S,
I'm sorry that your daughter bought a house now. It's very unfortunate for her...

Much higher rates (Paul Volcker-level rates in the high-teens) are right around the corner. And believe it or not, they are the best possible thing for you and I and all other potential home buyers. It will lead prices to tumble even lower that the most bearish analysts have predicted.

Sure, payments may be high for a while, but if you can pay 25 percent of the price, with a much higher interest rate, it's worth it. And when rates come down, you can always refinance.

But you can't ever reprice your home.

Regardless, you and your daughter should spend $98 bucks on a yearly subscription to The Economist (no relation to them). They called the peak of the market correctly (because they know the numbers and don't rely on intangibles). I bet they will call the bottom of the market just as well...

Good luck,
John

Tue Mar 4 2008, 16:04

Well now, that is pretty mean. . As mentioned we are not looking for someone to give away their house, in fact my daughter has purchased one. But if you want more buyers like her - qualified, good down, ready to pay a fair price, you are going to have to get some better listings. And although I could send out letters and knock on doors, why would I want to do that when there are realtors. Exactly what do you do for your commission - it doesn't sound like you are trying to find any good properties. Do you expect the buyer to find the property now too? Oh by the way, the house she did buy is from a realtor - he used it as an atm for the last few years and of course now has no income so he is selling at a loss - but even then he refused to be realistic about the price - but we are tired of the whole thing so we paid the extra. It won't make that much difference in the long run - rates are low.

