If a property was truely unique, like right on the beach, on top of the hill- with a million dollar view, or first time ever available.....or wouldn't ever be available again. That could be worth it at todays lower prices. But as you said Jim....if rent for a condo or home is only $2,100 and the cost of a mortgage was $4,500, that does not seem rational at all........go for the bargain....especially since the bell has not rang that we are at the bottom.

Fri Jul 4 2008, 18:12

Jim - Your question is a reasonable one.

A person may choose to buy a home for several reasons despite the disparity between renting and owning.
1. First, some people simply want a place that they own, where they have control of the property and everything down to the color on the walls.
2. Other people want to build equity - a tough thing to do in today's market.
3.Some want to lock in the cost of their housing. Rentals will continue to increase over the years, but if you purchase a home with a 15 or 30 year fixed, fully amortized loan, the payments will be the same - the only difference being the slight increase in property taxes and homeowners' dues if you have an association.
4. There may be a tax shelter or savings depending upon income levels.

There are many other reasons of which the above is just a sample.

Your point that prices are likely continuing down is a valid one, and I believe that a person needs to look at many factors before deciding if it is the right time to buy. There are pros and cons to this market just as there were in the sellers' market we had a few years ago.

Thu Jun 12 2008, 17:25

There are plenty of REO's out there that nearly pencil equal to renting. We just bought one and with the tax break, it's break even vs renting this place. We happened to luck out on rates. If we did the loan today, it would be more than renting, but not any where near 2-3 times. Some long time owners are pricing their homes right as well, but the majority of non distressed sellers are still asking far too much. If you look hard enough, you might be able to find something that doesn't cost a whole lot more than renting.

Rents have gone up considerably in the last 5 years. Properties priced in early to mid 2003 prices unadjusted for inflation will likely not be much more than renting.

Wed Jun 11 2008, 09:02

Paul

You make some great points but I do want to discuss a few things....and let me preface this by saying that I'm not saying now is the time to buy or not.....just stating some facts.

First, lender guidelines have relaxed dramatically. 1 in particular has eliminated their 10% declining markets" factor and their 30 year fixed rate for Jumbo loans is now only .1875 higher than their Conforming (both under 6.5%). Further, they have just this week brought back their first "stated income" program in over a year.

Additionally, being an internet driven real estate company, we track a lot of statistics that many are not privy too. 1 neighborhood in particular has gone from 34 active listings, 1 back-up, 1 pending 7 expired, and 3 Sold listings as of December. Today there are 13 active listings, 2 back-ups, 2 pending, 1 expired and 14 sold. A pretty dramatic swing for a lower middle class neighborhood. Similar results are found in about 37% of the neighborhoods we track.

Is this in part Summer buyers vs Holiday buyers...probably in part. Could it be a clear sign that things are improving.....possibly. More than anything, the ones that have sold have been reduced in price about 25% over the last few months. The median home price in this neighborhood is now $389,000. With 10% down payment, a mortgage would be about $2,100 a month. Rent on these same homes in this neighborhood is now $2,000 a month. I don't know and don't claim to know but there are a lot of indicators that the market may be approaching some normalization. Further, virtually all of the rest of the Neg-Am, and Teaser rate loans will be resetting within 9-12 months. I would say that there is still some downward movement ahead, but it is getting close.

Finally, the P&I payment on a $650,000 loan at 6.125% is $3,949 a month. At 7.5% percent, it is $4545 a month....over $214,000 more (amortized 30 years) on the same loan amount. Since you are watching the market, keep your eye on interest rates. It is a big part of the overall financial picture.

Finally, the 2003/2004 run up was very real to our clients that bought in the 1990's and sold 10 years later at 300% higher prices.

One thing is for sure, timing is in fact everything. I'm just excited that OC is starting to make sense for buying rentals again. :)

Tue Jun 10 2008, 20:21

Paul....you make some great points in your response. I think it is very important for Buyers to buy for the reasons that make it right for them and not because a Realtor or a Mortgage Broker or a friend or a neighbor told them to! Buying a home should not be viewed in the same way as investing in the stock market. A home is the place you live and where you enjoy time with family and friends. If you finance the purchase correctly and pay the mortgage (not just the interest), you may eventually own an asset you can then pass along to your heirs. Buyers who are trying to spectulate about the future of the real estate market purely for the purpose of making a lot of money in a short period of time run the same risks as those who speculated about the dot.coms....some made millions and some lost everything. I believe the primary roles of a real estate professional are - help you find a home that you want to buy; negotiate the best price and terms possible and then help you navigate through the various stages of escrow until the home becomes yours. If at any time you, as a consumer, feel you are being sold.....your should find another agent!

Tue Jun 10 2008, 17:55

I am a home buyer chiming into this discussion in reply to where some of the buyers stand in this current real estate bubble meltdown.

I am a 30-something attorney looking to buy a home probably somewhere in north Orange County/LA county. I have enough cash saved up/inherited for probably more than a 30-40% down on a 850K-1M SFH and don't anticipate any "problems" with getting a mortgage loan even with all the newly instituted ultra conservative lending criteria.

