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Patrick,
I enjoyed reading your perspective on the housing market, particularly looking at rents and salaries.
I am 28, and moved to California to start a job with Lockheed Martin in May of 2005. I work (for now) in Santa Maria and live in a 2BR 1 1/2 ba townhouse, 1200sf 2 car garage, in an "affordable" beach town called Grover Beach. At the time the market was still a seller's market. I was outbid on one condo, and then promised a fast close on my townhouse at asking price of $395,000. I got a first of $316,000 negative amortization interest only ARM. starting at mid to low 5%. It has now adjusted to 7.625%, but the payment is still low, but my principal is growing at nearly $1000 a month!
Having lived with my parents for a couple of years I had $20,000, and being real estate investors in Chicago, they encouraged me to buy....and it seemed like a good thing...double digit appreciation for the years before I bought.
A very similar 2BR in my complex, sat on the market since last October, and started at $395k (my comp), then $369k, then was relisted at $358k. It had sat empty the whole time, and just sold for $352k. Being a first time home owner and only making $55,000 a year....and collecting $7200 a year in rent, I really want to just crawl into a hole and not come out!
My job situation is shaky now too. My contract is winding down, and I am officially off the Air Force program I was working, charging overhead, and looking for jobs at Lockheed in Sunnyvale. In all this I am looking to refinance to a fixed rate, though can't afford it. I am trying to get more help from my folks (who are business people and charge me %5.5 on ~75k of a 2nd i have with them), and I am also looking for an advancement in the company by taking a higher position (level 2). which could add more income (upper 60s to 70k)
My parents are optimistic about holding the townhouse for the longterm, but I don't know if I can justify my negative cashflow for the next 5 years, etc.
If I sold now, I could pay off my first (now $330 up from $316 in 2 years) after commission, but I still owe ~75k to my parents in a 2nd..... and that's not looking at 2 years of taxes, etc.
I very likely might be forced to take a job in Sunnyvale within Lockheed, hopefully make more money, ....but the local rental market is so cheap here. I couldn't rent my place for more than $1300 or so.
The latest from a mortgage broker was a 24.5 year fixed (payed bi-weekly) at 5.1% but she is charging $5600 in fees (ouch). though it is at least 1 full percent lower than I was quoted by Countrywide, my current lender, that could do it for 6.25 with less fees.
What suggestion do you have about holding, refinacing, renting?
please help,
Scott
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http://www.latimes.com/news/local/la-me-lottery10may10,0,1542996.story?coll=la-home-center
One more reason why I don't want to live in CA. Arnold and the Sac Dems have done nothing to solve the chronic structural problems and plenty to cut off future tax revenue and increase future costs due to bond payments.
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I think California needs someone more like Sarkozy.
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The next "get rich plan" will be... drum roll please...
Real estate again.
While many on these boards take a smug pride in NOT buying, and since perhaps 2004 that has been a wise move, the next intelligent move will be investing with full force when the pendulum swings back. If we truly get a dire crash in prices, to the tune of 30% or more, there will be opportunities to find properties at even greater discounts from desperate sellers. Buy when the rent price makes sense, ie will provide positive cashflow with fixed financing. When I first began buying properties, everyone told me "don't ever buy a condo, they always go down in price" and "don't be a landlord, you will never make any money" etc etc etc.
Real estate was for decades the "get rich slowly plan" the "get rich quickly" thinking was a recent phenomena, soon to find its way to the trashbin like all other get rich quick lazy schemes.
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Hampton, VA
"the next intelligent move will be investing with full force when the pendulum swings back"
Isn't that what many on this blog are planning? To buy when the prices fall?
It is just taking longer than expected for that swinging pendulum.....
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Can we import Mike Bloomberg to be the Governing Czar of the United States, so the government can get some governing done?
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I still think we'll be living in a Sci-fi universe of some sort in 30 years, the only question is whether it'll be distopian or sorta utopian.
Or maybe we'll all be flesh eating zombies, I can undead with that.
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some on this board are planning that.
But considering that the topic just a couple days ago was someone bragging about NOT buying in 2000, and how smart he felt about that... (when almost certainly the price would have way more than doubled over the last 7 years even counting recent discounts) I don't think many people on this board are very good at elementary financial calculations...
