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

[toby]

If you don't care about money then yeah...it's a good time to buy. But if you do like your money, and want to keep as much of it as possible, then you need to wait another two years.

[Crash and Burn]

On one hand if you jump in the molting lava you might get burned.

On the other hand if you don't jump in to the molten lava you might be cold.

For some people, it might be a good idea to jump into the molten lava, especially those with babies.

If you don't want to ever pay for your baby's college its a great idea.

This article instantly jumps to the top 10 dumbest stories written this year, and the majority of the 10 in the last week. Way to go LA Times.

[Jack]

Nationally, home prices have been 2-4 times local income levels. In SoCal they've been at the higher end of this range because people have been willing to pay a premium for living here.

This ratio makes sense when you realize that in normal times, sensible lenders will only allow a borrower to use a maximum of 28% of their income for mortgage costs.

Now that lending standards have tightened, is it reasonable to expect a return to the historical ratios? Most think so. What happens to prices?

Consider a typical So Cal area where the median income in 1999 was $75,000 and where the median home price was $288,000. (a 4-1 ratio)

In 2005-06 the median home price in this area shot up to $700,000. Meanwhile incomes only rose a little bit. But let's be generous and give income a 3% a year increase. Now in 2005-06 the income in this neighborhood is $87,000. This is a 9 to 1 income to home price ratio. At a return to 4-1 ratio, the price would be $348,000. When you do the math and figure how big a mortgage this buyer can obtain it pencils out. The 348k is actually on the high side. The difference between the 700k and 348k two is the bubble. A bubble adjustment of 50% is not unreasonable. You can access the data for your zip-code and see the historical income to price ratios at this web site. www.ushousingmeltdown.org/home-value.asp
Look for the Ceiling fundamental.

[J]

Seems like everyone here gets this, but there's no point even looking for the bottom. It's not like once the bottom hits prices are going to shoot up 25% by the end of the year. We've seen that show before and I don't think we'll see a rerun anytime soon. I'll know the bottom because I'll see it in my rear-view mirror, and I'll probably end up paying more than the bottom by a bit. I'm OK with that. But that sure beats jumping into a deteriorating market and praying that the bottom comes soon before I start needing sleeping pills to get through the night.

[Anonymous]

I can't understand why so many people buy into the myth that you need to buy a house to have room for your child. You can RENT a house. I know this for a fact...because I rent the 2BR house I've lived in for 4 years, and my rent is about half of what I would pay with an interest only mortgage (and taxes, insurance and upkeep).

[andree]

Wow, what a debate and math and statistic analysis. No matter what it is you the one who singned the dotted line will pay. Do some interospection!!
can you buy home or can rent only?
Can you afford to pay 3500 to 4000 for the rest 30 years of life?
That is a about money you will be couhing up to pay for your dream. hold on what that is about 42,000 to 48,000 per year. Now i heard you make 85,000 per year?
will bank loan you money?
So no lessons or data is needed or forecast by any expert in my humble opinion.
Ask yourself can you do that instead did i do that?
lol

[Laker]

BuyNow wrote: "...last time I checked, 30% of us living in rental house and apartment...."

BuyNow,
Nationally, about 36% are renting today. In LA 70% are renters....not 30%.... 30% are home owners...

[Laker]

From the article :"...Smith and her husband, Gary Smith, a Pomona College economist, say buying is practically a sure bet when you would pay less for a monthly mortgage and other home costs than what it would cost to rent the home....
They call that monthly savings the "home dividend"....

Now, Show me where mortgage full PITI , maintenance and upkeep is less than the rent?
I'm coming with my check book ASAP.
(please don't send me to lancaster, IE, san berdo)

[Guy]

I've been researching homes in the South Bay area for the last few months. I've noticed that many homes for sale where the owners bought their homes in 2003-04 and are trying to sell their houses for almost double what they paid for only 4-5 years ago. This means that many homes STILL have current asking prices that would net the owners hundreds of thousands of dollars of profit for only a few years of ownership. This tells me that there is still room for the market to fall...

[LA-renter]

I know I'm a bubble-zombie, but...
the premise of Peter Hong's Business article was a false dichotomy. The "balance" in the article was forced. You'd gain respect if you just wrote the truth, and braced for the onslaught of real estate businesses.

Let's face facts, there is no REAL pro for a 1st time home buyer.

There is one reason to buy now:
If you already own your home but need to relocate to a comparable market. In this case, only funny money is exchanged.

Otherwise, the best (and only) advice is to wait for rational prices to return.

[Inland Empire]

The name of the blog should be changed to "Disgruntled Renters Anonymous". Buying a home is just that - buying a home. It can or can not be a financial investment. If you are too nervous to buy, don't. Others do not agree with you.

[AreYouKiddingMe]

If you find a house you like at a price you like with a loan you like, buy.

If not, don't.

Next topic.

[Anonymous]

Also, please stop saying that buying a home is potentially not a financial investment. This is fundamentally incorrect. You can RENT a home. The buying part necessarily makes it an investment.

