Update: Meet today's homebuyer, an L.A. Land reader

No, it's not Lefty. NF, A longtime reader, writes to describe his recent change of heart and purchase of a single family home in Pasadena. (Update: NF added a few more comments at the bottom of the post).

"It is funny, at first while I was on the sidelines and simply browsing for homes I agreed wholeheartedly with the majority of your readers; don’t buy, wait it out, the bottom is not even close.  It was great hearing about the price drops and seeing the rift between those who commented.  The smile on my face when thinking of the greedy speculators who were now in despair was often wiped away when thinking of those individuals who work beyond belief at minimum wage and were swindled by the sketchy mortgage brokers.

"As I continued shopping around and heard the stories of individuals that purchased homes during the boom I realized how fortunate I was to be in my current position.  My wife and I had the opportunity to have a checklist of all we wanted; nice-sized back yard (with fruit trees), 3 bedrooms, remodeled kitchen, a safe and quiet street etc.  We found a handful that fit the bill and that we would be happy to own.  We did not have to worry about competing offers.  We had the peace of mind to think things through rationally.  We quickly got pre-approved by several banks and put in offers at about 10% below asking price – we went back and forth with a few homes and ended up paying about 8% below asking price.  I was fortunate enough to put 20% down on the house – I am 28 and my wife is 27 but we have tried our best to live frugally the past few years in anticipation of the impending purchase. 

"Yes, the prices of home may/most likely will continue to decrease, but we do not plan on leaving this property for at least 4-7 years; plus the mortgage interest rates are pretty darn good.  The tax benefit from the interest payment lowering my taxable income will be embraced with open arms come this April – Thank you Republicans.  Plus, I still don’t know what it feels like, but I imagine the pride of owning your own home will feel pretty good. 

"I just wanted to say thanks for educating me on the real estate market.  I think most commenters on your site are hoping to enter the market at a bottom so they can get the best bang for their buck.  The thing is you can never determine when the market hits its bottom, and plus with the tax benefits from owning a home/mortgage and the ability to pick and choose your home stress free, perhaps entering a little prematurely isn’t that bad."

Update: Click below to see additional comments that NF added in the comment section.

"To be fair, I’ll provide a bit more information:

"As for the price, I watched several houses sit on the market and have their prices slashed over and over again (I know they were artificially inflated).  I checked the sale comps (again, I know they may have been artificially inflated) and I took into consideration that this was a turkey and recently remodeled; but I still made sure I was paying less than comps; I paid approx. 600K.

"As for my financials, we pull in approx 150K base.  My wife is an MD but in residency, so her salary will hopefully increase by 3x in one year.  I ran the numbers and I can pay this mortgage.  Before we make any other purchases, we are strengthening our emergency fund in case something happens to either of us.  If worse comes to worse, I still have my fruit trees and I’ll find some “organic” stickers and sell them at the same margins as Whole Foods. 

"The comments have been right on; Yes, I do wish/hope prices rebound and the market turns, but I am realistic, and regardless if it takes 1 quarter to 4 years, for us the bottom line is this: 

"Right or wrong, my wife and I were just not happy living in our one bedroom apartment with our two dogs (Yes two dogs in a one bedroom apt – we moved from NYC) and we wanted a house with space and privacy.  The intangibles of living in a house are worth it to us.  My story was not an attempt to justify my purchase decision; for my wife and I it was not just a business/financial decision, but more so a lifestyle and personal happiness decision.  Rent on a 3 bedroom house is pretty high up there.

"Finally, I admit my error for thanking the Republicans for the mortgage interest tax benefit.  I concede that I know little regarding the history on who passed what tax laws; I should have known better than to mention politics. 

"P.S. My anonymous realtor is a good guy; I worked with him at my prior job at a consulting firm before he left to become a realtor.  I trust him and I know he did not feed me (too much) propaganda."

Your thoughts? Comments? Be nice, for once in your life.
Photo Credit: Getty Images.

Comments

[Milla]

NF!!! many congratulations on your new home. as a recent homebuyer myself, i agree with everything you said and can confirm that the pride of ownership is indeed priceless. enjoy every second of it and pay no mind to the naysayers who would make you feel foolish for your decision. (now please go put on a suit of armor.)

[Fred]

Awesome. You made a choice. Of course, you could have bought the equivalent house next year and saved enough to put your firstborn all the way through college.

But hey, to each his own.

[shockg]

NF, Good luck on your new home! I hope you enjoy the years to come in your home. You will most likely get attacked for buying much like Milla did. My guess is since you are now in you don't care what these jealous angry fools say. Another thing, Ignore the requests for personal financial info from these angry fools. They will do whatever they can to twist things around to make you look bad. Enjoy!

[Anikisan]

NF:

Congratulations. You're 27 so enjoy...however, I was 26 during the last bust and I bought in 1993 (a year or two too soon). I also sold in 2003 (a year or two too soon). Now, as a seasoned vet with a little dry powder I have learned not to pull the trigger too soon and I believe you have. So...best thing to do (old, old investment advice) is walk away from sites like this, enjoy your purchase and don't look back. You'll be much happer that way.

Garrett

(@ Garrett: You had me at "congratulations." Then you lost me at "walk away."
--Pete)

[Laker]

NF,
Congratulations on your new home purchase. Enjoy the pride of ownership.
....
Now, on a selfish note, once a person buys a house in this market, he will immediately jump to the other side and join Lefty and shockg in trying to use their finger to shut the leaking damn from exploding...I understand it, you may say that you guess prices could come down, but deep inside you wish this is the bottom, and at least hope for prices to stay flat if not rise.
You do not share the details of your purchase so it is hard to figure out whether your house is worth the money you paid for it. Maybe the asking price was a 2003 price, and you paid 8% less, getting maybe something like 2002 price...then i think you are in pretty good shape. But it could be other way too...Looking at the facts you will probably need to say byebye to your hard earned 20% down payment and that is a shame. You mentioned that you and your wife lived frugality to save this money so i can feel for you to be watching it evaporate...I really would.
There is a 20% price reduction already priced by all mortgage/banks so i say it is pretty safe to assume it will be more than that.
Lastly, i think you'll need to stay at least 10-13 years before you could move up and sell it.
Good luck anyways!

[E]

When a new homebuyer purchases a home these days, are they furnished with a pamphlet by the NAR with all of the tired talking points?

Low interest rates.

Tax Deduction (spend a dollar to get 30 cents back)

You can't time the bottom!

We plan to be here (insert 4-10) years at least.

It's got everything we wanted!

Yawn!

And where does Milla find so much time to read and retaliate to the blog posters? Doesn't she have a job?

I take it she works for an investment company. What is their exposure to financial derivatives?

Too much questionable stuff here sometimes.

Things that make you go...

Hmmmmmmmmmmmmmmmmmmmm.

[Jason C]

First of all, congratulations on your home purchase.

I think it's important to point out that people will jump in when they feel the bottom is *coming soon*. Would poster have purchased the home if he believed it would drop in value another 20-25% in the next 1-2 years? Likely not. Look at the amortization schedule of any mortgage loan (fixed or ARM), and you'll see the vast majority of what you pay is interest. Sure you get a tax deduction, but if a home will decrease in value much faster than you can pay it off and benefit from tax breaks, you're paying an awful big premium for choosing your "home stress free."

Will you feel the same if, 2 years from now, you realize you could have paid $200K less? Will you feel the same if you could have gotten a nicer house in a better neighborhood for the same price in November?

This is not to say I think your house will drop $200K. I'm no clairvoyant. But what I am pointing out is that your decision to buy is a reflection of your belief about the likely trajectory of home prices. You don't believe your home will drop in value by 25% for an extended period of time (a la Japan) or you wouldn't have purchased.

As for me, my bank account is stuffed and ready to purchase, but my day will come when I see home prices START to approach historical inflation-adjusted levels relative to local incomes.

JC

[JK]

Congratulations NF! I only dream of being able to afford Pasadena. Enjoy your new home!

[somedude]

Congratulations on your new home.

Of course you can't time the market exactly to get the bottom, but that doesn't mean you ignore obvious imbalances.

As a future home buyer, I can say I am not waiting for the bottom, just for a rational price when compared to local incomes. I really don't care if I overpay some as long as I can afford the payments and don't feel i have to sacrifice the quality of my life (as a renter).

