Buy a home?
Tony Balsamo (@tonybalsamo) got me thinking a little this morning about something I normally ignore… the housing market. In San Diego - real estate is about as topical as the weather. It’s consistently only one of two things, perfect or not so perfect. Right now, the market is pretty much doing about as not-so-perfect as you can expect when it comes to real estate - and not just in San Diego.
Before I go into why I wouldn’t buy a house if my life depended on it, check out these little bits that I found out - paraphrased:
- When the market was on the up, mortgage offices allowed/encouraged consumers to lie about their income or employment status via the power of omission or outright bs’ing.
- These dishonest lenders pretty much set the national market up to tank, but hey - it’s not really their money they’re lending, it’s their parent bank’s money - as long as the commissions are paid… what’s really the problem?
- Artificial inflation is something that happens when people get greedy. Problem is when the inflation game begins, it’s like starting musical chairs, and every quarter that goes by, fewer and fewer chairs are left for people to sit on when the music stops.
- Interest only loans. The market was so hot, people were planning on turning and burning their investments in such a short amount of time, and they had such faith in this artificial inflation, that they went in for the short term gain… precisely what real estate isn’t. Greedy consumers + greedy lenders = a wrecked global economy.
- This is just the stuff I paid attention to… it gets uglier, but I’m in this industry sort of, and would rather not like to think of it as a dishonest game too much more than I already do.
The Wreckage
Here’s how this works. Consumer talks to Mortgage Guy, Mortgage Guy gives Consumer money from Bank A, Bank A is child to Big Bank B. Big Bank B is left holding the result of greed, and let’s face it, Big Bank B is the most greedy of all… So Big Bank B sets up a series of buckets that allow Foreign Entity A and Foreign Entity B to purchase these grubby greed loans: they’re insured, they’re backed by some rating, and they stink like utter garbage. When the loans are defaulted on after the housing market crashes and burns, you have yourself Foreign Entities holding a whole lot of defaulted nothing and they’re… for lack of a better term fucked. Let’s hear it for a global economy (applause).
Foreclosures
Want to know what the consumer facing fallout looks like? Do me a favor, if you’re in San Diego. Drive through Eastlake, drive through Otay Ranch… and have a look at it. There’s an upside to foreclosures. San Diego County Sherriffs are stocking up on staff so they can cover the amount of administered evictions they need to oversee… so if you need a job, they’re probably hiring.
Why won’t I Buy? - Factors in order of importance:
- Trust: I can’t trust the market or the lender, especially in times of desperation. The few that are still afloat, in my mind, are going to really be trying extra hard to get me to sign - but at what price? This might seem like I’m simply not educated about what happens in a lending office, or when talking to an agent, but … um… it’s (on average) over $500,000 we’re talking about here, I’m going with my gut when we’re talking that kind of scratch - sorry.
- HOA: Where I want to live, HOA fee’s can be well above $500 a month, in fact (since I’ve asked) some are $850 a month. Granted these are in high rises, and in downtown San Diego, but… $850? a month?! I’d rather pay my barely more than that rent, save my cash and invest in something else…
- Opportunity: If I were to take $500,000 and put it towards … something else - say a web-based company with a focus on market analysis based on user traffic that sells a product that promotes targeted marketing campaigns based on these analytics… I’d be more willing to bet on that working for an awesome long term gain, more than a house.
- Residual costs: As a renter, which is what I’m happy to be, I don’t pay HOA, sewer, garbage, or property taxes. I don’t have to worry about buying new appliances, remodeling to maintain value, appraising my quarters, or even commit to living to one place for 5 years.
Pretty much, the market, from a renter’s point of view, is a place that can’t be trusted, tainted with greed and/or despriration. The people in it deal in lots of money that isn’t theirs, and there are far too many chefs trying to put their fingers in the pie… The pie being my wallet, which is currently not empty… mainly because I didn’t buy in the boom, and won’t during this trough.
