I want to take a moment and talk about some really good info that I think the San Diego market should be interested in. I’m sure many of you have seen the site that Rich Toscano has put together: www.piggington.com. Not only does Rich write write regular articles for the Voice of San Diego, but he has some excellent content on his website that monitors real estate in the San Diego area. After seeing the ‘premium content’ listed on his site for months and going “I’m not going to pay for that…” I decided to spend the price of a movie ticket or a drink at the bar and see what it was all about.

It is apparent that Rich not only had to pay DataQuick for access to it’s data, but I’m sure it took quite a bit of time to do the analysis and excellent graphs that he puts together.

For the San Diego readers out there…how would you like to see how actual zip codes performed on a year over year basis? Not only that, but how would you like to see how every zip code ranked? Rich has put this data together, and he even did separate rankings for single family homes versus condos. He did not let the ‘condo factor’ affect the rankings of certain zip codes that are highly influenced by the condo market.

Aside from ranking and graphing all of the zip codes, he does a monthly track of the credit markets where he tracks and graphs how mortgage rates performed during the month. He also uses the DataQuick information to create several graphs that track every aspect of the San Diego market. Things like median home price, MLS inventories, sales volume, zip code increases and declines for SFRs and condos, and months of inventory at current sales pace among other things.

I know that I have received quite a few e-mails asking for various data that I didn’t have at my fingertips. You would think some of the industry organizations would put this info together. They might put bits and pieces of it out there if it fits their agenda, but not in the same format each and every month as the way Rich does it. From what I can tell, Rich is not manipulating or spinning the data…there is no reason for him to do so. Like his website says “In God we Trust, Everybody Else Bring Data”. Rich brings data…

If I were buying a house in San Diego in the next few months, I would definitely pay the $8 a month to get this info. This info, with tools like ziprealty.com and zillow.com will make you a very informed real estate shopper. Those 3 tools go a long way to add some transparency to an industry that is relatively ‘closed’ behind the ‘Sandicor’ doors. Ziprealty now lets you track price reductions and days on market. Zillow lets you track pricing for individual housing among other features.

I am not affiliated with Rich and I am not getting paid for this. I am just passing this info along. I was pleasantly surprised at what I saw in the ‘premium content’, and I know that many of the readers are in the San Diego area. As much as I wish I could share some of the data with you, I’m not going to give away the content he pays for and works hard to produce. I feel it is worth $8 a month…especially if you are in the San Diego market. If you don’t think so, you can cancel anytime. Click here for more info.

The best I can do for you is point you towards this article that showed up in the San Diego Union Tribune. This article gives some basic data, as well as the stats for a few neighborhoods. The thing to take away is that prices of new homes are taking a dive that will impact the rest of the market.

“But, in the new-housing category, which included newly built homes as well as apartments converted to condos for sale, there was a $104,000 drop from $539,500 in December to $435,000 last month.

That dollar decline represented an all-time record change, based on DataQuick reports back to 1988; while the 19.4 percent decline was the second biggest after a 24 percent decline recorded in July 1997.

OOPS! Doesn’t look good for individuals that paid 540k for homes a few months ago. I’m guessing they can’t handle the 100k drop in prices as well as the builder can. Don’t forget that many of these people used jumbo I/O loans, option-ARM’s, neg-am’s, 80/20’s and other creative financing to get into their 550k “starter home”.

If you happen to be in Orange County, then you can check out this data (hopefully the link will work without having to login). Orange County is certainly not invincible either. It seems that every major subprime lender is headquartered there. There is no shortage of stated income, interest only, option-ARM, and combo loans in ‘The OC’.

Don’t forget that there is a TON of activity going on in the forums. There are almost 100 topics, 600 posts, and over 160 registered users. There are lots of very informative people in the forums as well. After writing 70+ posts, I feel like I am beating a dead horse sometimes, so please let me know what you want to hear about. I know the FB stories are always popular, but as things have been slower, there haven’t been as many ‘good’ stories to tell. Plus the fact that since things are slower, I’m taking this time to work on a ‘plan B’…if you know what I mean.

Thanks for stopping by…and I look forward to the comments and feedback!

SoCalMtgGuy

I always like it when people not in the mortgage industry get a ‘whiff’ of what is going on. See this post below from a reader.

