patrick.net

therapy says

So how do I know when the time is right to make my move? Should I just wait until those $500-$700K suburban nearly-identical homes all through the valley drop another 10%?

10% would be the same trap you fell into before...

More like down to 300K would be a safer bet...

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

therapy says

The rent is reasonable for what and where it is, but I still feel like I'm throwing thousands down the drain instead of building equity.

if prices continue to fall (as they have for the last 4 out of 5 years) you will be losing equity, not building it.

seems you may very well make the same mistake as last time.

You really think the $500-$600K houses in, say, Cambrian are going to drop by 40%?

therapy says

You really think the $500-$600K houses in, say, Cambrian are going to drop by 40%?

you haven't learned anything.

i encourage you to buy a house because in your case it's better to learn things for yourself than to learn from others.

Don't think of rent as just throwing money away. I really wish that simple idea would go away, it's much to simple a way of looking at home ownership vs. renting.

A lot of homeowners wish they weren't throwing money away on an asset that is depreciating in value. There can be financial advantages to paying rent, especially if rents in your area are cheaper than an equivalent home after including property taxes/insurance.

Hysteresis says

therapy says

You really think the $500-$600K houses in, say, Cambrian are going to drop by 40%?

you haven't learned anything.

i encourage you to buy a house because in your case it's better to learn things for yourself than to learn from others.

Hey man, I was trying to ask a legitimate question. Do you really see houses in $500-$600K range in Cambrian dropping to $300-$400K?

I don't know as much about this as you do - which is why I'm here asking questions. I'm sorry if that somehow offends you, but I don't really appreciate "you haven't learned anything" comments. It's not helpful and it makes you come across like an asshole.

So, again, from a relatively young guy who's trying to make the right financial decisions for his family, I'd like to know a couple things.

1) Why you think the housing market will fall that much.
2) How to know when it makes sense to buy? I read so many differing opinions on this...
3) With real estate prices in the Bay Area being so high historically, and demand being relatively strong compared to other communities, to what degree is the area "protected" by relatively low unemployment and relatively high salaries?

I'm honestly asking for help here - not trying to judge your worthiness or something.

Hi, I expect to NEVER buy, but rent only and love this site for all the many reasons why buying is dangerous.

Today's news about Home Owner's Association often having the right to foreclose if an owner doesn't pay his fees? Marvelous and just a sign of things to come in this depression coming economy and society where you need to be very very nimble to stay above water with just living, much less owning a house.

Karl Loren
Devoted Fan, sent a $50 donation by paper check from WF account today -- on its way.

Houses are going to be cheap. Have you seen the price of food lately?

Debt-free Renter says

Houses are going to be cheap. Have you seen the price of food lately?

I don't know what this means or how they are supposedly related.

Maybe it means as the price of food goes up, people will have less money to spend on housing.

therapy says

I'm sorry if that somehow offends you,

i'm not sure why you think i'm offended. i'm just telling you what i see. someone who will possibly (i would go as far as "probably") make the same mistake as last time. if you repeat the same mistake, i claim you haven't learned anything. it's not nice to say, but the truth isn't always nice.

therapy says

It's not helpful and it makes you come across like an asshole.

i get this a lot; not that i mind.

Let's assume you buy, and the value of the house goes down. You are young, and if you can afford a traditional 30 year fixed (rates are good now), and you stay in the house to raise your family, it will be paid off by the time you are 60 or so, and want to retire. No one knows what the housing market will be like in 10, 20 or 30 years, but it is ALWAYS good to have a home that is paid for. There are other benefits such as being able to decorate and customize it to your tastes, and the most important - not having a landlord say, "I am not renewing the lease because. . . ."

We have to start looking at houses as we do cars - people buy nice cars all the time even though they know the car will be nearly worthless if they keep it 10 years - but we all need a car to get around, and many of us want a nice car.

Thanks to the last two guys - some good points. I guess I've been thinking that buying property is a good way to start building wealth - after all, unlike cars which are guaranteed to depreciate, land itself isn't. We could argue I guess that it always comes back to the inflation rate, but that's still only good in the long term.

I guess my concern is that I want a lot with some room to grow - as a first house, I'd like to buy a "starter" home and live there for about 10 years while we watch our kids grow.