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Hampton, VA
Astrid,
Like "Picnic on Nearside" with total freedom and details managed by a Central Computer, or the Terran Empire.
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Hampton, VA
"I don’t think many people on this board are very good at elementary financial calculations…"
azrob, you just did the equivilent of walking into a San Juan street and taking your shirt off.
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Azrob,
You can already buy property in much of the country which would be cash flow positive--even with 100% financing. But it is difficult and expensive to manage properties remotely, so this cancels out much of the benefit for CA residents. If you want to get rich in RE, you should move out of CA, in my opinion. Buy up property in Syracuse, Buffalo, Indianapolis... whatever.
Eventually, there may be bargains in CA, but it could be a long wait. Even a 30% drop would not be sufficient to make very much CA property cash flow positive, much less a screaming bargain. Especially in and around the BA, LA, OC & SD.
NOT REAL ESTATE ADVICE
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azrob,
I had Larry (Kudlow) on in the background yesterday too, but as far as I can tell that's going to be one long drum roll. The only reason anyone is even considering "it" is b/c everything else looks fully/over valued.
I can't speak for others but one of the first things that attracted me to patrick.net was it's sense of fairness. Where my primary residence is concerned I'm not even the least bit worried about making a buck (slow or fast). It's just my house, nothing more.
When we can get honest appraisals, a commission structure that's commensurate with the work and sustainable financing/lending back in place then I guess I can feel good about it. Until then I fear without a major REIC overhaul it'll be the same shady business (only this time on the way DOWN) in an unregulated bottom feeder's paradise.
We're already seeing evidence. I just can't get excited about that. Sorry. :(
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there is sustainable financing: its called the 30 year fixed mortgage.
The appraisal isn't designed to help the buyer, its designed to protect the bank. are you a bank? NO? then why do you care what the appraisal says? You don't trust your own judgement of a properties value?
what "shady business" on the way down? you make offers, people either accept or reject them. SOunds like silly scapegoating to me...
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I still think we’ll be living in a Sci-fi universe of some sort in 30 years, the only question is whether it’ll be distopian or sorta utopian.
That is not a question. Will human nature change in 30 years? No.
Be prepared for a future that is the sum of all dystopian Japanese movies/animations.
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Or maybe we’ll all be flesh eating zombies, I can undead with that.
Will London become like that 28 weeks later?
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DinOR Says:
‘pukka’ mortgage?
Oh I’ve GOT to hear this one!
Sorry, not nearly as exciting as it sounds. I meant he had a 30-yr fixed, so he could afford it, but was still pi$$ed at having to pay more than the place was worth for a decade afterwards
BTW - "pukka" is Southeast London slang for good, decent, upstanding, legal, etc....hence is was a 'pukka mortgage' (as were 99% of loans in UK in 1989) and not a 'NINJA Loan'.
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Sorry Rob, I'm not buying it. They have ENTIRE blogs dedicated to mortgage and appraisal FRAUD! It's that wide spread. It's common knowledge that appraise-whores publicly admit to being pressured to "hit the number" and we're supposed to throw 6% on top of that.
SP did a great post on the buyer being the only "party" in the transaction that brings any money to the party and right now I don't feel like partying.
If making money is the only thing you're concerned about there is the San Diego Creative Investors Club and I'm sure all of those guys that over leveraged and feeling decieved would love to have you post about how RE will be "the next big thing" back to back.
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speedingpullet,
LOL! That would have been the LAST thing I would've thought it meant!
I suppose I'll see you down at the Pukka Pub then? :)
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Yes, every once in a while I have a brainfreeze and forget I've lived in 2 nations divided by a common language ;-)
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dinor:
If you are not in fraud, then you dont need to care about the appraiser. They are not paying the mortgage you are. If the mortgage is less then rent, you are pretty much immune to a downturn. When I bought my homes here in az, the rent after expenses came out to 9% return on the price, and of course rents in general increase over time.
I don't care if the appraiser is a monkey, and the bank loan officer drools on himself; The agent can be a pedophile too. If price to rent makes sense, then its a good purchase.
Whining about other fraud deals has nothing to do with a properly thought out investment. YES I know there aren't any deals yet, and maybe cali is worse then az; 30% down will make quite a few respectable deals here, and particularly when i start buying pre-forclosures, just like i did 15 years ago.