[DF]

This seems like a rational decision to me. If you can find a place you're happy to live in and can readily afford, and are also willing to stick out market fluctuations for 5-7 years, you'll likely be fine. If I could find a place that met those criteria, I'd be happy to jump on it.

[Nelcisco]

I've been reading peter's articles and blogs now for the past five months, I started getting in the conversation today responding to Peter's artical yesterday on LA listing prices and I have to say you readers are probably the best bloggers I've had the pleasure to read, although I don't agree with everything thats said, all of you are well informed and passionate and concerned about our RE market. While most people in our community care more about whether David Cook or Archulta will be the next American Idol, or the Kardashian chicks, entertainment tonight, or whatever's on the tube you're concered about where the our economy our RE market is headed, Kudos to all

[Giacomo]

If there weren't dreamy young buyers like yourselves, I wouldn't have been able to SELL my bubble-priced house in Pasadena.

Yes, you bought too soon, but you'll have decades to recover financially- so you'll be fine. Enjoy!

[arroyogrande]

NF, Congrats! As long as you can afford the mortgage comfortably (in other words, not live like a vagrant in order to afford the house payments), can absorb any resets (assuming an adjustable rate mortgage), have factored in taxes, insurance, and maintenance, and have a relatively stable job and income, you should do all right.

There is a possibility that you will be under water at some point in time, but that doesn't really affect you unless you want to sell (ie move for a new job, or be forced to sell because of job loss).

Live you life, spend time with friends and family, and enjoy your new house! (BBQ season is here!)

"The tax benefit from the interest payment lowering my taxable income"

I hear you. The reason I'm currently renting is that, even *with* the tax break, my monthly outlay would be twice what I'm paying in rent, in an area that is still falling in price. The tax break really only means that you are paying less in interest, so the benefits vs. renting can go either way depending on the market conditions.

"I imagine the pride of owning your own home will feel pretty good."

Yes, it does. It's one of those "intangibles" that allows sales prices to be above rental income.

"The thing is you can never determine when the market hits its bottom"

So true. However, if the past is any indication, the bottom will be long and flat (several years), with only slow growth after that. I doubt that anyone that *really* wants to buy will "miss the boat" by housing prices taking off again any time soon.

"perhaps entering a little prematurely isn’t that bad."

Again, if you can afford the house (and any resets), and have some $$$ socked away for emergencies (job loss, etc.), you are golden. Sit back and enjoy life. Just don't max out those credit cards buying new furniture (jk)!

- arroyogrande

[normanpheeny]

NF, you have the right attitude and it seems like good financial responsibility. You will get some flack, but I think the majority will believe - if there were more buyers like you during the last few years, we would not be in this bubble mess we are in today.

[NoWayinLA]

You can tell he's a longtime reader, because he didn't give the financial specifics. Obviously, he's seen what happens to people who make that mistake.

I have to disagree with Milla, though. Pride of ownership is pretty cool. Priceless? Definitely not. There is a price point at which ownership becomes a burden and not a blessing. There are many families discovering that fact firsthand.

[jeff]

I really enjoyed reading your story, NF. Its great to hear about someone who had the restraint to save up a 20% down payment. I'm guess that is about 100K, considering todays prices. Thats quite an achievement for a 28 year old.

One thing that has really bothered me is that people always think of the income tax savings but never mention the property tax. If you pay about 24K a year in interest, it saves you about 8K in income taxes. Isnt the property tax close to that same amount?

And finally, thanks Pete V for maintaining a great blog. I am probably personally responsible for 100 hits a day.

(@ Jeff: Thanks, man. I need all the hits I can get. Refresh early and often!
-Pete)

[tealeaf]

NF: Many congrats on your purchase. If you got the place you wanted at a price competitive with renting, then you're doing just fine.

Enjoy the home.

Milla, you too. Just change your thinking on this 40 year mortgage thing, ok?

[l.a.guy]

Congratulations. I'm sure you'll be labeled a knife catcher, sucker or worse, but your approach was sound and sensible. It seems like a lot of posters on this site dwell on homes as investments and forget that the primary reason for most people to buy a house is to have a comfortable place to live that they can call there own. (Granted, many people lost site of that during the past few years, but that's why most people OUGHT to be buying)

If you like the place you bought and can comfortably afford it, you should never regret your choice.

[eprobert]

I hear you guys. While I'm cheering the crash and thankful for the greed of idiots now in foreclosure, we've been making offers on REO houses in our neighborhood.

Actually, it seems we are mere months away from rent and prices being in "perfect" alignment so I'm not to worried about timing the exact bottom.

Prices are falling so fast that things are adjusting much more quickly than I, for one, ever expected.

It's amazing to me that you are so young - at your age I had just finished my MA and had no way of saving anything, much less buying a house.

[Cal]

Congratulations.

[BottomFisher]

When we do reach the bottom, we will stay there for a long time and you will know it. Buying now is stupid...you will have plenty of time....stop listening to the REIC hype. Ants in your pants will only put you into the next foreclosure wave. I would end with "good luck', but you just killed that outcome.

[Fred]

@Eprobert - "it seems we are mere months away from rent and prices being in perfect alignment"

Don't know WHAT data you're looking at. Price-to-rent ratios are still SERIOUSLY out of whack. Like at least another 20% decline is needed across the board.

[N_C]

Congratulations! Please ignore all the flack you are/will be getting! I cannot believe how snarky some of these comments are. :/

You are buying for the right reasons. It sounds like you have a sensible attitude about the whole process. I admire your discipline in saving and I hope I can be in your shoes when I am 27/28. :)

[Jesse]

NoWayinLA explain this one please:

"there is a price point at which ownership becomes a burden and not a blessing."

So if prices will go down another 25% from what they are now, I can wait and save two years' worth of pay.

That's cool.

That decrease of 25% by 2010, is that a big IF or a big CERTAIN?

Say, a house going for 450K now.

[Arti]

It's tough to stay on the sidelines when you have the income and savings to actually jump in. I can attest to that. In the nicer areas like Pasadena or, where I have been waiting to buy, Santa Monica, prices have barely come down. 8% off a listing price that's at a historic high is not much of a shave given the runup we've seen. And yet the prices in West LA remain very sticky for SFRs . . . Perhaps these areas are in for a soft landing, i.e. flat values for 10 years as inflation and wages catch up. In which case, NF did the right thing, why wait forever if the nicer areas are never coming down...

[SoCalRealEstateNews.com]

Congratuations. You may not have bought at the bottom, but you certainly didn't buy at the peak!

April foreclosure data's in for much of So Cal, & it looks like, for the outlying regions at least, we'll have lots of REOs through the end of the year.

Renters, if you're not buying, you should at least be saving up!

For details and links, check our latest post on

http://SoCalRealEstateNews.com

[blah]

The mortgage interest deduction off taxable income is way overrated. It's just one part of the bigger financial picture and isn't always as great as it would seem all things considered.

[puckhead]

Hey we're neighbors, I live in Pasadena also. Great place to live, you'll enjoy it. The nice thing about buying a house at a young age is that you're just getting started in your career and your salary should see some nice jumps while your house payments will stay the same (assuming you got a fixed loan). It's hard in the beginning but you'll get some breathing room when your salary goes up and your house payment does not.

[sean @ San Marino]

NF- Congrats on your purchase. Pasadena is a good location. You are young, and the fact that you can sensibly purchase a home says a lot about you. Again congrats. L.A Guy is right, too many people here think purchasing a "home" as an investment. It shouldn't be.

[Anonymous]

NF sounds smart (although I agree with the poster above about the NAR talking points...very fishy) and if the tale is accurate, will likely be happy with the home and the purchase price unless the L.A. economy really goes to hell in a handbasket. I hope for the former but I'm worried about the latter.

Milla, on the other hand...well, you really need to stop talking. You didn't put down 20% like NF. You're just renting from the bank. You feel entitled to 5% down payments, you think the government (i.e., the taxpayers) should make low down payment loans a birth right, and you think the pride of ownership is "priceless." Really? Is it worth $100,000? $100,000,000? Or just every cent of your life savings? Of course you don't mean any of that. I don't mean to be cruel, but your comments evince little understanding of financial realities, and your desire to teach from your "experience" is especially odd given your youth and your apparent ignorance. That said, I still hope things work out for you and NF (again, if the above story is true and not carefully crafted guerilla marketing from NAR).

