Once in a while I like to feature individual requests for advice from readers. The following was posted on the forums by a reader going by the name “Novice.”
Advice Please!
I am a long time resident of Seattle and a renter. I am currently spending $700 / month to live on a tiny boat – I have to move out on June 1. I am 40 years old, I made the mistake of NOT buying in Seattle 15 years ago and now I feel that the bursting bubble has given me another opportunity to buy a home in this city. (where there are still homes and not condos that is)
My questions are: Should I buy? When should I buy?
Here is some more information:
I can afford to pay $2k / month – but I would prefer to pay less.
I can put 20% down on a $300K home (let’s say this is my max price)
I can qualify for a 30 yr fixed rate mortgage.
This would be my first home.
I would intend to hold the property for at least 5 – 10 yrs and rent it out it if I am not living in it.
I am in no rush to buy – I do need to live somewhere but I work from “home” and I can find temporary living quarters / sublet / leave town for some time etc…
I would buy the small / dumpy house on the nice street in the nice neighborhood – this is what i am looking for…
So, Do I buy? When do I buy? How will I know when the time is right?
Another question – I saw a beautiful cottage in a fantastic neighborhood that I would love to live in – it was priced at $280K – price lowered 10K from 6 weeks ago when it was first listed. The same property sold for $255K in 2005 and for only $150K in 2000. How can one determine the “real” value of the property?
Any advice would be much appreciated.
At the risk of sounding like a broken record, I’m going to reiterate my five self-examination questions that I think everyone should be able to answer affirmatively before deciding to buy a home:
- Do you like the home well enough to stay there for at least 5-10 years?
- Do you feel that the home is priced fairly?
- Can you afford it using a conventional 30-year fixed-rate loan?
- Do you have a minimum 3-month emergency fund that is not part of your down payment?
- Would you be able to handle it both financially and emotionally if the value of your home dropped considerably after purchase?
If you can answer yes to all of these questions, then I would say the answer to “should I buy” could be yes. Note of course that these are the minimum requirements.
Novice, it sounds like you are already thinking along these lines, so you’re already ahead of the game in that department.
As far as whether an individual home is priced fairly, a good starting point would be the rough pricing calculator we posted here, or a site like EstiMike. You should also compare the asking price to what similar properties in the neighborhood have sold for recently. Redfin is a good tool for this (uncheck all current listings and check only past sales).
In the end, the “real” value of a property is simply what someone is willing to pay for it, right? So if after studying the market you think a property is priced fairly, and you believe it strongly enough to commit $464,000 (the full cost of a $240,000 loan at 5% over 30 years), then I say go for it.
What advice do you, the readers, have for Novice? Have I missed something that needs to be considered? Let’s hear it.
Cheap South » Mar 23, 2009 at 12:23 pm
Long time resident but already thinking of selling in 5-10 yrs?
I would not go for a 30 years mortgage at age 40.
Steve Tytler » Mar 23, 2009 at 12:57 pm
Tim,
Good advice.
However I think a 5 year holding period is too short.
Real Estate is a LONG term investment.
We tell our mortgage clients DO NOT buy a home unless you plan to live in it (or keep it as a rental) for AT LEAST 7-10 years, which is the length of the typical real estate cycle.
demo_kid » Mar 23, 2009 at 12:57 pm
If you like the neighborhood and the house (and you can say yes to all of Tim’s questions), why not buy it? You’re looking at it as a place to live, not as an investment. The market has declined enough such that you’re not going to take a bath on this, and while the price may decline a little more as the market returns to fundamentals, you’re not likely to be underwater with the loan.
That being said, I’d buy at the bottom of what you’d be comfortable with at this point. Better to invest what you don’t use on a mortgage payment than to buy a more expensive asset that will not give you great returns in the foreseeable future.
Ray Pepper » Mar 23, 2009 at 1:36 pm
If you can pay 20% down on a 300K home then you can PAY cash for this. A short commute to Seattle from your home here will save you thousands!
This IS a very nice street and a very nice neighborhood. I wouldn’t call it “dumpy.” Sponge and some bleach gets rid of the fire smell and other then that a few windows, paint, maybe a few drywall patches, and you will have found your GEM!
http://www.500realtyinc.idxco.com/idx/2338/details.php?idxID=041&listingID=29011147
Take your time my friend Novice. Time is on your side. Concentrate on short sales and foreclosures and make your offer based on current market conditions and up to another 30% in declines. Be aggressive and don’t budge on your offer. After 1-6 offers on different properties YOURS will be accepted….If your patient…………………
Ira sacharoff » Mar 23, 2009 at 1:56 pm
RE: Ray Pepper @ 4 –
Dang Ray! That listing is for two? houses for 50 thousand dollars?
Those are Arkansas prices!
Ray Pepper » Mar 23, 2009 at 2:03 pm
Ira…..I always find the best in Value!
You and I with some drywall patch, 2 paint brushes, some nice pictures, and some Ajax we would turn it into this.
http://www.500realtyinc.idxco.com/idx/2338/details.php?idxID=041&listingID=28199014
Jillayne » Mar 23, 2009 at 2:16 pm
My advice: consider that even though we may believe that we’ll stay in one place for 5 to 10 years, that isn’t always how life works. A million different things could happen during that time. The obvious are: you could marry or partner up, you could have kids or kids could move out, you could get transferred or decide to relocate, you could decide you hate your traffic commute. You hate your neighbors. You discover you’re spending all free time on the weekends fixing things and doing yardwork and you want a different life. Because life happens, I recommend taking a look at what comparable homes are renting at in that same neighborhood.