[Model 3]

after waiting and saving and watching the market for 2 or 3 years, we jumped in and just bought a brand new house in Riverside. Why? because it's an awesome house, everything we ever wanted, brand new with everything selected our way, all upgrades included, a huge, prime lot, a view, and $200k off the original price. The commute is doable, even if gas hits $7 a gal (which it won't), we're used to living inland, and we're just plain sick and tired of living in a matchbox condo.

Whatever about prices falling through 2010. This is the house we want now, at a price we can afford without breaking a sweat, and it's the kind of a house where you put down your roots, add a pool, and prosper. It's not about rent ratios, equity, and timing the market to get a "deal." It's about coming home every night to a damn nice house in a good neighborhood, and knowing it's all ours.

At some point it's not about the money--it's about the quality of life.

[M]

Peter - Terrific advice. I'm a Los Angeles native and very much remember the previous boom and bust of the early 90's.

We bought a home in 2006 and while we have of course lost theoretical value (I say that because who knows the true value of their house until they sell it) we plan on staying in this home until retirement.

One thing a lot of people fail to recognize when arguing over the rent vs. buy issue is cost of living and natural inflation. Within 10 years my mortgage payment will seem first high, then reasonable and downright cheap compared to renting. Trust me, I was a renter for 15 years and my first apartment in Beachwood Canyon was $750 per mo (now that same place would be $3000 per mo.). I think renting is a great option for many and the choices of locations make it appealing but I also know that when I'm 60 my mortgage payment will seem paltry compared to Los Angeles rents and I will have a very nice nest egg built up.

It's with an eye to the long term future with which you should buy. If you like moving every 3, 4 or 5 years you should rent, rent and rent.

[MyLessThanPrimeBeef]

"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."

-----------------

Please tell that to all Westside SELLERS!!!!!

"We had joy; we had fun. We had seasons in the sun. Good bye, darling house. And papa, you don't have to pray for me. We'll just sell it. Whether we have to take a $500K loss today to sell it is not so important."

Yes, don't just say that to would be buyers.

Remember, kids, any time is a good time to sell. Don't remove it off the market. Tsk tsk tsk, no, no, no, that would be...(clearing my throat)...market timing. Horror! We can't allow that!

[Princess]

Any thoughts about this?
http://www.nytimes.com/2008/08/04/
business/04lend.html?_r=1&hp&oref=slogin

[Milla]

Also, please stop saying that buying a home is potentially not a financial investment. This is fundamentally incorrect. You can RENT a home. The buying part necessarily makes it an investment.

Posted by: Anonymous | August 04, 2008 at 08:24 AM
****
buying does not equal investing. you don't BUY a shirt and think of it as an investment. buying a home to live in doesn't automatically turn one into an investor. buying houses to flip does.

if buying/renting makes sense to the individual, that's all that counts. there's no perfect solution that applies to everyone and to suggest otherwise is short-sided.

[And I thought it was about real estate]

There seem to be many happy renters on this blog. So, why are you bothering with reading/participating in a blog about real estate sales?

[E]

M said...

Trust me, I was a renter for 15 years and my first apartment in Beachwood Canyon was $750 per mo (now that same place would be $3000 per mo.)

Cough...cough...Bulls#*&

http://losangeles.craigslist.org/search/
apa?query=beachwood&minAsk=min&maxAsk=max&
bedrooms=

[M]

Hey E - I don't get your post. Why are you accusing me of lying. I rented a 3 bedroom duplex 15 years ago in Beachwood for $750. Looking at the link you provided me I see that a similar 2 bedroom space is $3850 so point proved. Rents increase dramatically in Los Angeles, there are lulls (particularly the stretch from 98 - 2003.

[I live in LA, too]

E,

I have to agree with M. It looks like the vowel has met its consonant.

[Nick]

To M:

I think everyone can probably understand how a fixed payment mortgage would be better after 30+ years, especially with inflation. However, I think the counter-argument is understated, so let me present it (for what it's worth).

Say you pay double for buying, and inflation is roughly 6% (higher is better for buyers); that gives a break even point at 13 years. If you would be paying $4k/month for buying, that means by year 13 you have paid approx $624k for your purchase, whereas renting you would have paid $453k (but your payments have equalized). The break-even point is around year 22 (~$1,055k spent), at which point you start saving money in overall payments.

But wait... if you take your savings from renting, and invest them, and get [just] inflation as your return, you also have an extra ~$1,055k in the bank by year 22. So the real break-even point isn't until you have spent that money on rent also, which doesn't happen until well after the house is entirely paid off!

Yes, buying is better in the very long run, because eventually you have an asset you're only paying upkeep and property taxes on, and assuming those are lower than the cost of renting an equivalent property, you will eventually come out ahead. However, at double the cost of buying vs. renting, that 'eventually' is truly a long time: longer than most people's holding time for houses. Unless your time horizon for staying in the house is well over 30 years, it's better to rent at these prices.

[M]

Nick - Good point and nice to have an adult conversation with someone on a real estate blog.

[pch]

Now, i know. Fool people living in the house, and smart people living in the apartment