So what has kept me out of the markets for the past few years? The unprecedented bubble in the real estate market. I have enough experience in the financial markets to recognize a BUBBLE (as I also worked for a major Wall Street firm for a few years).

Similar to Hannah, I do NOT believe the equity built up during 2003/2004 to 2008 is real. With more foreclosures and inventory of homes to flood the markets for sometime in addition to the tougher credit lending criteria by banks, along with the cost of living getting higher with income levels not keeping pace, I don't anticipate submitting offers any time soon.

Every time a realtor says something like "...it is purely local and OUR local neighborhoods are DIFFERENT than the national trends..." or "...right now is a GREAT time to buy..." or "...okay so the real estate market is somewhat in a lull, but it will most DEFINITELY bounce in early 2009..." reinforces in my mind that realtors are mere sales persons who need to put food on their tables (which btw is understandable).

I anticipate that as long as the current "standoff"/disconnect between sellers/listing agents and the real value of homes in LA/OC exists, it will keep out many qualified home buyers out of the markets even longer.

Just chiming in,
Paul

Tue Apr 22 2008, 16:48

Hannah,

When a listing agent represents a seller, it is the listing agents job to jusify the price. Would you, as a seller, hire a listing agent to tell buyers, "No, it isn't worth the asking price."? Sometimes, a listing agent simply walks away from listing if it is overpriced. Sometimes a sellers suggests that they "try the higher price" and "will come down in price if necessary." Sometimes a listing agent needs the buyer to voice the subject of price directly, and the the listing agent will take those comments back to the seller. The listing agent wants to sell the property for the highest price and best terms, and the listing agent knows that overpricing will ulitmately lead to a lower sales price. With that in mind, the lisitng agent will advise a seller to price competitively, so they won't be overlooked in favor of other properties, but will not publicly announce to buyers that they are suggesting their sellers reduce. Buyers often do not candidly voice their opinions to a listing agent. It's better for all that they do. The market is what the market is. These candid remarks can be delivered politely. I am not a suporter of crude sarcasm, but I am a strong supporter of honest feedback.

You actually sound like a very level headed buyer....one who has realistic expectations of data to support their decisions and appreciates analysis. Best of luck to you in your search.

Tue Apr 22 2008, 15:32

I find that every statistical measure out there as flawed, so I'm a huge advocate of collecting as much data from many data sources, regardless of whether I agree with their methodology because somebody out there does. At the same time, we're in a down cycle and there is no statistical measure for the influence of the human factor in forcing prices down. And unfortunately you can't measure the impact of the "house prices are plummeting" news stories on the public's perception of what prices should or will be.

Historically, Southern California median prices (outside of the height of bubble prices) were at one point linked to median incomes. I realize there will be neighborhoods priced below and above. Clearly some neighborhoods will hold value much better than others, but there is usually some correlation to affordability levels for that neighborhood's target market.

In my opinion during the 80s/90s boom-busts, public perception had to have played a significant role in driving down prices. It's just not something anyone can predict. I've heard a lot of realtors talking about how well they know their market and what is likely to sell or not. They seemed to be in tune with the sellers, but were out of touch with what buyers are thinking. And I don't seem to be alone in this thinking as I've talked to other buyers at open houses as well as overheard conversations, even some chastising listing agents. They lost sight of the mantra "know thy customer." I even had to interview 14 realtors just to find one who didn't lose sight of this. And by the way, I didn't hire a pessimistic realtor, I hired someone with great negotiation skills and had a rosier outlook so that I could find a good middle-ground perspective.

Although prices have come down significantly on the median, my gut tells me it's still not the right time to buy. One reason is because of the massive run up in prices. Next, there aren't enough reasonable bank products to support the current high prices. Plus, my income is 3.2 times the median LA income, and that only gets me into an average neighborhood using traditional lending products. I've seen a lot of sellers come down in prices, but there are still a lot of stubborn sellers, assuming they aren't upside down. Probably the big sign for me will be the majority of sellers (including banks) come to the realization that the equity built in the last two years is not actually liquid so they lower their prices to a truer market value.

For example, I went to an open house (3/2, 1800 sqft, remodeled within last 2 years $799K asking reduced from $839K). There are two other comparable houses for sale on this block, one for $730K and another for $840K. A house (3/2, 1700 sqft, also remodeled in last 2 years) on the next connecting street, about 12 houses away, sold for $689K in 11/07. Each listing agent obviously justifies their house is better than the other and deserves the premium, but the problem is is that I've seen the previously sold house and it didn't look any better or worse than the houses on the current market.

I'm not looking for rock bottom pricing, I'm looking for a nice neighborhood at a fair price where I can get reasonable financing terms and not feel underwater in a mortgage. It just doesn't seem like that is out there yet. If this slow spring start is any indicator, I think sellers may come down more in line with reality.

Tue Apr 22 2008, 13:20

Very good explanation of the Case-Schiller home price indices. Here's a link that for those who would like more info on this frequently referenced source.
http://www2.standardandpoors.com/spf/pdf/index/SPCS_MetroAre…
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Thanks for posting that Deborah, I find the affordability index interesting.