I sold a condo and bought a house in June 2005. I sold in Arlington and bought out in the burbs of MD. When I went to buy the house we brought a lot of what I call “fake money” to the table as a downpayment. Ended up with over 50% downpayment. (I expect to lose most of this “equity” in the next few years, but we didn’t want to rent and we ended up in a nice house with a PITI of 14% between both our salaries so we don’t mind too much is we got robbed on the purchase because the condo market was even more extreme.) While speaking to a mortgage broker friend at the time he said with our credit scores and no documentation of income he could have given us a MILLION DOLLAR loan to buy a million dollar home. He was completely serious. My wife, who says the best things sometimes and this was one of those times, quietly said, “That’s scary.” There was then about a minute of silence before the broker said, “That is scary.” And he didn’t mention any mortgage financing to us again and we went to a big bank and got a 5 5/8% 30 fixed conforming (anybody remember that word?) no points mortgage.

This brings us to my question: Is it still that scary? I have heard that the industry is starting to crack down and require more documentation of income, etc. Is this really starting to happen or could my wife and I still walk into a mortgage broker’s office and get a million dollar loan?

I know my companies products, as well the products of my main competitors…but I don’t know every loan program out there for the hundreds of different lenders. So here is the reply from a reader who happens to be a mortgage broker:

Looking at a nearby product matrix for a mortgage company we sell to, I can obtain a borrower up to $999,999 (but not a million!) under the No Doc program. And if I wanted to spend the minute to look it up, I’m sure there is a lender who will give you $1,000,000+ going the No Doc route. If you look at a 1003 using No Doc, you will notice the employment section, income section, and asset section are left blank. The lender will look at your mortgage history to see if you have experience handling the payment. This is what we call payment shock. If you can handle 50% of your previous mortgage/rent payment, you can get a No Doc loan that high.

I would think the industry would start to crack down, but a few weeks ago I got a sheet from a lender stating they would do 100% financing, stated only, to borrowers with a 560 or 570 credit score. These are not conforming lenders, but they are really desperate to keep the party going. I do notice the Alt-A price up’s on No Ratio and No Doc loans going up as with the rates charged on 2nd mortgages. It will ultimately be decided by the investors and governments that buy the MBS’s. If they decide there is too much risk, these products will go away.

To follow up to both of these posts, I spoke with a bond trader last week, and asked them about the MBS market. I asked why people keep buying these ‘crappy’ loans. We didn’t talk very long or get too in depth, but the trader said that as crappy as the loans might be, the return is much better than many foreigners can get in their bonds. They said that many people are aware that there is the possibility of large defaults. Defaults would hurt the returns, but they would still ‘probably’ be ahead than if they were buying bonds in another country. That said, I know from talking to some people in capital markets that the investors are demanding a much higher return. This is especially true on 2nd mortgages and high LTV loans. Rates alone won’t ‘pop’ this bubble, but they will certainly curb the 20-30% annual returns many people accept as the ‘norm’ after the past few years.

If the add-ons and hits to commission are any indication, most companies are pushing 40yr mortgages, instead of interest-only mortgages. I think this has something to do with the way I/O loans are performing on the secondary market, but I cannot confirm this. I just know that the secondary market dictates our rates, guidelines, and pricing ads. When mortgage rates and guidelines change…it is safe to say…it’s about the money!

I look forward to the comments and feedback.

SoCalMtgGuy

“Get a LOW mortgage payment!”
“Payments YOU can afford!”
“OWN a condo! Payments under $1995!”

I’m sure that many of you have seen similar signs or advertisements out there. It’s all about the payment baby!! It seems the housing industry has taken a page from the car finance industry. “Sell the payment, not the price!”.

I know I have touched on this issue before, but this article by Rich Toscano of Professor Piggington fame, got me thinking again.

In the last asset bubble that burst a mere 5 years ago, the new paradigm was the ‘new economy’ and that P/E ratios could defy logic for long periods of time. This time we are looking at the “Payment Paradigm” (PP)!

That is all that anybody cares about anymore. When I’m getting the information needed to price a loan for a broker, I ask “what kind of loan is the borrower looking for?” The answer I get more than any other: “Lowest mortgage payment possible…”.

Ever wonder why the auto finance guys always want to talk payment, and “what are you willing to spend per month?”. The finance guys will find a way to make the payment fit. Even wonder why car payments terms have gone from 48 months to 60, 72, 84, and even 96 months? If the auto industry ever takes a page from the mortgage industry, then they could start doing option-ARMs to get more people into ultra-luxury cars, and exotic sports cars. You thought Bentley’ and Ferrari’s were expensive now…just wait until the option ARM gets the payments down on those bad boys!!

The same thing is going on in the mortgage industry. First it was the ARM loan. Rates were declining, and there was still a decent spread between short and long term rates. COOL…payment goes down a bit, I can ‘afford’ a more expensive home.

Next you have the Interest Only (I/O) loan. This is usually tied to an ARM, with an interest only period of 2-3 years for most subprime loans, and up to 5, 7, or 10 years for your alt-a or a a-paper borrowers.

