Is it time to buy? Pros and cons weighed

Today's newspaper asks the question many of you have already answered in your head: Is this a good time to buy a house in Southern California? Simple question, right?

The 30-second summary:

It's time to buy: because prices have fallen quite a bit from their peak. Besides, a home is not an investment; it's a place to live. Richard Green, the new director of USC's Lusk Center for Real Estate, just bought a home in Pasadena: "This was the house we wanted to live in," he said. "A house can be like a car, something you use and enjoy and have for a while. Whether it goes up or down in value may not be so important."

It's time to wait: because prices are high by historical measures and will likely continue to fall. Prices are still historically high relative to income and rents. Or, as economist Christopher Thornberg puts it, "There's no way in hell the house you buy now will be more expensive next year."

For what it's worth, I get this question all the time and I have a standard answer that's part cop-out and part real advice: It's a good time to buy if you can afford the house, you envision it as your home, you are planning to live there for six or seven years and won't be upset or inconvenienced if the value of your new house drops sharply in the next couple of years. If you're interested in buying as an investment, with hopes of profiting, you're on your own.

--Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: L.A. Times

Comments

[mbob]

Buy Now!

They're not making it any more! You snooze you lose! Those who doubt are left out!

There's never a better time here in beautiful metro LA!

The Viagra from Chicago wants everyone to know there's lots of GOOD news to report. Things are looking up, up up!

(...but maybe not for the head of Pimco, who has waggishly observed that one answer to the vast oversupply of housing --millions of units -- might be to simply dynamite the excess and start over)

[Lionel]

From the la times article --

Even Thornberg sees that there may be good reasons to buy now, regardless of price.

"Maybe you have a baby coming up," he said, "and don't want to be in an apartment."

Yeah, those babies need all kinds of room to roam. My wife and I lived in an apartment for the first two years of my daughter's life, and it was just fine. In fact, as she learned to walk, having the limited space of an apartment was a bonus as it was easy to keep an eye on her. I generally like what Thornburg has to say, but that's a silly comment. Babies need love and attention, not a house.

[Bill]

Peter Green is no economist. Median home price in Pasadena is still over 10x median household income. As you've shown before, prices at the center of LA have lagged the larger drops along the outskirts.

That will change in short order as the subprime mortgage crisis morphs into the Option Arm Mortgage crisis. That's the bad news as prices will probably drop another 20%-30% in nicer areas that haven't seen it yet such as Pasadena. The good news is that the Option Arm crisis will be limited to areas such as California (where most Option Arms were originated, some 60%) and the rest of the US will at least bottom out in 2009.

[Pat]

In the PRO section, the article cites a hypothetical $355,000 home that would rent for $2000 a month and explains the savings of owning vs. renting. This is a rent ratio a bit less than 15. In the CON section, it states that current rent ratios are around 20 and that historically, they have averaged 15.75 over the last 15 years. How could anyone reasonably cite a hypothetical situation that does not exist and has not existed for 15 years to support buying a house now? What kind of journalism is this?

[somedude]

If I found something I really liked, I'd probably buy even if I lost money for a long time.

The problem is at my price point (about 400K), I fall on the line between middle class neighborhood and ghetto. So it's more than just money, it's quality of life.

In other words overpaying in nice part of Pasadena is a lot different than overpaying in El Sereno. There are some places you just don't want to get "priced in."

[Enlightenment]

The most important sentence in the entire article is "There's no way in hell the house you buy now will be more expensive next year," he said"

[J.W.]

Only a total fool would buy a home in SoCal right now. Prices aren't anywhere near the bottom and they will lose a buku of money. Of course, the filthy rich crowd in L.A. (mostly movie stars and studio heads) who have ridiculous amounts of money don't care because they can easily replace the money that they will lose. Everyone else............BEWARE!
I loved the part in the front page article about prices having fallen around 30%: the same amount that they fell when the last bubble burst. What they DIDN'T SAY was that prices went up a gazillion times higher during this bubble. These people have NO SHAME! Don't fall for these velvet tongued, slick advocates for NAR, CAR and the NAB. They only want your money and to continue to prop up the ridiculous housing prices in SoCal.

[Nick]

The "house as a consumable" argument can make sense, but only if you consider the actual numbers involved. For a house in LA (not a condo), you'll likely still be spending $600k+. We'll assume a conservative remaining correction of 25% (after which prices stay nominally flat), so a loss of $150k, say over 2 years. Figure you can rent something for $2500/month as a baseline, to see how much extra your "luxury" of owning a house is going to cost, per month. Let's run the numbers...

