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When will you buy? What will you buy?


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2005 Aug 30, 12:53pm   22,493 views  174 comments

by Peter P   ➕follow (2)   💰tip   ignore  

The housing bubble will end but prices will not go down forever. At some point, it will be a good time to buy again. When will that be? How do we determine that point in time? What will you buy? How will you finance it?

(Note: this is not the same as the "Dream Homes" thread because the next house you buy may or may not be your dream home.)

#housing

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1   Peter P   2005 Aug 30, 1:04pm  

When I tell some friends that I am not comfortable about buying a home, they told me to buy a "starter" home and then trade up later, even if that means paying much more for much less.

This strategy has an obvious flaw: if prices drop, one will be stuck in the $hitbox.

2   praetorian   2005 Aug 30, 1:23pm  

Three years, when the wife finishes residency, economics be damned.

_gulp_

cheers,
prat

3   Zephyr   2005 Aug 30, 1:25pm  

What we are seeing today is fundamentally similar to what was experienced during every prior cycle since World War II. Prices go up until exuberance takes them too high, and then prices decline at a modest pace, usually for about three years. After that there is often a flat year or so, and then the market appreciates for about double the time spent in the preceding decline. Prices usually peak again at about double the previous peak. The entire cycle is typically about 10 years long from top to top (or bottom to bottom for those who prefer the negative view).

During the 1980s we had an unusually strong upswing in price followed by a longer-than-usual decline (about six years). That decline was at the typical modest single-digit annual rate. Even so, the downturn of the 1990s was the longest and most severe real estate downturn since the Great Depression. It was widespread with impact throughout the world. It was followed by a world-wide threat of deflation and financial crisis. Such major declines typically occur at intervals of about 60 years.

I believe that we are about to enter a typical cyclical decline which should reach bottom around 2008 or 2009 at prices about equal to what we saw in early 2004.

4   SQT15   2005 Aug 30, 1:31pm  

At this point I'm not buying as long as I can rent more home than I can purchase. The rest depends on what the market does. Then it all comes down to affordability, location, is it big enough, how long can I live in it without going nuts... that sort of thing. Because the market has been so crazy my expectations are kind of low on the buying end. I looked at a really nice rental house today, 3b/2.5ba/2car garage 1600 sqft for $1350 on a cul de sac that dead ends into a neighborhood park. I am all over this thing and until I can purchase something better, I'll keep renting.

5   Zephyr   2005 Aug 30, 1:46pm  

Madeline, I am suggesting that we are at or near the peak for prices and that we will soon see about three years of steady declines in home prices. Why buy while prices are still declining?

6   Jimbo   2005 Aug 30, 2:30pm  

Five years, when the kid hits Kindergarden. Someplace with better schools.

Hopefully 12 blocks northwest into the "good" side of Noe Valley where the grade school is much better. If my fiancee has her way, someplace like Orinda, with good schools and near a BART line. Maybe Berkeley.

Probably financed with savings. If we have to, we will sell the current home, a duplex, but we would both rather not.

If the housing market turns down and stays down, we might get the dream home at this point, but everything would have to come together just right.

7   Jimbo   2005 Aug 30, 2:31pm  

Which neighborhoods are you looking madeline? You could buy that right now in certain parts of LA.

8   Peter P   2005 Aug 30, 3:12pm  

I will buy if it feels right. Currently, it does not.

I will probably buy a condo or townhouse with good potential cashflow, probably in places where professionals and DINKs like to rent. When I move up or leave, the property can hopefully be cashflow positive. This should give some flexibility in the future.

9   Peter P   2005 Aug 30, 5:23pm  

Bala, 2002 prices should be quite possible. Where are you looking?

10   HARM   2005 Aug 30, 5:45pm  

When? When the correction is played out, or buying makes economic sense over renting again, whichever comes first. Like Zephyr has pointed out, this thing will no doubt take years --I believe it will take longer than 3 years though. Don't want to buy too early in a bear market rally just to see prices decline another 10-20%.

