capitulation. Right now, I think we’re in between denial and fear, and I’m aiming to buy around the panic cycle when people start to feel absolutely sick over real estate.

I could certainly pull the trigger early should I meet the financial goals above and feel like I found a house we can live in for a long time.
11 softwarengineer // Jul 2, 2008 at 10:54 am

I BOUGHT MY SECOND HOUSE IN 1999

I purchased a home for about half what I could afford, as I figured the housing bubble to pop in 2003 [I was off about 3 years] and felt buying too much house was like buying too much stock in 2001 and today. A big potential loss. to avoid. Buying a McMansion today is like holding on to Ford stock.

A plus, my present home is about as cheap as homes get in King County…..meaning, I’ve cut my base losses and I have a chance of selling it [with minimum loss] to a Middle Class household [not two or three household incomes to qualify as banks tighten up and interest rates sky-rocket].

Another plus, I paid the principle off in 9 years.
12 biliruben // Jul 2, 2008 at 10:57 am

My less-than-optimal strategy is to low-ball a few houses that have been on the market come fall/winter, then get serious and get the best house we can afford, based on what sort of down-payment I’m comfortable with and what interest rates are at, in the spring of 2009. I fully realize prices will almost certainly continue to decline after we buy, but that’s the situation I’m in family-wise.

My optimal strategy would be to buy as soon as SD prices see YOY increases.

The only way I could work the optimal strategy would be if the housing market got so disastrously bad in the next 6 months that it scared my wife into not only not wanting to buy, but refusing to buy.
13 Eric Arrrrr // Jul 2, 2008 at 10:59 am

When rent prices achieve parity with the monthly payment on an ~85% loan-to-value fixed-rate mortgage at current interest rates, it’ll be about time to buy.

I’m not dead-set on 85%. It could be 80% or it could be 90%, depending on other factors I’m still looking at.

But just for comparison, the monthly rent on the condo I now occupy is equal to the mortgage on just 68% of the price my landlord paid for the property in May 2008.
14 David McManus // Jul 2, 2008 at 11:01 am

“However, if they increase the quality of the free women that come with houses, I might move sooner.”

Some of those real estate “professionals” may come included with the sale of a house. There’s a few I’ve been eyeballing. ;-)
15 palm // Jul 2, 2008 at 11:14 am

My plan here in San Francisco is pretty simple, and that’s not to think about it until after (a) my son goes through the SFUSD school lottery and we figure out whether he’s was assigned to a school we can walk to–if so, we’ll stay in the city, and if not, we’ll have to buy a car anyway, so we might as well move to Marin where he can go to a fantastic local school sans lottery and (b) I am promoted and qualify for my employer’s 3% interest rate/90% LTV mortgage program for first-time buyers (they also offer a 100% match on downpayments). According to my department head, that will happen around 2010-2011. Our circumstances are unique, obviously. But the timing seems to coincidentally sidestepped much of the bubble froth. And even desperate real estate agents have been hard-pressed to come up with a reason that we shouldn’t wait to buy (e.g. “But prices are still going up in the city!” “Fast enough to make it worth taking a mortgage at 7% instead of 3%?” “Umm…”). When that day comes, we’ll have to see whether rents are still less than half the cost of buying, though.
16 DavidB // Jul 2, 2008 at 11:14 am

I plan to wait 3 to 6 months and see what’s happening with home prices. If prices look like they’re still headed lower then I’ll wait another 3 to 6 months. It’s important to follow the national as well as the local news. If the country is in a recession, inflation is still rising, consumer confidence is low, and interest rates are increasing it might be best to wait to buy a house because you know home prices will be declining. I think it’s better to pay a higher interest rate initially for a home purchase and get a lower price on the house. You can always refinance later on when interest rates drop.

I agree with you that I’m not trying to time the bottom of the market. Overall if you find a house you like and the price is right then buy it! It won’t matter in 10 years that you didn’t buy when prices were at the bottom anyway.

I’m certain that inventories will continue to build and prices will start dropping more dramatically in the next few months. Most people can’t afford to keep a house that they’re not living in for very long and rental income isn’t going to cover much of the mortgage and other carrying costs.

I expect the market correction to be similar to when the stock market bubble burst. Once prices start dropping off substantially we’ll see panicked sellers who need to sell an investment home race to get ther house on the market as soon as possible to try to minimize their loss. The notion that Seattle is immune to a home price correction will soon be far behind us!

Once sellers stop thinking they’re going to get ridiculous prices for their home and they see prices are going to drop we’ll see the market in Seattle adjust back to where it should be at. It will be 2010 or 2011 before we’ll have anywhere near a healthy real estate market again. I expect the rest of the country will start to improve before Seattle does since Seattle tends to lag behind in economic recoveries.
17 EconE // Jul 2, 2008 at 11:26 am

I’m waiting for an official Ray Pepper GEM!