Sorry...one final note...I can't help it. How in the world has NF decided that the mortgage interest tax deduction was born fully formed from the largess of the Republican Party? I can assure you that this is not the case. History shows that the deduction was mostly an accident, as the main interest tax deduction rules were enacted long before most residences had mortgages. Over time, circumstances changed in the home mortgage market, but the tax code did not keep up. Homeowners had come to feel entitled to the deduction, and at that point, it became impossible to even think about taking it away. Anyway, regardless of the accuracy of the history laid out above, you would be hard pressed to find any Democrats against the mortgage interest tax deduction. If anything, it's the few Republican flat-taxers who threaten the continued existence of the deduction. Honestly, I don't understand the need of people who have no idea what they are talking about to proclaim their backward views to the world. C'est la vie...

[Mark]

NF - I hope your house isn't in Northwest Pasadena, or you'll spend many sleepless nights listening to the "ghetto bird" flying overhead.

That's pretty much the only part of Pasadena that's seen any decent price drops in tune with the rest of L.A. County (20% or more from the bubble peak). All the rest of the nicer/more expensive parts of Pasadena (South and West of the 210) won't see decent price drops until summer 2009 when the toxic Alt-A and Option ARMs reset or hit the negative amortization limit.

If you would have waited till 2010 at least then you could have bought in a part of Pasadena that doesn't have a ghetto bird flying overhead every night.

[Joseph C]

Property tax is 1% of assessed value. Even if your assessed value is 100% of the purchase price, with interest at (roughly) 6%/year, and marginal tax rate (say) at 25%, you get back about 1.5% from the interest deduction on the mortgage, and 0.25% from the federal refund on (the previous year) state property tax.

So you pay 1% property tax, but get back 1.75% from deductions. So, net, you get back about 0.75%.

i.e., you effectively get back about 12% of your mortgage payment (during the first years of mortgage payments when it's mostly interest payments).

At least with my own home in Pasadena, my assessed value was much closer to half of the purchase price. The net result being that I got back almost 19% of the mortgage payment. That adds up!

[JW]

Lefty....
1) The value of that wonderful home that you bought is very likely to drop 20-30% within the next 3-4 years.

2) When prices finally hit the bottom, home values are likely to remain at those prices for 10-20 years. Don't believe me? Take a look at Japan where a very similar meltdown to the one that is happening in the USA right now, took place over 15 years ago. This is NOT like the other cyclical ups and downs that we have seen with past housing markets.

3) At 27 years old, you're too young to realize that lots of bad things can happen to you like illness, divorce, job loss, etc.
My point is not to be cruel but to point out that reality is reality and by any other name......is still reality.

I sincerely hope that you really enjoy that home.

[Inland Empire]

Good for you. Ignore all the envious and petty people on this blog.

(@ IE: I may be envious, but I hope I'm not petty.
-Pete)

[Doug in Toronto]

This may sound like a radical concept, with everything I'm reading here about the investment value of homes and such, but whatever happened to buying a home with the intention to live in it permanently??

Not seeing a lot of that these days...

[tealeaf]

Perhaps these areas are in for a soft landing, i.e. flat values for 10 years as inflation and wages catch up.
In which case, NF did the right thing, why wait forever if the nicer areas are never coming down...

Posted by: Arti | May 13, 2008 at 10:43 PM

Arti, I'll bite.

No one said "forever" and "never" is a strong word.

What drove the values of nicer areas? Is the value supported by the incomes of the inhabitants? Not anecdotal incomes -- the populous of potential homeowners. If the incomes and savings for down payment don't support the asking prices, the inventory will rise (check) and the values will fall (check).

Layer in an economic downturn (check), higher energy prices eating into the monthly wallet (check), and Option ARM resets over the next 18-24 mos (check), and the immunity you speak of will be non-existent.

Let me turn it around - what impact will these factors have on home values in nicer areas? I postulate that, on the margin, homes will be in distress, which will drive the prices downward.

[Steve]

If you live there for the time you state you will do great. Do not listen to the rest of the rubes about timing, you created your own timing and will do well, epecially as your primary residence in Pasedena.

[tarbubble]

congratulations. we're attempting to finagle a deal on a damaged house in the neighborhood we want to be in - keep your fingers crossed for us, even though it's a long shot. ownership feels good, but it has to feel good at the right price. if you got your right price, then great for you.

[Ragnar]

Congrats, NF. I love Pasadena and fruit trees as well. Enjoy your home!

[Pop]

It would be great to do a follow-up story with these buyers and the one who bought in the 'hood a year from now to see how they feel about their purchases, but something tells me they will be extremely unwilling to participate.

[Tony]

I smell a plant. My apologies if I'm wrong, but I would love to see Peter meet these NAR dream buyers in person to see if they, and their purchase, are real. Until then, it seems like a subtle NAR advertisement.

[Jackie Romulo]

This is a great story, thanks for sharing. I agree with NF in that if you are financially stable and plan to LIVE in the house for a while, it's a great investment. Especially if you've got the 20% to put down.

Congrats NF!

[Truth2Pwr]

I have no freaking idea where all of this, "there's no way to know when we're at the bottom" nonsense is coming from. When inventory overhang returns to traditional ratios, and a statistical balance exists between supply and demand, THAT is when we'll be at the bottom.

While there is an inventory overhang of well over a year in many areas, with an additional "hidden overhang" of would-be sellers sitting on the sidelines, we are not even within Hubble telescope viewing distance of a bottom. Spread the word.

This is VERY VERY SIMPLE STUFF FOLKS!!!

P.S. - Obviously 27 is the new 17. Hope you love that house kid. You're gonna be stuck there for a lot more than 7 years before you'll be in a position to sell.

[perks]

Congratulations, NF. Enjoy your new place. I think it's clear that you spent a great deal of time weighing the pros and cons before making your decision. In the current market, you'd have been a fool not to.

If I can offer one piece of advice: For the next couple of years, stay the heck away from any website that will tell you what the houses near you are selling for. I'm sure you went into the purchase knowing you'd be losing equity in the short term, but it still sucks seeing it! ;)

[Jonah LaFollette]

Mark,

You said the nice parts of Pasadena won't see price drops until 2009?

http://www.redfin.com/CA/PASADENA/
1879-E-ORANGE-GROVE-BLVD-91104/home/7206187

Please scroll down and see how much they have chopped the price of this house. Which is in a VERY nice area of Pasadena!

[xtine]

Congratulations. Good news for you.

You do not owe anyone the gory details of your financial life. Some of these (very smart) people won't leave you be until you give them a blood sample.

Not saying I wouldn't LOVE the gory details, but I don't think you owe it to us to offer them up--unless you really really want to... :)

[caliguy2699]

Congrats and good luck...I'm a RE bear in general right now but there is no denying there are deals out there that do financially pencil out - shocking that this is happening to soon but you can't argue with the numbers, and in that case, there is no reason not to buy in those situations (the possibility of rents falling notwithstanding).

It sounds like you did everything the right way...enjoy your house and don't look back. I do think it's a bit optimistic to assume the RE market is going to rebound enough in 4 years to recover lost equity you will be losing assuming this is not the very bottom and the 6% or so commission you will have to pay to sell your house - but you never know what is going to happen so no use worrying about it now.

[eprobert]

@Fred - "Don't know WHAT data you're looking at. Price-to-rent ratios are still SERIOUSLY out of whack. Like at least another 20% decline is needed across the board."

Looking at my own neighborhood. I'm paying market rent of $1920 for a 2br house w/a garage. Two years ago it was $650,000 for the equivalent house. Now it's $450,000 as a REO.

So not there yet, but very very close. Besides, it doesn't have to be the same, just within reason for the "ownership premium".

Anyway, as others have mentioned the investment component is not always the most important one. I work for a Japanese company, and most of my Tokyo colleagues own their own houses in Japan. Even though prices have been falling or flat for almost 20 years, there is still a RE market - people WANT to own their own place and will pay a premium to do so. They all fully recognize that they won't get out of the house what they put into it, but that doesn't stop them from buying one.

Prices in the Tokyo suburbs are cheaper than here, though, which is crazy (at least on a median house to median house basis). Ours are cheaper on a PSF basis.

