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Lizard wrote:

 

I have 2 friends who jumped into this market back in mid 2008, they both thought they got a good deal. I gentley suggested they wait.

 

"Wait" is just one of the options you can suggest to your friends. Besides that

, there should be more options for them.  I would suggest your friend to buy what they can afford and meanwhile keep some money on hand.

 

Friend 1 bought in OC at market, a "fair" price that got bid up by another mystery bidder but the wife had to have the house. They immediately dropped $45k into the 2006 built home to make it theirs. Now into it for $670k. I figure its valued at $600k today with dozens for sale around it. Fast forward 16mos later and he has been laid off and she has had her pay cut by 10%.

 

If I were you, I would suggested friend 1 to buy a $350K-$420K house and reserve $70 to $100K cash on hand for the rainy days.  Live in that affordable house until they pay off at least 80%-90% mortgage of that house, then change to a bigger house around $500K.

 

Friend 2 bought in Mar Vista mid last year and dropped $900k for a fixer and put in another $150k for a home that is way overimproved. He can afford, I think. But now he has a job offer he cannot refuse in Chicago. Sell the house and take hundreds of thousands in a hit ? Rent the house? Either way it's a losing situation.

 

Again, if I were you, I would suggest friend 2 to buy a $450K-$500K house, then keep whatever excess cash he has on hand.  I will suggest him not to over remodel the house. He may not see that money back in this economy if he wanted to sell it in two years. 

 

Instead of selling that house, I will also suggest him renting it out until he finally settled in Chicago.  God knows maybe he will be moving back to L.A. some day. 

Hi Lizard,

Thanks for the post.  This is definitely something my wife and I have been discussing as we look for our first home.

When you say, "...unless you can find a screaming buy, 20-30% BELOW REAL MARKET VALUE," is that because you believe the market will go down another 20-30%?  Hence, it would technically be buying at the future bottom?

I've seen statements predict a drop of 10-15%.  Do you think these predictions are off?

Thanks. 

  Owning short-term is almost always not a good idea. Home ownership makes sense in the long-term. Both of your friends are owning short-term, and they are demonstrating the risks of owning short-term. Homebuyers who are in it for the long-term should make sure that they have affordable monthly payments, have a substantial reserve for a rainy day, stable jobs, and plans to stay in the house long-term. Your friends are not a great argument to not buy right now. They would take a hit even in a flat market.

  For your argument to be persuasive for people who have the intention and ability to stay in the house long-term, you would need to find examples of owners who are worse off today after owning 10+ years. I challenge you to find that. On the other hand, I can name you dozens of my friends who are better off in their financial plan after owning 10+ years.

  Your argument is, however, very persuasive against people who may own short-term and who are not prepared (reserves, stable jobs, low monthly payments, etc.) to stay in their house long-term.

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richardonthego wrote:

Hi Lizard,

 

Thanks for the post.  This is definitely something my wife and I have been discussing as we look for our first home.

 

When you say, "...unless you can find a screaming buy, 20-30% BELOW REAL MARKET VALUE," is that because you believe the market will go down another 20-30%?  Hence, it would technically be buying at the future bottom?

 

I've seen statements predict a drop of 10-15%.  Do you think these predictions are off?

 

Thanks. 

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Richard, first I am just expressing my opinion based on my years of experience and education about these things. Withthat in mind I can tell you it is not science but mostly art and a lot from the gut [experience]. What is really messing up the numbers is all the gov't intervention.

Look at how cash for clunkers jazzed up auto dealers. When the program ended so did the parade to trade in clunkers. No gov't $$$ means no sales.

RE is so local, from block to block even. So I speak in generalities.

As far as a 20-30% decline this is a general number based on the LA county area. You could see such a drop in Malibu but only a 5% slide in Inglewood. Very counterintuitive but ask yourself how many can really afford a $2M+ home in Malibu and what would it take to really sell that home, how low a price drop? Same for Inglewood. A lot more can afford Inglewood at say $300k. remember this is about affordibility not desirability. Ever wonder how former dumpy areas like Melrose back in the 80s became really fashionable and expensive, outpacing appreciating places like BH? Simple, you start witha low enough base and you have huge upside. High base? Low upside.

That said who knows how much prices will drop, it depends on the area. However, I can safely say that home appreciation will not occur more than inflation rate for probably the next decade. There are so many headwinds....broke state means higher income tax, tight lending, supply, etc. All will keep a lid on what people want to spend and can afford.

Look no further than Japan where RE values dropped to 30 YEAR lows back in 2005. And mind you this was with mortgage rates of less than 3%! How would the NAR answer to that? LOL

Hence my questioning the logic of buying is less than renting. Sure, maybe on a month to monthcash flow basis but at the end of say 15-20yrs if you sell and pull out exactly what you put in was that a wise financial decision?

The mentality is still very strong of missing the boat, outbidding others, getting in when it's low, investors buying fixers to rent out, etc. Whenever you have that kind of frenzy you are no where near a bottom.

As always, I hope I am wrong [I own property bought 20+yrs ago] but how can one argue with history and facts?

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richardonthego wrote:

Hi Lizard,

 

Thanks for the post.  This is definitely something my wife and I have been discussing as we look for our first home.

 

When you say, "...unless you can find a screaming buy, 20-30% BELOW REAL MARKET VALUE," is that because you believe the market will go down another 20-30%?  Hence, it would technically be buying at the future bottom?

 

I've seen statements predict a drop of 10-15%.  Do you think these predictions are off?

 

Thanks. 

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I don't know if anyone really knows the answer to this, and a lot depends on what areas and price range. The tax credit has its proponents and detractors, but if numbers are anything to go by, it looks like is buoyed the housing market. Whether the tax credit extension will do the same into next year, is anyone's guess. Since it was also aimed at the 'move-up' buyer it will be interesting to see what the effect will be. Some say that without equity in your home, moving up is going to be difficult, but Congress is of the opinion that without a recovery in this segment, the economy is going to falter. It does still seem to be spluttering with 10.2% unemployment in September, and mixed results in retail sales. Sales of homes also dipped nationally in September, probably as a result of the expiration of the first tax credit. Add into the mix that the holiday season is not a great time to sell a home, and we may see a flattening in prices into next year. But that is all hearsay. The Case Shiller index for September comes out next Tuesday (I think), and may provide a clearer picture. Over the longer term, I would expect to see declines in higher end homes for the next two years, but these won't be as dramatic as we've seen over the last two years. 

"His employment prospects suck and her job could be cut at any time."

clearly they should have never bought.

this market (any market) has nothing to do with their current problems

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Lizard wrote:

~ yada, yada, yada ~

 

RE is so local, from block to block even.

 

~yada, yada, yada ~

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This is exactly what I believe.

I live in Culver City and looking for something that I can afford on one income.

Today I went to see foreclosure 2bdr,1,75 bath condo. It was very tiny, very small 885sq.feet place with 350 .month HOA . Kitchen, both baths are long time ago overdue for restoration. Dirty , old carpet that definitely needs to be replaced.

You can have it for only 295K.

By the way, I always sought that foreclosure house should be empty, without furniture and people living there.

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Vasilisa wrote:

I live in Culver City and looking for something that I can afford on one income.

Today I went to see foreclosure 2bdr,1,75 bath condo. It was very tiny, very small 885sq.feet place with 350 .month HOA . Kitchen, both baths are long time ago overdue for restoration. Dirty , old carpet that definitely needs to be replaced.

You can have it for only 295K.

 

By the way, I always sought that foreclosure house should be empty, without furniture and people living there.

 

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$295k / 885sf = $333 $/sf

how does this compare to recent comps?