He actually has a cool little housebarge that he’s listing…but it must not be much of a GEM as he didn’t buy it himself…not to mention it’s WAAAAAAY overpriced. The pictures that he took kind of sucked too. I would have called him to find out more about it but oh well…you know the Ray Pepper Motto…

NEVER CALL THE NAME ON THE SIGN!!!
18 S-Crow // Jul 2, 2008 at 11:27 am

Here’s my 2 cents:

If I were buying, I would look at when price reductions are no longer running at about one for every two listings that come on the market. When price reductions started to show in very late 2006 and early 2007, that is when I suspected a top. Since then, we’ve had days where price reductions are exceeding that of new listings coming on. This is something that is rarely, if ever, discussed by the real estate pro’s. And this says nothing about the FSBO market that is not reported.

My sense is that the slowing down and eventual reversal of price reductions scenario won’t play out for quite some time.
19 Alan // Jul 2, 2008 at 11:29 am

I’ll buy when I can get something I will be happy living in long term that doesn’t cost more than three and a half times my annual income. If that doesn’t happen within three years then I will move to greener pastures.
20 Bella // Jul 2, 2008 at 11:40 am

In my price range, I am waiting for a house in that range that is LIVEABLE.
By liveable, I mean safe, not a former meth lab, not about to collapse in on itself, etc. Almost everything in my price range is only suitable for tear down.
But I refuse to over extend our budget, and anyway, I just don’t personally believe that I should pay a half a million for a house. I’d rather rent and have some flexibility until something that I could live in indefinitely becomes “affordable”.
21 TJ_98370 // Jul 2, 2008 at 11:43 am

I’ll start seriously looking to buy six months to a year after real estate prices bottom out / stabilize in SoCal.
22 Sniglet // Jul 2, 2008 at 11:48 am

One other comment I would make about buying a home is this: don’t buy if you couldn’t stomach a 50% price drop. If you feel that a 50% price drop in a home would cause undue harm to your health and wealth, then you shouldn’t buy.

I actually believe that we are in for just such a significant decline (i.e. 50% or greater) in the next 4 years. However, even at the “bottom” of a market, I think people should ask themselves this question. I think it speaks volumes if a person feels that a major price drop would be unbearable.

The point is that you should NEVER over-extend yourself to the point where a major drop in asset prices would cause ruin. Heck, if a 50% price drop on a home you buy today wouldn’t really matter all that much to you, then go right out and buy.
23 Ubersalad, Ph.D // Jul 2, 2008 at 12:15 pm

My strategy is simple: When the general consensus is NOT to buy a home, that is when I consider to buy.
24 Keith // Jul 2, 2008 at 12:16 pm

Couple of comments - other than “softwareengineer”, it looks like all the other commenters are currently out of the RE market…looking to get in. Not a very balanced sample there.

Second, all of the posted strategies are incomplete. Unless your “strategy” is to spend all your money on disposable goods, you simply have to invest it somewhere. The stock market is down 20% in recent months - MORE than the decline in (local) housing values. We all know that the dollar has declined dramatically. Where are these commenters putting their money? Oil futures? As pessimistic as people are about housing values, there is equal - if not greater - reason to be pessimistic about virtually every other asset type. Put cash under the mattress? Whoops, there’s that inflation dragon to eat that up.
25 Ubersalad, Ph.D // Jul 2, 2008 at 12:18 pm

Keith -

I am laundering it in Canada as we speak!
26 Curious George // Jul 2, 2008 at 12:19 pm

Tim, what is your dream house or house close to a dream one? There is always compromise. It doesn’t matter how much in the bottom is the real estate. I can also wait for the bottom, but if I feel financially secure I will buy what I can afford. It doesn’t have to be in Seattle or Bellevue, it doesn’t have to be McMansion.
I’ll take into consideration current market situation and decide to wait for saving more down payment or try to really see how much my “dram” house cost. Do you know how much your dream house cost today? Have you seen it? Charts are helpful but hunting for the dream house at perfect price, location and affordability-this is a different one. Again, I’m just curious for what exactly you are waiting for?
27 Ubersalad, Ph.D // Jul 2, 2008 at 12:21 pm

Tim is living a dream life…
-Rent free
-Work free
28 Ubersalad, Ph.D // Jul 2, 2008 at 12:24 pm

Oh, and more than half of income from donation…

I need donation…
29 Matt // Jul 2, 2008 at 12:25 pm

the growth of the view that buying and selling a house is mostly an investment, as opposed to securing a stable place to live while building a little equity, is what has caused the run up in prices. buying and selling houses in hot markets is relatively new, and the result is a volatility similar to the stock market.

Timing is for buying stocks/bonds/etc, not a house. well, that’s the way it was. not anymore.
30 Sorin // Jul 2, 2008 at 12:30 pm

When the price of a house I would like to live in for at least 10 years comes to within 20% of a comperable fairly priced rental (based on the monthly payment on a 30-year mortgage). I figure that owning is worth that bit of premium to me, but only for a place I really want to live in for years to come, and that doesn’t stretch my budget. Currently, I’d say we have a good 30% more to drop before I start seriously looking again.

Oh, and if that just doesn’t happen, I’ll keep renting.
31 Ubersalad, Ph.D // Jul 2, 2008 at 12:31 pm

Sorin,

I guess you’ll be renting forever!
32 softwarengineer // Jul 2, 2008 at 12:38 pm

WHERE TO PUT YOUR MONEY IN TODAY’S HORRIFYING ECONOMY

The bank, yeah that FDIC back up is like 2% of the deposits….

