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The case for buying a home now
May 1st, 2009, 3:00 am · 21 Comments · posted by Mathew Padilla
Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions. Today he tackles two about buying a home.
Q. I am ready to buy now but am afraid that values may drop even more. What do you recommend?
A. The “average” value is developed from the whole range of sales. If the average value has dropped by, say, 20%, you ought to be able to buy some home at less than average, say 25% lower than what it would have been before the decline. The average could drop further and not affect you because you bought lower than average. Someone else may buy a home that is only 15% lower than before. Between the two of you, the average is 20%, but you got a deal. It also doesn’t mean he was wrong as the home may better meet his needs. Ten years from now, you will both be happy you bought.
No one can predict when the market will bottom out until a year later when you can look at a chart and see when the bottom was reached. It may turn out to be this month.
Bottom line: if you find a home that makes sense for you, you ought to buy now when rates are so low.
Raymond in Garden Grove asks:
Q. I own my house and might rent it out to my daughter. I would like to move to Murrieta/Lake Elsinore/Riverside area. With no down payment or maybe 3%, is this a good time to buy? I would like to know a good and trusted mortgage company, bank or credit union.
A. I don’t know the particulars of the market there but I believe it has been pretty battered, which should mean good opportunities for buyers. As to a lender, I’d get references from friends. Someone will have dealt with a hero. That’s who you should use too.
That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question.
Johnson will answer up to three questions each week, so keep checking back for a response. If many questions are submitted, it could take a while to get a response, or he may never get to it. Also, readers keep submitting variations on the same question, which has already been answered: what to do when you can no longer afford your mortgage. I have decided not to publish most of those questions, because they are repetitive, although I appreciate the difficult situation many homeowners are in these days.
Read prior questions and answers by clicking on the headlines below…
- Bigger home loans coming to O.C.
- A complicated mortgage that could fund retirement
- Loan doors open for serial housing investors
- Forget dodging refinance fees
- No job, no refinancing
- Avoiding a rate hit on an investment property
- Who qualifies for Obama’s mortgage refinance plan?
- Paying off a mortgage vs. refinancing
- Mortgage problems of the wealthy
- The skinny on 40-year mortgages
- Refinancing questions and answers
- How to buy with little money down
- Do banks renegotiate mortgages for ‘good’ borrowers?
- Is it time to buy a rental property?
- Caution urged on mortgages that fund retirement
- Refinancing can be tricky if your home was recently for sale
- Shopping for lowest rate is dumb way to get a mortgage
- Speedy mortgage payoffs could cost you
- Paying your mortgage may be the best use of your money
- A ‘good’ borrower these days is someone who…
- When insurers kill your mortgage application
- Mortgage insurance companies not giving breaks
- How price reductions work when Uncle Sam owns a foreclosure
- How long should we wait to refinance?
- Can you be too old to get a mortgage?
- Why aren’t foreclosures cheaper?
- When you can’t afford your mortgage
- How much to put down and other mortgage answers
Find out more about: MORTGAGE ANSWERS | MORTGAGE RATES | FORECLOSURES | HOME PRICES | INVENTORY | RENTS | FED |
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“if you find a home that makes sense for you, you ought to buy now when rates are so low”
Does this guy actually think that the higher rates won’t send prices into a freefall?
The only reason the government is forcing lower rates is because they know this consequence of raising them.
“Ten years from now, you will both be happy you bought”
That’s what bubble buyers said in 2005.
If you have to take a 10 or 20 or 50 year horizon to recoup given losses, you might want to reconsider your decision.
High unemployment, record defaults and a county that’s housing prices are still 30%+ overpriced when compared to income levels are just a few reasons why housing prices have much further to fall.
‘Randy Johnson, president of Independence Mortgage Co’ : Don’t you think this is a little self serving. His argument is completely flawed. OC remains way above historical norms. Prices are going to continue to drop, then stay down for years. The loose lending ‘party’ is over forever which fueled this false climate of inflated housing prices.
There are 360 payments in a mortgage. If you could save yourself $hundreds EACH PAYMENT by just waiting a year or two to buy, why wouldn’t you?
I would approach it like a table game in Vegas and ask myself a couple questions.