The question becomes: IF I chose to move on, and I could NOT sell this house, could I rent it out for enough to cover or nearly cover the monthly payment?
I recommend banking six months worth of mortgage payments if you work in an industry that may face job cuts in the future.
I also recommend writing down a list of things that you’ll need to BUY once you purchase the home such as a lawnmower, furniture, appliances, etc. so you’ll know how much to set aside after you’re a homeowner. This way you’ll have the cash on hand instead of having to rely on credit.
In terms of the payment you’re comfortable with, I’d plan for more expenses. Just about every month, there’s going to be an additional expense associated with regular monthly maintenance that you don’t have as a boat renter. Furnace filters one month, a ladder the next month, washing machine repair, and so forth.
James Lupori » Mar 23, 2009 at 2:23 pm
Tim’s five self-examination questions are right on track. Ultimately, finding a home to enjoy (rather than as “an investment”) is a healthy way to proceed.
JJ » Mar 23, 2009 at 2:51 pm
I have been using a completely arbitrary formula for determining a reasonable price for a home. Of course, a reasonable price in my mind could be significantly different from what I’d be willing to pay if I found something that I could afford and that suited all my needs.
JJ’s reasonable price = Start with the most recent pre-2004 sales price (from zillow, redfin, or my friendly NAR representative), add 4.5-5% per year for inflation/appreciation, add 6% for seller’s costs.
Using 5% appreciation, $150K in 2000 comes out to a JJ’s reasonable price of 246K. In this market, I’d bet a dollar your seller would be really happy to “break even” by getting 255K + 6% seller’s costs = 270K. I’d bet a nickel you could move into the home for $262K.
p.s.
I think if renovations have been done, they increase the reasonable price of the home by the cost of the renovation. I’m amused by people who say adding a second bathroom for 10K increases the value by 30K. They are the ones who got a very generous C in high school economics.
David Losh » Mar 23, 2009 at 2:53 pm
RE: Ray Pepper @ 6 –
Wow!
Alexu » Mar 23, 2009 at 2:56 pm
To pay 10% above 2005 price you must be absolutely sure that it is worth it.
I personally would NOT pay above 2005 price for any property in Seattle area. Though I may consider offers with late 2003-early 2004 price.
Kary L. Krismer » Mar 23, 2009 at 2:57 pm
By Jillayne @ 7:
This is an area where the first time homebuyer tax credit can really help out. What I like about it, as opposed to most other first time programs, is it’s money that doesn’t help you get into a property, but it helps you afterward. You still need to otherwise qualify to buy, you don’t qualify to buy because of the program. And after you buy is when you can need some help, due to these types of items (or just to replenish your savings).
pfft » Mar 23, 2009 at 3:03 pm
“while the price may decline a little more as the market returns to fundamentals,”
just a little? A LITTLE?
Kary L. Krismer » Mar 23, 2009 at 3:03 pm
By Alexu @ 11:
This makes little sense to me. If you can determine what a property was worth in 2005 (or some other point in time) then you’d be able to determine what it’s worth today. If you’re looking for properties in areas that have fallen more than others, then you might be looking for less desirable areas. I’m not sure that’s a good strategy, unless your plan is to think there will be another run up, and that area will be run up again. Otherwise, I think it will likely just continue to lag other areas and/or live in a less desirable area.
Now if you’re saying you want to try to find a property where the seller is likely to go below market, that would be a different matter. But that would have nothing to do with any prior year.
David Losh » Mar 23, 2009 at 3:45 pm
RE: Ray Pepper @ 4 –
OK
It was a fire so it will probably need an Occupancy Permit signed off by the city and fire department. I’ll bet the electricity is off so it will have to be brought up to today’s codes to get it turned back on. Without looking it’s a $60K fix to be worth $150K. Numbers are pretty tight there.
I know a guy who is doing one of these. He moved on a trailer, no body objected, got a site pole for the electricity, gutted the outside to studs, sheathed and wrapped it. He’s been working on the inside this winter in his spare time.
The problem with smoke is that you have to seal all of it. It’s doable, but most people tear down to rebuild.
JJ » Mar 23, 2009 at 3:49 pm
By Alexu @ 11:
As admittedly arbitrary as my formula is, this statement is even more arbitrary (or perhaps does not accurately convey what the author intended to communicate).
When someone overpaid for a house in 2005, they were in essence paying for future demand and appreciation/inflation in advance. It is pretty clear that we still have used too much future demand. But, if the price inflation in home building materials, labor, land and other costs has risen equal to or more than the amount overpaid in 2005, then a 2005 price is a good deal.
Obviously, some people overpaid just a little bit in 2005, while others overpaid by ridiculous amounts.
vypr51 » Mar 23, 2009 at 4:44 pm
RE: Kary L. Krismer @ 12 –
“This makes little sense to me. If you can determine what a property was worth in 2005 (or some other point in time) then you’d be able to determine what it’s worth today.”
Since I usually find your input on-target, I am having a problem with this one Kary. I have reread your comment a few times, and I think my problem may be that I get stuck on the portion above.
You make it sound pretty easy. How do you determine what a house is worth today?
I’ll wait for your response before I prattle on…
Again – I like your insight, and I am actually interested in what you have to say…
patient » Mar 23, 2009 at 4:48 pm
“In the end, the “real” value of a property is simply what someone is willing to pay for it, right?”