But as property kept appreciating…the payments were essentially ’staying the same’….for the short term anyway. Who cares if the house is 200k, or 600k, the payment is the same! That’s all that matters right?

After all, most people are moving every 3-5 years now. Since not many people are staying for 30 years, why get a 30yr mortgage?!?!? Get an I/O ARM, that will keep your payments low until you move.

The prices kept going up, but the mortgage industry found a way to keep “payments” low. Enter the option-ARM, or neg-am loan. This beauty of a loan has a 1% payment option…in addition to an interest only payment, a 15yr amortized payment, and a 30yr amortized payment. Notice I didn’t say fixed…because the rates are not. Even the 15 and 30 year payments are tied to an index that fluctuates. Your payment will be amortized over 30 years whether the rate is 5% or 9%. So even your 30 year “fixed” payment will adjust with these loans. But let’s get back to the 1% payment.

Let’s take a $1,000,000 loan. The 1% payment is only $3,216.40 a month!! Hey, not bad for a million dollar loan!! Even with property taxes of $900-1000 a month, I know here are lots of families that could ‘afford’ a $4200 monthly payment. Just to give you something to relate to, the interest only payment would be about $5000 a month (yes, that is about $1800 a month of negative amortization). The problem is that, even at a 6.25% rate, which is pretty low for a fixed payment in a million dollar loan, the payment would be $6,157 a month…before taxes. Not many people can afford a $7200 monthly mortgage payment…no matter what the price of the home. But who cares, I’ll take the $4200 payment!! After all, property only goes up, and I will ‘automatically’ make money when I sell!! …right?!?!?!?

Welcome to the ‘new’ “Payment Paradigm”. Never mind the price, just worry about the monthly. Get in trouble? …get a HELOC, take out a second, refi INTO an option-ARM if you aren’t there already!

Like most other “new paradigms” that stray too far from the fundamentals, I think this one will pass. I think the next 24 months are going to be very telling for the entire industry. Most of the “PP” depends on these artificially low payments for shorter, fixed periods of time. The clock is ticking now, but in 2007 1.4-1.5 trillion dollars worth of loans are going to put this new paradigm to the test.

How do YOU think it will turn out?!?!?

I’m going to go price out a new Lamborghini while you think about it….

Have a great weekend! If you need more content than just this blog, there are about 400 posts (and growing!) to read in the forums. As usual, I look forward to the comments and feedback!

SoCalMtgGuy

I want to take a look at 2 separate articles and show you (again) why I’m not a big fan of the way stated income loans have been used. Let’s take a look at this ‘entertaining’ article about rock musicians buying homes. It seems that one ‘rocker’ who hasn’t made it yet, is now rockin’ the loan business! The niche is doing seminars and getting loans for other aspiring rock musicians.

I really like this intro to the subject of the article: “Patey, 35, moonlights with the band The Raging Teens — ‘’The Aging Teens,” he quips — and manages the bands Darkbuster and Emergency Music, plus his wife, singer-songwriter Mary Lou Lord. But for the last year he’s also worked full time for Northeast Lending as a mortgage consultant, telling rockers they can buy a house, even with no day job and no savings.”

Anybody seeing a problem yet? If not, don’t worry….there is more.

At some of the seminars, people …express concerns that range from improving credit scores — maxing out the plastic to put together a CD can do a number on them — to documenting income and having less than $2,000 in the bank.

In response, Patey and realtor Stephen LaBollita, Patey’s partner in the seminar venture, suggest such options as interest-only mortgages and loans that don’t require income verification.

Great, take borrowers with maxed out plastic, hardly any money in the bank, and get them an interest-only no-doc loan!!! It might have been a ‘plan’ that worked the past few years, but I have to believe that eventually these ‘rockers’ will have a slow month or two and start missing payments. After all, they don’t have regular jobs, or savings.

I think this is the kicker though: Patey’s day-job boss, Northeast Lending’s co-owner Geoff Ricks, 28, explains to a reporter, ‘’It’s not that you want to be in [those loans] forever, but you get in the door.”

It’s this attitude that makes Patey — with his slicked-back hair, heavy glasses, and turned-up jeans — think rockers will feel more comfortable with him than with ‘’the guy with a suit and tie.”

Here are 2 more ‘words of wisdom’ to live by: Down the road your house will be your most valuable asset. You can use that equity to pay for college tuition . . . or recording an album. and Explore mortgage options. Don’t settle for a loan you’re worried you won’t be able to afford if the gigs stop coming.