A 30yr fixed loan on $600k is about $3800/mth. Taxes at 2% annually are another $1000/mth. Insurance is going to be another $200/mth, and we'll ignore upkeep and repair costs for now. Your total cost is roughly $5000/mth, or $2500/mth more than the baseline rent amount. For the low price of $50,000 out of pocket, you can live in a baseline house instead of renting for two years!

But wait, that's not all. You're still on the hook for those payments for another 28 years, so even though your house is worth $150k less, you've only paid for roughly $15k of that loss... you have 10 more years of paying $25,000 extra per year before you break even with the nominal price of the property. After that, you'll still be paying more, but at least you'll have equity again, as long as you didn't default. Oh, and good luck getting a HELOC between now and then, cause you'll be underwater.

So the real question is: is the "luxury" of owning a house (compared to renting an equivalent property) worth an extra $25,000 per year to you, for 10+ years? If so, then buying now could be right for you. For everyone else, waiting for prices to be rational again first is probably a more financially astute plan.

[Chris]

Hey PAT - Great comment, 355K!!! I almost spit up my breakfast on that one. In another article in today's paper about borrowing on 401(k)'s they discuss buying a house for 200K and missing out on 10% stock profits per year - apparently they wrote that article in 1990. When houses cost that much and the stock market made some sense!

But really I like this article on buying houses and the one on 401(k) borrowing. It would have been nice if the reporter had pushed the economist to calculate using realistic house prices. Maybe at their universities they are still using textbooks from the 1980's.

Hey Pete, or Cal how about filling in actual home prices with current interest rates and updating this 1994 article. And where's your interview with Christopher Thornberg Mr. Viles?

[Laker]

"There's no way in hell the house you buy now will be more expensive next year." - Thornberg

No need to add to that.
However as Lionel said babies don't need to buy houses, if the apartment is small, they can rent a big house and pay half the mortgage (and save the other half)...let the housing drop to 2001 prices, and then buy.

[Trevor]

"Those who say now is a good time emphasize the benefits of homeownership...consider the advantages of owning versus renting"
1. "As long as you can afford your mortgage, for instance, you won't be evicted"
Prices are still so high relative to incomes, that if you CAN afford your mortgage, then you definitely would have been able to afford your rent. If you were already more than able to afford you rent, then why would eviction even be an issue. Or better yet, if eviction is a problem for you as a renter, then you aren't ready to buy.

2. "With a fixed rate mortgage, your payments remain the same over time, while rents generally rise."
Again, your mortgage is so much higher than you rent in the first place...so who cares.

3. "Over time you can build equity in you home and own it free and clear - and then won't have to worry about monthly payments at all"
This sounds like a real estate agent talking. Come one people, the vast majority of homeowners don't stay in the same house for more than 10 years. This is utterly unrealistic in today's market.

I think the strongest arguments for or against buying now are your own personal 'rent v.s. own' analysis, interest rates and income.

Here are the variables for a Rent v.s. own analysis:
Your rent ($)
Renter's Nest Egg ($) - (this is the difference between mortgage and rent)
Down payment for house you can buy ($)
Mortgage payment for house you can buy - annualized ($)
Annual home appreciation estimate (%)
Annual mortgage interest deduction ($)
Annual depreciation deduction ($)
30 yr fixed rate mortage interest rate (%)
Tax Rate (%)

Throw these variables into a spreadsheet and adjust variables to see that outcome. I think that interest rates only have one direction to go and that is up. Higher interest rates means a higher cost of borrowing, and that means even lower home prices. The Fed will almost certainly be raising interest rates to combat inflation and save the ailing value of the dollar.

I'm a renter, and despite the decrease in home values the "rent v.s. own' analysis still favors renting for me.

On a final note, the article states that "11% of adults in the L.A. area earn enough to buy a median-priced home of $412,000." RED FLAG PEOPLE. The current real estate market is a house of cards.

[Cal]

One of the issues is that the place where the majority of people are hasn't come down nearly as much as the outer areas in which they are comparing the price declines which are making things "affordable". Buying in Pasadena but comparing the price action of what is happening in the IE to justify things. Prices have declined across the board but it the majority of price declines are ahead of the higher end areas where I think the majority of price declines are behind places like the IE.

Peter Viles:"if you can afford the house"

People have very short term thoughts on what is affordable, they will sacrifice long term goals (retirement savings, emergency fund savings, college savings, basically any saving) for a short term getting in a home. Rationality is lost on an emotional purchase. Basically, if the bank will give them a loan, it is "affordable". I think people don't want to go write down what their long term goals are and plan for them because then they would be force to realize what they are sacrificing just so they can paint the walls.

p.s. I've painted the walls of my rental, it is an overrated experience

[Rational Renter]

Most people simply can't afford houses anymore (whereas they could during the bubble thanks to creative financing). So most people don't even get to ask this question, since it's already decided for them.