Stocks, they’re bearer than skinny dippers lately….

Gold, at $1000 a ounce or there-a-bouts, I see a supply and demand problem, like lack of money supply reducing demand….

Canned food and rice….yes, stock up bubble heads, you’ll get 10-20% interest on your savings….

Can of cash in case banks close doors….I’d go with two hidden safes, if a robber finds one, you still have the other….
33 Nick // Jul 2, 2008 at 12:40 pm

For me, it’s going to be a combination of affordability and rent/price ratios. I’ll look to buy a second house when I can comfortably afford the payments within the normal ratios (eg: less than 1/3 gross income). However, I also won’t look to buy until the rent/price ratio drops near (or preferably below) 120; I have high confidence that normal market correction will push prices to that level eventually, barring government interference.

The only variable which might alter my approach is if a large-scale bailout looks imminent (eg: if Obama gives a trillion dollars to speculators and lenders), which would permanently push up house prices at the expense of creating inflation. In that case, I might look to get in before the prop-up if possible, to save some savings from the backside inflation/taxation hit.

Oh, and I would prefer to buy with high rates and low prices, because I can always refi later. I might be willing to go slightly over 1/3 gross income if the rates are high and prices are very low (eg: rate over 10%).
34 Birdie Num Nums // Jul 2, 2008 at 12:46 pm

Unless I came upon a house that knocked my socks off and had everything I could ever imagine wanting — and thus be willing to pay a premium (i.e., risk losing 20% of its value in a declining market) — I would not consider buying a home until AT LEAST six consecutive months of flat or rising values, preferably one year. I don’t need to “find the bottom.”
35 economist // Jul 2, 2008 at 12:53 pm

Put cash under the mattress? Whoops, there’s that inflation dragon to eat that up.

If you’re saving money to buy a house, the only inflation that matters is house price inflation. So what if gas, etc. keep going up. If house prices keep falling (and that is a logical outcome of gas and consumer prices rising) you will get more house for your money.
36 Eric Arrrrr // Jul 2, 2008 at 12:55 pm

Keith @ 24: inflation + a bear stock market doesn’t mean that the case against real estate investment somehow becomes incomplete.

But since you mention it, the other side of my strategy is based on foreign exchange. Inflation has not been a problem for me.
37 Birdie Num Nums // Jul 2, 2008 at 1:00 pm

P. S., in response to Keith’s question in Post #24, here’s where I’ve had the majority of my investment income for the past 20 years, and it’s been very, very good to me for the past six years or so (26% average annual return for the past 10 years):
https://personal.vanguard.com/us/funds/snapshot?FundId=0053&FundIntExt=INT

If housing values continue to decline, and I find the place I want, I plan to pay cash and not worry about mortgage rates at the time.
38 softwarengineer // Jul 2, 2008 at 1:01 pm

WATCHOUT ERIC

Even Euros and Yens can plummet with dollar based oil sky rocketing in price causing a worldwide recession; since America’s interest rates are way too low to sustain a dollar value.

Toyota sales are down 20% too, nobody’s buying anything with their cash machines (home equity) butcher axed 20%.

Investing is a shell game, even the billionaire Buffet’s lost 20% since Dec 2007.
39 Captain Kirkland // Jul 2, 2008 at 1:02 pm

I’ll buy when inventory of homes gets down to a reasonable level in King County (ie. back to 10,000)…Supply and Demand really exists.

Until then, I’m invested in a hedge fund making 20%+….but I am admittedly fortunate to have that opportunity. Caveat Emptor: Hedge Funds are only as good as the team managing them.

Most people should consider AAA Corporate bonds. Returns are around 6-7% right now, and they are virtually risk free.
40 Birdie Num Nums // Jul 2, 2008 at 1:03 pm

Correct, Eric. I have a portion of my cash in euro-based CDs, and am looking at getting an Australian dollar-based CD (all available over at Everbank.com):
http://www.everbank.com/001Currency.aspx?LinkID=Column
41 Ira Sacharoff // Jul 2, 2008 at 1:07 pm

If you’re looking to buy a home, it’s unwise to buy it as an investment, especially if you think you might live in it for ten years. but it should be something you can easily afford.
Right now, most home prices around here are unaffordable, unless you make really good money or have a large inheritance.
So trying to time when it’s the best time to jump back in might be wise if you’re looking at it from an investment standpoint, but otherwise it might just do to wait until prices have dropped to the point where the monthly payments aren’t that much more than comparable rents.
42 Yaoyao // Jul 2, 2008 at 1:19 pm

We are planning to wait 1 year or 2 and see what’s going on. My wife saw statistics that Santa barbara median price fell 50+%. We are not hoping for that kind of price drop, but 30% would be nice.