I disagree with this sentiment. When oil was at $150 the trading value was $150 if you sold it the same day. Trading value is very different from real value to me. Imo real value should be determined by things a cost of new construction – depreciation for wear and tear + area premium based on your preferences. Imo, the real value is far below what today’s prices are, they are still based on expected trading value.
kfhoz » Mar 23, 2009 at 5:13 pm
By JJ @ 16:
I think that market competition insures that virtually all people people would have overpaid, or underpaid, by very close to the same amount. Special properties might be outliers in the data, but even then I would expect people to look for the best deal and be in competition with other people doing the same.
In other words, back in 2005, every person with, say, $350 to spend on a house was going to look for about the best deal possible. None of them is going to settle for a house that is only going to sell for $300 unless they personally buy the house. Ditto for every other person and house at every other price point within about 3x of the median house price.
I trust the free market to “find” the correct competitive price for each time window, virtually every sale. There is a possible exception for chaotic conditions such as now when house prices are plummeting. I do think that the whole housing market was out-of-whack, but that everyone in that market was the same amount wacky. I bought in April 2005 under get-priced-out-forever fears, so include myself in the wacky group.
I would be curious to hear counter-opinions from others and why and how they think in 2005 some people would have overpaid more, hence would have failed to find an appropriate deal for their house costs.
Objectivity » Mar 23, 2009 at 5:24 pm
kfhoz- its called the mortgage bubble..it pushed prices up across the board…and killed the financial system in america as we know it. Now banks will NEVER issue exotic loans on a large scale every again…hence prices will fall dramatically over the next few years since hardly anyone is lucky enough to pay cash for their homes.
To the guy who left the message-
Compare what you get for the money renting to what you’d get for the money buying (make sure to include taxes, insurance, repair costs). If you can find a similar place, go for it and plan to stay in for a LONG time. If its not close, you WILL NOT BE MISSING OUT ON SOME HUGE RALLY if you wait a couple years. My novice, but incredibly informed opinion, is that prices will fall fairly dramatically in Seattle (another 20% at least) as income/ price ratio still does not meet historic norms, and financing continues to be evasive.
Remember, its better to miss the bottom of the market late by 5% than be early by 50%…be patient and wait for some stability.
Good luck to you.
sead97 » Mar 23, 2009 at 5:58 pm
By Objectivity @ 20:
This is spot on! People want to believe prices will rebound once we find a bottom. It’s not going to happen – likely they will be flat for a couple years while inflation further deflates what is left of the bubble. And then real estate will be the boring old asset class that it’s been for most of history (at least until memory of this bubble wears off and we get another one – may we all live that long)
If you have patience to wait a year, I’d say it’s about as good a risk free proposition as there is. Even if you miss out on the 8K tax credit (which will likely be extended as long as the slump continues), keep in mind your $300K house only has to fall 2.7% to lose that. And prices fell more than that in December alone.
wreckingbull » Mar 23, 2009 at 6:07 pm
I have to differ with most of the opinions here. Rather than try to calculate a current value based on past prices, I would look at current rental rates to get a frame of reference. Rents in this city have remained fairly consistent, both before and during the bubble. Today I rent a a for only nominally more than I did for in 1993. The increase has been rather linear.
My own rule of thumb is not to buy until monthly P.I.T.I + Maintenance = comparable rent, assuming 20% down. When I bought in the late 90’s, this was the case. It will be the case again, we just need a little more patience. Furthermore, rent is better correlated to a with the ability to pay. If rents are too high, people move. They have no other choice. If home prices are too high, people take out toxic loans, thus the disaster we are in today.
Kary L. Krismer » Mar 23, 2009 at 6:18 pm
By vypr51 @ 17:
Sorry for the delay.
What my comment pertained to was the reference to 2005 values. In doing a CMA I can value the property at any point in time. I just look for comps from that point in time, the same as what I would do if valuing a house today. Going back in time is a bit easier if you don’t go back too far, because you can use comps from both sides of the transaction, but other than that, it’s pretty much the same thing.
So what I was saying, if you think you can determine 2005 value (or some other date), then you can determine today’s value too. And your decision to buy or not buy should be based on today’s value, not 2005 values.
Over in SREP I recently did a piece comparing what’s happened to certain types of property in certain areas. Without going back and looking, I think one of them was Skyway 1 bedrooms under so many square feet. Those fell tremendously, and they’re probably well under 2005 values. Does that mean you would want to buy one of those today? I just don’t see that entering into the equation.
Does that make sense?
Jonness » Mar 23, 2009 at 7:36 pm
Many high-ranking economists say there’s a high probability of a further 20% reduction in house prices. So if you feel like losing $60,000.00 over the next couple of years (your downpayment), go ahead and buy. By the time you sell, perhaps you can talk the bank into a short sell at the expense of your credit rating.
Or, since your are not in a hurry, you can wait 2 more years while you rent a cheap dump and save a much larger downpayment. Then pay $240K for a similar house to the one you’re passing on. Then you can decide whether to put down a larger downpayment or invest all the extra money you saved up while waiting.
Don’t worry about interest rates going up. If they do, it will put additional downward pressure on house prices. Also, the extra money you’re saving more than makes up for any potential rise in rates down the road.
In short, don’t buy until homes reach historical ratios compared to rents and incomes. And whatever you do, don’t buy a house if the previous two quarters Seattle median house price did not stay flat or appreciate consecutively.
Ray Pepper » Mar 23, 2009 at 8:02 pm
Tim….EstiMike and the Rough Pricing Calculator are simply horrible and should never be utilized for even a guide. The numbers are way off base. Even though we place Zillow on our website the numbers are also way off the mark now. However Zillow aerial search is entertaining and should be used for titillation only.