On one hand you are ‘educating’ people on no-doc and interest only loans, then you tell people not to settle for a loan they won’t be able to afford if the gigs stop coming? If you don’t have a job, or savings, how can you afford the cost of housing in Boston?? Oh, that’s right, they already filled in the ‘appreciation’ part of the equation. Your house will be your most valuable asset…and you can use the equity for college or to record an album.

ROCK ON!! Get a mortgage with no job, no savings…and refinance when you have some equity so that you can buy some beer and help other struggling bands. I guess it is a good thing they don’t partner with an honest financial planner. I don’t know too many people that would suggest buying homes under these conditions….other than the people that will directly profit from it.

Now that we have looked at the ’cause’ side of the equation, lets look at this article that deals with the San Diego market. The author looks at the two main reasons that San Diego real estate is hitting the skids: Two kinds of gamblers are leaving town in a hurry: (1) speculators, or people buying condos to sell them, not live in them, and (2) homebuyers taking on exotic mortgages so they can buy houses they can’t afford. The former have been skipping town for a year, and the latter are being restrained by regulators who fear a wave of foreclosures and defaults.

The author then points out the situations that are making things even worse: Two abuses are exacerbating this situation: (1) overblown housing appraisals and (2) false statements of family income on mortgage applications. These deceitful practices — typical of financial bubbles — have permitted the gambling game to go on.

Where have you heard about this before? It is just nice that media is finally reaching the ‘masses’ with what I have seen for years now, and been blogging about for months. But wait, it gets better…

As the real estate bubble expanded, San Diegans had to live with high home prices and low affordability. It was shocking when only 10 percent of families could afford the typical home, and now it’s down to 5 percent.

So people took on complex mortgages, with names such as “interest-only” and “option adjustable rate,” permitting homebuyers “to buy a bigger house than they ought to buy,

How long do you think things can continue when only 5% of a major metropolitan area can afford the price of homes?

I think this explains exactly what I have seen the past few years: “There has been a race between affordability and exotic financing. Affordability has been trying to keep people out of the market, and exotic loans have tried to keep them in. Over the last couple of years, exotic loans won that race. When the exotic loans start to lose, the San Diego market will lose a lot of demand.”

I did a post a while ago that compared the payments of 30, 40, and 100 year loans. I wanted to show that extending the loan term a long time, doesn’t necessarily save much on the monthly payment. Eventually the ‘market’ is going to run out of ways to stretch, extend, or delay the payments that invariably will be due. Oh that’s right, I forgot, you just SELL!!! …because property only goes up!

The article also had an FB story buried down in there: “The price of the asset has gone way beyond its long-term fundamentals,” says Robert Campbell, publisher of San Diego’s Campbell Real Estate Timing Letter. “It’s become a Tinkerbell world.” As regulators “tighten up on funny-money loans,” those housing prices will come down to earth quickly.

“I have not yet seen a bankruptcy” as a result of the exotic mortgages, says bankruptcy trustee Richard Kipperman. “But we know it’s coming.”

Like I discussed in an earlier post titled, What is taking so long? I covered why we aren’t seeing the BK’s…YET. Over the past 5-8 years, appreciation, and a hot sellers market has ’saved’ most people that got into trouble, or in over their heads. It is over this time that interest only, neg-am, option ARM’s, and other exotic mortgages became popular.

The article finishes up with the typical “analysts say” bla bla bla…BUT this time it is countered by Campbell who says “Campbell points out that the housing market itself has been a big source of job growth. So an implosion could affect the economy generally. He sees a high probability that Southern California home prices will plunge 20 to 40 percent. His Real Estate Crash Index signaled “sell” in August of last year and continues to plummet.

Unfortunately, San Diegans have been borrowing against the inflated equity in their homes to continue their consumption. If home prices decline and lending regulations tighten up, that game could slow. Sales at retailers, car dealers, and other consumer outlets could suffer. This will impact jobs and, in a snowball effect, further whack the housing market. An economy based on debt is risky. An economy based on dangerously speculative debt could be disastrous.

I know how I think it will all pan out, and I’m sure that many of you feel the same way. It is just going to take TIME! Just wait until people realize their neighbor is losing their house. Wait until “John” and “Sally” are hanging out by the water cooler at work all glassy eyed and shell shocked when they realize their I/O or option ARM is about to adjust, and they can’t refi, or make the new payments. Look at our ‘rockers’. They are marching down the same path that is leading San Diego to increased inventories and eventually much lower prices. Many people are using these short term loans as ways to ‘get’ some quick appreciation before they sell. Just look at San Diego to see the results of everybody buying at one time…and now selling at one time.

Everybody talks about the aerospace industry taking a major hit back in the early 90’s. I have a question that I don’t know the answer to: was 40% of the job growth in California from 1985 to 1990 in the aerospace industry? I doubt it was, but I know that real estate related jobs have accounted for 40% of the job growth in this state the past 4-5 years. I can’t find the link right now, but I’m sure one of the readers has it handy.