Palm: What industry do you work in? Is the first time homebuyer loan benefit standard for the industry?
43 jon // Jul 2, 2008 at 1:19 pm

It would be great if you didn’t have to treat a house as an investment, but the act that it costs so much to live in close proximity to a major job center makes borrowing unavoidable. As such, you have to plan for it in the context of your overall financial strategy. But the nature of transportation, communication, and everything else about urban life presents an opportunity to choose your house partly according to its economic value. To ignore that aspect of it and just buy a cheap house actually puts yourself at greater financial risk. If you understand your local market, there really are sometimes good houses, just like there are good stocks and any other investment, provided they balance with the rest of your portfolio.
44 Slumlord // Jul 2, 2008 at 1:20 pm

I had a conversation with my parents’ neighbor on Monday about her housing situation. The neighbor is a recent widow in her early 70s. Her income declined significantly with her husband’s death. She wants to stay in the house for a couple of years — which I interpret as part of her grieving process — before downsizing to a condo. However, she does not have a huge amount of equity in the house or savings to maintain it should she live a long time (which seems likely because she is in excellent health for her age).

What I told her is that she should sell her house now and rent for a couple of years before buying a condo. She seemed indignant to the idea of renting; to which I replied that I’m not trying to scare her, but there is a very real chance that her $450,000 house could become a $300,000 house in two years’ time. Given that she still owes around $200,000, and has a limited income and only modest savings, the decline in equity could be financially devastating at a point in life where finding a job is very unlikely.
45 Jon // Jul 2, 2008 at 1:57 pm

I know that everyone that isn’t in the market is worried that prices will keep falling, but the other aspect you really need to think about is interest rates. All indicators point to higher interest rates over the next year… and here is something to chew on…

For every 1% increase in your APR, it’s worth 10% of the value of your home.

In other words, if you wait till next year when prices fall 5%, and interest rates rise 50 basis points, then you are in the exact same position you are in right now.

Except, if you buy now, you can write off the cost of acquiring the property on this year’s taxes…

Either way, inventory is fantastic, interest rates aren’t going any lower, and it’s a great time to take the homeowner plunge…

Ok, bullet proof vest is on, shoot away!
46 softwarengineer // Jul 2, 2008 at 2:02 pm

GOOD CALL SLUM LORD

Selling quickly now for 10-15% below the 5-10% drop in prices since 2007 makes far more sense than waiting for a 25-50% butcher axe later. Waiting for the condo price collapse while renting is a good idea too, but supply and demand will keep rents as high as the market’s going to bear…..and that’s not a worry at all, the market can’t bear anymore than $1000-2000/mo for rentals of $300-600K properties in general. That’s got to be like at least 40-60% of the average household net pay for tennants anyway. It can’t exceed that, with gas, food and utilities gobbling the rest like termites on wet wood.

You international stock buyers took massive losses too in general. See the proof (G= CDs/Money Markets, F= Government Bonds, C= Domestic Stocks, I= International Stocks, S= International Stocks):

Returns & Share Prices Current Returns

G Fund F Fund C Fund S Fund I Fund
June 2008 0.32% (0.08%) (8.41%) (7.63%) (8.15%)
Year-to-date 1.79% 1.26% (11.90%) (7.68%) (10.78%)
12 Month 4.25% 7.28% (13.05%) (11.14%) (10.42%)

Numbers in parenthises are losses, remember, these figures exclude bank/broker fees….so your returns will be much lower (or losses much higher).

You see why even financial advisors suggest “cans of cash” lately.
47 TJ_98370 // Jul 2, 2008 at 2:02 pm

Keith said:

..Put cash under the matress? Whoops, there’s that inflation dragon to eat that up.

In October 1981 when inflation was running at 10.14%, you could buy a 3 month CD paying 16.7% interest. If inflation really takes off again, is there any reason to not expect a similar repeat?
48 [troll] // Jul 2, 2008 at 2:48 pm

Th Tm: “… knwng tht cld pssbly gt bttr dl by wtng,”
–
Tm - t glnc, ths s smrt-lkng sttmnt (.g lks gd).

Yt, n rlty, f n rd t crflly - y r cntrdctng yrslf n tht n sttmnt. Y clm t “knw” smthng, by wtng fr th ftr t hppn.

Hw cn y “knw” wht wll hppn n th ftr, tdy? .g. knw typd ths prgrph, bcs jst dd. Bt wht dn’t knw s whthr y wll pstvly r ngtvly rspnd t t. cld sy “ KNW” bsd n yr prvs rspnss, bt hw s tht ctlly rltd t yr rspns (r lck thrf) n th ftr?
49 Keith // Jul 2, 2008 at 3:14 pm

>> I am laundering it in Canada as we speak!

Off Topic: Check out the Canadian series “Intelligence”.

>> If you’re saving money to buy a house, the only inflation that matters is house price inflation

Yeah, but if you _have_ a house (my point, actually) and are paying for it with a fixed-rate mortgage it works out a little differently. Of course, if you have to sell during a period of high inflation (and high mortgage rates) you won’t be that happy.

>> In October 1981 when inflation was running at 10.14%, you could buy a 3 month CD paying 16.7% interest. If inflation really takes off again, is there any reason to not expect a similar repeat?

I would certainly expect a similar situation, but do you remember how happy those folks were then with their 4% fixed mortgages? Actually, I have completely lost track of whether any current mortgages are “assumable”…

Still, if you truly expect inflation to take off, it’s hard to imagine a better investment than a fixed-rate mortage against a small down payment.