[Geek Seek]

Anonymous: Bingo. Guerilla pr campaign. Seek out the active real estate blogs and blow unrepentant sunshine. That's the only way to rationalize the cognitive dissonance (at least I got a few anglo saxon words in there too). That would explain lefty as well who seems to have a grasp on the fact that if you repeat something over and over it actually has an effect, no matter how goofy. We need some feel good stories and a positive perspective... but it's got to remain firmly based in re-a-li-ty.

[Laker]

Arti: "...why wait forever if the nicer areas are never coming down..."

Arti, really...patience my friend. Wait for Option ARM recasts and IO 5 year teaser reset...
Last down turn, the high end suffered more than the low end. And this time, it will be much worse.

[the problemwithcaring]

So someone somewhere in Pasadena thought it was a good idea to buy at house at some point over the past, I don't know, some time. Shocking!! I fear this non-story with its unnamed person and its non-information is just another hurried attempt by mr. viles to throw a bone to the occasional commenter who deem him a propagandist or worst – a bubble blogger.

Also: I am quite sure I don't like "responses to comments within the comments" thing. It's like when someone sits too close on the bus. Very awkward and unnecessary.

(@ problem: You are correct. About the comments within comments thing. It was an experiment, suggested to me by the septegenarian blogger king of L.A. Times, the incomprable Andy Malcolm of "Top of the Ticket." But you are right, it doesn't feel right. This will be the last one. As for the first part of your comment, I don't feel obligated to throw bones to my critics (not naming any names, shockg, just sayin'), but I do feel obligated to stay in touch with the market, and there is a market, however diminished right now. There are buyers. That said, I'll go back to my seat on the other side of the bus and get out of your face
--Pete).

[E]

Ok...we have the Ramen Eaters (code name for Realtors from housing panic) coming in with all of their *new and improved* talking points.

1. They bash bubbleheads (supposedly) by telling us that too many of us look at a home as an investment.

Hey...dumbshi#s...that's what we have been saying for years. Why did you just start to change your tune now? Oh...because if it *were* an investment like you used to tout every purchaser would lose their a$$ in this market currently.

Oh...yeah...SIX PERCENT COMMISSION.

2 Then...they buyer is praised for getting a 30 year fixed and staying put for a while.

Funny...before I remember the quote "It's not the home you can't afford, it's the loan you can't afford" from the infamous RainCityGuide (before the original post was altered and the comments erased) that tried to convince us that an ARM was an acceptable way to purchase a house and that we couldn't think that we could afford anything but an ARM.

"But don't worry. You can always refinance out of it!" was the common thread amongst dishonest and clueless people within the profession...meaning MOST.

So...Realtors...stop pretending that you have found religion. You'd say anything for a buck even if it is parrotting what the bubbleheads have said for two years.

Sorry...but I don't have a SHRED of sympathy for any of you who can't make ends meet now.

Slimy industry.

[kosher krab]

Congrats! If you are planning to have kids while you are in Pasadena get them on to the pre-school wait-lists as soon as you find out your wife is pregnant. (I'm not joking)

[TakeFive]

“…we do not plan on leaving this property for at least 4-7 years…”

Well you probably won’t get hurt in that time frame only because so many people want to live in Pasadena. Hopefully the condo construction will slow down before the streets become undriveable.

The second thing this tells me, along with your age, is you either have very young, or no kids. It sounds like you researched this, but for the casual readers, most of the schools in Pasadena are basket cases. I had a kid in private school in Pasadena some years ago. $1200 per month was the cover charge, plus extras.

Nevertheless, congratulations. There are some enjoyable canyon hiking trails beside the stream in Millard Canyon (don’t forget your Adventure Pass – the ticket is $100) and behind JPL, and lots to do around town.

[eric sievering]

I think the tax cut he is mentioned was actually created under the Clinton administration.

Thanks

[NF]

To be fair, I’ll provide a bit more information:

Rest assured we did our researched and avoided NE Pasadena (West of Lincoln and East of Hill). We looked at San Rafael Hill and NE Pasadena and the home we purchased was in NE. I visited the area often, spoke to the neighbors, and did my due diligence.

As for the price, I watched several houses sit on the market and have their prices slashed over and over again (I know they were artificially inflated). I checked the sale comps (again, I know they may have been artificially inflated) and I took into consideration that this was a turnkey and recently remodeled; but I still made sure I was paying less than comps; I paid approx. 600K.

As for my financials, we pull in approx 150K base. My wife is an MD but in residency, so her salary will hopefully increase by 3x in one year. I ran the numbers and I can pay this mortgage. Before we make any other purchases, we are strengthening our emergency fund in case something happens to either of us. If worse comes to worse, I still have my fruit trees and I’ll find some “organic” stickers and sell them at the same margins as Whole Foods.

The comments have been right on; Yes, I do wish/hope prices rebound and the market turns, but I am realistic, and regardless if it takes 1 quarter to 4 years, for us the bottom line is this:

Right or wrong, my wife and I were just not happy living in our one bedroom apartment with our two dogs (Yes two dogs in a one bedroom apt – we moved from NYC) and we wanted a house with space and privacy. The intangibles of living in a house are worth it to us. My story was not an attempt to justify my purchase decision; for my wife and I it was not just a business/financial decision, but more so a life-style and personal happiness decision. Rent on a 3 bedroom house is pretty high up there.

Finally, I admit my error for thanking the Republicans for the mortgage interest tax benefit. I concede that I know little regarding the history on who passed what tax laws; I should have known better than to mention politics.

P.S. My anonymous realtor is a good guy; I worked with him at my prior job at a consulting firm before he left to become a realtor. I trust him and I know he did not feed me (too much) propaganda.

[Jonathan]

He bought a house? Let's get him!!! There's no justice like mob justice.

[RW]

Joespeh C said: "At least with my own home in Pasadena, my assessed value was much closer to half of the purchase price."

The assessed value *is* the purchase price plus an annual increase limited to 2%. There is no way your assessed value is half the purchase price unless fraud was involved during the title transfer.

Also, bond measures and other fees generally push property taxes to 1.1% of assessed value, not 1.0%.

That being said, there obviously is a positive impact of the mortgage tax deduction, but it's not as great as you state. Also, it has always been the case that for the same full-loaded, tax-deductible discounted payment, you can get a better deal renting than buying.

However, the real advantage of ownership comes from 1) the fact that while renting is initially far cheaper, after 3-5 years owning becomes cheaper (assuming traditional mortgage), and 2) you will see asset appreciation (though not like was seen during the bubble, long-term it should mirror rent inflation).

[dutchtrader]

Good for you lefty,

Still waiting for my shotgun shack to come down in price! But as a unmarried person I enjoy such luxuries.

The thing I liked the most about this was how gracious lefty was unlike Milly who kinda came of as arrogant and tacky.

[stew]

"I imagine the pride of owning your own home will feel pretty good"
this sounds like escrow has not closed yet, please inform us if the sale is completed.

from the description of the property, it sounds like the price is 8% off a seller's asking price, not a forelcosure. thats way too high

[Pasadena]

I just want to know where and at what price he found that perfect house in Pasadena. My wife and I relocated a year ago from the east coast and have been on the market in Pasadena/South Pas/San Marino for a $1 million dollar or less house . We cannot find a single one that is worth our hard earned $200,000 down payment. And all we want is a true 3 bed/2 bath 2100+ sq ft house with a decent yard, on a quiet street with sidewalks. The inventory is horrible. Too small, poor flow, busy streets, bad parts of town (for Pasadena), etc.

[David]

One factor rarely mentioned in the decision to wait for the bottom: cost of rent while waiting for "bottom": If one's rent ist $1,200 (low), you pay over $14K a year w/ no tax benefits, no paying down principal - nothing. So unless the "bottom" means a property drops well beyond 25K per annum, waiting provides no real savings.

[dunno]

Pete, I'm curious how these stories are verified. What steps do you take before posting these submissions to verify that some anonymous person isn't just making this stuff up?

Same with the blog post a few weeks ago about the nasty email exchange someone had with a realtor and spam. Real or fake?

If you don't answer I'll be sure to ask this during your next Q&A post. Thanks.