Before I wrap this up, I need to report that the San Diego inventory per Ziprealty is up to 16,464. That is an increase of 67 properties in about 24 hours! I guess that is part of the ‘normal’ market the California Association of Realtors told us was coming. The good thing, according to them, is that increases in inventory don’t mean price reductions……riiiiiiight!!!!

I want to thank everybody for making the forums a pretty big success in only 6 days! There are over 315 posts and 120 registered members! Keep the excellent content coming!

I look forward to the comments and feedback…

SoCalMtgGuy

This week we are looking at the buy vs. rent debate from different angles. We have looked at the ownership costs versus the rental costs if you were to make the decision TODAY. I think it makes renting look like a good deal at this time, in your high priced ‘bubble’ areas.

But what are the downsides to renting? I know that many people have experienced bad landlords. Some of these people never made repairs, were pains to deal with, or worse, lost the property with ‘you’ renting it. I know that there are some horror stories out there, but do they outweight the economic costs we looked at earlier this week? I have had mostly good experiences from renting, so I am going to look to the readers to share some ‘horror’ stories here. I have excellent credit, I have never had a problem making deposits, and I have been lucky to find good situations with good landlords. I did have a situation a few years ago where I had to move out in a weekend, but all in all, I have not had any problems renting.

I know that having to move and not feeling ’secure’ is probably the biggest drag on renting. My advice is to sign year long leases with landlords that you have ‘interviewed’, or find good apartment complexes that are not going anywhere, or plan to be converted to condos. I know that moving is even more of a pain when you have kids and family. But is the pain of possibly having to move a time or two worth the monetary saving by renting in high priced areas? I think it is. I would have to pay over 2x my rent to buy my place with an interest only mortgage. I’d rather rent from my landlord, pay half as much, and not have a huge mortgage hanging over my head…than ‘rent’ from the bank and the government with an interest only loan and $500 a month property taxes. I know most people just focus on the monthly payment, but you have to look at the amount of debt you are taking on as well. Is it really worth spending 3-4k a month to ‘own’ that condo that you can rent for $1400? Only you can make this decision for yourself, I’m just telling you what I think at this point in time.

I want to share this information from a reader. Some of you might have read it already, but I think it is worth reading again. I know I have read it several times, and I can’t help but think that families like this are not alone. Let’s see how they handled their buy vs. rent situation in a high cost area, WITH children.

—–I have one of those perfect families, and wanted to share my story. Despite my husband’s very good salary, we lived paycheck to paycheck, due to the high cost of housing in San Diego. We finally sold our house, to cash out at the top. Now we rent for a little less money, and paid off all those credit cards that we used to pay for car repairs, property taxes, and other “unexpected” expenses.

I would love to hear more stories from people who are honest as I was, who can say “I was in over my head too because of these high housing prices”.—–

So there you have it. An honest and straightforward explanation of one family’s decision to rent vs. buy at this time. You can read more about this readers situation here.

Let’s look at some market conditions right now.

Before I get to the loan side of things, I’d like to point out that there are 16,397 properties for sale in San Diego (maybe more or less when you check). When I checked earlier in the day it was at 16,352. Remember that just 2 weeks ago the inventory stood at 15,568. Ok…onto the loans.

As you can imagine, there is nothing groundbreaking going on out there in the industry right now. I knew that things were going to slow down going into the holidays, and I figured it would be the March timeframe until things picked up noticebly. It seems that more people are ‘testing’ the waters, but not liking the temperature. More people are seeing the rates, and instead of refinancing early, they are waiting until pre-pay penalties expire. Things are still pretty slow on the subprime side, and I see that continuing for another few weeks at least. A-paper is still clicking along, with some of my offices doing 80% of their business with the option-ARM.

That said, I’m sure most of you can tell that I see the writing on the wall. Hence the extra work going into this blog and working on getting the consulting page where I want it. I’m not going to be one of those people that just ‘hopes’ it will be 2003 again…or that thinks will ‘take off’ again during the spring. I read the data, I know what I have seen, and I have my opinions on what I think is going to happen. That is why I believe in having a contingency plan. Waiting until the subprime industry hits a major speed bump, is not the time to go ‘what happened?’ and try to figure out what to do. I’m sure things will pick up some, but nothing like past years. Even the media is starting to discuss many of the crazy loans that are largely responsible for the boom in the mortgage industry. Once the domino’s start falling, I have a hard time believing that subprime will continue to exist as it has the past few years. It will always ‘be there’, but the rates will be higher as investors will DEMAND a high risk premium again. Once the ’stated income tsunami’ washes ashore and makes people look like fools for giving Wal-Mart greeters 400k loans, look for some changes in the industry. I could be wrong, only time will tell. Either way, it never hurts to have a back-up plan.