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azrob,
We'll just have to agree to disagree here. I have total confidence in my ability to gauge the viability of the investment. That's hardly the problem. Wether we like it or not the MLS Cartel (TM) dictates the terms. Every time you look at a HUD statement (and all the clowns that have managed to somehow get paid) it makes me ill.
Even if I could find an inv. prop. that returned 30% all year, every year it doesn't do a thing toward addressing a system where there are a helluva lot more losers than there are winners.
As Glen points out, even a 30% drop in prices won't create a whole lot of positive cash flow in CA so before we go off on yet another lucrative leg of the RE cycle anyone mind jumping out and changing the flat?
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danville woman's website
Max
Sorry you are not thrilled with the Landlord business. My husband and I have done quite well with it. We have had several single family homes in California and have had tenants of all kinds - one of them tried to commit suicide and I was left washing the blood after she left without paying the rent. Others have been exceptionally wonderful. We cashed in our California real estate and now are buying our 4th home in Oklahoma.
At the moment, Oklahoma makes more financial sense for rentals than California, although we are not planning to move there ourselves.
We treat our property manager in Oklahoma like the queen she thinks she is, and our Oklahoma tenants have been terrific.
Compared to my job, which is being a Nurse Practitioner at an HMO, being a landlord is a piece of cake.
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danville woman's website
Max
Sorry you are not thrilled with the Landlord business. My husband and I have done quite well with it. We have had several single family homes in California and have had tenants of all kinds - one of them tried to commit suicide and I was left washing the blood after she left without paying the rent. Others have been exceptionally wonderful. We cashed in our California real estate and now are buying our 4th home in Oklahoma.
At the moment, Oklahoma makes more financial sense for rentals than California, although we are not planning to move there ourselves.
We treat our property manager in Oklahoma like the queen she thinks she is, and our Oklahoma tenants have been terrific.
Compared to my job, which is being a Nurse Practitioner at an HMO, being a landlord is a piece of cake.
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Redwood City, CA
If you guys haven't seen this yet :
http://tinyurl.com/2wfwgr
Ah, the life of a FB! (After they've had to park/sell the hummer)
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Malcolm's website
Guys, I hate to piss on your "the next get rich.....real estate again." While I agree that it will be a very good time to buy real estate in the future I would not hold my breath waiting for it to spring back up. I really caution people about speculative investments. Real estate will be a good long term holding, and will probably perform to its historcal fundamental returns, which frankly suck until the harvest.
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Malcolm's website
Even if prices stay flat the leverage works against you. If you have a 6% loan, and it appreciates by 5% you lose more than 1% on your initial outlay.
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Malcolm's website
San Diego foreclosures have now hit an ALL time HIGH!
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Our favorite columnist wrote about the tax consequences of canceled debt today.
Uncle Sam also does not tax cancellation of debt income on nonrecourse loans if the lender forecloses. However, if a lender voluntarily forgives debt by agreeing to a short sale or a deed in lieu of foreclosure, the forgiven debt could be subject to cancellation of debt income tax, even if the loan is nonrecourse, says Internal Revenue Service spokesman Jesse Weller.
Does this sound familiar? As I wrote a couple of days ago:
So an underwater FB in the Golden State with a non-recourse loan faces two choices:
1. Foreclosure (no 1099, but wrecked credit)
2. Short sale (debt forgiveness with 1099, saved credit score)
Don't worry, though, the government has a plan in the form of HR1876, the Mortgage Cancellation Tax Relief Act of 2007. This bill would eliminate the tax on cancellation of debt income on primary residences, with some limitations. Nice, looks like the intrinsic put option on non-recourse loans is getting more valuable. Don't worry, it is not too late to participate in this bonanza as they are still writing 100% Option ARMs. Evidently foreclosure rates are low for this type of mortgage. (see Ben's blog for an explanation of that ugliness -- basicaly foreclosure rates are low as the resets haven't happened yet!)
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Oh man... Wait until this POS becomes law...
Note, though, that this won't help FBs who used the money for vacations, Hummers, unsecured debt consolidation or for specuvestments. It is really just for FBs who bought too much house for their principal residence.
