patrick.net

or maybe higher interest rates put more pressure and drive prices down.

They won't drive them down below rents, and the rich scumpeople who buy up residential properties are paying cash so they'll beat you to it every time.

piti + hoa will be $100 more than what I’m paying for rent.

This is the key takeaway for me, since PITI is something of the WRONG measure to look at IMHO (though as you state it makes sense in your case to make sure you're not biting off more than you can chew)

PITI on a $300K purchase is ~$2063 a month (30yr FHA @ 5%), yet the notional carrying cost (interest + HOA etc less tax benefit) is $1400 a month and the actual cash outgo (PITI + etc less tax benefit) is $1840.

Going with a 15yr FHA @ 4% reduces the carrying cost to $1250/mo and the actual monthly expense becomes $2500.

Reducing the monthly housing expense to $1250 a month on a $300K property is pretty damn good (assuming you can handle the accelerated paydown), and if you can lock in the 4% rate chances are you'll have it for 15 years. Plus since you won't refinance it it will be a purchase money loan and you're free to walk away more or less (though any debt forgiveness will be taxable after 2011 with current law).

Not sure what the SD economy is going to be like. I don't think Navy money will be any less, if anything the nation's Pacific logistics point of presence will consolidate on SD so that's all good.

I'm a super-bear and have been for 10 years now but I think buying with the numbers you have may be a good thing. You even save the $5000 or so it costs to move!

Oh, here's what my spreadsheet looks like:

Purchase Price 300000.00
Down Payment 8700.00 3.50%
Loan Principal 289500.00

Points 6513.75 2.25%
Points Net Tax 4220.91

IO 965.00 4.00%
PMI 120.63 0.50%
Prop Tax 308.50 1.23%
Tax Credit -490.73 35.20%

Subtotal 903.39

HO Ins 80.00
HOA/Utils 150.00
Maintenance 100.00
Opportunity 21.53 2.00%

Total Other 351.53

Nominal Cost 1254.93

Actual Expense 2511.32

How long are you going to live there? Housing isn't going up anytime soon, so you may find yourself stuck. Why are you paying so many points?

The idea with home is that over time the costs will go down. That's why renting almost always looks like a better deal.

If you're looking for stability I say go for it. House getting sold from under you is going to be a common theme for the next few years.

by the way Troy what is the Actual Expense in your spreadsheet? I can't see where that number came from.

The situation sounds good to me though, check few things thoroughly.

First, your income. mortgage / annual income rate of 2.4, and if it is gross income, you need to think real hard about it because you're paying more than 1/2 of your actual money for mortgage. And there always is something other than mortage you need to pay upfront. Can you still be comfortable after all that?

Second, you as a buyer do not pay a penny for realtor. "offering to use his own agent who will only charge 1% each"? sounds rather fishy than generous. What "each"?

Third, why he is selling? Check if he is in financial trouble, he is retiring etc. When it come to buying home, you should pay attention to details.

And now, how's the market doing?

Consider those things, and you still think positive, then go for it.

thanks all for your responses. Troy, I appreciate the analysis - I'm still trying to figure out what some of the terms like carrying cost mean when doing a rent vs. buy analysis.

I'm thinking about doing 30yr FHA and maybe putting 10%.

Would it make sense to want to put down 20% and get out of FHA + PMI ? I might have to get "gift" loan from family to do that.

some more info, the property I'm looking at is priced at 235k, considering inflation it's down to 2001 prices. Rents for similar 3BR go for $1800+ around here.

I'm not so much wanting to buy up as trying to buy into the rental that I like while keeping my costs the same - this means I'm able to continue saving at the same rate. At the same time protecting against the hidden costs of moving around every couple of years + future rent increases.

just wanted to get your guys' opinion on what the numbers look like and what I can expect.

toothfairy says

by the way Troy what is the Actual Expense in your spreadsheet?

PITI less the tax credit plus Total Other.

Second, you as a buyer do not pay a penny for realtor.

Contrary to REIC propaganda, this is totally incorrect. Realtors are taking money from the deal, money that is being brought to the table by the buyer.

I’m still trying to figure out what some of the terms like carrying cost

Everything except principal paydown. I consider principal paydown a form of savings and don't look at it in the rent vs. buy analysis.