I believe the size and breadth of the current bubble is unprecendented --even compared to the early 90's. More toxic loans products constituting so large a percentage of the total market that a small, gentle deflation followed by stagnation (while inflation/incomes catch up) seems optimistic right now. Plus, what will drive incomes up fast the way the tech boom did in the late 90's? I may be wrong, just an educated guess.

What? Probably a nice 3-bdm detached SFR in Washington or Oregon on a decent sixed lot. Something close to a medium-sized city (for shopping/convenience), but not too close. After living most of my life in large, densely populated cities, I'm "urbanned-out". Something close to a lake or the Pacific would be nice, but not essential.

11   HARM   2005 Aug 30, 6:00pm  

Forgot to mention the financing. Hmmm... let's see... gosh, there are just so many different financing options today. Decisions, decisions... which NAAVLP(TM) should I get?

How about a $0-down, stated-outcome interest-only neg-am for 180% of the appraised value? I could then furnish it with a HELOC (up to a modest 90% of my vapor-equity).

Seriously, I doubt anyone on this blog is going to go for anything like that. We're all going to (a) get a "real" 15 or 30-year conforming mortgage with at least 20% down (because we don't want to pay either PMI or high interest on a piggy-back, and lending standards will be tighter then), or (b) pay cash. Right?

12   praetorian   2005 Aug 31, 12:47am  

All,

Proposed topic (or at least discussion):

Economic theory would predict that, as information and markets become more fluid and flexible, the price set by markets should become more "perfect", where true supply equals true demand. Since the advent of the internet we have seen two massive bubbles in sequence: first the equity bubble and now the housing bubble. This is, at some level, counter-intuitive: the internet provides more liquid markets and better information. Look at electronics, which have come down hugely in price in no small part because the online market for them is so competitive.

Housing is obviously much less liquid than electronics (although recently not in some places, like Las Vegas), but stocks are very liquid, and we saw the same bubble in them but a few years ago.

So it seems that the internet may actually encourage bubbles rather than provide a more perfect market, at least in some asset classes. Why? To what extent?

Cheers,
prat

13   SQT15   2005 Aug 31, 1:06am  

Some are now saying that we are experiencing an oil bubble and that until the boomers hit retirement that we will be in a period of bubbles for the next few years, and then a prolonged recession after that. The predictions I've heard lately say that when the housing and oil bubbles burst the masses who should know better but don't will then create another stock bubble.

14   KurtS   2005 Aug 31, 2:08am  

Probably a nice 3-bdm detached SFR in Washington or Oregon on a decent sixed lot. Something close to a medium-sized city (for shopping/convenience), but not too close. Something close to a lake or the Pacific would be nice, but not essential.

@HARM,
have you checked out W. of Seattle? There's a few nice (and quieter) port communities out in Kitsap county, still within a ferry ride to downtown. I'm also considering Bainbridge if the market drops enough.

15   Peter P   2005 Aug 31, 2:19am  

Prat, SactoQt, there will be bubbles so long as there is greed, fear, and assets.

Information is supposed to make markets more efficient. Yet streaming real-time stock quotes did not prevent the last bubble. I guess human emotion can only be that efficient.

16   Peter P   2005 Aug 31, 2:26am  

Some are now saying that we are experiencing an oil bubble

Well, with dinosaurs being extinct, they are not making any more oil. ;)

Oil production is somewhat limited, yet demand is steadily increasing. With peak oil looming, I will not be surprised to see $100+ oil. That said, if the world is heading to a severe recession, the inevitable may be delayed.

So... we are doomed anyway... unless we play the cards right. Let's play the cards right.

17   Peter P   2005 Aug 31, 2:28am  

Forgot to mention the financing. Hmmm… let’s see… gosh, there are just so many different financing options today. Decisions, decisions… which NAAVLP(TM) should I get?