I want to take a moment here and get serious. I have some startling information to share with you. I was passed this ’secret’ info by a reader and I want everybody to take 3 minutes out of their day and watch this educational video clip titled DEBT. Just click on the link that says “watch an ad to view the site for FREE” and you won’t have to register or anything. There is some startling information in there. Sometimes the things that sound so simple are the hardest to understand. Let me know what you think.

Keep the comments and feedback coming! Don’t forget that there is a lot of activity going on in the forums!

SoCalMtgGuy

As you know, I’m taking some time this week to discuss the ‘buy vs. rent’ debate that seems to have taken on a more argumentative tone lately. It hasn’t happened much on this blog, but I know that many people are getting anxious and impatient as people see no end to the ‘froth’ that keeps coming…like tapping a keg that just rolled down the stairs. I not here to tell you what to do, I’m just here to help give you information so that you can make the best decision for you and your family. Sometimes renting is the way to go, and sometimes buying is the way to go. The problem for many people is that they are getting pressure from people already ‘in’ the game. That said, I want you to read about this readers experience. I think it illustrates very well that there is a time to buy and a time to rent, and outside pressure without accompanying data can be devastating. I think this situation is applicable to lots of our California readers. Enjoy….

—-The year was 1988. My wife and I, along with our two kids ages 5 & 6, were renting a three bedroom house in Van Nuys for $900 a month and we were happy. The year before, I’d just became a journeyman union plumber and my wife had just became a journeyman union electrician. We were finally making a decent living and did I mention we were happy? Very happy.

Enter my wife’s father and her sister (who had just purchased a townhouse in Redondo Beach). “When are you guys going to buy a house?” “If you don’t buy now you’ll never be able to afford one.” My wife and I had never really given it much thought but since these older and wiser people were so adamant and expressed the urgency, we agreed to look at houses for sale.

For the youngsters here, those were the days when lenders wanted 20% down. You could buy a house with 10% down IF you had an extremely high FICO, been at your good paying job for a long time, and had at least 3 months future house payments in the bank (and all that money had better of been there for a while). Since houses were approaching the $200k mark, this would mean at least $25k in the bank. We had about $10,000. We started working all the overtime we could. No vacation that year. No eating out, etc. By May of 1989 we had our $25,000.

The median price was now $210,000. There were bidding wars and camp outs and lotteries all over. With the help of an agent, we found a 1954 tract house in Canoga Park that just went on sale that day for $209,900. We made a full price offer and it was accepted. The school district was horrible but who cared? We were in at 10.75% 30-year fixed and a payment of $2000 a month. Quite a jump from our $900 rental. Also we postponed paying income taxes until August that year since we owed $7000 from claiming 10 dependants all year to save up the $25k.

Shortly after moving in, my wife had an accident at work. The general contractor cut a hole in the 2nd floor and didn’t mark or secure the cover. She fell 20 feet and was hospitalized. Even though she was miraculously back 100% in 6 months, the electrical contractor she was working for sued the general contractor in her behalf and she was given $20,000 the next year, 1990.

Since we really hated the schools in Canoga Park and we now had new found money, we wanted to move to a better school district. I checked comps. The house had risen from $210k to $230k. Sweet. It was just like they said. Easy money but not enough to cash out with, yet. So we venture over the hill to Santa Clarita Valley and find a brand new home being built for $187,500. We bought it and rented out the Canoga Park house for $1200 a month. Only an $800 negative but it’s going up $1600 a month in value so who cares?

We had to evict the first grandmotherly type old lady for not paying rent and the 2nd tenant caught the house on fire but those are stories for another time.

Fast forward to 1994. The housing market is tanking and interest rates have dropped. My wife and I are killing ourselves making these two payments. Something has to give. I called the lender on the rental. I tell them I want to refinance the $190,000 that I owe them to the current interest rate. They tell me the house is only worth $164,000 and besides that, I have PMI, so no way. We were FB’s.

At that point, I said to my wife, “Let’s walk away.” She said okay and immediately the weight of the world was lifted off our shoulders. I figured we lost around $100,000 between both down payments, negative cash flow on the rental, etc. but we weren’t the only ones walking. There were thousands. If we were able to walk with $100k of our money in the game, how many and how fast will the people walk this time with very little in the game?