Would it make sense to want to put down 20% and get out of FHA + PMI ? I might have to get “gift” loan from family to do that.

Only a spreadsheet can tell you this.

FWIW, what does this chart:

http://research.stlouisfed.org/fred2/series/MORTG/

tell you? Rates going down another step? Or the long-term trend is going to reverse? Me, I lean toward the thesis that rates are going up and now is the time to lock in the lowest rate we're ever going to see.

Contrary to this of course is that prices are going to be going down more this decade, either in response to falling wages, rents etc or rising interest rates.

Also, the powers that be may change the rules again and boost the tax credit to $20,000, create a government direct-lending corporation that offers 10-year fixed at 2%, or something equally "interesting".

We can't know the future, but you can know what you can lock in with a loan right now.

Hmm, according to Google's tool 20% down and some points can get you a 3.75% @ 15 now . . .

Purchase Price 235000.00
Down Payment 45590.00 20.00%
Loan Principal 188000.00

Points 5640.00 3.00%
Points Net Tax 3654.72

IO 587.50 3.75%
PMI 78.33 0.50%
Prop Tax 241.66 1.23%
Tax Credit -319.44 35.20%

Subtotal 588.05

HO Ins 80.00
HOA/Utils 150.00
Maintenance 100.00
Opportunity 82.07 2.00%

Total Other 412.07

Nominal Cost 1000.13

Actual Expense 1859.81

Actual outgo, not counting the loan repayment for the DP, is equal to rent!

After 15 years you will own free & clear. The only variable really is what home prices are going to do in the near term. Here where I am they are declining faster than my rent so I'm still on the sidelines.

can you link to Google's tool please

https://www.google.com/comparisonads/mortgages?q=15-year%20fixed%20fha&src=t#ti=0

cv_renter, I think the numbers look pretty good. A couple questions though:

Since this is a condo, how are they about assessments? Do they have an escrow fund or are current tenants hit for the full value at the time of repair (what happens when the building needs a new roof?). Is the place fully occupied? This can affect HOA fees/assessments.

Why do you need an agent at all? You can hire your own inspector and pay a RE attorney to look over the paperwork. Involving an agent is just wasting money.

grywlfbg says

cv_renter, I think the numbers look pretty good. A couple questions though:
Since this is a condo, how are they about assessments? Do they have an escrow fund or are current tenants hit for the full value at the time of repair (what happens when the building needs a new roof?). Is the place fully occupied? This can affect HOA fees/assessments.
Why do you need an agent at all? You can hire your own inspector and pay a RE attorney to look over the paperwork. Involving an agent is just wasting money.

How much would the attorney will save compared to the agent?

dadab says

How much would the attorney will save compared to the agent?

The realtor wants $4700 to print out the purchase contract and do the filings.

An attorney could do this for about $4000 less. . .

lookforevan says

Having said that I think your real mistake is not looking at other house for the sake of comvienience. You owe it to yourself to look beyond what’s in front of you and explore elsewhere. How do you know this is the best when this is your only choice?

This is what I'm most afraid of too - rushing into this and then missing out on getting something better down the road, say after saving two more years and coming in with cash reserves. Maybe getting something closer to work instead of the 30 minute commute, or better schools, etc.

PITI = Principle, Interest, Tax and Insurance. 4 major costs of housing.

Home Price = 235K.
Assuming 20% Down Payment, 30 year 5% loan. Monthly PITI is about $1300~1400 depends on your terms. Your upfront cost at the time of closing is about $55~60K (Down Payment + closing costs + other financial charges and fees). This will be differ when you take other type of loans.

Your monthly housing cost is PITI + HOA + Utilities + Maintenance + Other fees. $1800~$2000 seems to be the number you're looking for. You can deduct tax return later when you get it, then that's your yearly carrying cost.

grywlfbg says

cv_renter, I think the numbers look pretty good. A couple questions though:
Since this is a condo, how are they about assessments? Do they have an escrow fund or are current tenants hit for the full value at the time of repair (what happens when the building needs a new roof?). Is the place fully occupied? This can affect HOA fees/assessments.
Why do you need an agent at all? You can hire your own inspector and pay a RE attorney to look over the paperwork. Involving an agent is just wasting money.