>> Either way, inventory is fantastic, interest rates aren’t going any lower, and it’s a great time to take the homeowner plunge…

I personally could really go either way on this, but in investment advisor terms I’d say that real estate is currently a “hold” proposition (as if you had a choice!). I’m not sure yet whether it’s a “buy” locally (I couldn’t even hazard a guess about other areas of the country), but I do agree partly with Tim’s earlier ananlysis that the risks of missing the bottom compare favorabley to the rewards from picking it correctly.
50 Amy M // Jul 2, 2008 at 3:14 pm

I’m not completely out of the real estate market. I bought some ocean view property in Brazil last summer. Their market is on fire and is still cheap.

My next move is here in the U.S. so I’m saving lots of cash. We sold our home last Spring before we moved here for top dollar, even though it was starting to get chilly in the market place. I’m renting now but I’m planning on buying a house sometime next Summer, probably a foreclosure. (I won’t buy unless I can hedge another 10-15% down off the already discounted price).

Next, I’ll buy a cute condo in Hawaii in another few years when the recession is at it’s worst. I’m young so I can take those kinds of calculated risks.

As for stocks, we’ve finally hit a bear market. I can’t wait to start picking up the bargains. I moved 30% of my portfolio into cash last year. It was hard to look like I was standing around with my hands in my pockets. Now I look like a genious. This is what I’ve been waiting for. Great dividend stocks at cheap prices.

Oh yeah, did I mention I locked in my rent for two years and after Sept. I’m month to month so I don’t have to worry about breaking a lease when I find what I’m looking for. And, my biggest monthly expense is inflation proof, at least for now.

When we moved here last year everyone said I had to “hurry up and buy something before I was priced out”, but I felt convicted to hold out. I’m glad I did. I can’t pretend renting is fun, but it’s paying off.

Real estate will come back someday and be the “it” investment again. Just wait another 12 years.

Also, I don’t think you can compare our real estate market to Japan’s. They have had a declining population for a number of years, so less buyers, and it’s much harder to buy real estate there than here. Don’t forget, when the YEN was so strong in the late 80’s they bought up Hawaii, Manhattan, and other places like crazy. The Brits love Florida too so don’t count it out yet. You may also see some Canadians taking advantage of their strong currency too.
51 vboring // Jul 2, 2008 at 3:19 pm

Nostra"golly"Us,

first of all, the statement was “knowing that I could __possibly__…”

this is completely non-committal. I know that i could possibly sprout wings tomorrow. so, if you wanna play semantics, you have no ground to stand on.

secondly, given that housing prices have a lot of momentum to them and numerous other technical arguments covered here, one can be reasonably confident in a belief that prices will continue to fall for some time.

but, that is all. markets of all varieties are only partially determined by technical factors, so one can only ever be reasonably confident of what will happen next.
52 Joel // Jul 2, 2008 at 3:25 pm

Oh, and if that just doesn’t happen, I’ll keep renting.

It it doesn’t happen I’ll move to someplace where prices dropped 75% (SoCal, Florida) and bask in the sunshine. Cue the trolls that say those places don’t have jobs…
53 BubbleBuyer // Jul 2, 2008 at 3:39 pm

You all should put your market timing expertise to work in the stock market. Forget about real estate, you should be able to retire on your stock market profits…you know, by buying low and selling high time after time after time!

Empirical research has proven that it is impossible to time the markets. If you think you can then you aren’t very smart or you are just gambling on sheer luck. A better approach is when the time is personally right to buy, look at the macro economic trends and make an informed decision whether to buy or defer purchase. The “don’t buy until you have 6 months of flat prices or appreciation” is just BS but it sure filled this thread!
54 EconE // Jul 2, 2008 at 3:40 pm

Joel…you don’t want to live in the areas in SoCal where the prices dropped 75%+

trust me.

But give it time.

Jobs? Who cares! They’ve got surf.
55 Joel // Jul 2, 2008 at 3:43 pm

For every 1% increase in your APR, it’s worth 10% of the value of your home.

Thus every 1% increase in APR will cause prices to come down another 10%. People are (almost) back to being constrained by what they can afford on a month to month basis using a reasonable loan. If something like interest rates causes a reduction in affordability, the number of people buying will be reduced also, putting downward pressure on prices.
56 Joel // Jul 2, 2008 at 3:47 pm

My grandmother used to live in Long Beach so I know what the bad areas of SoCal are like and a lot of the areas that have seen big declines in the vicinity of San Diego look nothing like that. At least according to the posts over on BMIT.
57 B&W Nikes // Jul 2, 2008 at 4:11 pm

My wife and I just bought, (we were going to wait a good while but a very unique situation presented itself that would sound crazy to many people) and in biting down hard we are going to be hanging in there for the ride. As total noobs to the whole thing (minus some education I get around here from y’all - thank you very much) our strategy is to steer clear of landmines and continue our education in “to the bones” remodeling while considering zillow-like wealth-o-meters only at face value for the next 5+ years.

One thing I am really curious about that appears murky in the crystal ball is whether the declining value of a dollar plays into pricing in as noticeable of a way as interest rates may. Just using grossly underestimated gov inflation stats from bls, 300,000 2003 dollars is about 353,000 2008 dollars. When combined with rising interest rates, the monthly payments may not be all that different in the next several years, even if asset values are appraised at lower figures. Being a noob home debtor, I am no authority - just highly curious. Any thoughts on that?
58 EconE // Jul 2, 2008 at 4:22 pm

Joel…I have my eye on Long Beach also…not very familiar with it other than the fact that the Congresswoman is a joke with all her houses in default…anything I should know about the beachfront condo scene and the surrounding areas? I’d apprecate any advice you have. PM me if you want.

