A time to buy, a time to rent….but don’t take my word for it
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
February 7th, 2006 03:51
-a sobering story, and it alarms me to think “how bad it could be” this time compared to the early 90’s. I don’t think there will be any hesitation to keep people from walking who bought in the last 12-18 months with I/O loans and no money down. The same real estate genius’ who goaded them to “buy now before prices go up” will be telling them, “just walk away, it’s only bankruptcy/foreclosure, everyone’s doing it, you’ll time it better next time”. Maybe having a foreclosure around your neck will become the next cool status symbol, kind of like having a Hummer is right now?????
-at the end of the day, I hold the mortgage industry responsible for what is coming. Their decision to make a large pool of people qualified buyers for large mortgages, who historically wouldn’t have been, artificially deepened the buyer pool. Demand outpaced supply, 18-20% annual appreciation for several years when income rose 3-4% put median home prices well beyond what people could rationally afford.
-If a 30 year fixed rises to 8% in the next couple of years, I would expect prices to fall back to around where they were in 2001-2002. That will leave buyers in bubble areas who bought in the last 12 months hundreds of thousands of dollars underwater. Those who bought 0 down will have an easy choice to make, and they will be saying to theirselves “I should have rented”.
February 7th, 2006 05:05
People really are influenced by what happened to them in their formative years. Having graduated from college in 1983 and unable to get a job for months, I’ve been a FE — employee — always earning less than my peers based on what I earned before. My attitude — please give me a job sir. The attitude of those who entered the labor market near the peak of booms? On your knees and perhaps I’ll work for you!
But getting back to the housing market, as mentioned I avoided becomming a FB in the 1980s in part because I had had a housing market course in graduate school (for city planners) and realized there was an unsustainable bubble on the coasts. We purchased our home in 1994, after the bubble had deflated.
But plenty of our friends had experiences like SoCal. They ended up saving for years, living crammed in to their one-bedroom condos with two or three kids and living like slaves in order to make the payments — and save up enough cash to bring to closing and walk away with nothing. Their desire to get in early cost them dearly.
There was also a demographic aspect. I’m among those the back end of the baby boom, born from 1955 to 1965, a FG generation. The older boomers had bought condos, made money, sold them to us, and bought houses. By the time our generation started buying condos, the entire first half of the baby boom — a big bulge — was moving out of the singles and couples phase and into the parenting phase. So while the median single home price fell 33% relative to inflation from 1987 to 1994, the price of the average coop/condo totally collapsed, especially outside prime areas for the young like Manhattan.
Fast forward to today. The hip 1960s generation, while running up the national debt, are moving en masse into empty nesterhood. Many are moving back to cities and apartments/condos, along with their GenY offspring. Meanwhile the number of people in the parenting phase is going down, as a result of the “baby bust” of the late 1960s and 1970s. So are school enrollments, except in areas with booming in-migration.
In short, it is possible that within a few years those entering the parenting phase will have their pick of family homes, as more and more boomers sell. So what will happen to those overpriced new homes way out in the exurbs in areas without established schools and communities? Perhaps the same thing that happened to condos outside Manhattan after the 1980s. Poof! And condos? Well, it doesn’t make sense to “downsize” to a housing unit that costs just as much as the house you left behind, so that will be over. But don’t worry; developers can make money at much lower prices.
February 7th, 2006 09:32
Larry, I hope you are right. I’m one of those really really late boomers who also entered the employment market during the 80’s recession - talk about starting off behind the 8 ball. You really felt like all the good opportunities had been eaten up by the generation before you.
One thing I had been wondering was what was going to happen to all those boomer homes once they head to senior facilities, especially if they are migrating to the condo city core? I’m hoping that they sell cheaply, finally allowing me to enter the buyer market. I probably could have bought in 99 or 00′ but the numbers still weren’t making sense even then. In the meantime I’ll keep saving 35% of my paycheck each month and wait.
February 7th, 2006 09:49
if you walk away can’t the bank 1099 for the difference between what you owe and what the mortgage company can sell the property for??
February 7th, 2006 09:53
This from the just released NAR forecast:
“Sometimes people lose sight of the fact that real estate is cyclical,” he said. “Even so, sales will continue at a historically high pace with modestly higher interest rates as the year progresses, and 2006 is forecast to be the third strongest year on record.”
So they are forecasting a 5% increase in the median price, and a slowdown — but not collapse, in sales.