[Robert Laughing]

Congrats...it is rarely an easy decision to take the plunge, and there is ALWAYS the unintended - lose a job, get promoted to...Texas (ouch!), wife gets pregnant with triplets....life does go on. BUT, STAY IN CONTROL of ALL that you CAN control....NO KIDS for 5 years minimum! No stock market 'flings' on that SURE BET...'bet' is the operative word, and hold 6-12 months expenses in cash/equivalents. Personally, I would say, you bought TOO early and will pay insurance and taxes on inflated price. You TWO need to focus on your jobs, staying healthy, each other and NO MORE DEBT! NONE!!!

[Alan]

It still blows my mind that with the housing prices in Pasadena being so high, it has one of the worst public school districts in LA.

[puckhead]

NF,

Talk about déjà vu. I live in NE Pasadena and work at a consulting firm. We might even work at the same firm. I don’t know half the consultants that work with me.

I love the posts about you being a fake and being planted by the NAR. Some people are sooooooooooooooo bitter about other people being able to accomplish something that they cannot. Jealousy is a bitch.

BTW, another poster said to get your kid on a wait list at a good preschool even if you don’t have a kid. 100% agree. Man, the stories I could tell you about what my wife had to go through to find a decent preschool………………

[peteviles]

dunno writes, "Pete, I'm curious how these stories are verified. What steps do you take before posting these submissions to verify that some anonymous person isn't just making this stuff up?

Thanks, dunno, great question. The issue comes up a lot and I don't have a hard and fast rule. I do some reporting and I use an enhanced smell test. I want personal stories on the blog, but I don't want people to have to sacrifice their privacy, so I offer to publish initials or blog names. Could they be duping me by creating fictitious identities, fictitious email addresses, fictitious stories, etc.? Yes. Milla, who has become a regular here, could be a press agent for the National Realtors' Association in Washington who has created an identity and a blog and a loooong and involved story about homeownership in Los Angeles. I don't think so, I bet you don't think so either. but it's possible. "Cal" could be Warren Buffett. Shockg could be, well, you get the idea.

In this case, it didn't appear to me that NF was lobbying to get something on the blog. He sent me an e-mail, which included his name, professional affiliation, work address and various phone numbers. To be frank, the e-mail read like fan mail. He didn't suggest that I use his story on the blog. But I suggested it - I like having buyers on the blog. They are kind of like happy animals in the zoo. So we emailed back and forth, and have since had a brief phone conversation (He said, "I'm a real person. I'm moving in in three weeks!"). It occurred to me the email COULD be a plant, but I don't think the industry's talking points include logic like "put in a bid 10% below the ask," and "the prices of homes most likely will continue to decrease." Smell test.

I also check the IP addresses of comments to see if I'm being spammed. Remarkably, it hasn't happened. (Although I can see that you, or someone using your IP address, have commented under several different names, including: dunno, wha, armchair prognicator, and PU). Remember the wacky mortgage broker Cal from Atlanta? I wrote critically of him and dozens of his "friends" jumped on the blog to comment in support of him? Readers smelled a rat, but the comments all came from separate IP addresses.

Hope that answers. Pete

[arroyogrande]

"If one's rent ist $1,200 (low), you pay over $14K a year w/ no tax benefits, no paying down principal - nothing. So unless the "bottom" means a property drops well beyond 25K per annum, waiting provides no real savings."

False.

I'm currently renting a house that was listed for sale at $670,000. With a 30 year fixed rate loan, 10% down payment, at 7% interest rate, the monthly cost of buying that house would be:

$4011.77 monthly mortgage payment
$ 558.33 monthly property taxes
$ 83.33 monthly property insurance
$???.?? monthly maintenance/repairs

For a grand total of $4653.43 a month. I'm in a high tax bracket, so my tax mortgage interest deduction tax savings would be nice, to the tun of:

$1,582.88 monthly income tax savings.

That comes out to $3070.55 a month to buy the house, even after taking into account the income tax savings.

My rental costs, on the other hand, are:

$1900.00 a month rent.

Also, the 10% down payment can generate $115 a month TAX FREE in a CA tax exempt money market account, so the true monthly cost of renting is:

$1785 a month.

So that comes down to:

$3070.55 a month for buying
$1785.00 a month for renting (the EXACT SAME HOUSE)

For a monthly savings of:

$1285.55 a month, $15426.60 a year savings by renting vs. buying, even taking the tax break into account, and NOT accounting for maintenance and repairs (which are taken care of by the landlord in a rental, but is an out of pocket expense to an owner).

"no paying down principal"

Well, if we had bought the house two years ago, when we started renting, we would have paid off about $7200 in principal (remember, that most of what you pay in the first 15 years is interest). However, the house comps in the area are down $100,000.

So by "paying down principal", I would have been in the hole deeper by $92,800.

Many people have been indoctrinated by a Real Estate industry marketing campaign that even De Beers can't compare to, with notions such as "throwing money away on rent". A lot of times, paying rent IS "throwing money away". However, what the real estate industry doesn't tell you is that there ARE times that "throwing money away on rent" is BETTER than "throwing money away at mortgage interest and depreciating house value".

- arroyogrande

[Mark]

In NE Pasadena you'll actually be able to put your kids in the only decent elementary school with consistently good API scores in the Pasadena Unified School District - Don Benito. Other than that on decent elementary school in Pasadena, add the $15-20k you'll need to pay for a private school for your kids -- which is what most upper middle class and higher income parents in Pasadena do. You an your wife will be making $250k+ once she finishes her residency, so spending 10% of your after-tax money on a good private school isn't that big of a deal.

[Rich]

Congratulations NF, on your new home, you have the right attitude toward your purchase. I said in a post early this year that people didn't need to feel for a bottom, that they could use their own level of affordability as their yardstick--if the price of the home was 5x or less your gross income, you were within the range; your 4x is in the zone.

Unfortunately, there were a couple of caveats with that. 4x income is still above the national average of about 3.5x income and very high compared to the 2.5x ideal of the mortgage industry. Also, the amenities, condition, and location of the house have to be reasonable in relation to that premium. I hope you cherry-picked a good house, because there's a high probability you will lose equity over the coming year.

I won't knock your choice, though, because it's tough to make these choices well when you're still in your 20's and new to the game; and because, as ex-residents of NYC, you've been conditioned by prices in that bubble market to think that the price you paid "looked reasonable" in this market. You didn't do bad all things considered, so enjoy the estate. You're excused from reading the foaming lamentations of this cheerless lynch mob any further...

[TakeFive]

NF wrote:

"...avoided NE Pasadena (West of Lincoln and East of Hill)."

You've got that reversed. It's east of Lincoln and west of Hill - although Lake ave is the tradionional dividing line between the east and west sides. Plenty of quality homes / decent neighborhoods just east of Lake (between Lake and Hill).

Would you mind giving us the area you bought in, just the boundries of the major steets (i.e., Colorado blvd x Lake x etc. x etc. )

"Be nice, for once in your life."

I for one promise to be unfailingly civil - just like aways.

[puckhead]

Arroyogrande,

It’s not just the deduction of interest on the loan. You also have to take into account the deduction in real estate taxes, state income taxes and any other items that you can itemize. Without a house, most people would not be able to itemize any deductions.

[giresu]

I sold my house three years ago and still feel pain for my buyer. Its so much less now I am sorry.

[Mark]

"It still blows my mind that with the housing prices in Pasadena being so high, it has one of the worst public school districts in LA."

It's actually due to Pasadena being so desirable to professional couples like NF that gross $250k+ that such is the case. They all put their kids in private schools...some of the best private schools in the country are here (ask Dr. Drew Pinsky who attended and has his kids at Polytechnic School). 1/3 of all school-age kids in Pasadena attend private schools.

It all started with the "White Flight" that occurred when Pasadena Unified Schools in 1970 were forced to desegregate.

From http://en.wikipedia.org/wiki/White_flight : "Busing and desegregation orders in education had also led to a further, non-geographical white flight: out of the public school systems subject to desegregation orders, and into private schools. For example, in 1970, when a federal court ordered desegregation of the public schools of the Pasadena Unified School District (in Pasadena, California), the proportion of white students in those schools reflected the proportion of whites in the community, 54 percent and 53 percent, respectively. After desegregation began, a large number of whites in the upper and middle classes could afford private schooling and so pulled their children from mixed public schools. As a result, by 2004 Pasadena was home to sixty-three private schools, which educated one-third of all school-aged children in the city, and the proportion of white students in the public schools had fallen to 16 percent. The superintendent of Pasadena USD characterized them as being to whites "like the bogey-man"[19] and mounted policy changes and a publicity drive to induce affluent whites to put their children back into the public schools."