I also should have been more specific with my response WRT some of the super hard hit areas….I was speaking more about Los Angeles. My Bad.
59 TJ_98370 // Jul 2, 2008 at 4:54 pm

B&W Nikes - I’ve long been a believer that the housing price correction will be an interplay between deflating bubble prices, inflation, and increasing interest rates. I don’t think anyone can accurately predict what the end result will be.

An interesting oversight with respect to above comments is that nobody considered the possibility that some bubbleheads may actually be able to pay cash. If you are able to pay cash, why would you care about interest rates.?
60 cheapseats // Jul 2, 2008 at 5:30 pm

Based on this guys analysis - http://www.bergenjerseyforeclosures.com/blog/info/entry/where_should_house_prices_really

Housing should be near 3 times median income.

Median KC income = $67K * 3 = $201K (wiki data on KC median)
KC Median house price in April = 400k ish

Even with the Seatlle area premium that is a big delta. Holler if my understanding is wrong?
61 obelus // Jul 2, 2008 at 5:54 pm

cheapsets,

Sorry, but I think the median KC salary is around 45K - 50 K.

Anyone know differently?
62 TJ_98370 // Jul 2, 2008 at 6:05 pm

cheapseats -

You got it! While some believe the multiple should be around 4X median income, this simple detail is like the elephant in the living room that has been ignored by many in the real estate industry.

The disparity between median income and median house price has been discussed many times by The Tim and others on this blog.
63 b // Jul 2, 2008 at 6:13 pm

BubbleBuyer -

Actually, roughly timing the real estate market is not that difficult. The stock market is about 10 orders of magnitude more volatile, so of course its more difficult to accurately time the market there. However, plenty of people are able to do it with regular enough accuracy to get 7-10% returns over time. Real estate is leveraged, so much less volatile and slower moving it is much easier to time it roughly enough to save you quite a bit of money. Sorry you bought at the wrong time, you should probably start reading the newspaper more often.
64 b // Jul 2, 2008 at 6:17 pm

cheapseats -

The CSI says that Seattle metro prices nearly doubled in the bubble market, so that analysis is not that far off. The only trouble is that you need a lot of back data to extrapolate the general median:home price ratio for an area. 3-4x is a good rough guess for anywhere, but according to CalculatedRisk (sorry, I am too lazy to find the link) some areas like LA have bee more like 4.5x for the 20 years or so before the bubble.

Tim - do you have the data or have you done this analysis in a previous post? Might be interesting…

obleus - Median household income is a better gauge since single people are a much smaller segment of the homebuyer market.
65 Nick // Jul 2, 2008 at 6:18 pm

Response to Jon (and at the risk of feeding the trolls):

A counter-point to the “good time to buy because of low rates” hypothesis is that everyone is fairly sure prices will continue to decline at least until inventory is cleared out, whereas nobody is sure where rates will go. I personally see no evidence to support the idea that the Fed will raise interest rates any time soon, and lots of evidence to suggest they will not. Given that, there’s at least a reasonable chance rates will stay low for a while, if not a chance they will be even lower in a year or two.

Aside from that, there’s also the issue of the amount financed, where the less you finance the less you care about rates. At the extreme (100% payment up front), rates are irrelevant.

Finally, there’s obviously the “you can refi rates but not principle” argument, but I think that’s already been stated several times.

Not saying you’re wrong, just wanted to offer the counter-point. :)
66 The Tim // Jul 2, 2008 at 6:18 pm

b, the historic relationship between incomes, interest rates, and home prices in King County was explored in this post: King County Affordability: 1950-2007
67 cheapseats // Jul 2, 2008 at 6:33 pm

Obelus,

I used the median household income from wiki which had it at $66K and change. The point being, even using the highest rounded up numbers don’t really pretty it up any.
68 david losh // Jul 2, 2008 at 6:47 pm

Tim said something in his “interview” with Dustin Luther that hit me while driving this afternoon. He said, “buyers go to the Loan Originator to find out how much home they can afford rather than seeing what homes fit thier budgets.” “It’s just wrong,” he said, and it was so correct.
Real Estate is about the numbers, and the numbers, are the numbers, they don’t change by what your payment might be. Your monthly payment may be less if you put more down. Would you pay more for a house because your down payment is giving you a lower monthly payment? Of course not. The numbers are the numbers.
I’ve been using the Case Schiller charts with my sellers and releasing those listings that are not selling or won’t lower the price. We are in a declining market. We have hit 2005 pricing while the Real Estate world slept. Now, in July, I don’t see pricing creeping up for another two years.
I would take advantage of these months during the winter to make my best deal. Next spring as the disappointment sets in it’s my opinion that the market place will shut itself down. Stagnation of pricing will be replaced with inflated dollars and the Real Estate market will be propped up accordingly.
I think the inflation factor should be a part of any discussion concerning Real Estate. The housing deal you make today will be paid with those future inflated dollars.
69 NotaBull // Jul 2, 2008 at 6:48 pm

“I personally see no evidence to support the idea that the Fed will raise interest rates any time soon, and lots of evidence to suggest they will not.”