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First, what are the odds that home prices will rise over the next year? With higher unemployment, many people lack the ability or desire to buy, so demand will be weaker than normal. Also, with foreclosures still increasing and no end in sight, there will be a constant supply of distressed properties on the market, creating a drag on home prices. So the answer is maybe a 10% chance that property values will rise.
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Second, what are the odds that home prices will continue their historic decline? According to recent information, prices in March were 24% below the previous year. However, prices have been almost flat for the 5 months since November. Interestingly, a lot of government incentives have been supporting home prices for the past 5 months, including artificially low rates and large tax credits that are temporary. The question is what happens when rates do go up and the tax breaks go away? Depending on the timing, it could put more downward pressure on home prices. I would assign the odds of further price decline at 50%.
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So if I were stepping up to a table game called “The Housing Market”, I should expect a 10% chance of winning and 50% chance of losing. Some would play this game just for the thrill of gambling. Others would step away knowing that other games provide better odds. What would you do?
Randy Johnson, president of Independence Mortgage Co. in Newport Beach says buy NOW!!!!11!!
This guy has zero conflict of interest! He only wants the best for you! Buy NOW!!!! He doesn’t care if his Independence Mortgage Co. in Newport Beach sells lots of mortgaged, he only cares about YOUR well-being!!!!
You got to love how he takes the average discount from peak prices as a justification to buy. So it’s OK you overpay now, because in the end it will all average out….. WHAT?!?
XTRA XTRA read all about it—
OC BANKRUPTCIES SOAR 98%
http://www.ocregister.com/articles/oc-bankruptcies-soar-2384796-in-march
a sure sign the housing turnaround has arrived —- llooll@ribsplitter
I think I’ll know the bottom when I see that most people dont buy a home as an investment and instead decide to buy a home because a) ‘rent’ wont go up and b) cause they would like to pay it off.
its a mindset change, not a price.
Let’s say you have a family of 4, a pet, and want to live in an area where you do not have to panic if you are in the backyard and remember you left the garage door open.
In this type of area a rental 4 br house, +1700 sq ft, is going to run you about $2300/month. To buy you are looking at $500k +/-10% and you have some tax incentives that out weigh the property tax burden. Note 30 year fixed will be about $2100/month at todays average rate - could do better if you shop.
What should one do if you are looking for a place to live for at least 10-years?
Buy a home now if you know absolutely that you will not need to sell it for the next 20 to 30 years. If you do need to sell in the next 20 years, you will be taking a loss. If you buy now and do need to sell in the next 20 years, be prepared to take a loss that will destroy your financial well being for 10 to 15 years.
This is not a game that every one wins at, buying real estate is a great way to destroy your life.
One other thing to consider: interest rates are very low now, let’s say 5% (for argument sake) and let’s say you wait and rates move up to 6% a year from now. On a $400,000 loan, 30 year fixed, the payment difference is $251.00 a month. This $251.00 buys a lot of price difference in home buying. Using the ten year figure everyone is using on this blog, payment difference represents over $30,000 in payments. Now do the math and see if now is a good time to buy. Of course this scenario is based on interest rates increasing over the next year, which we do not have a crystal ball to know if that is going to happen, just as we don’t have a crystal ball to know what housing prices will be in a year.
I’d still wait 12 months before seriously shopping.
Bill-1a..
You’re forgetting a couple of things. Sure payments will go up when interest rates go up. But you’re not factoring in that higher interest rates will put pressure on prices to go down. Then factor in all the alt-A’s, REO’s etc..that will push prices down and now does not seem a good price to buy.
Need another factor? High unemployment.
Still need another factor? How about the fact that the lower price a year from now will lower your tax base on that home.
No thanks…I’ll wait.
I agree with OC Trojan, and I’d also do what Liar Loan says and play the game…..waiting about 12 months seems about right. But if you’re staying for 10 years, watch interest rates too, the difference of 1% can be significant over the long run.
To Those Consider Home Buying —- Let’s Do Some Simple Math
Suppose you buy a home for 400K putting down 20% and financing 320K with a 5.25% 30 year fixed loan.
Your payment including property tax and home insurance will end up being $2300 per month. (I am assuming no HOA). So in a whole year you would have paid $27600 in mortgage payments.
Now lets assume home prices only go down 10% over the next year (remember dataquick and Case-Schiller have been showing annual price declines in Southern Calif of over >20%) so 10% a fair guess.