But I have one thing to add to those who say they should buy if they find the "right house" now. Sure, if you hold on for 10 years, your house's value will probably recover. But you could save $100,000 if you bought an equivalent house next year. That's enough (if invested) to put 2 or 3 children through Harvard, Yale, Princeton, Duke, Stanford, etc. That's a lot of money to just throw away b/c you think you found "the right house."

[Rational Renter]

And one more thing...median house price in L.A. must fall another 35% (landing at $275,000) to match median incomes. High-end areas might have to drop further since they haven't declined as much yet.

35%. That's 1.5 times your down payment. Thrown away within 2 years.

[E]

The "experts" were wrong all the way up.

I expect them to be wrong all the way down.

Nothing but a bunch of paid shills.

[Westside Bubble]

Had an agent try to convice me that over the long term I wouldn't care even if prices fell for awhile after I bought. WRONG! If I save $200K by waiting to buy, that's a very real $200K saved.

And be sure to read Calculated Risk today on the Smiths' 2006 paper called, "Bubble, Bubble, Where’s the Housing Bubble?".

[RM]

Unless you're buying cash, one has to also take interest rates into account. Just about half a year ago 30 year fixed rates were about one percent lower (in the mid 5's) equating to about a 18% increase in interest. Lower prices will be offset by higher interest rates. Where it not for government intervention and market manipulation, rates would already be higher than where they are now. How long that can be sustained is any one's guess.

Given the current inflationary environment, rates have been trending upwards. Alan Greenspan, who likes to rub things in our face, warned in one of his books that we would probably see double digit interest rates in the not too distant future. Someday a 5% interest rate on a 30 year mortgage will prove to be a great bargain and hard to believe that it even came around.

[Wes Boudville]

Pat,

From simple maths, what you stated cannot be true - that the situation "has not existed for 15 years".

The rent ratio has averaged 15.75 over the last 15 years. So if the rent ratio is now around 20, then in the last 15 years, the rent ratio was < 15.75. So the rent ratio was indeed at the level of that hypothetical situation.

[AnonymousPerson]

Lionel said: Yeah, those babies need all kinds of room to roam. My wife and I lived in an apartment for the first two years of my daughter's life, and it was just fine.

I agree, but I bet your wife would much rather have a house to raise the kids in.

[l.a.guy]

My problem with these buy now or later arguments is it assumes that all houses are roughly the same. Sure, if houses were Big Macs I'd wait another year or two. Finding the right house is not easy and for many people it's more important to live in a house they like than a less expebsive one they don't.

I doubt very much that everyone advocating waiting is renting the least expensive place they could find or driving the cheapest car on the market. Most purchases are a trade off between price and quality.

[BuyNow]

Buy now? Sure, if you don't mind seeing your property drop another 30%! Seems like the only arguement to buy is, "you need a place to live in." Well, last time I checked, 30% of us living in rental house and apartment are doing just fine.

[Buylater]

Oh no, not another RE AGENT line of "You better buy now because interest rate is at all time low. You won't see rate this low again. Buy now!" And you know what happens when rate goes up? That's right, price will come down even further because people can't afford to buy at your high price!! Only 1 out of 10 can afford to buy a house at today's price and at today's interest rate. We know interest rate is going up, so price will have to come down even further for the rest of us to be able to afford to buy. We aren't the stupid folks buying 0% down !

[Cal]

http://tinyurl.com/2sdtvd

Still one of the best rent vs buy calculators out there.

It has a bunch of customizable settings. If you assume you are going to be a house 7 years and that prices will have recovered by then (I think that is a very optimistic assumption btw) you can set the appreciation rate to 0% and see what it takes to break even on a home relative to renting. There is so much dead money in home ownership that the people that dog on renting as throwing money away just have never broke down what it costs to own a home. Add in depreciation and things even get dicier. The one sure thing right now is that you should only buy a home you plan on staying in for a very, very long time.

[sandiegan]

LA median is 20 x yearly rent still?

Wow.

San Diego is down to less than 16 times yearly rent.

Median home price: $370K per DQ June 2008.

Rent would be about $1950/mo. (Go check rents on Craigslist, etc. to see what you get for that.)

Rent to buy multiple: 15.8.

PITI w/20% down at 6.25% = $2246/mo.

PITI is 1.15 x rent (before mortgage deduction.)

Median household family income for San Diego 2008: $72,100.

Price to median family income: 5.14 to 1.

Mortgage payment is 37% of median income.

Those are the numbers.
What do they mean?
Decide for yourselves.

[Lionel]

"I agree, but I bet your wife would much rather have a house to raise the kids in."

Indeed. It's partly why we moved to Seattle last year. I rent a beautiful 3 bedroom tudor in a wonderful neighborhood for 1800.