Given the recent rise in inflation, and the noises from the ECB on potentially raising rates and not lowering them as the fed had hoped, the chances of the feds raising rates in the near term (Q3/Q4) has actually gone up significantly over the last month or so.

Having said that, the fed’s rates have little relation to the mortgages that people take out to buy houses. Only HELOCs are directly affected by the fed funds rates, most 30 year fixed mortgages (the current flavor of the month) are more correlated with 10 year expectations of inflation. The higher the inflation expectation, the higher the yield on mortgage backed securities, the higher the APR on the consumer’s mortage. That’s why mortgages have gone up 0.5% or so in recent weeks/months and will probably continue to go up or hover around current levels for a while.

My 2 cents…
70 mikal // Jul 2, 2008 at 6:49 pm

Those historical numbers don’t explain all. Two income households only really started taking off in the seventies and eighties. Now nearly every household has two incomes. There is more money chasing those houses. We also now have land use restrictions that haven’t been in effect long enough to see their historical effect. If the bubble brought a doubling of values then to get an accurate value take a normal historical gain each year when the bubble started and figure it to that. Houses are not going to drop by fifty percent in value. I have had a few beers so if this makes no sense I better have some more.
71 John // Jul 2, 2008 at 6:51 pm

I have gone over this in my head for a couple years. What will I do AFTER house prices hit bottom?

Since I have the money to put 20% (or more) down the thought of actually using my hard earned money to buy a house…well…is nauseating. What if inflation does come and my money is tied up in some box and I miss the opportunity to buy some long term bonds at 10% plus? What if the stock market continues this nose dive and their are some great buying opportunities? What if….

If I had no cash it would be a no-brainier and I would definitely buy since I would have nothing to lose anyway. And if I had a hundred million it wouldn’t matter either since it would be a small portion of my liquid assets. I am between that where a half-million asset is both a lot of risk and a huge purchase.

Renting is cheap and I may always be better off financially if I don’t buy even after calculating the loss of rent vs. house taxes.

Shrug, its a gamble either way and I don’t have an answer.
72 NotaBull // Jul 2, 2008 at 7:34 pm

“Shrug, its a gamble either way and I don’t have an answer.”

You will likely not need 20% (or more) down when you feel like you are ready to buy a house. So put 10% down, and put 10% into bonds or whatever. Basically, if you’re not sure which option to pick, do both.
73 jon // Jul 2, 2008 at 7:38 pm

According to http://www.city-data.com/county/King_County-WA.html, median KC household income in 2005 was $58,370. 40% of households in KC rent. For simplicity, lets say the bottom 40% in income rent. Eyeballing this graph, http://www.visualizingeconomics.com/2006/11/05/2005-us-income-distribution/

and adjusting for the ratio of KC median to US median, I’m guessing the median of the top 60% in KC is 90K. Those are the people buying houses in this simplistic model. 90K times three is 270K. With a 20% down payment you could buy 337K. With just a 15% drop in price, basically the entire housing stock could be purchased with standard financing by first time buyers. Considering half of all houses don’t even have any mortgage at all, that just doesn’t look that bad to me.
74 Michael // Jul 2, 2008 at 7:43 pm

I don’t think values are going to drop as far as everyone else. The Saudi’s, Chinese and maybe Europe will step in and buy a lot of US real estate. These countries have huge sovereign wealth funds and the money has to grow somehow. China may lose a lot if the US market drops but I could see them moving into a global landlord position with their reserves. They are already doing this with the banks. Our leadership will never understand that free markets involve deals that both parties understand. Bush is the least “free market” president in history. Unregulated markets are not free markets unless both parties understand the deals that they are getting into and have equal protection under the law. If you don’t have both knowledge and equal legal protection deregulation spurs fraud not opportunity. This is an issue that the Republicans seem incapable of understanding.
75 johnnybigspenda // Jul 2, 2008 at 7:44 pm

Cheapseats:

You should be looking at the median income of home owners… not of all King County residents. The people that own homes in King County most likely make quite a bit more than the median… ie. those at or below the median should be renters. (not that there is anything wrong with being a renter)…

What % of households own vs. rent in King County? If its less than half, that would explain why the median can not afford the median house price (ie. more than half the people don’t make enough money, so they rent…)
76 EconE // Jul 2, 2008 at 7:45 pm

Interesting Mikal…the Harvard Joint Center for Housing Studies said the opposite in their recent report.