[Cal]

Peter:"I like having buyers on the blog. They are kind of like happy animals in the zoo."

Interesting analogy.. :-)

[Ramador]

While buying something you want (and can afford) is great and all, I wonder if your situation is very representative of an average buyer. Frankly, if you can afford 20% down in a good area of Pasadena you can afford to live practically anywhere.

[Laker]

Truth2Pwr : "...When inventory overhang returns to traditional ratios, and a statistical balance exists between supply and demand, THAT is when we'll be at the bottom...."

Truth2Pwr , i have to correct you my friend. All that you describe as supply meets demand is a characteristic of a normal / mean / balanced market. THE BOTTOM is when supply is larger than demand and causes prices to be LOWER than they should be. That is rent will be MORE than mortgage payments....that is a bottom!

David wrote: "...:So unless the "bottom" means a property drops well beyond 25K per annum, waiting provides no real savings...."

David,
Next year values in LA will be 17%-20% lower - that is backed by many reports by investment banks, case shiller, etc. On a median $500,000 that is about $100,000. If i pay $28,000 rent a year i think i still would be better off by $70,000 gross.
However, when you buy even with PITI loan and pay some principal, during the first year the payment mostly goes to interest...so at best you pay $3000 for this house the 1st year in principal the rest is renting money from the bank...I think I'm actually better of by $97,000 renting for another year...

[Fred]

Not to sound like a jerk, but you pull in 150k as a family. You shouldn't be buying a house that costs more that 450k. You should have rented a better place for the next year or two. Your wife will certainly be making more money in the next few years, and that's a very good thing, but you're set to lose the 120k you put down in less than 12 months. I said it up above. You could have put that money in the bank and put 3 children through Harvard in 20 years. Now it's just going to be washed away. Or you could have bought yourself a 600k house in a year that's considerably bigger and better.

[Fred]

Puckhead: you say "You also have to take into account the deduction in real estate taxes, state income taxes and any other items that you can itemize. Without a house, most people would not be able to itemize any deductions."

Uh...these are miniscule amounts of money you're talking about. Because anyone who can afford to buy a house already itemizes. My wife and I make over 200k a year, rent, and we itemize. The fact remains that the tax deductions do not come anywhere close to bridging the gap between ownership costs and rental costs.

[jeremy]

During Christmas of 1997 I was able to put 20% down on a "Tickle Me Elmo Doll". It was a rational financial decision because I could afford it at the time. It didn't bother me that months later people were able to purchase it for much less.

[puckhead]

Fred & Arroyogrande,

I hope your wifes take care of your money.

Lets say you buy a $800K house with 20% down. Your interest for the year would be $32K and the RE taxes would be about $10K, total $42K of deductions. Assume a 25% tax rate, you’ve saved $10.5K of taxes. That’s not a small amount.

Put it another way, said above loan factoring in RE taxes will equate to monthly payment of $4.7K. I don’t know what crack house you’re renting, but rental prices in a decent neighborhood in Pasadena, Arcadia, South Pas will run you $2.5K-$3K. Factoring in the monthly tax savings of $875 per month above, the differential becomes less. And for most people, there is a premium in not having to deal with a landlord. Plus, assuming one can lock himself into a fixed rate, the payments are fixed over time while rents will go up. Plus, one can refinance down to a lower rate loan when interest rates go down further diminishing payment. Plus, after 30 years, said homeowner will own an asset that they can either live in at retirement or liquidate. A renter after 30 years ends up with………………….higher rent. So yeah, your previous post leaves a lot to be desired by ignoring some facts.

[perks]

Could somebody explain why there's such skepticism that the "buyers" featured on this blog are legitimate? Obviously there are people out there buying houses right now. What sort of answer would you expect that these buyers would give other than what NF has said? If you picked any random person out of the current pool of homebuyers, you'd probably get a nearly identical answer.

While you'd of course be a fool to buy a home you can't afford...right or wrong, money is not always the only thing that factors into one's decision. Most of our major decisions are not rational economic choices: trading in a perfectly functional car for a shiny new one, dining at an expensive restaurant, buying a home that may lose value. None of them make financial sense, but there are any number of other factors that come into play. Maybe the seats on your car aren't as comfortable. Maybe that expensive restaurant is where you met your spouse and holds special meaning. Maybe you really hate moving and just want a place where you can be fairly certain you won't need to pack up all your stuff again for a long, long time. There are plenty of perfectly good reasons for making a decision that may not be the best move, financially, in the short-term.

I will disclose, though, that even though I recently bought a house, I have been telling all my friends NOT to buy if they have the option of waiting. Buyers DO need to weigh the current state of the real estate market in their decisions, and decide how comfortable they are with the likelihood that the market could continue to drop, and could do so dramatically.

[arroyogrande]

"I hope your wifes take care of your money."

Thanks! However, we tend to make financial decisions as a team.

"Assume a 25% tax rate, you’ve saved $10.5K of taxes. That’s not a small amount."

I had assumed a $1582 per MONTH figure in my example, which comes out to $18,984 per YEAR. Therefore, you're tax savings assumption is even LOWER than my assumption. And even with that big $18K a year tax savings, I was "throwing away" more money than by renting.

"I don’t know what crack house you’re renting"

A nice house on the California Central Coast, ocean view, big back yard, deck, 2nd floor balconies, about 2200 sq. ft. 9 minutes from Pismo Beach.

If you want, I can compute the difference between what my 3800 sq. ft. Los Angeles house rents for vs. what it would be listed as, and see how much my renter is saving vs. buying...

"Factoring in the monthly tax savings of $875 per month above, the differential becomes less"

Again, your figure for tax savings is LESS than my estimates...so with your estimates, the difference in favor of renting (at least in my case) becomes MORE. (I'm in a higher tax bracket, and that's why you underestimated the tax benefit to me).

"there is a premium in not having to deal with a landlord"

True. However, isn't there also a premium for not having to pay for maintenance or repairs? I am a landlord, so I know what a pain these things are, especially when the repairs have to be done NOW. Isn't there also a premium for being able to move with only 30 days notice, and not have to be worried about being "under water", or selling your house in a short sale (job loss, better job opportunity elsewhere)? As in life, there are pluses and minuses to both sides.

"assuming one can lock himself into a fixed rate, the payments are fixed over time while rents will go up."

True, over the long term. We are not renting forever.

"Plus, after 30 years, said homeowner will own an asset"

True for me, as I tend to use fixed rate, fully amortizing loans. What do you say to those who took out interest only loans, Pay-option ARMS, or continued to extract equity from their houses? It all depends on how you conduct your finances. Long term, ownership is the way to go. However, I see no need to stop renting any time soon (possibly as long as 2-5 years).

"So yeah, your previous post leaves a lot to be desired by ignoring some facts."

Did I address your facts properly above?

- arroyogrande

[Laker]

puckhead: "...Plus, one can refinance down to a lower rate loan when interest rates go down further diminishing payment. Plus, after 30 years, said homeowner will own an asset that they can either live in at retirement or liquidate. A renter after 30 years ends up with………………….higher rent...."

puckhead,
you claim one thing and then claim exactly the opposite.
If you refinance your loan so to pay lower mortgage to "diminish payment" you will never reach your "second point" of after 30 years to own the house free and clear at retirement...
I sure agree that renter after 30 years will end up with ....huge sum in the bank had he invested the difference between rent and mortgage in a good diversified stock portfolio and higher rent...
I sure agree that it is better to buy a house than to rent for the rest of your life IFFFFFF and only IF, you can buy a house at a normal price (not inflated) that be 2001 price level today.

[bode]

arroyogrande,

Your numbers seem reasonable but I'm curious how inflation and increased rent factor into your calculation. After 30 years your $1,900 rent is going to be $7500, but your mortgage will not change. Your rent sounds awfully cheap also -- I don't know anything about Pasadena, but in Mar Vista there aren't any $700k houses renting for $1,900 because that's what a two bedroom apartment rents for (or more). Houses in my neighborhood typically rent for $2,700 to $3,000, and all of a sudden your windfall isn't so large.