Maybe — remember the bubble is strictly a coastal phenomenon, so prices elsewhere could still rise. But the flyover country has had its own bubble — in the amount of new construction, much of which was snapped up by investors. I think they have built a decade’s worth of housing in many markets where prices have not soared.
You wonder if exurban McMansions are like SUVs, and the housing industry will be like GM and Ford. The problem — if you own a home, you are IN the housing industry.
February 7th, 2006 10:36
A zero down mortgage is really like a cheap option. If real estate prices go up, you get all the appreciation with none of your own money at risk. If the price goes down you walk away with a ding on your credit. The bank or investor takes all the risk. The bankers are stupid because they are essentially giving away options without a corresponinding accounting for it.
Does anyone remember what happened the last time options were being giving away by the billion? Companies like Intel said the options had zero value because they were given away with zero “intrinsic” value. It ended very badly with the tech wreck, and finally NASB has required companies to take a charge when awarding options. Congress fought for years the proper accounting of options because they were getting so much money from the tech industry. Sounds a lot like the fight against tighter lending standards. I sure hope none of you own a bank or mortgage stock, or GNMA paper.
February 7th, 2006 10:38
Being a couple years younger than Larry, but basically on the same life track, I applaud everything he said.
I’m not sure that the bubble is purely coastal. Prices in Minneapolis (where we used to live) have skyrocketed — I think the fourplex we sold in 1999 has since increased in value about 700%. And this fall, Minneapolis was awash in speculative loft/condo developments. At many, they were collecting cash but didn’t even own the land yet! So their condo market is probably going to collapse in a big way. Their regional FRB has made bubbly noises about housing prices.
It does seem that, away from the coasts, bubble-type activity is much more limited to big cities. Other regions haven’t achieved the Total Sprawl that characterizes California.
February 7th, 2006 11:26
I wish people would stop confusing the San Fernando Valley with California. What would East coasters think if every time some said they were from New England the next question was “Oh, what part of Boston?”
February 7th, 2006 11:49
Robert, whom are you arguing with?
I live in Northern California, and I’d say that, with people commuting to San Francisco and San Jose from *more* than 90 miles away (the hot ‘burb is now El Dorado Hills, on the east side of Sacramento), we have pretty much achieved Total Sprawl. There are very few breaks in urban development along I-80 and I-580 into the Central Valley. Developers now want to build new tracts in the swampy bits of the Delta; they’re promising to put up really nice levees.
Everything I’ve read about Southern California is true of the SF Bay Area I know — just change the place names and occasionally adjust the dollar amounts. Oh, and don’t forget our little rent spike circa 1999.
February 7th, 2006 13:00
here we go, the sacrifices to get into a home, same now as it was 15 years ago. endure the bad schools, endure the long commute, endure the shrunken cash flow, all in the name of getting in before it is too late. I see the effect of this everyday. Anxiety, depression, diabetes, obesity, cholesterol problems all from long commutes that just taxes your system to the point where ultimately something has to break. But we got a nice deal on a home in Victorville. But you also just signed a contract with the devil giving up 4 hours a day for the forseeable future and if this continues also shave 10 years off your life expectancy. But it is a really nice home in Victorville and we are homeowners. That’s what its about!
February 7th, 2006 13:13
Victorville is a stretch but I bought in Riverside 3 tears ago, one of the biggest bubble areas. Contrary to the stereotype, it has some decent areas. I live in a tract community, 15 year old homes, big yards, all races (decent folk), white collar and blue collar, kid friendly.
I first looked to buy in the OC but realized it was too much $. My wife and I are open minded and decided to look out this way. Other friends laughed at the idea of us moving here making jokes and comments about ghetto living but guess what, now they are outpriced of this market and my kids have a nice home I can afford. As far as the commute, I admit my commute to the OC sucked ass for a while. But hey I was lucky enough to get a new gig 2 years later, a 15 minute coomute from home and with a pay increase!
February 7th, 2006 13:19
It would seem from these postings that if you “make” or “lose” money in real estate, 9 times out of 10 it is just dumb luck. Most people buy/don’t buy property in reaction to their own particular needs and stage of life. If your need to buy or sell corresponds with a bubble or a bust, then you become a f@ckedborrower. If you hit it the opposite way, then you’re a “smart investor”.