In a declining asset environment with short sales and foreclosures that are gapping down home values monthly I strongly urge DD (due diligence only). Not these tax record recording sites or the other two worthless calculators.
Kary L. Krismer » Mar 23, 2009 at 8:24 pm
RE: Jonness @ 24 – Well ignoring the fact that no economists predicted oil dropping about 66% (although some did predict a drop), in the next two months the stats will probably show a close to 10% drop. There’s a time lag in the stats. Things are already “better” than what most people know, if by better you mean lower prices.
Jonness » Mar 23, 2009 at 11:25 pm
Kary:
I don’t quite understand your meaning. Are you saying that the stats will probably show a price drop of about 5% per month for February and March? That’s staggering. Are you getting part of this from observing the current MLS? By stats do you mean Case-Shiller when it catches up? What are your predictions for this Spring selling season?
Sorry for all the questions.
Thanks :)
Herman » Mar 24, 2009 at 12:16 am
By Ray Pepper @ 6:
Does that garage come with an attached house?
Kary L. Krismer » Mar 24, 2009 at 8:35 am
RE: Jonness @ 27 – First, I was referencing March and April because I use NWMLS numbers. February is already out.
But what I’m saying is the current pendings are showing a significant drop in price for March through maybe April. The problem is that indicator can sometimes be misleading because some of those are short sales that may take a while to close, or some may flip entirely and never close. During 2008 the median pendings were below median closed (SFR) 8 times, and the price the following month went down 6 times. It was higher 4 times, and went up 3 times.
The median pending for February was $359,950, compared to $375,000 for median closed. I believe the median pendings for March will be below February’s median pendings. So, using pendings as a leading indicator, as this is written, the properties that are selling seem to have much lower medians than what February’s median closed figures would show. So buyers are operating in a better market than what they know, and sellers a worse market.
BTW, I think the dispute over MWMLS and C-S figures is largely a false debate. They both peaked in the same month, and in December they were both about 17% off the peak. Yes there gets to be a spread from time to time, but they do largely give us the same information. It’s just that C-S isn’t as timely, and covers a larger area.
Greg » Mar 24, 2009 at 8:39 am
Tim’s Rough Pricing Calculator and EstiMike are both based on rates of appreciation: Tim’s calculator is based on historical averages, while EstiMike is based on the Case-Shiller values. These are both more defensible than Zillow, which does not explain how they calculate property values.
Tim’s 5-point checklist is great advice for everyone. If more homeowners followed this advice, the country would be in far less of a mess. As they say, common sense is becoming less common these days.
Kary L. Krismer » Mar 24, 2009 at 8:40 am
BTW, the median pendings were different by $15k or more 4 times in 2008, and there the correlation with the following month was perfect. Up once and down 3 times.
Arno » Mar 24, 2009 at 9:47 am
If you are concerned about losing money with your purchase, then you have to consider what a fair price for the home is, and not only what you can afford to pay. For the cottage you are looking at, what would be a fair monthly payment for you to RENT it? Then compare that number to what you will pay to OWN it. I would also recommend that regardless of how much money you actually put down, do the ownership calculations based off of ZERO DOWN. If you are really conservative, then figure the ownership calculation of monthly cost based on a likely interest rate in 2-3 years – let’s say 6%. I have done these calculations on houses all over Seattle and I still find NOTHING that is cheaper to buy then it is to rent. It sounds like you have built a lot of equity (at least $60,000) buy NOT BUYING. Compare that to the amount of LOST EQUITY experienced by people who bought 1-2 years ago.
I’d also recommend reading the following:
http://www.geldpress.com/2009/02/requirements-for-buying-a-house-dont-lose-money/
Rob Jellinghaus » Mar 24, 2009 at 10:20 am
Personally, I can’t see why anyone would buy anything in Seattle this year if they didn’t absolutely have to for some strange reason.
I mean, just look at this graph:
http://seattlebubble.com/blog/wp-content/uploads/2009/02/case-shiller_seatiers-yoy_2008-12.png
My wife and I are renting in Kirkland right now, sitting on $100K cash down payment, and we’re not going to buy until that curve climbs back up to -5% or so (and trending upwards towards 0%). But buying right now? When the YOY trend is almost -15%? WHY?????
Everyone wants to know when the bottom is. THE BOTTOM IS WHEN CASE-SHILLER’S YEAR-OVER-YEAR INDEX STOPS BEING NEGATIVE AND RETURNS TO ZERO! I mean, isn’t that the frickin’ definition??? Even if that were a false bottom, it’d be a hell of a lot more bottomful than this -12% YOY regime we’re in now!
Kary L. Krismer » Mar 24, 2009 at 10:36 am
By Rob Jellinghaus @ 33:
So in your world it was better to buy back when it had been heading up? That it’s heading down is a good thing for buyers. Trying to hit the bottom would involve pure luck, especially if you’re looking at C-S data which constantly out of date.
bob » Mar 24, 2009 at 11:01 am
Rob, I think it’s easier than that. The bottom is when The Tim buys a house.
Kary L. Krismer » Mar 24, 2009 at 11:26 am
Maybe we should start a poll as to when you’ll know it’s a bottom. Will it be 2 months after it happened, 2 years, longer?
DrShort » Mar 24, 2009 at 11:58 am
RE: Kary L. Krismer @ 36 –
Have prices stabalized anywhere yet? CA, NV, and FL have HUGE price declines and it appears volume is picking up in those areas. But from the limited data I’ve seen, prices are still falling. I would imagine those areas have to be getting close to the bottom now.