Tue Mar 4 2008, 15:22

Realtors, have you thought about going out and getting listings? All realtors seem more than happy to show the existing properties and work with buyers but I am not seeing any that will look for new listings. In our case we are looking for a Valley Park or Sunkist home in the West Valley - there were almost 5,000 of these built - there is no shortage. I would imagine there are owners that might like to move up to a larger house if they had a buyer - realtors - get out and find these people! If there are more of these starter homes available at a reasonable price (we are not looking for rock bottom here) they will sell - perhaps cut your commission a bit to make it work - and then they will buy - if the new buyers have nothing to pick from there will be no movement - there are lots of first time buyers out there - they are what will get sales going
~~~~~~~~~~~~~~
S, turn off the computer and start knocking on doors yourself. Go for the whole realtor experience before you expect me to do it for you AND cut my commission! You have identified where you want to live, they've built 5,000 houses, come on now, go knock on those doors. Expect to be told "I'm not GIVING IT AWAY" more than once before you find a buyer who will deal with you.

Tue Mar 4 2008, 15:08

Sylvia, with respect to your post below, and the importance of the emotional value of the house, I have some thoughts:

1. Perhaps the emotional value had a bigger weight in people's decision to buy a home and hold onto it 15-20 years ago, but these days, it appears to be less so (see: intentional foreclosures). The mentality of people is more focused on actual returns than intengibles,

2. People w/ homeownership experience assign a lot of value to various intangibles, e.g., their ability to make changes to the house. Someone used to renting probably assigns less value to that. Also, w/ time, the value of ownership grows,

3. W/ respect to the balance / supply imbalance, there are sellers that HAVE to sell, but I don't find any fundamental arguments to classify a buyer as one who HAS to buy. If someone relocates and you label them as a buyer who HAS to buy, don't forget that the same person HAS to sell their current home. So that's a wash. I think there is a huge supply - demand imbalance,

4. 24c on a dollar? As much as many cautious, conservative buyers hope to see that happen as a reward of their patience, prudency, and conversative approach to "investing in a house", I'd hate to see that happen. It will be worse than the Great Depresssion,

Tue Mar 4 2008, 14:31

I have to disagree about sellers waiting it out and not wanting to sell now. If they are looking to move up this is the perfect time. They may take a loss on their home but percentage wise they will make it up in the long run if they are moving to something larger and more expensive - since that seller will also be taking a loss. Sounds like a pyramid but there are plenty out there that can take the loss since they have the equity. I am back to realtors but they are the ones really holding sales down - they discourage listing low, they discourage making a low ball offer - they want to keep things as high as possible and sales as close to 100% of price as possible. I welcome the foreclosures. The banks will not care - they will take what they can get eventually as they don't want to be landlords or homeowners. They will force the prices down. In the meantime, realtors should get their buyer the best loan possible - we have never seen anything like these interest rates for years! Mark Medina in Woodland Hills is the best broker out there - bar none - and no, no affiliation to me.

Tue Mar 4 2008, 14:31

Hi John and others:

I have a spreadsheet to figure out the rate of return for pruchasing an investment property.

The spreadsheet takes account the purchase price, land/improvements ratio, downpayment, loans (respective interest rates, years to pay offer, etc), acquiition cost, appreciation of home, purchasers tax bracket, years of holding property, estimated incthat breaks down the purchase price, anticipated apprecaiation (yes long term basis), ...and much more to figure out both the before or after tax rate of return for the investor/homeowners.

So, yes, we know about the GRM or CAP rate, statistics, and others.

However, the one thing that's not accounted for is exactly what Jim said in the first par of hist postinig below, home ownership is not just numbers.

There is emotional value in investing in homes, they are not just numbers. Trust me, we moved five times due to my husband's projects before we settled down.

What the buyers, especially the wanna be home owners, need to know is that it's extremely difficult to time the market. Not too many people can claim that they bought at the very bottom of the market while the interest rate is the lowest.

In waiting to do so, there might be three, four years where you can't build that deck, paint that room dark red, put in a pool, ,get rid that wallpaper, nor can your kids have a memory of families gathering in your house for holidays, BBQs; or they have to be uprooted to move away from their childhood friends etc. There is always trade-offs in life, and the priorities in life is quite important.

One side of the coin is the buyers won't buy unless it's 25 cents on the dollar; the other side of the coin is the sellers won't sell unless the rate is higher (I won't try to speculate), and only the ones who have to sell will be selling. Supply and demand is the bottom line. We have sellers who took the house off the market because they do not have to sell and they have no need to take a beating. They are waiting.

You find the best home with the best value (knowledge, negotiation of your Realtor) that fit your goal (homeownership vs. investment), then you go from there. There is no absolute in real estate.

Sylvia

Tue Mar 4 2008, 13:46

In our case the extra low interest rate helped in buying a house now rather than waiting for the further drops, which I also think will be coming based on all of the foreclosures in the pipeline. I still think there are plenty of buyers out there, and they have to live somewhere, so if you get a good loan you can afford to buy now rather than rent. btw, our realtor had no clue about good financing, luckily we have an excellent loan broker that we used in the past. He has a loan to fit every need - in our case 4.85 fixed - this allowed us to overpay a bit on the house and get it now -

Tue Mar 4 2008, 11:33

John, that's a bold prediction re: those areas. 25c on a dollar? Wow!

If that happens, there will be major disruptions in the housing and financial sectors, and the entire economy. "25c on a dollar" will have major effect on CRE prices. When the CRE bubble pops, we are set for another ride downhill.

Tue Mar 4 2008, 11:05

In reading S and Sylvia's responses, there is a large gap between the thinking of buyers like myself and RealEstateInvestor and Yev. S--what you are calling rock bottom prices is probably what I (and Yev & RealEstateInvestor) would call overpriced.

A reasonable price for a home is a multiple of monthly rent, the same as a stock price being a multiple of earnings. Right now, nearly every home in West LA has about the same value as Pets.com's stock had in 2000--it was far too expensive and speculative to even make a bid of 50 percent of the listing price.

A reasonable offer on a home in Santa Monica, Brentwood, Westwood, West Hollywood and Hollywood Hills West is maybe 25 percent of its list price. Obviously, I'm generalizing as there are different asking prices, but with many foreclosures around the corner, I believe my cash will be able to purchase a home in those neighborhoods at 25 cents on the dollar in 2010, 2011 and beyond.