This part about HOA fee is so true. It's the #1 thing I'd look into before buying a condo right now.

grywlfbg says

Since this is a condo, how are they about assessments? Do they have an escrow fund or are current tenants hit for the full value at the time of repair (what happens when the building needs a new roof?). Is the place fully occupied? This can affect HOA fees/assessments.

All the info I have is from the current owner: He said assessments are part of the HOA rules but there have never been any in the 20 years he has owned. Two years ago they resurfaced the local roads and last year they fixed up the pool and everything came from the reserve fund they keep. The place looks fully occupied to me.

Is there any way of verifying this ?

seaside says

PITI = Principle, Interest, Tax and Insurance. 4 major costs of housing.

. . . that can mislead analysis if you're not careful.

First, principal repayment is NOT a cost at all. Aside from the transaction cost of selling, it is a form of savings -- every dollar you pay into your house is a dollar of savings. My mom had a rather unfortunate divorce, leaving her somewhat cash poor, but part of the agreement was getting the nearly paid-off house, now worth 10X the original purchase price of 1981.

Interest -- that declines quite quickly at today's low rates. Plus of course interest is tax deductible at both the state and Federal levels. Total interest paid on a 15 year loan ($200K @ 3.75%) is just $62,000, or an average of $343/mo -- $223/mo after the tax deduction is taken. And interest GOES AWAY as the principal is repaid!

Taxes -- are locked at ~1.2% + 1% annual increase. My mom is paying more for her gardener than property taxes now.

Insurance. PMI is 2% or so, but goes away after 20% equity is reached. Hazard insurance is $1000/yr or less. It's hard to see, but the bulk of the value of a property is not the structure but its ground rent and that survives nearly anything, including a nuclear bomb.

I was renting for just $800/mo back in 2000-2001 and one of the mistakes I made was looking at the $330,000 condo prices in the fortress as too expensive compared to renting. I was including principal repayment in my calculation, and not foreseeing that interest rates could be heading down from 8% then to 4% now, and sorta just assuming the tax deduction would match the HOA, which wasnt quite accurate.

So now I'm stuck renting a 1B apartment for a bit more than I could be carrying a nice 2B/2B condo in PA/MV.

thomas.wong89 says

cv_renter says

some more info, the property I’m looking at is priced at 235k, considering inflation it’s down to 2001 prices. Rents for similar 3BR go for $1800+ around here.

Check the charts…what did they sell for before the say 2000.

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

Looks like a good deal to me. I would still offer say only 200K at first go around.
You may get it below $235K. There should be lots of price negotiation.

Thomas, very cool graph, thanks.

I went and past sale prices in the complex for similar homes and then checked how far off they are from the current asking price.

Current price is:
- 15k more than inflation adjusted 1985 price
- 10k less than 1993
- 35k more than 1998 price - I can see the effects of the 92-98 dip, just before the 99 bounce back
- 10k more than 1999 price

There definately is room for negotiation - thanks

^ 4% interest rates alter the price comparisons a LOT. 30 year rates were around 8% for most of the 90s, this held down prices. Then 1yr ARM rates fell to 4% in 2002-2004, but of course outfits like Countrywide, WaMu, and 400 other lenders no longer with us were extending "affordability" products to anyone who could sign the paperwork, causing prices to totally detach from any reality 2005-2007 (as the Fed raised rates to bring down the lending balloon).

With the 15 year FHA at UNDER 4%, you've just got to do the math and think about where you want to be for the next 10-15 years.

If we start getting bona-fide wage-price spiral inflation, then rates will go up but then so will area wages and you'll do very well, like the 1970s stagflation was for housing prices.

If there's fiscal catastrophe, where interest rates go up and wages don't, then you can just mail the keys. Congress has kindly given you a get-out-of-jail free card (no 1099 on the debt forgiveness) that expires at the end of 2012.

If things stay as they are you're banking a lot of money paying down a loan instead of paying the LL's mortgage or whatever.

If you like the place I don't see the downside of buying, frankly.

