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John the Bru…, Home Buyer in Connecticut

Prospective buyers - how much have you saved so far by not buying in 2005 or 2006?

Asked by John the Bruce, Connecticut Sat May 17, 2008

In response to other threads where some say it’s always a good time to buy, I figured I’d poll the prospective buyers here to calculate what they’ve saved by not buying in 2005 or 2006.

Maybe then it will be obvious to more people that sometimes, in some markets, and in some asset classes, there are distinct and measurable times when it’s a bad idea to buy.

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$130,000 on one miserable little condo.

I had a lease-option on a 2 bed/2 bath condo in Reston, Virginia (Shadowood) for $245,000. This was in the summer of 2006. The 2/2s had sold for as much as $275,000. The 3/2s had sold for up to $300,000. Today, the 3/2s range from $125,000 to about $160,000. There are some 2/2s on the market at $145,000, but why would anyone buy a 2/2 when you can get a 3/2 for the same or less?

My strategy was to do a sandwich lease-option, marking the price and the rent up a bit and finding a tenant-buyer. In retrospect, of course, the tenant-buyer (had I found one) wouldn't have bought, but all they'd have lost is a few hundred dollars a month that would have been credited to their purchase price. Instead, some of those units still sold...for $230,000, then $210,000...then $190,000...and so on. And lots of the people who bought at those prices are not in foreclosure.

That whole experience cost be about $5,000 (in lease costs and marketing expenses), and four months of my time. And while my strategy was never to buy the place, but rather do a sandwich lease-option, had I bought, I'd be out well over $100,000. (That, in fact, was one reason I was doing a lease-option: to protect myself if prices did fall.)

More generally--and feel free to check my other posts--I agree fully that "sometimes, in some markets, and in some asset classes, there are distinct and measurable times when it's a bad idea to buy." And I also agree with Brent regarding your contributions to Trulia.
4 votes Thank Flag Link Tue May 20, 2008
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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Hey, Brent. Thanks for the reply.

To answer your question, “[H]ow is a buyer going to calculate what they have saved by not buying?”

As a mortgage broker, I’m sure that you know that it just works out to a net present value problem, right?

Or, put even more simply: just look at the kind of house you would have bought at the peak in 2005.

Now, look at what it’s selling for today.

There’s your cost for buying in 2005, my friend. Add to it what you could have made employing your capital (assuming people in 2005 made down payments – a stretch, I know) in other, higher returning ventures.

I will concede that if the price to purchase a given unit is less than the price to rent it – then it’s a great time to buy. Unfortunately, that’s not the case in the vast majority of America today. Prices are not being supported by rents or any semblance of income growth fundamentals.

In most of America, it’s MUCH more expensive to buy a given housing unit than rent it. Reference the CEPR report below that concluding just that.

http://www.cepr.net/documents/publications/ownrent_2008_04.pdf
5 votes Thank Flag Link Sat May 17, 2008
Good question! I usually fixate on the fact that I could have bought a beautiful bayfront home in .75 acre for 275,000 in 1991, but I could only afford 200,000! Now that bayfront home sold for 1.7 million! Of course it could have sold for 2M in 2005, but I'd still be happy if I have bought it back then. Then there was the soundfront cottage I passed up in 1994. I acre. $180,000. I don't even want to think about that one. Oh well, can't look back.
2 votes Thank Flag Link Thu Aug 14, 2008
John,

Now I'm a banker not a mortgage broker! lol there is definately a huge difference. I was a mortgage broker for 3 years but did not like the objective at the end of the day, needless to say. I have to say, I agree with your comment totally and 100%. If it's not a smart calculated buy, it makes no sense. Unfortunately, the vast majority of homebuyer's don't share your weath of knowledge. They want to own a house! Maybe a stupid decision but their choice. You are absolutely right they shouldnt be pursuaded into a purchase feeling like it is the right thing to do when it could possibly hurt them in the long run! I do want to say, as much as you raise turmoil with some of the realtors on here, I agree with most of your comments on here and they are well thought through!!! I think you are a great voice on trulia and people need to embrace your knowledge instead of bashing you because it digs into their pocket books and idealogy. You back your comments up with facts and references. plain and simple, in my books anyone who feels like refuting them would look like an idiot not to do the same!

Brent
2 votes Thank Flag Link Tue May 20, 2008
I'l will comment because no realtor would. I think this is a buyers market. Secondly, how is a buyer going to calculate what they have saved by not buying? Probably because it's really nothing, because if their rent payment is more what are they saving? Last week I closed a loan for a buyer that was paying 1100 dollars a month in rent. Her payment is around 950 on a 110,000 house. Why wouldn't she buy? My question to you........ It's not ALWAYS a good time to buy, however so many banks have properties on their hands they are trying to rid of and cheaply. I would also think this affects regular home sellers to the point where they have to drop the price.....Why do you think it is not a good time to buy?
2 votes Thank Flag Link Sat May 17, 2008
I agree that those two years were tough times for buyers, and tough times may still be ahead, but a poll of America's millionaires says that they consider now a good time to buy. I would like to be in that poll someday soon. After every recession in history there has been a huge boom. While it's easy to look back at the money you may have saved by not buying, it's also hard to get ahead by sitting on the sidelines too long. Not to say that there were many deals recently. Also, real estate has a lot of hidden advantages, that's why the vast majority of those who have owned their home for five years or more have made a lot of money.
Web Reference: http://www.homevaluator.org
1 vote Thank Flag Link Sat May 17, 2008
I've saved a few hundred thousand so far. I'll wait to save a million more before I buy.
0 votes Thank Flag Link Fri Aug 15, 2008
Glad I checked back in. I thought this thread was dead.

Brent - agreed - a very big difference. My apologies. Thanks for your compliment and your answer, BTW.

Don - thanks for your answer as well. That's a great data point. Thank goodness it turned out to be a $5000 loss instead of a $130,000 one! Thanks for the kind words – I always look for your posts - you’re quite the straight-shooter here and a lot of people really appreciate it.

Anyone else?
0 votes Thank Flag Link Sun Jun 8, 2008
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