At the beginning of this thread, along with a colleague (who teaches Real Estate at NYU) I ran the numbers on a property that Dot Chance had listed as a sold property on her website. There were a number of similarly listed properties within blocks of that property listed on Craigslist for rent for less than 1/3 of what Dot's buyers are obligated to pay in monthly expenses (mortgage/taxes, etc.). We did use some estimates, and we are assuming that those properties for rent are comparable (although we haven't seen them), but let's say there is some higher luxury value in the purchased property--is it really worth three times the rent payment? Give me a break...

As Jim Walker wrote, "Tripling the housing cost is probably impossible to justify on economic grounds."

Jordan & Dot--can you point to one property in the areas you service where one can pay less than a 30 percent premium to buy as opposed to rent? Or even a 50 percent premium?

Tue Mar 4 2008, 08:49

Realtors, have you thought about going out and getting listings? All realtors seem more than happy to show the existing properties and work with buyers but I am not seeing any that will look for new listings. In our case we are looking for a Valley Park or Sunkist home in the West Valley - there were almost 5,000 of these built - there is no shortage. I would imagine there are owners that might like to move up to a larger house if they had a buyer - realtors - get out and find these people! If there are more of these starter homes available at a reasonable price (we are not looking for rock bottom here) they will sell - perhaps cut your commission a bit to make it work - and then they will buy - if the new buyers have nothing to pick from there will be no movement - there are lots of first time buyers out there - they are what will get sales going

Tue Mar 4 2008, 08:21

When the buyers are suspicious of the numbers, you may or may not be able to show them the statistics to convince them.

However, I have been successful with my clients by telling them that I am here for them, I am patient and I will work with them until they find the right property. However, I do want them to be upfront with me that they shall let me know about what they really want so there is no time wasted on either side.

The first thing I told my buyer clients is that I am working with them on a long term basis and I won't let them buy unless a good property comes along. I am very low pressure and I often talk my clients out of purchasing a home. .

However, when the right property comes along, I am not shy on helping them making a low but reasonable offer (or even not so reasonable - the seller can always counter back). I have many contracts that went through several counters and took a month or more to negotiate but my clients are happy. This is as important to them as it is to me - I never want a client to come back and tell me that I gave them wrong advise, I will not be able to sleep, seriously.

Buyers - be honest with your Realtor, give them the perimeter you can work with and then let them help you. i just talked my brother-in-law out of investing in a house here in Marin. He is from out of towh, saw an REO home at an artificially low price (to attract bidding). Upon investing, I know he'd never get the house at the price he wants, not will he be able to rent that house out at the rate he wants, the area is not as nice as others so the appreciation will be less than others. I talked him out of that house even though I know he is well qualified to buy. However, he gave me his criteria for buying the investment property.

Let your clients know that you are there for them. When they trust you, they will be looking and yes, even purchase.

Sylvia

Tue Mar 4 2008, 08:10

Dot Chance,

Could you provide us with the current inventory number and number of sales in the area where you are writing these offers, compared to last year and year before during the same time period?

Thanks

Mon Mar 3 2008, 20:27

Trulia Roger, I agree that prices are not LOW, however, they are lowER than they were. While doing some comps for offers I'm writing I'm seeing that the closing prices in these particular areas are between 95% and 107%...I am amazed that some things are actually going for above asking.

Mon Mar 3 2008, 17:53

John, Yes I believe that rental value and purchase value are loosely correlated. This is not a 1 to 1 correlation for the following reasons:

When you own, your landlord cannot evict you.
When you own, you can keep pets.
When you own, you can make changes.
When you own, that principal part of payment that is not interest pays down the mortgage, if you stay there 30 years without using it as an ATM you will own it free and clear!

Rents rise with inflation, over the very long term. Your purchase price is established at the time of purchase. You do not face rent increases if you stay in the same house have a fixed rate mortgage and payment, do not refi cash out;
Your property taxes, maintenance costs and insurance will go up. but not as much as rent will (again long term )

There are currently tax incentives that favor owners over renters.

Interest paid on a home mortgage is deductible from income, this results in lower taxes for homeowners than for renters. It is in effect a federal and state tax subsidy to own.

Wealth gained from owning a residence and experiencing appreciation is currently exempt from income tax up to $250,000 per person of $500,000 per couple. ( See your tax adviser for details )
This is also a federal and state tax subsidy to own

So expecting a 1 to 1 correlation just would not work. The values, though, are loosely correlated, as
the benefits I listed above are substantial, but they are not infinite.

While an informed, analytical renter who can afford to may gladly exchange a $1200 per month rent for a $1600 per month mortgage due to all the added benefits and subsidies of owning, doubling the monthly housing cost is harder to justify, the buyer must then be factoring in very long recapture times and or assigning significant value to the non-economic benefits. Tripling the housing cost is probably impossible to justify on economic grounds.

However, even at triple or quadruple of rent, some benefits, amenities, some luxury features may only be available by purchasing owner occupied housing. Think country estates, suburban mansions and city penthouses.

The values are more closely correlated for the lowest priced homes, unsurprisingly these appeal most to investors. Lower income citizens do not gain as much from the tax subsidies as higher income citizens so there is less financial incentive for renters at the lower end to make the switch.

Mon Mar 3 2008, 15:28

I'm sure you mean no harm, but there are a lot of people who would like to see the market at ridiculous prices again. Those buyers dragging their feet are probably like me, I have a $60k downpayment and great credit, yet could not buy when the market went through the roof. I have no plans to pay too much for a house that someone else has used as an ATM.
~~~~~~~~~~~
Good post, Carrie, this is what I tell potential sellers what price they want to put on their house.

Mon Mar 3 2008, 13:26

RealEstateInvestor--While I don't think you should personally attack Jordan (and you owe him an apology), you make great points.

My question for Realtors is:
Do you agree that a home has a true intrinsic value based on its' rental value?
If you do agree, how can you honestly tell someone it's a good time to buy a home in Los Angeles?

Mon Mar 3 2008, 13:05

I'm sure you mean no harm, but there are a lot of people who would like to see the market at ridiculous prices again. Those buyers dragging their feet are probably like me, I have a $60k downpayment and great credit, yet could not buy when the market went through the roof. I have no plans to pay too much for a house that someone else has used as an ATM.

Mon Mar 3 2008, 11:55