10 years after that, I think I'd like to buy a nicer home, something a bit more unique and not so tract-like.

I don't think it's the right time to buy right now - just from everything I'm reading, I don't feel strong enough in the economy to make the bet. But I'm trying to gauge when it makes sense - not so much in a timeline, but more in a "what details to watch out for" type of thing.

Thanks again to those who helped.

therapy says

Thanks to the last two guys

aww you left me out. now i feel hurt. lol

E-man says

Huh? There is practically no inventory out there in Santa Clara County. I don't know when this artificially low inventory will be over, but at the moment, there are multiple offers/bids on any half decent property out there.

Look at the data and decide for yourself if inventory for Santa Clara County is artificially low.

http://www.deptofnumbers.com/asking-prices/california/san-jose/

What seems clear is that inventory was artificially high in 2008 and early 2009, but it's not clear that inventory is artificially low now.

thomas.wong1986 says

10% would be the same trap you fell into before...

I disagree with this. With the cost of money at 3% (4.25% less tax deduction), you should put as little down as you can.

I don't think "good" inflation (the kind that raises interest rates on savings) is coming any time soon, but if it does, you'll be golden.

But even decent starter homes in the South Bay in good neighborhoods are $500k+, which means a 20% downpayment is $100k.

FHA is 3.5%. Just sayin'.

I have no idea what the housing market is going to do. I've never been right in 20 years and I don't expect to be right now.

My gut says buying now/soon is not a mistake, but I'd certainly wait past October for the conforming limit change to work its way into prices.

SCC will go down from $729k to $625.5K. This will lower the max 3.5% loan from ~$750K to $650K. While I don't expect prices to fall $100,000 in response, this is more than a love-tap to the market.

corntrollio says

http://www.deptofnumbers.com/asking-prices/california/san-jose/

Where do they get their numbers? Or did I misread something? Based on what I think I read, they are saying 7000+ properties in San Jose alone (ignoring the rest of SCC).

E-man's info says 2381.

If you do a search on Redfin for SCC, it shows ~2200.

Why such a large discrepancy? Which is correct?

Edit: deptofnumbers includes condos, but even redoing a redfin search, I only got ~4000 total and that included all of SCC, not just SJ. SJ was ~2000.

E-man says

That's basically just over 2 months worth of inventory for SFHs in Santa Clara County.

http://scc.rereport.com/market_reports

Yeah, when you use those BS reports from Keller Williams that ignore data so that DOM is always low.

Look at KW's Cupertino data and compare to raw sales data:

http://www.julianalee.com/reinfo/sold-CU.htm

KW says 42 sold, Juliana says 45 SFRs sold + 14 condos sold. KW says only 54 active listings, Juliana says 115 SFRs and 48 condos. I know whom I believe -- the person that gives me better data.

Even your own calculation is wrong. You ignored the houses that are pending, which doubles the months of inventory, even if you assume Keller Williams wrong numbers are right.

E-man says

The data is obtained from Santa Clara County

No, it's really not. :) The county does not provide the numbers at all.

Intero is using the same incorrect data feed as Keller Williams. That data is from one particular provider who has a proprietary method of calculation.

Even if you look at their own data for Days of Inventory (3 month moving average, that they give), you will see that it's not extraordinarily low. In fact, it is roughly the same as last summer.

Anyway, you need more evidence to say that inventory is "artificially low" than you've provided. For example, how does this compare to 2008 or during the housing boom and before?

I've been following this slow motion train wreck that is the housing bubble and bust for some time now....and waiting.
While I understand the rationale behind not buying, at a certain point paying rent in an expensive city like San Francisco does start to feel like throwing money away.

I've been renting the same SFH in the city for 12 years. Rent was $2100, is now $2300. We pay all utilities. Love our house, but honestly - we've paid well over 300K in rent. WTF.

At what point does this get ridiculous? How much rent is too much? The landlord paid off this house many years ago and pays pre Prop 13 taxes. Another 10 years here and we would have paid for what the house could sell for now (maybe 650K?).

How can renting for another 5 years be a good idea?

1sfrenter says

How can renting for another 5 years be a good idea?