February 7th, 2006 14:08
Drwende, you said; “the Total Sprawl that characterizes California” so I guess it is you that am “arguing with.” I live about 50 miles west of downtown LA (yes, west) and this is my backyard:
http://users.adelphia.net/~techscan/Backyard2.jpg
http://users.adelphia.net/~techscan/Backyard3.jpg
Southern California is not Canoga Park or Ontario. Those are just stereotypes and even those stereotypes are inaccurate. The LA urbanized Area is the densest UA by far in the US yet sprawl is always characterized as low density. By every single enumerable criteia Los Angeles is the least sprawled place in the entire US bar none.
February 7th, 2006 14:18
vicente fox said… 9 times out of 10 it is just dumb luck. Most people buy/don’t buy property in reaction to their own particular needs and stage of life. If your need to buy or sell corresponds with a bubble or a bust, then you become a f@ckedborrower. If you hit it the opposite way, then you’re a “smart investor”.
That’s not it at all. First there’s real estate to live in and then there’s real estate investing, two different animals. And regardless of which type we are talking about it is never required that you get f@cked in the process. You cannot cheat an honest man and you cannot make a FB out of someone who isn’t greedy. (Maybe I’d be less terse if I didn’t have a $4000 paint crew and $12,000 roofing crew crawling all over my “investment” while i’m trying to work.)
February 7th, 2006 15:02
Robert,
I know you are having a rough one today, but not every FB was necessairly greedy. There are going to be lots of people who wanted nothing more to own a home. They were not speculating or flipping. Maybe they didn’t know as much as many of us here do about the market, etc.
That said, what are you getting done to your house??? Sounds like a lot. Good luck with the renovation!
SoCalMtgGuy
February 7th, 2006 15:27
I’d vote “greed” for people buying multiple “investment” properties with flaky financing and unexamined assumptions… but “fear” for people who bought because they expected to be priced out of the market permanently if they didn’t stretch to the max and grab a house now.
Let’s not forget, too, that using the house as an ATM was being advocated by “investment advisors.” When you pay a supposed professional to advise you, you usually trust what s/he says. That’s what you’re paying for. Having learned how to research an advisor’s qualifications properly, I’m having a lot more trouble finding one I’d feel safe using. Think what people who aren’t obsessive researchers must go through!
February 7th, 2006 15:50
Larry,
thanks for the heads up about the NAR “Forecast”. What a joke. I would love to read their forecasts for 1992, 1993, 1994… For anyone interested, here’s the link: http://www.realtor.org/PublicAffairsWeb.nsf/Pages/HousingForecastFeb06?OpenDocument
Here’s what I took from it:
1. Existing home sales will decline 4.7%
2. New Home sales will drop 8.5%
3. 30 year fixed rate mortgage will rise to 6.9%
4. Not all Real Estate Agents are as ethical as Realtors ™
5. Inflation will be 3.1%
6. Personal income will grow 3.9%
7. GDP will grow 3.4%
And the conclusion of all of this is that real estate prices will continue to rise at the rate of 5.0% for all housing, and 5.7% for new housing!
Man, I’m glad they’re not teaching math to the children of America! Or, given that most new Realtors ™ are part-timers jumping on the bandwagon, maybe they are. Yikes!
February 7th, 2006 15:52
David in Berkley, Maybe on the left coast you cn just mail your keys into the bank. Out here in the East the bank tends to drag you into court saying “Where’s the rest of our money?” It’s hard to get away without a bankrupcy judgement and giving up most of your assets.
February 7th, 2006 16:04
I just found this while randomly surfing the net.
Quicken Loans ranks 13th in Fortune Magazine’s 100 Best companies to work for. Under the “What makes it so great” is the following:
“A supercharged mantra culture rules at this mortgage bank. Sayings such as EVERY CLIENT, EVERY TIME and NO EXCEPTIONS, NO EXCUSES are plastered on posters, T-shirts, travel mugs, notepads, and portfolios.”
Yea, every client indeed.