I think a decent, sustained year over year increase in non-distressed sales volume might be a good precursor to the bottom. At least double where we are today.
Ray Pepper » Mar 24, 2009 at 1:42 pm
RE: bob @ 35 –
Tim will buy soon (within 1 year)……..Hes chompin at the bit looking for GEMS…..He will find one……….I look forward to see if he utilizes an Agent, an Atty, or himself. If he chooses an Agent I can’t wait to see who he picks.
Maybe Ira, Losh, 500, Red Fin, Findwell??……….I can’t wait to see who , why, and how it went down. He will LOVE the short sale process.
The Tim » Mar 24, 2009 at 1:52 pm
RE: bob @ 35 – I’ve stated before that I’m not really personally concerned with buying “at the bottom.” I’ll buy when the answers to those five questions in the post are all “yes” for me, bottom or not.
bob » Mar 24, 2009 at 2:18 pm
RE: Ray Pepper @ 38 –
Ray, I think he’ll go with 500 Realty (Tim likes to do the work and wants to get paid for it). I recently spoke with a rep from 500 Realty and was impressed by his candor … and patience – I thought it would be like calling a sweat shop or worse, getting teleported to a far and away call center. You recently were at the home-show educating people – when’s your next gig – I’d like to learn more. Thanks!
Ira sacharoff » Mar 24, 2009 at 2:24 pm
if I were a betting man, I’d say that The Tim does not buy a house within the next year. ( Small wager, Ray?)
…And his agent might end up being this struggling little guy named J Lennox Scott, but i wouldn’t put any money on that.
Ray Pepper » Mar 24, 2009 at 2:40 pm
RE: bob @ 40 –
Bob and Ira
Bob, I do NOT believe he will use 500 Realty, Findwell, or Red Fin. We do run a sweat shop here and I’m happy one of the Agents you spoke to answered your questions. Our next show is The Seattle Home Show again. I’m not sure on the dates(most likely summer- they call all the time wanting our money for the next show).
Ira the bet is on. I say Tim Buys (and closes!) by March 24, 2010. If he does you treat me for a lunch at Claim Jumper South Center. My favorite restaurant! If I lose I treat you!
Mark your calendar!
(hmmmmmmm.. God, —–Can some Mtg Rep here get a Pre-Approval on him for me.) I may have made a bad bet. Just like WASH knocking off Purdue. Danggggggggggg.
patient » Mar 24, 2009 at 2:50 pm
By Kary L. Krismer @ 34:
If you are so impatient and view buying homes as a day trading actviity you expose yourself to very big risks. If you can’t wait for 2 months for Case Shiller you are bound to make a mistake. Being 2 months off the bottom will make little or no difference in price. Be patient and use the most reliable measure even if it’s 2 months delayed.
Rob Jellinghaus » Mar 24, 2009 at 3:42 pm
By patient @ 43:
Amen, patient, amen. That’s what I’m saying: Case-Shiller is the closest thing we have to an objective, trustworthy metric about what actual prices are doing. So USE IT!
“Out of date”? Relative to what? When we do hit bottom, it’s going to be flat for a long time — at *least* a year. So even if it is out of date, who cares? You’ll only lose a couple of percent, max, by missing the bottom because you were waiting for Case-Shiller. Better that than listening to Kary, and buying now, and losing 15% – 20% as Case-Shiller continues dropping like a lead balloon.
Kary L. Krismer » Mar 24, 2009 at 3:58 pm
By Rob Jellinghaus @ 44:
First, the out of date comment is more in context of those who are looking for maybe a six month trend, which isn’t something I agree with anyway. But if you’re looking for six months when the data is 4.5 months out of date, that’s not a good thing.
Second, where have I said to buy now? My approach is a little bit similar to Tim’s, although not as spelled out. I say you should buy if and when you want to, based primarily on other factors (job, family, etc.), not concern over guessing something no one can guess. That’s just plain stupid, IMHO. There are a lot of reasons to buy, and a lot of reasons not to buy. I just don’t think guessing the market is one of them.
Ira sacharoff » Mar 24, 2009 at 4:05 pm
RE: Ray Pepper @ 42 –
Ray,
You’re on. Wager terms accepted. But we’re never going to regain our girlish figures eating at Claim Jumper.
patient » Mar 24, 2009 at 4:11 pm
When you use data as Case Shiller to determine the current direction of prices it’s no longer a guess. That’s the whole point.
Ira sacharoff » Mar 24, 2009 at 4:17 pm
RE: Kary L. Krismer @ 45 –
Kary has a good point. There are lots of reasons to buy a house, and it doesn’t always or shouldn’t have to do with whether it’s a good investment financially. Some people just want to own a home, it makes them feel secure, they’re not at the whim of a landlord, and don’t feel whole or complete without owning a home. I’m not going to judge whether it’s a valid feeling or not, you feel the way you feel.
If it’s going to increase your level of happiness to buy a home, then you should do that.
People here know that I expect home prices locally to continue falling, and that waiting to buy is likely to be beneficial from a financial standpoint.
But if you want to buy a house, and you can afford to make the payments, and it’ll increase your level of happiness, go for it!
Kary L. Krismer » Mar 24, 2009 at 4:25 pm
By patient @ 47:
It’s no longer a guess because it’s history. Right now the latest C-S numbers are from December. Those are for sales that were entered into largely in October and November! So right now Case-Shiller is telling us what the market was like five months ago. If Case-Shiller was our only news source, we might still not know that Obama won (or hell, he might not have won because no one would have known about McCain’s the economy is sound comment by the time of the election).