I agree it's a hard calculus, but I think it's not unreasonable to assume rent goes up and fixed rate mortgage does not (especially as home ownership becomes less affordable -- this isn't when rents go down).

Just one more thing to think about, but I have to agree with NF -- I really understand how nice it is to live in a house, and not in an apartment. And, owning a house is definitely nice -- bottom or not, it's not going to fall another 25% in Pasadena.

[Italian Stallion]

"I was fortunate enough to put 20% down on the house – I am 28 and my wife is 27 but we have tried our best to live frugally the past few years in anticipation of the impending purchase"

Tell the whole story, if you're even real: how much did mummy and daddy (or grampy and grummy) gift for the down payment?

[arroyogrande]

"I'm curious how inflation and increased rent factor into your calculation."

Again, long term, I will buy a new primary residence. Short term, it makes no sense *for me*. I'm not too worried about rent going up any time soon (next few years), as rents have been stable (and even decreased) here (California Central Coast) a bit for the past two years. I have a rental in the Inland Empire, and if we lost our renter, we would actually have to *decrease* our rent. What I am saying is that long long term, rents "always go up" (mostly due to inflation)...but shorter term (even in the five year span), they can be quite variable.

"Your rent sounds awfully cheap also -- I don't know anything about Pasadena, but in Mar Vista there aren't any $700k houses renting for $1,900"

California Central Coast. I do have a rental (house, 3800 sq. ft.) in the Pasadena area, and the rent is around 240x what it is "valued" at. I can run the monthlies on buy vs. rent on that puppy if you want.

"all of a sudden your windfall isn't so large."

Depending on the area, your millage may vary. I've never even implied that renting is the choice for everyone, and at all times...just that, during extreme market conditions like now, it can actually make sense.

"Just one more thing to think about, but I have to agree with NF -- I really understand how nice it is to live in a house, and not in an apartment."

Me too.

"And, owning a house is definitely nice -- bottom or not, it's not going to fall another 25% in Pasadena"

We'll have to agree to disagree on that one. Look me up in four years...winner buys the beer at The Yard House at Paseo Colorado.

- arroyogrande

[LA]

Jonah wrote, "Please scroll down and see how much they have chopped the price of this house. Which is in a VERY nice area of Pasadena!"

http://www.redfin.com/CA/PASADENA/
1879-E-ORANGE-GROVE-BLVD-91104/home/7206187

No way this lot is over 10,000 sq. ft. Looks like the same footprint as mine, <6,000 sq. ft. Seems to be a common problem on Redfin. I filter for listings with large lots in my area and the aerial views often prove them overstated.

[puckhead]

Laker,

I've refinanced my house 5 times, either to a lower rate or lower time frame. When you refinance from say a 6.5% loand to a 6% loan, your payments go down. My original loan was 30 years, after 5 years I refinanced not to a 30 year loan but to a 15 year loan, not back to a 30 year loan.

[puckhead]

Arroyogrande,

You’re comparing apples and oranges. You rent in the central coast where housing is cheaper and is a landlord in SoCal where rent is more expensive. Of course you are able to rent more house than what you can buy in SoCal. It’s a sweet arraignment, but for the majority of us, we don’t have the option of leaving SoCal and moving to a cheaper location. I bill out at $150-$200 hour in SoCal, I would be working at the Whole Foods at your Pismo location. Your beachside rental in SoCal will run you about $5K a month. You know what kind of house will get you for $2K a month in SoCal? Try a dump in Van Nuys next to family of 15 with cars parked on the lawn. If you want to do a comparisons apples to apples, compare the house that you rent out in SoCal and the cost of owning that house. The spread will be much less than your beach side rental in the Central Coast.

[Mark]

Jonah wrote, "Please scroll down and see how much they have chopped the price of this house. Which is in a VERY nice area of Pasadena!"

http://www.redfin.com/CA/PASADENA/
1879-E-ORANGE-GROVE-BLVD-91104/home/7206187

This is DEFINITELY not a nice area of Pasadena and the reason you see such drastic price drops. You're blocks away from the Villa Street Gang and the Baldwin Alley where drug pushers roam day and night. This is Ghetto Bird territory: http://www.youtube.com/watch?v=wN1hgc-AlOk

With the exception of a small section of very northeastern Pasadena by the foothills, the nice parts of Pasadena are West and South of the 210 FWY.

[Cal]

puckhead:"If you want to do a comparisons apples to apples, compare the house that you rent out in SoCal and the cost of owning that house. "

http://tinyurl.com/6a84pj

Rents for $3900, for sale for 1.2 million. Pasadena by the Arroyo (off one of my favorite streets in fact).

Rent vs Buy
http://tinyurl.com/58wg65

Playing around with the default values will give you different results. Especially telling would be changing the appreciation rate (either way).. or the investment return rate (at an absurdly low 5%) .

Unless you are extremely bullish on RE the next 10-15 years (high appreciation) and very down on any other investment (low return rate) there isn't a real good scenario suggesting one should buy now. Unless you just like wasting money.

p.s. I think any owner renting out their house now until things get better is making a big mistake.

[sfvrealestate.blogspot.com]

NF, congratulations on your new space and being brave enough to take the plunge, not to mention being brave enough to post about it here. And remember that nobody knows the future, not even the Chicken Littles here.

[Arti]

Arroyogrande,

Way to own puckhead . . . I just wish everyone knew how to get the rational calculus part of a decision right like you do, if they did we never would have gotten into this bubble to begin with. It's really not that hard, but some people just can't be troubled to tease out the math and compare apples to apples.

[E]

My father rents a house in the Los Feliz hills for @$4200/mo (including gardner service). It was pretty easy to negotiate the price down.

The people who bought it paid almost 1.3m in 2005 put a bunch of money into it (supposedly) and couldn't flip it.

Comparable houses are still asking 1.3. (any wonder why they aren't selling?)

At the end of the lease I'll be willing to bet that the rent won't go up. Why? Because if it does, my dad will consider moving and then the house will sit empty for another couple months (just like last time). So...the owner would have been better off keeping him there at the same price or even lower.

[Paul L]

Arroyogrande,

I could not agree with you more. Your numbers pencil out quite closely to the model I use for evaluating real estate. Puckhead uses fuzzy arguments rather than addressing your numbers head on. It is sound number crunching that puts this current market in perspective. Anyone who considers buying a home must learn to roll up their sleeves and understand basic finance to see how the numbers pencil out. Anything else is realtor-speak.

[NoWayinLA]

Jesse: "NoWayinLA explain this one please:

"there is a price point at which ownership becomes a burden and not a blessing."

So if prices will go down another 25% from what they are now, I can wait and save two years' worth of pay.

That's cool.

That decrease of 25% by 2010, is that a big IF or a big CERTAIN?

Say, a house going for 450K now."
------------------------

Sure, I'll explain. I'm not referring to anything as complicated as you make it appear to be. It's really easy to over-think yourself on these issues. Forget about timing the market... you never know when the right deal might show up. Forget about forecasting home prices... my guess is as good as anyone else's (but much better than Lawrence Yun's).

It's really easy to figure out the price point at which owning becomes a curse. First, figure out the minimum requirements you have for a house. Rooms, square footage, amenities, neighborhood, commute, schools, whatever is so important to you that you can't do without it.

Next, do a budget. Pay yourself a little for retirement. Put a little more into savings. Pay your utilities, car payments, insurance, fuel, groceries, etc. Figure out what your minimum lifestyle needs are... if you have to go out to a restaurant once a week, put it in. If you can sacrifice your movie trips and make do with a Netflix subscription instead, put it in.

Whatever is left over in your monthly budget is what you can reasonably afford to pay for housing, while maintaining the kind of lifestyle you desire. Figure out what that'll buy you on a fixed-rate mortgage at current rates, factoring in principle, interest, taxes, insurance, homeowner's association dues (if applicable), down payment, closing costs, and maintenance. If your desired house will be bigger than your current one, make sure you plan for higher utilities. If your commute will be longer, make sure you plan for higher gas expenditures. However your situation will be different, put it in.

When you're done with all that math, you'll have a maximum purchase price. That's your price point. When the price of your minimum required house is below your maximum price point, ownership can be a blessing (assuming you didn't buy a Money Trap). When the price of your minimum standards home is above, ownership is a curse.

[arroyogrande]

"You’re comparing apples and oranges...Your beachside rental in SoCal will run you about $5K a month."