Well, for one, there are market-timing issues to consider. Here's a perfectly nice home:

http://www.redfin.com/CA/San-Francisco/2559-42nd-Ave-94116/home/2010848

they're just trying to get their money back with a $680,000 listing price (previous sale was $640,000 back in 2007).

Going with a 5% cost of ownership, they've paid $120,000 over 3 1/2 years or $3000/mo, not too bad if they can get that $680,000.

But if they only get $600,000 after agent fees, the four-year stay here will have cost them $3300/mo.

Goes to show buying in a declining market is tough. Better off renting.

What I like doing is looking at the average monthly cost of ownership over the 30 year life of the loan.

Just add up total interest & property taxes (subtracting the tax benefit you get), insurance, maintenance accruals, and extra utilities of owning and divide by 360, and that will give you the average monthly cost of ownership.

If you're happy with that number, buy. If not, rent.

This ignores NPV and opportunity cost of the down payment & mortgage repayment, but all this mumbo-jumbo is kinda cancelled out by the leveraged nature of a home purchase. You can't point to a 30 year timeframe in California where buying has been bad; I think rents in 2041 are going to be much, much higher than they are now.

I'd happy to be wrong about that, but a world where rents don't continue inflating like they have since 1981 has its own problems.

Just remember never buy a home as an investment. That term only came into being in the late 70's and early 80's when we had Carter's 22% interest rates. They had to do some quick marketing to get homes to move at those rates.

If you like it buy it. If you think of it as an investment vehicle good luck. From the late 1800's until 2003 home prices move at a very level of up/down of 2-3% a year and then went crazy. The bubble is still deflating. Nationally home prices have to drop about 25-30% more to get along that time line. May take the bay area much longer to come down. But from what I know there are many families one paycheck from being homeless.

Use the old tried and true formula of 20% down and the mortgage plus taxes taking no more than 25% of your income then you are in the correct ball park to buy. Maybe you will have to make a bigger down payment to meet that 25% marker.

This is what has kept me out of the bay area housing market.

1sfrenter says

At what point does this get ridiculous? How much rent is too much?

it's easy to calculate whether buying a house is reasonable, renting is reasonable or it's a wash:
http://patrick.net/housing/crash1.html

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

1sfrenter says

've been following this slow motion train wreck that is the housing bubble and bust for some time now....and waiting.
While I understand the rationale behind not buying, at a certain point paying rent in an expensive city like San Francisco does start to feel like throwing money away.

I've been renting the same SFH in the city for 12 years. Rent was $2100, is now $2300. We pay all utilities. Love our house, but honestly - we've paid well over 300K in rent. WTF.

At what point does this get ridiculous? How much rent is too much? The landlord paid off this house many years ago and pays pre Prop 13 taxes. Another 10 years here and we would have paid for what the house could sell for now (maybe 650K?).

How can renting for another 5 years be a good idea?

$200 a month increase over 12 years is pretty sweet deal though! Curious why you didn't buy say... back in 1999? I'd imagine if you could afford to rent a $2100 a month home in 1999.. that you could have qualified to buy back in 1999 too?

Home prices were pretty realistic back in 1999...

Los Angeles Renter says

Home prices were pretty realistic back in 1999...

I helped my sister buy a condo in Orange in 2001. Pretty good market-timing in retrospect, given the interest rate move down that happened 2002-2004.

They paid $200,000 in 2001, after 10 years and a couple of refis they'd have a housing expense under $900/mo by now with under 40% LTV, assuming they moved into an ARM by now and not taken any HELOCs. Unfortunately they sold during the boom and have pretty much lost their equity moving out of the area.

Whoa Nellie! Why do so many prospective mortgage debtors think that paying a monthly PITI on a many year mortgage contract is a way to "save money"?

Here are a few ideas:

1) As long as the annual house appreciation percentage gain is less than the mortgage interest.. YOU ARE LOSING MONEY..Not including home repairs and maintenance and property taxes. In this market...houses are LOSING value for at least the next few years.

2) The Realtor commission ON ITS OWN in a market where the annual mortgage interest rate is LESS than the house appreciation rate. How many years will it take you to pay off the 6% you are giving away?