Using NWMLS sources, we know that March and April will probably be over 10% below what December was–the last month that C-S has information on. Or just using the published data for February, we know that the median was off 7% from December. That’s pretty significant, and something Case-Shiller cannot tell you.
BTW, NWMLS numbers are not guaranteed, but believed accurate–standard disclaimer.
me » Mar 24, 2009 at 4:35 pm
By Ira sacharoff @ 48:
That sounds great, but how many people’s level of happiness will be increased when they’ve bought a home and, 2 years later, realize it has gone down in value by $75,000 and now they couldn’t sell it if they wanted to because they have no equity and couldn’t pay the realtor fees and taxes?
Buying a house in this rapidly dropping market is one of the dumbest financial mistakes one could make, unless one is planning on living there for 20 or 30 years.
And, as people keep saying, knowing when the market has hit bottom will be easy. When a couple years have gone by and prices have stayed the same, you’ll know we’ve hit bottom. People have this fantasy that somehow they’ll miss the bottom, and that prices will suddenly begin surging up by 10% a year again. That’s simply not the way real estate markets work. This isn’t the stock market, there is no chance that you’ll somehow suddenly miss out on huge price increases.
Kary L. Krismer » Mar 24, 2009 at 4:44 pm
By me @ 50:
Well first, I went through that in the early 80s (although the magnitude was less than 75k) and it didn’t affect my level of happiness.
Second, just when do you think you can buy real estate without that being a concern? Your approach seems to be a never ever buy real estate approach, because it’s always possible it will drop after you buy.
me » Mar 24, 2009 at 5:01 pm
By Kary L. Krismer @ 51:
You may not have noticed this, but we are now in once in a century housing downturn, where housing prices are dropping like a stone nationwide.
It’s as if you woke up in the middle of the night, noticed signs that your house was on fire, and said, “Yeah, well, there’s always a chance that a house can catch fire, a person can’t live their life worrying about such things, I’m going back to sleep because a good night’s sleep is important to me”.
Real estate is almost always a reasonable investment. This is one of the rare times when it is not. That smoke coming under the door and the crackling sounds of flames are not your imagination.
patient » Mar 24, 2009 at 6:26 pm
Things like “Your approach seems to be a never ever buy real estate approach, because it’s always possible it will drop after you buy. ” is typcal agent BS to try to convince people to not be logical since then they will never buy. It’s a perversion of smart peoples preference to act from what is most likely to happen to making it look like they will never act out of fear of what could possibly happen. Look up possible and likely in a dictionary and you will find out that it’s two vastly different things. Do not listen to this kind of BS, make decisions from what you yourself think is most likely based on many sources of info. And regard all info from agents as colored by their self -interest.
I heard on the radio today that the Florida market has a big upswing in home sales volume. An agent was interviewed and instead of stating the pleasant likelyhood that the price levels have now reached affordability for more people levels she started the fear tactics immediately and proclaimed that people are now starting to realize that these prices will not last! Redicolous.
David Losh » Mar 24, 2009 at 7:00 pm
This went nutsy didn’t it?
Real Estate is a constant. You determine the value of Real Estate in Reality. The price of the dirt is a percentage of what you can build on it. There are zoning codes, environmental impacts to the zoning and lastly land use restrictions. Real Estate is the price of the dirt.
There may be a view or economic impacts, all that can be determined once you chose a neighborhood.
If you want fair market value you look at rents rather than sales. Sales used to be a good indicator that got smashed in the past five years. People started looking at mortgage payments and interest rates. That’s a suckers bet. Figure your interest at 6% to 10% then the mortgage payment. Let’s pick a number like 25% over fair rental value for a mortgage payment, factor in code, land use, environmental, and economic impact. You can play with the percentage over rental price for a fair payment on a mortgage.
There you go, you have a formula. Nobody but the buyer determines the price of Real Estate.
Kary L. Krismer » Mar 24, 2009 at 8:12 pm
By patient @ 53:
How about rather than just calling it BS, try to say why I’m wrong? In what market would you buy? Was it July 2007 when everything had been great for a long time. Was it anytime this century? Have you ever thought it was a good time to buy?
As I’ve said before, owning any asset is always risky, but it’s better than the alternative.
Kary L. Krismer » Mar 24, 2009 at 8:14 pm
By David Losh @ 54:
Yep. That’s what led to the 80/20 loan package. The solution to the question that was never asked.
Ira sacharoff » Mar 24, 2009 at 10:03 pm
By patient @ 47:
Case Schiller is a useful tool and should continue to be, but laws, theories and rules only work until they don’t.
Robert Schiller is a human being, and as accurate as he’s been in the past, he and his index are not infallible.
I look at and value the Case-Schiller index, but even Robert Schiller is not God.
Using the Case-Schiller index is far better than just guessing, but despite what some people claim, it’s not the be all and end all for all times.
Groundhogday » Mar 24, 2009 at 11:08 pm
By demo_kid @ 3:
Based upon the Case-Shiller index, we are probably a third of the way down to the bottom. And who knows how far it will overshoot at the bottom. If you can afford it, like it, play to live in it for years and don’t care about losing money on paper, go ahead. But no one can say with certitude that you are not going to take a bath on this purchase.