I would probably go for a 30YR FRM with 20% downpayment. However, I will try to make monthly prepayments to emulate a 15YR amortization whenever possible. Why not a 15YR FRM instead? I need flexibility. I need options. Just not an Option ARM NAAVLP.

18   Peter P   2005 Aug 31, 2:45am  

Oil price does not appear to retreat significantly after the announcement regarding the release of strategic petroleum reserve.

19   HARM   2005 Aug 31, 3:14am  

Kurt S - Thanks for the info.
Bainbridge Island sounds very nice. Telecommuting vs. commuting sounds even better to me. Noticed it was ranked #2 on CNN-Money's "Best places to Live" 2005 survey. Median price is a bit steep ($430,417), so yeah, I'd wait a little while before taking the plunge.

20   HARM   2005 Aug 31, 3:20am  

Also loved how WA has no state income tax, while it's sales tax is just BARELY higher than California's (8.6% vs. 8.25%). And despite that, they (unlike us) manage to have well maintained infrastructure and good schools. Amazing what you can have when you're taxpayers aren't carrying half the third world on their backs, eh?

21   HARM   2005 Aug 31, 3:21am  

your taxpayers -- need to grammar check before I hit "submit"

22   Peter P   2005 Aug 31, 3:22am  

Amazing what you can have when you’re taxpayers aren’t carrying half the third world on their backs, eh?

Also, I think Washington is more conservative and pro-business then California. Sometimes, being "liberal" does no good at all.

23   Jamie   2005 Aug 31, 3:27am  

Our current plan will have us buying in 4.5 years, regardless of economics (but this timeline is dependent on the dh getting promoted, and we won't know that until this winter). If that works out, we should have enough saved by then to buy the house we'll raise our kids in with a smallish 15-year fixed-rate loan.

Or if we end up living in a really affordable area, we could probably get by with no loan at all. :-) I understand the value of keeping the money invested, and who knows, we'll probably do that if it makes sense at the time (and interest rates are not sky-high), but I will want the peace of mind to know that we can pay off the house at any time should the need arise.

If this plan doesn't work out, we could find ourselves needing to buy a house as soon as next summer. In that case, we'll need a bigger loan, and probably 20 or 30-yr fixed rate. Unless it's in a bubbly area, and then I guess we'd rent until it makes sense to buy (rent v. mortgage cost).

The dh will look for a job in the BA, but we'll have to be open to wherever he gets a job offer, be it in CA or elsewhere.

Peter P, we've gotten that same advice repeatedly about "buy a starter house and move up later." It's interesting to me though that this advice always comes from people who have become unintentionally stuck in their "starter" houses for decades or people who lost money on their homes during the 90s CA bubble and now live in second or third homes that are still basically starter homes.

24   Peter P   2005 Aug 31, 3:34am  

Peter P, we’ve gotten that same advice repeatedly about “buy a starter house and move up later.” It’s interesting to me though that this advice always comes from people who have become unintentionally stuck in their “starter” houses for decades or people who lost money on their homes during the 90s CA bubble and now live in second or third homes that are still basically starter homes.

Jamie, I get this advise from semi-sucessful (so far) real estate "inves-culators". However, the big underlying assumption of this strategy is exceptional appreciation in the next few years. This assumption is usually valid in California in the past. Now, it is a very dangerous one to make.

25   HARM   2005 Aug 31, 3:51am  

Wow, Greg --and people think I'm pessimistic!

26   plymster   2005 Aug 31, 4:06am  

Regarding bubbles, I would guess that the internet has helped produce large bubbles for two reasons:

1) There is a huge disparity between those with lots of information at their fingertips and those with little or no information, creating a series of unfair sales. When a seller is equipped with more information than their buyers, this will help to create a sellers' market.