Sat Apr 19 2008, 17:42

The dataset for CS was set years ago. It was appropriate then. It is not now. CS is riding on the laurels of past credibility. If it was unbranded and had to prove itself as an unknown today, it would be laughed at.

Sat Apr 19 2008, 16:24

Hannah, if I didn't take Case Shiller into consideration, I wouldn't have read the methodology behind it. Case Shiller even acknowledges that Real Estate, over time, has outperformed many other investment opportunites with less risk. My only problem with CS is that it takes such a broad geographical area into consideration (perfect for economists who want to see a big picture and don't need to be specific to neighborhoods) and that they have only been tracking data since about 1985. Real Estate is more local than it is broad (If it weren't, then homes would be priced the same in Corona del Mar as they are in Corona). While buyers should be aware of the broad situation, they can't expect those numbers to be more accurate in a particular neighborhood or tract than the actual comps.

If you look at the data I provided in the previous web reference, you will see both Median Averages Used (and a whole post on why I don't like median prices being used on a local level over a short amount of time) as well as Price Per Square Foot Data. If you click around you will find many other reports stating the facts for my area. As for Chuck Smiar, his tactics or approaches which I am not familiar with, are his business. If you don't like how he works, don't use him. Lawrence Yun is an economist, but show me ANY economist who has been accurate in predictions and I will share him/her with everyone via my blog.

What I am more interested in is your predictions. You have identified yourself as a Home Buyer in Los Angeles so that makes you "the market". What do you feel is going on? And, when you feel it is a good time to buy again, which areas will you look at? What do you need to see from the market or economy to make buying a home something you would want to do? (Anyone else who is a buyer, please add your opinions too.)

Sat Apr 19 2008, 11:21

And herein lies the discrepancy between realtor forecasting and broader economic forecasting. Who's more reputable, NAR/CAR or Standard & Poor's? Case-Schiller gets their numbers from sales prices for individual homes over time. NAR/CAR bases their methodology on median prices. Both have major flaws, but only one is used by the majority of economists. As a realtor, maybe you've lost touch, but from a public standpoint, realtor statistics are not seen as objective. There is a reason Lawrence Yun has been wrong with mostly all of his recent predictions, and it's not helping his credibility. Look at your industry, look at people like Chuck Smiar, with his scare tactic sales approach, buy now or you'll be sorry. He's also been wrong with his we're at the bottom predictions. These are the kind of people you are lumped in with and your one-sided data only makes you look popular to home sellers looking to make huge profits and buyers who are gullible. If you were a smart realtor, you'd analyze all the data, and not ignore Case-Schiller, but incorporate it with CAR/NAR data, plus look locally and nationally at how much banks have tightened standards, factor in the weak dollar, overbuilding, plummeting consumer confidence levels, plummeting job landscape in Orange County (which is one of the worst situations in the nation according to Bureau of Labor Statistics).

Fri Apr 18 2008, 12:17

Here are some historical prices for Orange County...

Fri Apr 18 2008, 10:31

If you buy a house you can paint it any color you want.

Thu Apr 17 2008, 15:50

I am always amazed at how out of touch many people are with the state of the market and how a goldfish has better memory. Does anyone remember the housing boom/busts of the 80s/90s? I realize housing falls in the Great Depression can only be read out in history books, but we had recent bubbles that burst very badly in recent memory. Most realtors now seem to hold on to the same arguments that the NAR and CAR had in 88-91 about why housing will rise and stay more expensive in Southern California. That bubble didn't deflate until around 97. I remember high end markets which realtors never thought would fall, like Bel Air, Beverly Hills, etc. took major dives, even around 50% losses.

Realtors seem to have a good feel of the very microeconomics of their real estate market at this moment, but are woefully ignorant of the macroeconomic picture. Of course Case-Schiller has it flaws, and nobody is saying that it doesn't. My main problem with Case-Schiller's index is that the data collection has big holes and doesn't paint an accurate enough picture in regional markets, especially on the way down, but to say it's worthless for individual markets is ridiculous.

The point of the Case-Schiller index is to give you a rough picture of where the market as a whole is headed, which is based on sound economic theorem. It is likely that Southern California prices will be out of line with national median affordability levels, but there is no way this market can sustain the insane differentiation between current income and housing prices without crazy loan products, which really aren't happening that much now.

According to DataQuick, Orange County as a whole lost 16.1% YOY in Feb 08. Is that worthless because it is all of OC vs. just Irvine? For right now, maybe. There is a reason that a Consumer Confidence Index is generated and plays a major role in economic forecasting. If the population at large in any market, especially buyers, thinks values in OC are worth at least 16.1% less, and real estate is worth only what someone is willing to pay for it, how long will it be until the price drops are in line with consumer expectations? At what point does the consumer say, okay that's enough price drops? At the current rate of decline, probably not long, but if history is any indicator, the correction will happen.

Thu Apr 17 2008, 13:04