The trough won’t end for at least 2 to 3 more years either, by the way. By then, logging companies, schools, retail locations, and almost every corner of the global economy will have been touched adversely by the effects of omission by consumers and artificial inflation by the market.
Enrique,
I totally agree - although I have a house. I expect to live in my house for another 10-15 years. For me it is both a place to live and a long term investment.
The market today is having problems because the supply chain is hosed just as you pointed out.
The supply is glutted (or soon to be) because of people getting out of bad deals, voluntarily or not.
Buyers are waiting because rates will continue to go down according to what we’ve been told. So will prices. Why buy now? I can’t think of a good reason.
Banks are scared to lend because they don’t know what their total exposure is. They probably have a good handle on the sub-prime exposure at this point, but how many prime loans are gonna find themselves in a bad situation?(http://www.slate.com/id/2188982/) People with good credit should be expected to try and exit deals when the market drives the value of their houses down enough and the terms of loans no longer make sense. It is simple economics.
Banks were happy to lend because they could package high risk and low risk loans and resell them turning a nice profit. Everyone knew that a certain amount of these packages would default - but as long as property values are going up the defaults wont hurt the value of the overall package that much when they get sold at auction or wherever. With values going down, these bad apples can spoil the whole bunch.
On top of this, it is now clear that the repackaging of high risk and low risk loans wasn’t done very well - what was once considered low risk is quickly becoming high risk.
With banks unable to flip these things they are less interested in loaning money.
I suspect that in a year or two, the packages will look more attractive and the markets will become more likely to want to buy them then they are today… but just like the potential buyers, there is still a lot of down to go. No reason to jump in buying loans that suck from banks who cant really tell you how much risk is there.
Given my long time line, I expect to make a reasonable enough of a return on my investment given tax benefits, appreciation and quality of life to make having a house for me and my family make sense. (If I was single I wouldn’t want to own.) But, I’m a little bit worried that this might not be true. If the value of my house dips much below the 2002 value, which I predict is going to be bottom, I’ll be looking at ways to get out. I learned in the Internet bubble to know you need to have a point at which you will cut and run and make sure you are ready with a “stop loss” order.
@gebl
First I’d like to say that you two (nrek and gebl) are much better informed than most people I talk to and my respect for your opinions has risen in the last few minutes (it was never low, I just didn’t think about it). That is one reason I’m really taking your comments to heart and doing some serious thinking here. I like what you said and it makes a lot of sense.
On one hand I agree with nrek (though he said it more eloquently than I could) regarding rent vs buy. It all comes down to cash flow, which in turn determines your quality of life (not being house poor). Of course none of us has a crystal ball so who knows when the market will turn. I’m confident prices will rebound at some point, they have for the past 30 yrs (though past performance does not guarantee etc), but with regard to rates I’m in the dark. Rates have been at lows in recent memory to levels I never thought I’d see if asked 30 years ago to predict the rates in 2008.
I guess I keep going back to when I first bought property here in San Diego in 2001. My friends thought I was crazy, but I decided to buy where I wanted to live (I didn’t actually move here until a few years later), but those same friends thought I was some kind of genius three years later because I found myself on the leading edge of the wave. Like gebl says, prices could reach back down to that level (so much for my genius), but I doubt they’ll stay there.
If I had the money to buy investment property now and have positive cash flow, I’d do it today, but only if I could be sure I wouldn’t be negative. As far as owning my primary residence goes, nrek hit the nail on the head. Unless it makes financial sense, and my quality of life wouldn’t suffer, I would not buy. This is not because of the present real estate market, this holds any time you consider a purchase that costs many times your annual income.
Lots of this of course depends on down payment, loan type, rate etc. We could have another discussion on the merits of not tying up huge amounts if cash in a non-liquid investment like real estate.
I don’t think I’ve added much to what you two wrote, but like I said, you’ve got me thinking and listening. I’m sure I’ll post more on this as I mull it over.