“Social trends - people getting married later and divorced more often - are making single-person households the fastest growing household type, the study finds.”
77 b // Jul 2, 2008 at 7:48 pm

johnny -

If KC is anything like the rest of the country, then 69% of households own verses rent.
78 b // Jul 2, 2008 at 7:51 pm

mikal -

We have discussed this before. You are talking about long term trends which effect things over spans of decades. The bubble did not start until 2003 and really didnt take off until end of 2004. I think its very unconvincing to think that such widespread, long term social changes all of the sudden had some huge impact for the years between 2003 and 2007.
79 deejayoh // Jul 2, 2008 at 7:59 pm

What % of households own vs. rent in King County? If its less than half, that would explain why the median can not afford the median house price (ie. more than half the people don’t make enough money, so they rent…)

It’s 61.9% as of 2006 ACS. That’s a pretty basic fact, and easily found if you don’t know it
80 david losh // Jul 2, 2008 at 8:18 pm

One of the many things I learned on this blog is that the bubble actually started in 1998. It continued to creep up and kind of took a natural exponential growth rate throughout the 2000 years. It peaked in 2007 but was clearly evident in 2005.
The idea we’ll recede below 2000 levels is valid, but impracticle.
As another comment pointed out other economies have invested here heavily. I still think housing prices in other parts of the world are completely over inflated. In time as the global bubble continues to dominoe the United States will still be attractive.
81 george // Jul 2, 2008 at 8:28 pm

Vboring makes a lot of sense. Based on past bubbles.

I’d bet on a quick drop for 2-3 years from the peak and then a flat to declining market for many years after that. Prices will dip below fair market value. Real estate is dead. All the smart speculative buyers are gone gone gone.

I’d guess 30 percent off the peak is a reasonable expectation but I also expect to miss out on the bottom of the bottom mostly because I’m impatient and landlords are a pain in the neck.
82 Jonny // Jul 2, 2008 at 8:40 pm

Isn’t it obvious that the ability for most people to buy a home at a given price is dictated by mortgage interest rates, which have been declining steadily since the early 1990’s.

As rates declined, the ability of incomes to purchase more house has gone up.
83 mikal // Jul 2, 2008 at 8:44 pm

According to previous graphs the bubble started in 98. The land use restrictions also have been within the last what, ten years. I agree that nothing would be affected over a short period of time, but much of the studying Tim does from the past never considers the effects of social change. Land use is definately having some effect. Some studies say it inflates a SFH by $100,000 in value. That isn’t going to change.
84 Rhonda Porter // Jul 2, 2008 at 9:04 pm

Question(s):

What if it’s “the house” you really like and an acceptable price? Would you gamble buying now and worry forever that you maybe could have bought it for less?

Where do you predict mortgage interest rates will be in 6 plus months (factoring inflation)?

The Tim, I thought you did great at RCG Radio. You are a pro! Jillayne cracked me up…I think she either was a show-host in a past life or really wants to be one.
85 TJ_98370 // Jul 2, 2008 at 9:22 pm

johnnybigspenda:

You should be looking at the median income of home owners… not of all King County residents. The people that own homes in King County most likely make quite a bit more than the median… ie. those at or below the median should be renters. (not that there is anything wrong with being a renter).

What % of households own vs. rent in King County? If its less than half, that would explain why the median can not afford the median house price (ie. more than half the people don’t make enough money, so they rent…)
.
Okay! There you have it. You must be making more than median household income to afford a median priced house in King County!

With inventory increasing like it is, maybe an adjustment is due?
..
86 shawn // Jul 2, 2008 at 9:57 pm

My plan is to wait about a year or less depending…I think my employer has some perks on getting good home loans, but not sure if I have to do it before the year is up. I also need some time to find the right neighborhood.
87 economist // Jul 2, 2008 at 10:39 pm

The neighbor is a recent widow in her early 70s… However, she does not have a huge amount of equity in the house or savings to maintain it … there is a very real chance that her $450,000 house could become a $300,000 house in two years’ time. Given that she still owes around $200,000,

Someone in their 70’s owes 200K on a house? Someone that age should have a paid for house. I had a paid for house before I was 40, and no I’m not old enough to have bought in the 50’s or 60’s.

No wonder this country is screwed.
88 Eleua // Jul 2, 2008 at 10:39 pm

When rent is at a premium to PITI.
When rent can make the property cash-flow.
When rent can produce a ROI that is 600+bp above 10year USTreasurys.
When the “man on the street” thinks you are nuts for buying.
When price stability shows signs of strength.
89 Ray Pepper // Jul 2, 2008 at 10:47 pm

As I have always said…………..It doesnt matter when you buy ..It matters:

What you Buy !!
What you pay for it !!
How you Buy to maximize your GAIN!!
Is it a GEM or not?

There will always be GEMS. ALWAYS!!!

Ray Pepper
http://www.500Realty.net

(BTW..Greetings from Foreclosure capital USA…Stockton, Sacramento, and Reno–my last tour of properties this year. Now the REAL work begins!)
90 Scotsman // Jul 2, 2008 at 10:52 pm

If we accept that interest rates are probably about as low as they’re likely to go, or at least that they are more likely to go up than down significantly, then housing prices, like rents, will be determined largely by changes in income.

Housing prices will continue to fall until excess inventory is absorbed. Then the price decreases will continue until real incomes begin to rise. I don’t see any forces working to increase income. Unemployment is rising, world-wide competition is holding U.S. wages down, productivity increases are few and far between, etc.

When you see real wages start to increase sharply, then housing prices will stabilize and/or begin to increase again. That’s when it will be a good time to buy.
91 Joel // Jul 2, 2008 at 10:53 pm

I also should have been more specific with my response WRT some of the super hard hit areas….I was speaking