Groundhogday » Mar 24, 2009 at 11:18 pm
By The Tim @ 39:
Ditto. People keep asking me when I’ll buy as if that is some sign that it is safe to go back into the water. But we might well buy before the bottom, with the following slightly modified rules:
* Do you like the home well enough to stay there for at least 10 years?
* Do you feel that the home is priced fairly relative to equivalent rent?
* Can you afford it using a conventional 15-year fixed-rate loan?
* Do you have a minimum 6-month emergency fund that is not part of your down payment?
* Would you be able to handle it both financially and emotionally if the value of your home dropped considerably after purchase?
what goes up must come down » Mar 24, 2009 at 11:33 pm
Kary this is what I call BS on “As I’ve said before, owning any asset is always risky, but it’s better than the alternative.” It is NOT better than the alternative all the time that simply is an incorrect statement.
David Losh » Mar 25, 2009 at 12:05 am
RE: Kary L. Krismer @ 56 -
Sorry, I don’t get it.
The 80/20 was to avoid mortgage insurance. 0 down has been available for a long time. Some lenders used to lend on the asset, they still did up until 2007.
It’s a formula that lenders used. In my case the CMAs would come in 20% higher than loan value. That’s the deal, take it or leave it. I very seldom put much money into a deal, there again I bought em to sell em. Now I’m out of business.
The formula went very, very wrong. I blame a flood of inexperienced agents and loan originators. The reason is painfully clear today. The paper had value. The Notes were bought sold and traded internationally. They were packaged and had derivatives.
Derivatives, I just love that term, I think it means there is a sucker born every minute.
But wait there’s more. As we are watching the housing market, which has a correction that needs to be made, there is an economic collapse all around us. There are millions of people out of work with no real skills, no money, big bills, and families.
We keep talking about the little people but what about the hedge funders, doctors, dentists, lawyers, accountants, and all the people who depend on the little people to pay thier bills.
Buying a house kid is a simple formula. You buy it, live in it, and do what ever you have to to make the payments. Make a deal, the best deal you can.
Never give money to a land lord. Land Lord, I love that term also, I think it means there is a sucker born every minute.
economist » Mar 25, 2009 at 2:37 am
That’s the market price.
The value of an asset is its economic return to the owner if it’s not sold – in the case of a house, its net rental value.
“Price is what you pay, value is what you get” – Warren Buffett, after Ben Graham
Kary L. Krismer » Mar 25, 2009 at 7:34 am
By what goes up must come down @ 60:
Either you don’t understand, or you think that being totally broke or possibly insolvent is better than owning assets.
Kary L. Krismer » Mar 25, 2009 at 7:39 am
By David Losh @ 61:
Yes, but from the borrowers’ point of view it was a fool’s bet. We’re talking about the risk of owning assets here. Well with an 80/20 your risk is much higher because there’s a much greater chance that if something goes wrong in your life that you’ll not only lose the property, but you’ll still owe the money owed on the 20. With a single loan at least you’d only lose the property. The goal was to avoid PMI, and obtain a blended rate slightly lower than what you’d pay on a single loan, but in doing so you increased your risk incredibly.
Also it was sort of a fool’s bet from the lender side, because in a down market rather than lose maybe 10-30% of your money loaned, you’d likely lose 100%.
peter » Mar 25, 2009 at 8:00 am
RE: pfft @ 13 – HA! Agree 100%. Its coming down a lot. Definately a good time to WAIT.
David Losh » Mar 25, 2009 at 8:11 am
RE: Kary L. Krismer @ 64 –
You’re confusing the process of owning a home with what is going on today. No one bought a home with the idea they would lose it.
The 80/20 was a response to the Mortgage Insurance scam. It became a 0 down tool, as it should be. Now people are losing a home and maybe the 20% will still be owed, otherwise, if they had a down payment, they lose the down payment and the house.
I think the 80/20 is more fair than giving the lender a wad of cash that may reflect the bulk of your savings. Come to think of it the bank ends up with your savings anyway, when you begin paying your mortgage with your savings.
I think the lender should be happy to make a loan secured by the value of the asset.
Kary L. Krismer » Mar 25, 2009 at 9:08 am
By David Losh @ 66:
It’s that type of thinking that made the 80/20 so popular.
First, whenever you do anything you should think of the worst case scenario. People lose their jobs, get an illness, get into an accident, etc. There are a lot of things that can happen that can cause you to lose your house, beside just buying too expensive of a house. Why would you want that worst case scenario to be losing your house and owing $80,000 (20% of $400,000), when it could be simply losing your house?
Second, PMI is not a scam. That’s absurd. There is more risk to a loan over 80%, and the PMI accounts for that. An 80/20 is a different way of accounting for that risk, but PMI can eventually be dropped off in many situations. The interest rate you have with an 80/20 you’re paying until you refinance, sell or payoff the loan.
patient » Mar 25, 2009 at 11:20 am
By Groundhogday @ 58:
This is one of the most scary misconception when it comes to home buying, that if your home looses value after your purchase it is somehow “paper losses”. It is not, it’s very real losses compared to if you would have waited and paid the lower price. The delta from what you paid and what you could have paid if you waited is very real losses that you will make every month you pay your mortgage.
Paper losses is if your home goes down in value but not below what you paid and you are not selling. It’s very different from if you buy a home now and the value goes down. Not only are you in risk of being underwater but you also overpaid and will do it for the duration you have the mortage. I doubt many readers here can fund anything they like to, if you like me belong to that group I don’t want to buy a home just because I can afford it if the value is likely to continue to decline. I rather wait and by lower and use the savings to fund other stuff like retirement, the kids college and hobbies.