3) I am a renter....but I live BELOW my means. I am currently so frugal that I bank my income checks.

Try it....in a FEW years you can pay cash for the house you want. I promise you...even cash that is losing value buy the FED games is with MORE than a long term debt to a bankster.

I am still saving and renting...and someday when either the Real-a-tor-- bankster mafia gioes to prison or the house prices return to a VALUE..I will keep my GOLD...I mean money.

If you are paying $2390 for an $850,000 house in an area you like - you are doing great. You are renting the house for about 3.4 percent of the appraised value. I would rather rent a house for 3.4% than borrow money to buy a house at 4.5%. At this point I think the odds of prices going up is about the same as prices going down.

investor90 says

3) I am a renter....but I live BELOW my means. I am currently so frugal that I bank my income checks.

that's awesome. how are you paying for things?

My wife has a job, and she saves 40% off the top. Some of our savings goes to tax deferred retirement plans, the maximum number of IRA's and other legal tax avoidance "scams". But we DON'T stop there. If you earn it...and don't spend it, even if you pay tax on it...Guess what? It's yours! I have memberships in five credit unions each at the maximum NCUA insurance, and I am having fun. When we go out "window shopping, if we see something we want. We PAY CASH for it. Its surprising the deals you can get for CASH. Both of us have mediocre paid jobs...but which is the better way? 1) Strive to kiss up to make the highest possible salary, including all the office politics and worry...or mediocre paid jobs and FRUGALITY? I have been on both sides. The highly competitive rat race and NO LOYALTY to me as a worker, or the low and slow KEEP WHAT YOU EARN. My financial advisors have learned things from us. They told us that we are doing better IN LIQUID ASSETS than most professionals they advise.

Hint: My time is spend not in networking with other wage slaves, but in learning more about money. The BIG Picture! DEBT IS NOT WEALTH and wealth is not debt ....repeat 100 times.

Hint- #2 I am now a minimal investor in the stock market and am strong in metals - GOLD and Silver. Buy LOW and sell high...if you want. I prefer to hoard it...just like the central banks.

Am I wealthy? NO..! DO I have a new car? NO! new house? No ! Any debts? NO! and what amazes me...is that even though I have NO cash in any bank...and NO DEBT consumer or otherwise...the banksters keep sending me UNSOLICITED pre-approved credit cards. My dog even got one! And I am supposed to worry about bankster insolvency? They get what they deserve. In the past two weeks I received 2 credit cards...over 10K limits on each...and I never applied for them. I HATE BANKSTERS...and would not help one if they were bleeding. Let them go...! They produce NOTHING but pain to debtors and wealth for themselves. I will celebrate when they start making wet splat sounds as they hit the pavement as in the 1930's. Splat.. splat splat..

At one time I was chasing the carrot of corporate success,,,but it is ALL A STATE OF MIND. The question is: HOW MUCH CASH can you get your hands on...and how fast. I could say more than I can carry...and right now. BUT I WILL NOT OVER PAY FOR A TERMITE ridden money pit. NO ONE CARES.

Newsflash: I recently learned that my "landlord has not been paying the mortgage ...FROM MY RENT PAYMENTS. I LOVE THIS ...HE IS IN THE HOUSE OF PAIN. He owns dozens of houses....Mr Realtor bigshot...but HE HAS NO MONEY,,,unless we ( tenants and buyer suckers) give it to him. I will "slow pay" this sucker until he chokes...turnabout is FAIR PLAY.

I can walk any time...nut will stay so anyone stupid enogh to buy will hear HORROR STORIES...from me and other tenants. Bring it on banksters...flippers...floppers...and Real-a-tors.

1) Don't consider the house you use as your residence as an investment unless you plan to rent it out at some point (because you're not going to be selling it for years that's for sure)

2) Gauge whether or not what the additional costs/responsibilities of owning v renting is worth it to you. Obviously if you own you will have the ability to remodel to your taste as you see fit over time and you won't be evicted unless you default. A fixed payment over 30 years can eventually beat renting but only if you work your finances properly.
In other words don't only use a rent v buy calculator to decide - determine what you see yourself doing in 10, 20, 30 years. If you find a house you feel like you can live in forever and the finances work out, why not?