And how much would it cost you to *buy* said beachhouse in SoCal? What would be the monthly outlay on it be, vs. rent? Do the math, post the numbers, and educate us.

Like I said, the same situation (currently) exists with my Pasadena area rental. It may not be as extreme as the Central Coast case, but the difference IS there...so much so that my renter is in no hurry to buy, although he (actor making good $) and his family are planning to buy someday soon.

I take it that many of you believe that it is ALWAYS better to buy than to rent, no matter what the purchase price, and no matter what the time frame. Fine. This is for you people:

1. If you rent, you are throwing money away.
2. If you rent, you are paying someone else's mortgage for them.
3. if you rent, your family will think you haven't grown up enough to tackle the financial responsibility.
4. if you rent, your friends and co-workers will think you are poor.
5. If you rent, your neighbors will not invite you to their fancy dinner parties.
6. If you rent, you will not be able to take advantage of advanced financial strategies like HELOCs and cash-out refinances. A home is an ATM!
7. If you rent, no one will let their kids play with your kids.
8. If you rent, you will miss out on the great mortgage interest deduction that is like free money!
9. If you rent, your wife will resent you, and you will not have 'pride of ownership'.

It is obviously better to buy than to rent, no matter where prices and rents are at. Hello, people, sometimes, short term (1-5 years) it *does* make sense to rent.

- arroyogrande

[IToldu2CashOut]

The new york times has a calculator that shows you whether it is better to rent or buy. Just google for it. Could really shed some light on all these arguments. Needless to say it is always better to rent than to buy a house that drops in value. It takes a lot of rent payments of $1200/month to equal 100k in depreciation (which I think we will see on 600k houses).

Aside from that Congrats dude. Enjoy the house.

[tealeaf]

Puckhead:

Renting for $3500 per month in Encino. I have 2 well known artists as neighbors (one singer, one director). We are near the galleria, 4br, pool, remodeled, tree lined street, 2300sf, SFR, ~10k sf yard. this includes gardener and pool svc.

many homes with signs, one almost identical asking $1.25M.

Our equivalent rent puts the value at about $560k (PITI all in). I would buy the place at $600k, maybe $625k. )Our household earns a hair over $200k, and we are living below our means to compound savings.

Call us "bitter renters," we will be the ones that put our money where our mouths are and will ultimately save this market. Not yet... not yet....

[shockg]

David,
Next year values in LA will be 17%-20% lower - that is backed by many reports by investment banks, case shiller, etc. On a median $500,000 that is about $100,000. If i pay $28,000 rent a year i think i still would be better off by $70,000 gross.
However, when you buy even with PITI loan and pay some principal, during the first year the payment mostly goes to interest...so at best you pay $3000 for this house the 1st year in principal the rest is renting money from the bank...I think I'm actually better of by $97,000 renting for another year...

Posted by: Laker | May 14, 2008 at 02:15 PM

Laker, no one knows whats going to happen next year. You speak in absolutes like a little bird came down and told you 20% to go. Did you take up foretune telling besides day trading homes?

[tealeaf]

Puckhead: you say "You also have to take into account the deduction in real estate taxes, state income taxes and any other items that you can itemize. Without a house, most people would not be able to itemize any deductions."

Uh...these are miniscule amounts of money you're talking about. Because anyone who can afford to buy a house already itemizes. My wife and I make over 200k a year, rent, and we itemize. The fact remains that the tax deductions do not come anywhere close to bridging the gap between ownership costs and rental costs.

Posted by: Fred | May 14, 2008 at 02:21 PM

FRED & PUCKHEAD:

RE taxes are not tax deductible once you are subject to AMT. Fred, if you're not there right now, you will be shortly...

[sandiegan]

Looks like (based on check of realtor.com) the median listing price for a SFH in Pasadena that has at least 3bd and 2ba is just a bit under $850K. (That includes EVERYTHING that size and larger.)

$600K sounds pretty reasonable.

But there are cheaper.
Here's a 3/2 SFH on 5000 sq ft lot in Pasadena for $300K:

http://www.realtor.com/map/search/
listingdetail.aspx?ctid=501&ml=3&mnp=18&
mxp=36&bd=4&bth=4&typ=1&sid=2224c6eb37a54ea0b
6c1e5eecf3409a2&lid=1094186648&lsn=1&srcnt=204#
Detail

Funny market.

[puckhead]

OK ArroyoGrande,

You want real numbers with the like houses, instead of houses 300 miles apart. A house in my neighborhood recently rented for $3K a month. Houses are selling for about $750K. 20% down with 30 year fixed is about $3.6K per month, add in RE tax and it comes up to about $4.3K per month. Deduct about $875 in tax savings from deductions as calculated in my previous post and the true cost of owning is about $3.5K. Still more than the $3K rent, but hardly the windfall you make it seem like. Plus, if I sell my house and become a renter I need to pay $500K in capital gains tax. It's take a long time for the $500 incremental gain I'll make each month to cover my tax bill. Like I said before, it's EASY to make it renting sound like a great deal when you end up renting a mansion in the middle of nowhere with no jobs. Try the reality of renting a decent house in a good neighborhood in SoCal. Not some shack in the hood.

[puckhead]

I did a quick check on Realtor.com to see what $3.5K will get me in Encino. For $3.5K I can get a 3BR/3BA 2 streets over from the 101, for $3.6K I can get a 2BR/1BA 1400 sq ft house, for $3.8K I can get a 3BR/3BA 1900 sq ft house. None of these houses will fetch anywhere close to $1.25M. Either you’re sleeping with the landlord and got one hell of a deal or your rental ain’t all that.

[Geek Seek]

This was a fun post to read at 2:00 a.m.

Bleary-eyed scribblings:

Septuagenarian, says the contrarian quadragenarian.

[The thing with money]

All of you that think you'll save so much money by renting......well, I'll tell you....most of my friends who didn't buy 20 years ago in the beach areas because they wanted to save money by renting are still renting. I bought and went through the pain and guess what? I now own the best house with an ocean view with tons of equity. You renters aren't forced to save like the buyers. Owners don't have the worry of a lessor giving them 2 months notice to move from a place they love, and they have the right to dig up their backyards to put in a vegetable or rose garden if they want to. My favorite apartment memory - the police were called by a nasty neighbor because of music I played while I served dinner to parents - Kenny G music!!!! on low!!!! You can keep your apartment living - give me the fixer-upper with a mortgage any day.

[Justice]

Why are only people who are getting their down payment from Mom and Dad buying now? Hmmm, free money . . . wacky financial decisions, where have I heard this one before?

The good new is that at 27-28 and with your income about to triple, you'll have plenty of time to start over after you get wiped out.

Here I thought only the Federal Government was crazy. At least your dogs each have a private bedroom now.

Well, thanks for prolonging the misery (don't tell my kids about your dogs’ private bedroom, they'll be jealous since they won't be getting their own one anytime soon between you and the Feds).

P.S. I'm not bitter.

[tealeaf]

I did a quick check on Realtor.com to see what $3.5K will get me in Encino. For $3.5K I can get a 3BR/3BA 2 streets over from the 101, for $3.6K I can get a 2BR/1BA 1400 sq ft house, for $3.8K I can get a 3BR/3BA 1900 sq ft house. None of these houses will fetch anywhere close to $1.25M. Either you’re sleeping with the landlord and got one hell of a deal or your rental ain’t all that.

Posted by: puckhead | May 15, 2008 at 12:15 AM

Puckhead:

These are active in craigslist.

Remodeled 3/2 in Encino, $3795: http://losangeles.craigslist.org/sfv/apa/680150206.html

Another, with 4/2, pool, remodeled: $3500
http://losangeles.craigslist.org/sfv/apa/679968246.html

We signed a lease about 3 months ago. If necessary, I can verify privately if you submit to changing your tune... As someone else said on this blog, it is very easy to negotiate rental rates - there are a TON of ex-sellers (listen up, shockg) that couldn't get their wishing price on a sale and are now looking to get their wishing price on rent. Landlord was originally asking $4k, but went down to $3.5 with flexible terms (18 month lease, immed move in, no pets, great credit).

We put in 2-3 other rental offers, which subsequently reduced their asking rent BELOW what we offered in the weeks that followed. This is not a "one-off" situation.