Been keeping an eye on sales listing lately and it looks like the peak month for prices this past year was Oct. Prices seem to be falling and falling substantially. We could see a 15% dip this year.

Sources: http://www.homepricetrend.com

Home prices dropped 20% in 2009 and due to the huge hidden inventory and distressed and homes pending forclosure, economist predict worse results in 2010. Are you sure you want to buy?

www.cyberhomes.com

www.patrick.net

www.marketwatch.com

www.forbes.com

Believe the economist, not the hype that got us into this mess in the first place spewed out by professions that have to buy and sell homes for a living. Major conflict of interest. Your finances and their profit. Beware and proceed cautiously.

I’m betting prices will be UP in 2010 and after looking at the inventory numbers I’m certain of it.
Pent up supply (NODs, NOTS, bank-owned) appears to be rising again in Ess Eff after a brief holiday slowdown. Low inventory, though, certainly makes for interesting conversation.

I see more homes for sale than normally. In addition, once the huge hidden inventory comes to the market and builders release smaller models as stated by the National Builders association what will that do to the alledge low inventory, even if one did exist. You are right that is an interesting conversation.

The web-sites are cited above; open them up and read. The sales histories are factual and confirmed (recorded) at the clerks office.

Place your address and/or other addresses you are interested in either buying or selling and check before proceeding further. Values have dropped in 2009 and are reported to drop more in 2010.

Home prices have dropped 20 % nationwide in 2009, and high as 40, 50, 60 % in East and North Bay communities. Stockton, Tracy, Moutain House, Merced, Manteca, Brentwood, Dublin, San Ramon, Alamo, Livermore, etc.... to the north Fairfield, Cordelia, Green Valley, Sacramento, you name it, they have dropped.....check at the county clerks office to confirm..... The experts predict 2010 will be worse and the market will drop more.

I think you guys are talking about completely different areas. if you check the numbers for milpitas for example, http://www.redfin.com/zipcode/95035 , you'll see that sale prices has not gone down much in 2009, and inventory numbers have gone down significantly. This is pretty much the same story across the board for santa clara county and san mateo county.

Note- the moratorium on distressed properties and foreclosures have slowed the rate of housing market decline down, but we will see thoses declines come to fruition in 2010. Most of the significant declines are on homes built or purchased after 2006.

www.cyberhomes.com
www.marketwatch.com
www.Patrick.net
www.Forbes.com

I'm sure everyone in the financial word, except those professions who profit by home sales will agree.

Just a prudent observation as prices must adjust to $100 per square foot on purchases and $1 per square foot for leases. Exception is Ocean or Waterfront property.

Anything else is over inflated and should not have been priced that high in an honest market to begin with.

Gina says

Just a prudent observation as prices must adjust to $100 per square foot on purchases and $1 per square foot for leases. Exception is Ocean or Waterfront property.

This is a bogus heuristic. Prices are what the market will bear and incorporate credit costs. In Japan you can get a 40 year loan at 4%, and a 10 year ARM at 2%. Right now a 15 year FHA ARM with 3 points is 3.75%, ~2.5% to 3.0% after the tax deduction is factored.

In a recession people have to live where the jobs are, and housing where the jobs are can extort extra value thereby, as LLs collectively turn the screws to find the market's point of max bearable pain.

Now, I don't see wage inflation in the cards and think California is doing a fair impression of circling the drain, but I just don't think anybody can be certain of what's going to happen this new decade.

Other than more pain as the nation's politics and economy is carried in the widening gyre.

thomas.wong89 says

Not sure what the hold up is for the Bay Area. Maybe someone is too spooked!

http://www.dqnews.com/Charts/Monthly-Charts/SF-Chronicle-Charts/ZIPSFC.aspx

my zip code only down 0.2% time to break out the champaign?

Home sales dropped 17% in December, largest drop in 40 plus years. Over a million homes less than anticipated with historic low interest rates, reduced pricing, record foreclosures, distressed properties, and tax benefits already in place.

Interesting conversation indeed.

Don'y believe isolated charts, graphs, and stats. They are easily manipulated to support or negate what someone wants you to believe.

Beware of purchasing in 2010 as values are projected to drop significantly.

Never judge anything by the median price.