3)I don't know a darned thing about NorCal but from everything I've seen San Fran seems like a really foo-foo, macbook and caffe latte type area which to me translates as 'way too expensive' so if that's the case think really hard about how much you really want to live there.

Again, don't buy a house with the idea of 'building wealth' in general terms. Wealth is only as good as your ability to cash out. There are only few ways to extract money from a house.

1) rent it
2) sell it (not likely to get much profit for a number of years)
3) borrow against it ( Not a good idea unless you are using the money for some type of investment that will make you more back than you are paying in interest. That means do not borrow to remodel your house, take vacations, buy a snowmobile or whatever other stupid crap people got into a HELOC for)

you'll have to wait for at least until after the 2012 elections. Democrats in Congress will do anything in the meantime to keep housing afloat until the elections are over. So they will keep on handing money out to keep it going, at least until than. Who knows what will happen after.

My advice is don't buy the house because of the risk/reward is too high in your case. If your income isn't going to be able to meet your payment (you said in 2 years wife may stop working), why take the risks (depreciation, debt load, unable to move for a new job, etc) for what reward? The recent Wall Street Journal article stated that from 1980 to 2011, buying a house with 19,910 down gave you 297,000 over 30 years, while dow jones index gave you 1.8 million over the 30 years. Add in the baby boomers retiring and downsizing their houses with the shadow inventory and you are looking at a horrible investment in the future.

If you for some reason decide to buy, my advice is make sure you don't refinance your loan so you can walkaway in CA without recourse to reduce your downside risk and have a backup plan if things go south. Also, put the minimum down to lock in an interest only fixed rate so that if you have to walkaway you have saved the principal payment.

Take the principal payment saving and put into gold and silver as a hedge against the coming economic crises. Read the article "30 reasons to get out of real estate and into real assets" from dont-tread-on.me to get a refreshing argument from the other side of viewpoint.

Keep renting. Period.

It has little to do with the monthly money you are saving, which is substantial, and more to do with falling prices.

A house - yes, even in places like Cambrian - priced at $800,000 probably will end up closer to $500,000. In fact, it would have been there already if it weren't for all of the extend and pretend programs.

With your crystal ball, consider that:

1. HAMP is now releasing more foreclosures than it is absorbing.
2. QE2 is done - and though interest rates won't rise much, rates in the 4's are done.
3. Homebuyer tax credits are done and the public won't support bringing them back.
4. Conforming loan limits are set to drop in your area from $729,950 to $625,500

All of these programs were put in place to grow the housing bubble and to prop up home prices as the bubble burst. All of these programs (and many more) are ending.

The first foreclosure moratoriums began in August of 2008. That's 3 full years of foreclosures that should have happened, and most of them still will.

As canaries in the coal mine, even the low-end markets have really started to suffer in the last few months. Concord and Livermore markets have softened dramatically in the last 90 days. The first-time buyers have largely bought and the investors are rightly much more cautious.

Rent for another 3 years. You'll probably "earn" 75K a year in not-lost-equity by doing so.

Why would you volunteer to be a debt slave to yet another mortgage company in a market that is only halfway to the bottom?

I don't get it. The safe bet is to wait until 2013-14 when the real bottom should arrive in the middle of a deflationary depression. Then you can buy that $500,000 home for $150,000 cash.

You have to follow economic cycles. We are in the winter cycle of another great depression. Save your cash and wait!

"I know a guy who has been renting the same apartment since 1993. 18 years x 12 months x (average) $1400 = $302k total rent.
This apartment is in a condo complex.. his unit went for $170k in 1999 and about $220k today, peak value was $450k in 2007.
Yeah, a major benefit of renting is the flexibility to move."

This doesn't include the total cost of ownership.

In my own particular condo complex and state, it's 1% property taxes and about $200 per month in condo fees. This is VERY reasonable.

Doing the math, over 18 years, that comes out to: $43K condo fees and $36K in taxes for a total of $79K. We'll ignore interest and tax savings on interest, for now, because overall that will drive overall cost of ownership up, not down (You get back a small percentage of what you paid in interest so it's a net loss)

So the current evaluation of $79K + $220K is about $300K. Almost EXACTLY what he paid in rent!

