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

[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.