If you bought fthat home a year later the cost will be 360K. How do you think you will feel after working your butt off to pay the $27600 in mortgage for the year only to find that the home is worth $40K less than last year. The price of the home has decreased beyond every dime you paid.
IN OTHER WORDS EVERY SINGLE DOLLAR YOU WOULD HAVE PAID TOWARDS YOUR HOME IN THE FIRST YEAR YOU WOULD HAVE BEEN THROWN AWAY (PAID MORTGAGE OF $27600 in first year BUT HOME WENT DOWN BY 40K).
IN ADDITION YOU WILL SAVE 8K IN DOWN PAYMENT AS YOUR DOWN WILL ONLY NEED TO BE 72K INSTEAD of 80K. (so you can save 8K for a rainy day).
Lastly, by waiting a year for the rest of your life you will only have a montly payment of $2050 per month instead of $2300 per month. A net savings of $250 every month that you can put away for retirement, 529 college savings plan for your kids, vacation, or whatever you chose.
The choice is simple. I have done the math myself and will continue to wait.
When price declines start to get closer to <5% year over year annual drop it will be a good timet o buy because at least then your payments are not being thrown in the trash of falling real estate values.
Only realtors and related brokers will tell you it is a good time to buy now.
<5% YOY is a little too late IMHO heres why. Take the hypothetical price of 100K for every month in 2008, and assume seasonality in pricing doesnt exist. Further, assume we see the following prices in 2009:
Jan 80K (-20% YOY)
Feb 70K (-30% YOY)
Mar 60K (-40% YOY)
Apr 50K (-50% YOY)
May 50K (-50% YOY)
Jun 55K (-45K YOY)
Jul 60K (-40% YOY)
Aug 65K (-35% YOY)
Sep 71K (-28% YOY)
Oct 79K (-21% YOY)
Nov 87K (-13% YOY)
Dec 95K (-5% YOY)
Assume 2010 & beyond prices are flat. If so, was it was clearly better to buy at -40% YOY than it was at -5% YOY. Mind you, this is an extreme example, and it doesnt take seasonality into effect which happens in the real world. However, when the drop from one year to the next is so extreme (i.e. -40% YOY in OC is reality), understand that by the time we get back to -5% YOY, the bottom could be long gone.
Casio..that arguement is so flawed I don’t know where to begin. I’ll let others try to explain it.
Sounds like another realtor just trying to say BY NOW! in July! There’ll be nothing left in Dec!. Umm..what about the REO’s from all the Alt-A’s and such coming down the pipeline? And where do you come up with those numbers? Just a guess? Even if they drop by a lesser percentage they are still dropping?!? Oops..I said I wasn’t going to comment and there I go.
SavininLA..you had much better math classes. Perhaps you can tutor Casio?
JK - thanks for bringing up irrelevant stuff like ALT A and REOs since they have no bearling whatsoever on the hypo above. If you prefer, lets say all the ALT A & REO hit in May driving the price down further. Either way, the principle is still the same.
To answer your question “Even if they drop by a lesser percentage they are still dropping?!?” The answer is NO, they are not. Again, look carefully at my hypothetical - since there is no seasonality the bottom was in April & May at 50% off. By december (when prices were down 5% YOY), the bottom would have been 45% earlier.
Again, this is a HYPOTHETICAL so im not saying this will happen. However, I do think that in a severely down market waiting til -5% yoy could be well past bottom. Thus, a statement like waiting til -5% before buying may not be the best idea if you are trying to time the bottom.
Still, you seem so sophisticated on this issue. Just for fun, go back to My HYPOTHETICAL and show me where the error was. Show me exactly when the bottom happened, and show me why buying at -5% in this hypothetical is not well past the bottom…
Casio,
It may be helpful to refer to a chart of housing prices while you read my explanation. I suggest looking at the Case-Schiller charts. You should be able to Google them.
The year-over-year change is the slope of the price curve at a moment in time. When the bubble peaked, the previously upward slope finally (and momentarily) went to zero (no change) just before home prices started their descent.
We can say without a doubt that home prices hit bottom when the downward slope (year-over-year change) goes to zero and begins to move upward. This is indisputable and is a fundamental theorem of Calculus. Google “local maxima and minima” if you want to learn about this.
Where you got mixed up was in thinking about prices (for example, you have a Freudian slip in your June data). Perhaps you are thinking about dollar loss from peak price or something. When we talk about a change in y-o-y we are talking about a change in “the change in prices” (not a typo).