Kary L. Krismer » Mar 25, 2009 at 11:32 am
RE: patient @ 68 – So I guess the paper losses I took holding my condo during the last downturn were what was really important, and the 100%+ gain I actually realized irrelevant?
Or perhaps during more normal times, people should liquidate their retirement accounts any time an investment drops below what they paid.
Our current house is probably down about 10% from when we bought, but that doesn’t bother me any more than what I’d be excited if it were up 10%. It’s pretty irrelevant.
patient » Mar 25, 2009 at 11:48 am
“So I guess the paper losses I took holding my condo during the last downturn were what was really important, and the 100%+ gain I actually realized irrelevant?”
Correct, since while you lived in the condo you only made paper gains but what you initilaly overpaid you lost.
When you sold you moved into another home which you had to pay the market increase for so no real gain unless you sold and waited for another deep downturn. Buying at the right time is the key.
Kary L. Krismer » Mar 25, 2009 at 12:13 pm
RE: patient @ 70 – Well first, I actually bought too late, not too early. If I’d bought about a year earlier I could have afforded a house, and they didn’t suffer the same slump that condos did. And when I sold I sold too early because I missed the big condo run-up. I could have sold for 4x+ what I paid instead of 2x+. But I sold after an earthquake, thinking that is wasn’t good to have so much tied up in something that could go boom. Anyway, it just shows how pointless it is to try to time the market, and in any case I’m happy with my 100% plus profit
BTW, when I sold I didn’t re-buy, because I was living in the house my wife owned when we got married. When we sold that in very early 2008 we were just a bit too late getting it on the market, but our timing was based on the actions of a neighbor moving out, not the market overall. And the house we bought has fallen in price less from the peak than what that other house had, so even though we increased our exposure to real estate, we ended up better off than doing nothing.
Oh, and renting isn’t an option. I’m a control freak and would have a hard time living at the whims of a landlord, especially in these times where you hear of landlords being foreclosed. But I like to live places at least 10 years, and you don’t have that kind of control being a tenant (although it can happen).
patient » Mar 25, 2009 at 2:24 pm
“Anyway, it just shows how pointless it is to try to time the market,”
No it doesn’t, just beacuse you didn’t manage to time the market doesn’t make it pointless for others.
David Losh » Mar 25, 2009 at 3:22 pm
RE: Kary L. Krismer @ 67 –
Sorry, not even close.
The recourse is foreclosure. The PMI is a mechanism in between. it’s a scam, it’s all a scam, mortgages are a scam, that’s why we are were we are.
We pay $300K for a $150K property because the mortgage makes it possible.
If we were in a normal 4% appreciation without the depreciation we have today you would be at the 20% in five years and refinance.
That was the purpose. No one thought we would have 19 million empty houses. The worst case scenario argument is mortgage babble.
pfft » Mar 25, 2009 at 3:24 pm
“It’s a perversion of smart peoples preference to act from what is most likely to happen to making it look like they will never act out of fear of what could possibly happen.”
it’s the tactic the real estate industrial complex has been using for 3 years now. it’s been disastrous financial advice that led millions astray.
pfft » Mar 25, 2009 at 3:35 pm
“How about rather than just calling it BS, try to say why I’m wrong? In what market would you buy? Was it July 2007 when everything had been great for a long time. Was it anytime this century? Have you ever thought it was a good time to buy?
As I’ve said before, owning any asset is always risky, but it’s better than the alternative.”
wow, how pressure sales tactics and really bad advice all in one! where do I sign up?
Kary L. Krismer » Mar 26, 2009 at 11:56 am
By patient @ 72:
Rather than pointless I should have said impossible. Being impossible makes it pointless.
Kary L. Krismer » Mar 26, 2009 at 12:01 pm
By pfft @ 75:
How is that either a pressure sales tactic or bad advice? I think this is just a situation where you don’t understand what I was saying.
Of all the people here, perhaps only Eleua (presumably) made a good decision not to buy for the right reason. He saw the potential for a systematic economic collapse. Many of the rest of you just look at a chart of what happened in the past and think that somehow tells you what will happen in the future. Anyone who is good at doing that would be rich from the stock market, and own a very expensive house that would be about 1% of their net worth.
As to the assets comment, name an asset that you can own without risk. There isn’t one. Even some bonds that adjust for inflation would be dependent on the entity that issued the bond.
lunaticfringe01 » Mar 28, 2009 at 1:32 pm
Buy now? Are you kidding?
Why would you possibly buy now when we’re staring the Alt-A recasts (not resets) square in the face, unemployment rates not seen since the time of the Depression and we need to see if the Chinese will stand for Obama’s financial “acumen” and Bernanke’s “buying down the long end of the curve” shenanigan’s. The recasts will flood the market with a serious number of higher priced foreclosures, unemployment will dry up demand and a bond market dislocation will drive rates sky high.
In the case of higher rates, this does not mean “buy now” in case they do go higher. It means wait because higher rates will drive home prices down even further.
As numerous other people have already stated, the market will not suddenly shoot back up to bubble prices. There is absolutely nothing to lose by waiting and everything to gain. Go find a nice place to rent. Seriously, does it matter if you rent a house from a landlord or “buy one” and rent it from the bank?
And somewhat off topic but as a former (and now reformed) Seattle-ite, I gotta say you people are just too nice. Here in So Cal we don’t put up with the realtor bull that they spew. Kary has 20 postings on this thread telling you why you have to buy now and that’s about 19 too many.