Eight years later, 2002. My wife and I put $8000 down on a $275,000 house in Portola Hills. 2 years and 10 months later we sold it (Feb. 2005) for $500,000. Finally in the black again on real estate. People at work puzzled as to why we sold. What are we thinking? Don’t you know real estate only goes up? Yeah, right.—-

As you can see, the “If you don’t buy now you’ll never be able to afford one” line was used 18 years ago. It wasn’t true then, and it won’t be true this time around. It took years for things to shake out last time, and that was in a decreasing rate environment where 30yr fixed loans and 20% down payments were the norm. What do you think it is going to look like this time around with 100% financing, stated income, interest-only, neg-am, and a rising rate environment?

Some of you might have read this story already in the forums. I think this is the type of ‘real world’ story from the last ‘SoCal Property is Invincible’ real estate boom that needs to be heard by more people today. Just remember, there was a reason that interest-only loans were very popular during the 1920’s…but there was a bigger reason they were not widely used for the 70 years afterwards.

Stay tuned for more ‘math’ behind the buy vs. rent equation. Keep the comments and feeback coming…not only on the posts, but on the site, the forums, and the consuling page as well.

SoCalMtgGuy

For the sake of simplicity, I am going to apply my rationale to the California housing market. I know that property values have gone up many places, but I think California as a whole probably has the worst affordability problem. California is where I live, it is where I work in the mortgage business, and you can apply the fundamentals that I will talk about to any area of the country. Now let’s get moving!

In this first segment, I want to look at the ‘core’ arguments people use for ‘owning’ versus renting. The 4 main points I hear as to why owning is better than renting are (in no particular order):

1. Tax benefit
2. Appreciation
3. Pride of ownership
4. Stability

Before we get going, I want to say that I have absolutely nothing against owning or renting. I just think the choice should be based on math and finances, and not emotion and ‘hype’. That said…let’s start looking at things.

To look at this rent vs. own decision, we need to look as if we were buying TODAY, not yesterday, not in 2003, and not in 1997. To do this, let’s use a ‘median’ priced type home for California. I will use a price of $550,000. If you live in CA, you know this isn’t going to get you something that great. It will be a 1-2 bedroom condo, or an older, smaller, SFR, that isn’t in a ‘prime’ area. Yes, there are always, exceptions, but I think this is a fair assessment.

Since most people do not have the 110k to put down, and about half of your first time homebuyers put no money down, I will use 100% financing in this example. I will assume ‘good’ credit with a 700+ FICO score. I know 100% financing isn’t preferred, but let’s face it, many of the financial decisions made during this real estate boom aren’t preferred, just very popular. To get a 30yr fixed on this house, we will use a 6.25% 30yr fixed first, and a 9% fixed 2nd. I will use a LOW tax rate of 1% even though 1.25% is more realistic for most areas in California. I will use a flat $75 a month for insurance.

$440,000 at 6.25% = $2,709.16
$110,000 at 9.00% = $885.08
Property Tax 1.0% = $458.33
Monthly Insurance = $ 75.00

Total payment = $4,127.57 **note: if this happens to be a condo or PUD, add HOA fees. Add Mello Roos as well

I know about what a 1 bedroom condo rents for, and I also know what a smaller 1000-1200 sqft house rents for that falls into this price range. You are looking at rents that most likely fall in the $1200 to $1800 a month range for a place like this. I know several friends that rent million dollar plus homes in the $2500 - $3500 range. So I feel comfortable with these amounts. Again, I know that most people do NOT get a 30yr fixed or a fixed 2nd, but if you are getting an interest-only loan, then you are just ‘renting’ from the bank, and banking on the appreciation you hope the property generates. You get a tax deduction, but ’spending a dollar to save 40 cents’ isn’t necessairly the best plan either. Maybe some of the tax pros can chime in on what they see with regards to the actual write-offs for real estate. I have heard from several people that their ‘tax break’ wasn’t all it was cracked up to be. It was nice, but they were expecting much more.

That said, how many people can really afford to spend $4000 a month on their mortgage?? Let’s use the higher debt-to-income ratios of the subprime market at 55% for a full doc loan. Let’s give this person the benefit of the doubt, and assume they have zero debt and zero car payments. I’m trying to err on the side of ‘lower’ than actual costs to show how much money you should really be making. Using the $4,127.57 payment with no other debt, at a 55% debt ratio, you would need to make $7,504.67 per month or $90,056.07 per year. If we throw in a car payment or a little credit card debt, and round the monthly debt payment off at $4600 a month, we would need to make $100,363.63 per year to ‘afford’ this house. Again, let’s not forget that this is with 55% of our income going to DEBT…this is before taxes, food, gas, furniture, savings, health insurance, dental, disability insurance, entertainment, vacations, movies, fun, etc.