The argument made by SavingInLA is that prices are currently heading down and there is no rush to buy right now just so you can watch your home drop in value faster than you can make mortgage payments. Wait and save your money. You’ll be glad you did.
The reason Randy Johnson and other brokers/real estate agents will tell people that nobody can time the bottom is because they want you to buy right now! Just as magicians vow to one another never to reveal the secret of their tricks, these brokers and realtor guys apparently can never admit that the present time is not the best time to buy. I guess they’d get kicked out of the clubhouse or something.
Sadly, I must admit they are in some respects technically correct, because we can’t truly start pointing at the bottom until after it has already been established through sales data.
However, you don’t have to take calculus to understand what SavingInLA is saying: before we hit bottom the negative year-over-year changes will get smaller before they turn positive. So at the very least, wait until the year-over-year change is slowing its descent and leveling out, even if you miss by an entire year, there is no way prices are going to jump back up to unaffordable levels.
Also as others have pointed out, due to the artificial forces at work, there could be an “echo bust” even after the bottom as we return to a capitalist economy and market forces determine prices and interest rates. Still, you’d be better off than those folks who were told “now is the time to buy” in 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, and 2009.
Mike - thanks for the thoughful response. I have some understanding of what you are saying, but I may not be getting all of it. If you look again at my data series (and assume the freudian slip wasnt there
you would see the following - and please correct me if my terminology isnt correct.
A. The “bottom” in terms of price was april/may at 50K. At the time we were showing a -50% YOY price decline.
B. If in this extreme case we were to wail til the data indicated we had “-5% YOY declines” as Saving In LA suggested, we would be buying in December @95K.
C. In this case, by waiting til we saw -5% YOY decline before we jumped in, Our purchase price was 45K more (or +90% higher than the “bottom” price of 50K.
Thus, if in this example in hindsight we would have been better moving in much earlier, when (as you said) the rate of YOY change is slowng which, in my example was in June when the rate of YOY decline went down to -45% versus -50% YOY the month before.
Now, there are many many cases where the rate of YOY price decline is going down but the prices are going down too. So yes, its not always the case that the price bottom is once the YOY rate of decline decelerates.
However, what I am saying is by waiting til we see -5% YOY before moving in in a very dynamic market with a huge price crash and (in my example) a huge price recovery, you waited way too long.
So in a dynamic market where prices fell precipitously, when should you go in? I dont know, but I do think that -5% YOY is too conservative. Perhaps in cases like the OC where -40% YOY was seen, you may (and I stress “may”) be better off by moving in at -15% YOY. If the OC acted exactly like my Hypo (which it wont) clearly waiting til you see -5% YOY is too long.
In any event, I do appreciate the comments, far more constructive than JK who bristled at my suggestion, called me a realtor, and then ran away when it was clear he couldnt find the hole in my HYPOTHETICAL argument.
However, you don’t have to take calculus to understand what SavingInLA is saying: before we hit bottom the negative year-over-year changes will get smaller before they turn positive. So at the very least, wait until the year-over-year change is slowing its descent and leveling out, even if you miss by an entire year, there is no way prices are going to jump back up to unaffordable levels.
sorry, I included your quote
However, you don’t have to take calculus to understand what SavingInLA is saying: before we hit bottom the negative year-over-year changes will get smaller before they turn positive. So at the very least, wait until the year-over-year change is slowing its descent and leveling out, even if you miss by an entire year, there is no way prices are going to jump back up to unaffordable levels
because I agree you are correct, it is highly highly highly unlikely prices will jump back to unaffordable levels. However, in my hypo, where I get to set the rules, unaffordability was quickly reattained. (i.e. by the end of the year prices had recovered immensely from the crash which bottomed 6 months earlier). My point again was not to say this will happen - it was only to point out an extreme - a reductio ad absurdum - to say that waiting til you saw -5% YOY before you moved in may be too conservative.
Many here are OK with being that conservative. Many here will take the certainty of missing the bottom and purchasing significantly thereafter, because they feared the bottom could have been a “dead cat bounce” - very legitimate concern, and justifyable position.
However, for those out there who have a higher risk tolerance and are willing to accept the greater risk, in hopes of catching the true bottom, waiting til you see -5% YOY is too long.