2) (and this is the big one) The internet has also helped make entry into highly complicated forms of investment readily available to most consumers. 30 years ago, very few people bought and sold stocks because it was more expense (you had to go through a broker, so trading costs were much higher). Housing loans can be approved online in less than a minute, and people can shop for mortgages online. This helps to create a sense of speculation, and creates an arena for predatory lending and speculative scams.

27   KurtS   2005 Aug 31, 4:13am  

And despite that, they (unlike us) manage to have well maintained infrastructure and good schools. Amazing what you can have when you’re taxpayers aren’t carrying half the third world on their backs, eh?

I also noted this during my last visit. The roads were far better than where I live (Marin) I was thinking...WTF...why can't we do that in CA?
Yes--there are migrant workers in CA, but there's also in WA too. And, from what I've read, our ag economy is dependent on a migrant laborforce to keep produce affordable--do you think many US citizens would do that work? But, I digress; I don't intend to get that started...

28   SQT15   2005 Aug 31, 4:19am  

Peter P

Re: oil bubble
I don't know if there is an oil bubble or one in the making, I just know that some economists say there is. According to what I've read, it was predicted by some when we were in our last oil crunch in the 70's that oil would be trading at $90 a barrel by 1990. It's 15 years later and $70 is considered very high. Now where we go from here is anyone's guess, but since the price is being driven in large part by speculation on futures it's not out of the realm of possibilty to suggest we could be looking at an oil bubble in the making. I would simply keep that in mind when investing in oil and remember that the oil market can correct just like the RE market.

29   Peter P   2005 Aug 31, 4:26am  

SactoQt, the speculation in oil futures is in a very small scale. The futures market is tiny. The reals speculations that we should look at are large deals like China buying up oil assets and building up oil reserve.

In the 70's, price shocks were caused by artificial factors (e.g. embargo). Now, the peak oil theory predicts that production will drop during rapidly increasing. The shortage is "more" real.

That said, I am not going to over-leverage on oil. The short-term retreats can be lethal.

30   Peter P   2005 Aug 31, 4:30am  

I would simply keep that in mind when investing in oil and remember that the oil market can correct just like the RE market.

Oil can be traded literally at the push of a button with real-time streaming data. It can correct much more quickly than the RE market. It is also a 24x5 market, if one choose to stay up and traede. ;)

31   HARM   2005 Aug 31, 4:34am  

Yes–there are migrant workers in CA, but there’s also in WA too. And, from what I’ve read, our ag economy is dependent on a migrant laborforce to keep produce affordable–do you think many US citizens would do that work? But, I digress; I don’t intend to get that started…

Oh, no let's get started on that.... ;-)
Yes, out agribusiness (and construction and garment and hotel) industry is now dependent on migrant labor. Mainly because they've deliberately engineered it that way (i.e., use sub-minimum wage illegals to drive out Americans and small domestic businesses as well).

Of course if the kind-hearted executives running these agribusiness/hotel/construction behemoths really had the immigrants' best interests at heart, they would encourage immigration law reform to allow more of them to come here legally. But that would require them to pay at least minimum wage and EVEN WORSE abide by labor laws, withhold FICA, provide sick/vacation pay, possibly provide worker's comp & medical insurance, and even *gasp* allow workers to unionize.

GOD FORBID IT!!

32   SQT15   2005 Aug 31, 4:48am  

In the 70’s, price shocks were caused by artificial factors (e.g. embargo). Now, the peak oil theory predicts that production will drop during rapidly increasing. The shortage is “more” real.

My husband has been getting a lot more literature through work that says this is not true. They say the reserves are bigger than reported. Again, I don't know what is or isn't true, but there are those who are very vocal in saying don't buy into hype over oil prices. I am not currently worried about an oil bubble, but if we do start trading at $100 a barrel then I would say we're definately in a bubble.

33   HARM   2005 Aug 31, 4:52am  

Prock,

I've visited Seattle & surrounding areas quite a few times, though I haven't lived there and can't speak authoritatively. Even so, based on my limited experience/knowledgee, I think you're far better off on just about all scores. Of course, no area is perfect or problem-free.

