Steve

The first is that all recent homebuyers are in trouble. For people who couldn’t afford houses and somehow managed because of an exotic mortgage, that may be the case.

For people who planned to live in their houses for a realistic period of time and locked in rates or planned for their rate increases, they are unaffected by any short term impact.

Are home prices at the top of the market? Your question assumes that a market has to go down and won’t get back to where you bought at — and that your needs won’t be fulfilled in the mean time.

I’m writing an article about market data as we speak which will help illustrate my point, but until that’s published, I offer that the stock market is higher today than during the most recent bubble. If you held your stock through that period, you would be unaffected. If you panicked or invested in an area with poor fundamentals, you lost a lot of money.

The Central Valley is an example of a place with poor fundamentals. There weren’t enough high-paying jobs to support those prices and that many houses.

If you’re worried the bottom will fall out of the market, think about the price your co-workers and bosses would pay for a house.

Think about the rental lifestyle and how people treat rentals vs. taking ownership. Think about not having physical or financial control over where you live. More importantly, think about the averages over the period of time your family would stay in that house to make it a stable home.

I’d argue that for all the rationality with which your questions are presented, the opinions are actually colored emotionally by fear of a catastrophic downside. What I’m saying is that, yes, no purchase this large is risk-free, but with good preparation and an understanding of your own needs, you can mitigate any major downside risks while improving your lifestyle.

It’s late, I’m tired, and we can pick this up again.

Cheers,
Steve

My opinion as an agent is that the only thing you need to do is what’s right for you, your family and how comfortable you are with risk (i.e. what you’re prepared to do, what you want to avoid, and as a corollary, what your time horizon is). Yes, it is conceivable to be priced out of the market, but if that’s a conscious decision you make, then you can plan ahead to try and mitigate that.

So with that in mind, yes, interest rates have gone up over the past few years. But the only thing you can predict about the Fed is that they have an anti-inflation bias. September 11 (down), the job market (inverse), oil spikes (inverse), and other unforeseen events could all impact rates.

If you’re sailing a boat, you would need to ensure you have the right provisions for your journey and ensure you’re not sailing into danger. The ocean is the ocean and she’ll do what she does! If you get a mortgage, you can lock in the ocean for a period of time which may outlast your boat.

Boats are expensive though, right? Yes, it’s a lot of money; yes, it is an important place where you put your money; yes, you want its value to increase. But it’s both investment and use. If hypothetically your baby grew up (son or daughter?) and wanted to paint his room Giants orange and you only treated your house was an investment, you’d never do it. But you care for your children and you consider it anyway knowing that you’ll never get an A’s fan to buy your house. Would you do that in an investment property?

That’s how I see the difference between a home, a rental, and an investment property. One is use and investment, the other is pure investment.

I phrase the question, “Are you buying at the right time?” differently. I ask, “What are events that will necessitate selling the property?” because the price of the house only matters AT THOSE POINTS. Otherwise, you’re locked in for the period you’ve chosen, with a possible ARM reset which you can plan for.

With salaries at Bay Area levels and job growth at sustainable percentages, there are many ways to be financially stable with a 10% down payment and keeping investment reserves elsewhere. My opinion is that the key is for the difference in money to be there (i.e. invested somewhere) and not for it to go into “stuff” that has a low resale return.

I’m old school because I see people look at 0% as if it’s a right and not a marketing tool. It’s okay to do 0% if you’ll be staying in the house for a while and understand the ramifications of not having upfront equity. (Can explain.)

I’d argue, instead, that more qualified people are making stronger offers on better properties. (I used the word “better” for which there’s no measurement, just experience.) Those who waited out 2005 are sensing more weakness than there is and running into competitive offers from all the latent money sitting in stock around Silicon Valley.

I need to take this phone call but I’ll be back to answer the rest of your post! Very thought-provoking!

Cheers,
Steve

I’m should clarify that I’m not trying to base my decision on the Fed’s actions — I’m just trying to glean how their actions will impact rates, because the real estate boosters have been screaming “Buy now before rates go up!” for five years. My primary thought is that a lot of homes have zoomed in price the last few years; a RE agent friend of mine told me last summer, “$800,000 is the new $600,000, and you need to buy before $1,000,000 is the new $800,000.”

By the standard 20% down rule, and the need to have a fund for repairs and furnishing, someone in the BA really needs about $200k in the bank before buying a house. But in the past few years, as lenders have gotten aggressive, that price of entry has dropped considerably, in some cases to $0. We have to admit that way, way fewer households are going to be able to afford $800k homes if that minimum capital for entry goes back up to $200k. Even with all that starting capital, you’re talking about $5k+ in monthly expenses before upkeep or quake insurance.

And as for the AMT, my wife and I are already paying it without even holding a mortgage. We’re already at our minimum possible tax with only a baby and some fairly modest charitable contributions to deduct!

So, if our rent is relatively low (yes, rents are generally higher, but still far lower than the cost of ownership), home prices are still close to the top of the market, recent homebuyers are stressed, and we can’t possibly lower our tax bill, why would we — or any dual-income families still renting — buy a house in the Bay Area in 2007?

It basically says that high-paying jobs (not even including stock and option bonuses) allow personal savings and keep the market here competitive. And that the foreclosure rate on default remains low because most owners can afford to make other arrangements.

If you’re an avid reader here, you’ll know that I don’t advocate aggressive lending and am pretty old-school about my opinion on down payments. I know a lot of responsible people who want to use their money elsewhere, and that’s fine, but it takes a lot of discipline to keep a good investment reserve.

Also, a couple things about renting vs. owning. I’d need figures to do more than handwaving, but because of the high salaries in the area, the tax deduction really does matter even when you factor in the possibility of AMT. The savings based on your tax rate is significant and offsets much of the cost. (Accountant for details, but I am someone who’s been through it.) Rental prices here have increased significantly as well offsetting many of the monetary arguments and bolstering some emotional ones.

There’s no question a disciplined saver can accumulate more money for a down payment over time.

But if you’re going to base your purchasing decision on what the Fed will do in two years, I have a financial advisor at the Las Vegas Bellagio who’d like to meet you at the craps table for some equally good advice.

Now you know you can keep renting for significantly less than owning. Also, the Fed has moved away from rate-tightening, so mortgage rates should remain low as the economy continues to slow. In two years, you’ll be able to have your pick of homes from desperate sellers, for less than you would have paid today, and you’ll have a bigger down payment to boot!

Steve

Excellent post. This will be my Carnival choice for Toward Better Life Carnival #6, which will post on My Wealth Builder later today.

Is there evil in the mortgage and real estate world? Of course. But, then there is in every possible business (Enron?). The key is to work with someone that you trust — and know your limitations.

It often amazes me how much someone will tell me (as a licensed agent in Ohio) about themselves in a 30 second phone call. Last week, in 30 seconds a woman told me their house had black mold and that it was making them all very sick, they had to move, they had bad credit, etc.

What did she just do? She just set herself up to be taken advantage of. Fortunately, she called me and I explained to her what she had just done — and you could hear the alarms going off in her head. How many people had she called before me? I don’t know.

The most important thing to do is to find people that you TRUST in this business and work with them.

The wide-variety of houses on the market, and the wide-variety of mortgages are not in and of themselves a bad thing. But when matched with “evil” people they can be. Unfortunately, we tend to hear so much more about the bad ones than the good ones.

Toby