Wow!

Of course, the difference being that if he bought rather than rented, he'd own the unit by now but this is assuming he bought at the bottom. During the peak of the bubble, he clearly would have been a fool to buy.

Here's my 2 cents. Before you continue understand that only you can make the decision thus what I have to say is mere opinion.

First of all, in the end the only thing that matters is money. In the end you'll need somewhere between 1 million to 2 million dollars saved in order to retire. The 2 million is more for people who elect to live in expensive places like the Bay Area. 1 million gives you an income of 40k a year. In other words- not much. How you get that money depends on what you invest in. Thus my advice for anyone-regardless of whether they own a house or not- is to see what situation their retirement funds are at. Your house does not count unless you plan on selling and moving somewhere drastically cheaper and thus can use the equity from the sale of your home. Whether homes in other areas will continue to be a lot cheaper in the future is debatable so again- houses usually don't count for much.

Moving on and still in reference to point number one, you would probably need to do some simple math. How much more would it cost to buy a house? What would be the realistic monthly expenditures? That includes the mortgage, down payment, taxes, maintenance, etc etc etc. What about car payments, insurance, health insurance, etc etc etc? If buying is cheaper than renting then the choice is easier. If not or the costs are about the same... perhaps less so. If one costs less than the other, how much money can you make using that extra savings to your advantage? For example, we rent and our rent is about 50% less than buying. We use that savings and invest it in stocks, bonds, and various mutual funds. Despite the bad news, the funds are gaining about 7-10% per year. Thus renting-if cheaper- is not necessarily throwing money away since the money saved can be invested in stocks that are for the most part beating the crap out of real estate that has been losing value for 5+ years so far. Also- if you did buy, could you afford the mortgage on one income? This is perhaps the biggest reason we aren't buying. I've been out of a job twice in 5 years. While I've been lucky and found new jobs, I have other friends who have been out for 2+ years. I am very wary of buying a house unless it could be paid for with one income.

How likely is it that the Bay Area will be your forever home? As we all know, 150k buys a pretty nice house in a nice, safe neighborhood in many, many other different cities, some of which have a decent amount of comparable jobs in the same industries as those in the Bay Area. We ourselves are likely moving to one of those places someday for that very reason. If you have such an eventual plan, does it make sense to buy?

Lastly, I would be less concerned about what the value of a bought home would be. If you plan on staying long-term... as in 10-15 years or so, then chances are good that in the very worst you'll probably break even if you sell. Even if the home lost value, how much of an impact would that really make on your finances? If your finances are heavily tied to the value of your home then that means you're probably investing too much into a house to start with.

In the end there's not really any right answers. Its what YOU and your wife feel comfortable doing. Only you know what's right for you. Sometimes decisions aren't even based on financial reasons. Sometimes decisions are based in pure emotion.

Good luck.

therapy says

The rent is reasonable for what and where it is, but I still feel like I'm throwing thousands down the drain instead of building equity.

If the rent is reasonable, you're not throwing it away. Please stop using this stupid realtor cliche. It's false, and given that you've been burned by owning, it's pretty astonishing that you've yet to realize this.

You're paying for a roof over your head. If you bought a house, you'd be "throwing money away" on an assload of interest and taxes. But in reality, you're still just paying for a roof over your head.

As for your expected "equity", consider a risk assessment of what might happen were you to buy a house, and just how unlikely equity growth will be.

You save about $900 per month by renting, even after the tax deduction. I'm not even going to include the expenses that come with owning a house. $900 invested at 6% per year would come to over 900k after the 30 years of your mortgage. Nobody considers what a few hundred dollars per month could compound to with a conservative 60/40 equity/bond index fund allocation.

E-man says

Active listing = 2,381
# of Sales in June = 1,099

That's basically just over 2 months worth of inventory for SFHs in Santa Clara County.

That is not how absorption works.

klarek says

therapy says

If the rent is reasonable, you're not throwing it away. Please stop using this stupid realtor cliche. It's false, and given that you've been burned by owning, it's pretty astonishing that you've yet to realize this.

you said it much nicer than i did.