Makes you wonder if there is REALLY enough money left over to do anything else after 55% of your income is going to debt payment. Add another 25% to taxes, and you already have 80 cents of every dollar you make spent!! As you can see by this CAR data, most people in California make about half that amount. So it is possible for a couple to ‘afford’ this median priced home. But let’s not forget that I am using a 55% debt ratio and assuming very little debt, and using low estimates for property taxes and no HOA’s. I’m also assuming it is not a fixer upper, and move in ready.

Don’t you wonder why for the longest time (decades) that banks wanted people to spend no more than 28-33% of their gross income on housing? Now it is commonly accepted to use 40-43% or even higher in subprime. I won’t even get into ’stated’ income loans right now. If you can’t qualify at a 55% debt ratio, then should you really be buying?

Know that we have a good ballpark of what is costs to ‘own’ ($4100-$4200 a month), and we know what it costs to rent…$1200-$1800 a ‘median’ priced home, which looks like the better option for ‘most’ people TODAY? With the median income in CA only 53k, how many people can really spend $4000 a month on their mortgage for the LONG TERM?!??

I know that pride of ownership is a nice feeling. I know that getting 10-20k back on taxes is nice (rough guess…no number crunching there), I know that reading the OC register and watching the news and hearing about escalating property values is REALLY nice. But what happens IF that appreciation happens to slow, stop, or heaven forbid, go the other way?? I’m not saying it will happen, but can you at least admit that it COULD happen? What is the plan if everything doesn’t go as planned? What happens to that pride of ownership if you can’t sell your house for 5-6% more than what you paid for it to break even?

WHAT?!!??!

Yes, you have 5-6% transaction costs to buy and sell real estate. If you buy the place for $500k today, you can’t sell it for $500k tomorrow and ‘break even’. You need to pay 20-30k to get that house sold. So you better hope that you have some appreciation in there. And no, an appraisal doesn’t mean that is the ‘value’ of your house. The real ‘value’ of your house is what somebody will PAY you for it. Appraisals look at recent sales to guage your value. If the values happen to be declining, your appraisal is a ‘lagging indicator’ of the market.

So, assume you are looking TODAY at buying vs. renting, where do you stand? Let’s answer these questions.

1. Can you afford to put money down? If not, do you have 3-6 months minimum of ALL your living expenses in savings…including your ‘new’ mortgage payment? If no, they I would consider renting.

2. If you have some money down, can you afford a 30yr fixed rate mortgage payment? You probably need to be making $120,000 a year or more to do this realistically in California.

3. Do you like the house and plan on staying a while. Emphasis on staying a while. If your job isn’t set or secure, or you can’t find another high paying job quickly, I would suggest renting for a while.

4. Do you realize that property values MIGHT go down? And if so, are you prepared to take a loss or wait it out? Remember, past performance is NO guarantee of future results. Just because property has doubled in many places, doesn’t mean it will continue to do so.

Even in today’s market that just experienced rapid appreciation the past few years, if you can answer the above questions, and are comfortable with the situation, then by all means, go ahead and buy. If you have the money to put down, are making great money that will continue, can easily afford the home, and plan on staying a while no matter what the market does, then by all means, enjoy your new home.

I’m just here to point out to the people that don’t have the savings, the down payment, or the income to ‘afford’ a house TODAY. I’m here to let them know it is OK to rent! Based on the statistics, I think renting is the smart choice for the ‘average’ person in California with the ‘average’ income. I don’t think getting an I/O or neg-am loan so that you can ‘buy in’ today is the best choice. Those loans were designed to help sophisticated people manage their cash flow, not help people that don’t make enough money get a house they can ‘afford’.

Read some of the stories in the forums. There are people in there with real world stories about how hard it was to ‘live’ with a mortgage that was only 30% of gross income, and not 55%. There are stories about people with kids, families, and people that experienced ‘unplanned’ events. Take their word for it, not mine.

I will get into renting more this week. I know renting can be a pain. Moving, it’s not your place, etc. We will look at this more later in the week.

I hope this helps people some. I know it is not all inclusive, but it should give many people, lots to think about.

I look forward to the comments!

SoCalMtgGuy

Based on some of the comments and the e-mails I have received, the ‘buy vs. rent’ decision is becoming a big one for many people. It is also becoming a ‘heated’ subject for some people.

I want to take some time this week to really address the pro’s, con’s and other factors that should be looked at when making this decision.

I will be back at my computer later today, and will start getting into this subject at full length. Until then, I suggest spending some time in the Forums. It has been a little over 72 hours, and already there has been quite a lot of activity. I especially want people to read THIS THREAD.

Check back later in the day, as I look forward to tackling this buy vs. rent decision in a financial, not emotional way!

SoCalMtgGuy