We just voted to build a monorail, and now we’re taking away funding. People are constantly wrangling over light rail (we don’t have anything like California’s rail system), and traffic is a mother-f—ing nightmare.

Ummm... you know where just about ALL of the nation's most congested freeways/roads are? As far as that wonderful light rail system goes, what we have (BART-NCAL, MetroRail-SCAL) is not adequate for our population needs and traffic problems, but, yes, it's better than nothing.

The city plans to toss about 15 billion (American, that is) down a tunnel to replace a crumbling viaduct.

Wow! You actually SPEND taxpayer money on infrastructure there?? I'm impressed...

Our school system is routinely a few billion over budget, and teachers are constantly striking or threatening to because our half-million dollar $hitboxes (not to be compared with your million-dollar $hitboxes) are still out of their reach.

Try routinely tens of billion over budget here. And as you pointed out, housing's still more affordable --or more accurately-- less unaffordable up there.

Also, I don’t want anyone else moving here and screwing up my commute.

Sorry, Prock, I'm coming ASAP. Maybe you can sponsor an anti-Californian immigrant ballot initiative to keep us out or something. :mrgreen:

34   Peter P   2005 Aug 31, 4:54am  

My husband has been getting a lot more literature through work that says this is not true. They say the reserves are bigger than reported.

I read that production quotas are based on the estimated oil reserve in each OPEC member country, so there is definite incentive to over-report the amount of reserve.

Again, I am not an expert in oil or pretty much anything. I can have a chat with a friend of mine who is an energy analyst.

35   Peter P   2005 Aug 31, 4:57am  

HARM, why not Vancouver, BC? It is just 3 hours away from Seattle and it has slightly less rainy days per year. It has many good, cheap restaurants and health care is (so far) taken care of.

36   SQT15   2005 Aug 31, 4:57am  


Again, I am not an expert in oil or pretty much anything. I can have a chat with a friend of mine who is an energy analyst.

That sound like an excellent idea. Nothing like an expert opinion.

37   KurtS   2005 Aug 31, 5:08am  

Yes, out agribusiness (and construction and garment and hotel) industry is now dependent on migrant labor. Mainly because they’ve deliberately engineered it that way (i.e., use sub-minimum wage illegals to drive out Americans and small domestic businesses as well).

Well...I don't claim to know much about ag, but I do recall a trend moving towards large farms vs. the traditional family farm, which incidentally got my family out of farming altogether; it was no longer competitive. The same holds true for parts of europe, but there govts. heavily subsidize many traditional farmers to "continue the cultural tradition". I suppose the question still persists: how many Americans would be happy with agricultural jobs, and could they be paid "fair wages"? California has a huge ag economy, and currently I'd have to wonder if American farm workers could ever afford a house--it's hard enough for "highly paid professionals". Sigh.
While I like cheap produce, I think our current migrant population should also be given a worker's permit and enter the labor pool legitimately. This talk of "closing borders", while industry hires illegals strikes me as very hypocritical.

38   HARM   2005 Aug 31, 5:12am  

I seriously considered Vancouver, BC a few years back. The wife and I went up there on vacation, and liked it so much, we actually met with an immigration attorney. He told us to stay the hell out of Canada --we'd just drive down wages and overload their health, transportation and education infrastructure. Plus we don't speak Canadian.

HAHAHA, just kidding...

Really, he said (at the time) that based on our employment histories, we'd have a tough time qualifying, based on Canada's point system. Haven't looked into it recently, though.

39   Peter P   2005 Aug 31, 5:18am  

Really, he said (at the time) that based on our employment histories, we’d have a tough time qualifying, based on Canada’s point system. Haven’t looked into it recently, though.

I am very surprised. I thought they have a very liberal immigration system.

40   Peter P   2005 Aug 31, 5:20am  

BTW, I consider Vancouver the best city I have ever visited. You need to create your own job though.

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