February 7th, 2006 16:09
SoCal,
I’ve got the littlest home sick on the couch (1st grade) and the painters are grinding on the outside walls and there’s about 8 guys pounding nails on the roof (4175 sq ft!). the inspector was late this morning, and I’m waiting to hear if the clock has started on escrow for the investment house I’m selling up in the mountains (Wrightwood, Mountain High Ski Area). More about that later. Back home; since we bought in Jun ‘95 our primary residence has appreciated $9/hr every hour since then. The roof however was the original and was old growth redwood, 44years old. Fire hazard and us next to a large barranca. We are adding a granny flat, garden house, Cabana, whatever you want to call it as my office and guest quarters along with lots of defered landscaping. 5% HELOC taking our max exposure up to 25% LTV. It was funny applying. When they asked approx LTV and we said 15%, they assumed we meant to say we had 15% equity, they just weren’t used to people like us. Apparently HELOCs are also being marketed to those who don’t understand their proper use. I’m still thinking that anyone who is a FB did the f@cking to themselves. Just because you can do something doesn’t mean you should and I just cannot see anyone buying at 2.5 times rent without having a glint of avarice in their eye as the motivator.
That said there is a lot to condemn the industry and our educational system if the risks aren’t obvious. Part of that is the people buying houses today are nowhere near as smart and/or educated or experienced as in times past. Their tution at the school of hard knocks will be expensive indeed. Still, ignorance of the laws of mathematics is no excuse.
I feel for those who are priced out and those who are about to placed under house arrest through no fault of their own but the FBs? I don’t lose sleep excepting those with major medical, etc. problems. That brings up another thing, don’t get divorced; fastest way to become poor known.
February 7th, 2006 16:40
Robert,
I know that makes it worse having a little one home sick. I agree with much of what you say. HELOC’s are sold to everybody…I’m sure you can believe this after your experience.
I agree that the industry and the educational system are partly to blame. I did a post about people bankrupt in math. I saw some stats a while ago that said something to the effect that high school grads today have the equivalent of an 8th grade education of decades ago. The standards have been lowered, and most do not know how to think for themselves.
You have to admit this, most people had no idea they were competing against all the crazy loans out there. If you were not in the industry, you would not know that the guy who makes 40k is competing with the guy who makes 150k. One guy ’states’ it, the other guy ‘makes’ it. It will be interesting to see how it all pans out.
I hope your little one feels better, and that they get your renovations done sooner, than later.
SoCalMtgGuy
February 7th, 2006 16:43
Just spoke to someone moving from OC to Idaho.
-Bought their home 30 years ago for $70,000.
-Total improvement in last 30 years: $60,000.
-Sold for $960,000.
-Buyer is using a bridge loan as their home inland has not sold. A FB in the making?
February 7th, 2006 16:48
I agree with the sentiment that for most people, your lifecycle dictates when you buy. But unfortunately, sometimes it’s not the best time to enter the job market, buy a house, or get old. Most of us, for example, will be getting old at a time where the elderly are less prosperous than today.
Still, if you know what is coming, you can be better off.
Those who are buying multiple homes to rent are pursuing the latest dream of wealth without work. If they survive they will end up earning their wealth by working their asses off collecting rents, finding tenants, maintaining properties, and working two jobs besides to cover the negative carry. Meanwhile, the get rich quick ads are shifting from real estate to the foreign exchange market.
February 7th, 2006 21:10
I think I would hold off for at least 4-6yrs at least until the rubble clears. The economy is not doing as well as the media makes it out to be. If you factor in realistic price inflation and remove all the hedonic multiples that the Govt has been using to pad the CPI and GDP you would remove the 2-4% exagerations that have been built into their bogus stats since 1992. The 1.1% 4Qtr growth in 05 really means that the economy declined by 3%. We have been in a recession since last fall, but the fed won’t admit it until the S*** really hits the Fan.
Sites of interest:
http://globaleconomicanalysis.blogspot.com/
http://www.goldenjackass.com/main5.html
For those of you on the west coast who need to buy now, Centex Corp. is having one of their one day only specials again for several communities in Sacramento. Up to $150k off your purchase.
http://www.centexhomes.com/Sacramento/norcal12hoursale.asp?DivisionID=1016
Better than the last one time only sale for that area about 60 days prior (up to $60k off). Who knows, maybe if you wait long enough you could get one for free.
February 7th, 2006 22:02
hey socal, this is crazy but when i bookmark the forum and then click on it i get sent to the blog.
can you sticky a forum link at the top of your blog?
February 7th, 2006 22:04
doh…..(homer simpson voice) i found the link. (strangles bart)
February 7th, 2006 22:52
Don’t forget… even if FB’s can just “mail in the keys and walk away” the damage done to their credit will mean much more in the future than it has this past decade. A short time from now sub-prime lending of any kind will virtually cease to exist.
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