Even though I am anti-bailout, I think this might actually stimulate quicker short sales, which could accelerate the decline in prices. FBs would have even less incentive to stick with an underwater property and more incentive to let the bank liquidate it.
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Actually, I should have said "paid too much for a house" instead of "bought too much house." Most FBs didn't get much for their money.
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Evidently foreclosure rates are low for this type of mortgage.
Foreclosure rates are low for voodoo loans because their effects are deferred. They have very low initial payments that escalate quickly.
Time Will Inevitably Tell
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HARM's website
New thread: “Real Financial Heroes” needed in CA!
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SP,
(If we are all trading insults) Looking at the track record of almost 60 years of Indian nationhood, I'm not sure pukka is a native concept in India.
Can we just all be happy that there's no longer any thuggies?
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malcolm: if it apreciates 5% and your loan is 6% you lose 2%? Yeah.. cause I rent my properties for $0!!!! hahahaha
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dinor:
congatulations you managed to write an answer that proves you apparently didn't read or understand anything I wrote! nice to see the public education other places is just as bad as it is in az!
IF a property will make you positive cash flow with a 30 year fixed loan, it is a good buy. Period. There is nothing to agree or disagree about, unless you just prefer to pay more for things than you have to...
Are there any/many such deals today in Cali? probably not... But anyone intelligent on these blogs doesn't hate real estate on moral principles, they simply believe the prices are so high they constitute a bubble. When I moved to Phoenix 15 years ago the opposite was true, anything you purchased cost you less per month then renting it. I wish I had bought more then the 5 homes I bought then. Now I am down to 3, and the bubble money from the 2 I liquidated, each after living in it for 2 years to avoid capital gains taxes, paid off the other 3.
SO you disagree that having 3 homes completely paid off is a good thing? You must work for the bush administration then, and think the war is going well too! Party on genius
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surfer-x's website
Wow, was that a personal attack on DinOR? Amazing. DinOR's slick, he's quick, he's got a big dick, he's long, he's strong, he could never go wrong.
DinOR. yeah yeah
DinOR. yeah yah
DinOR.
If DinOR and Randy H were to fight, who would win?
Dude, don't diss DinOR.
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# GC is a woman Says:
Why did you learn to speak English so well?
Because you probably don't speak kiswahili too well, bwana.
nasikia njaa sana, ni wakati ya usafiri, mwenenzi.
SP
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GC is a woman Says:
Why did you learn to speak English so well?
But the real answer to your question is that my parents saw fit to send me to a school run by a bunch of Carmelite nuns, who caned us if we spoke in anything _but_ english. Charming, and effective, don't you think?
SP
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azrob,
I would rather look at return (rent, increase in value) on capital (time and money, present and future). Being a slumlord isn't really worthwhile for most people even if it yield a positive cashflow upfront.
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astrid:
appreciation is gravy, you want the deal to make sense based on the rent.
In other words, if you assume 10% appreciation, everything is still a good purchase today... however, if that 10% turns out to be -10% then oh shit!!!
however, I helped a friend (young college kid) buy a 2br condo here (az) for 95K last month; 5% down fixed 30 years, and his payment is all of about $90 more then the place would rent for. OK so not quite a screaming deal, but on the other hand, not exactly at great risk of going bankrupt over it either...
But if I found one of those same units in pre or forclosure for say 70K, then it wouldn't require much thought on my part to buy it...I plunk 70K down, and make about 6K give or take a year... say 5K after taxes, (allowable depreciation is a great help on a rental)
We may have a bubble here, and there may be pressure on rents for a couple of years, but I honestly think in 10 years rents will be considerably higher, particularly as construction is dropping dead now. supply/demand going forward for rentals looks to me like flat for a few years followed by an increasingly good rental market.
I plan to start nibbling at purchases as the market turns in my favor; I don't need to catch the exact bottom of the downturn to make plenty of money...
Note to the idiots from cali who start screaming: if the math is different in your market, then obviously you might need more of a drop for it to make sense...
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azrob,
I assume negative appreciation for the next couple years, so even if I would get positive cashflow on a rental property, I would not buy.
I'll buy when the market is dead or if I run across "once-in-a-lifetime" properties. Otherwise, I'm happy to rent and retain flexibility.