Best time to buy a house?

[rachits]

I've been lurking at this site for some time now, posting very rarely.

I've done some thinking about the financial crisis and the inevitable dollar decline / inflation.

I basically came to the conclusion that the best thing to do now to prepare for this is to borrow as much money as I can now at a fixed interest rate and put it in something that will hold some value. The only way (that I know) to really do this is to buy a house. Yes, I believe house prices will fall in real values around 30% in the next few years. But I'm expecting the following things:

1. Inflation will really start to rise, offsetting the house price declines.
2. Interest rates will shoot up.
3. Banks will stop lending even you have the means to pay back.

I have tons of cash saved up and I cannot find a safe, decently yielding place to put them. I have it spit in 3: gold, ultrashort ETFs (yeah, not safe...), oil trusts / agri-business etfs. As time goes on, I'm getting more and more paranoid that what I've saved up will be vaporised via inflation. Paranoia does not make for a good investor although I've been doing well so far.

If I do this, it will be a big bet, because I live in the SF bay area and everything decent in a good area is bloody expensive. And unfortunately those areas haven't been hit much yet by the price declines.

Note that if I could put 20% down get a 30-year loan with no margin calls and buy a chunk of gold instead, I would do that in a heartbeat. Allowing me to deduct interest from my taxes would be a bonus .

[hoodoo]

Re: Best time to buy a house?

Just what the doctor ordered!

Cheers,

Hoo

http://www.itulip.com/forums/showthread.php?t=846

[grapejelly]

Re: Best time to buy a house?

I've been lurking at this site for some time now, posting very rarely.

I've done some thinking about the financial crisis and the inevitable dollar decline / inflation.

I basically came to the conclusion that the best thing to do now to prepare for this is to borrow as much money as I can now at a fixed interest rate and put it in something that will hold some value. The only way (that I know) to really do this is to buy a house. Yes, I believe house prices will fall in real values around 30% in the next few years. But I'm expecting the following things:

1. Inflation will really start to rise, offsetting the house price declines.
2. Interest rates will shoot up.
3. Banks will stop lending even you have the means to pay back.

I have tons of cash saved up and I cannot find a safe, decently yielding place to put them. I have it spit in 3: gold, ultrashort ETFs (yeah, not safe...), oil trusts / agri-business etfs. As time goes on, I'm getting more and more paranoid that what I've saved up will be vaporised via inflation. Paranoia does not make for a good investor although I've been doing well so far.

If I do this, it will be a big bet, because I live in the SF bay area and everything decent in a good area is bloody expensive. And unfortunately those areas haven't been hit much yet by the price declines.

Note that if I could put 20% down get a 30-year loan with no margin calls and buy a chunk of gold instead, I would do that in a heartbeat. Allowing me to deduct interest from my taxes would be a bonus .

There are flaws in your logic. The biggest flaw is what happens if 1) prices fall nominally and real-ly, and 2) you need to sell.

The housing prices are a result of the availability of easy money. Absent that, the prices will fall and fall because buyers can't get those easy monthly payments anymore.

[touchring]

Re: Best time to buy a house?

The credit crunch has just began....

There are flaws in your logic. The biggest flaw is what happens if 1) prices fall nominally and real-ly, and 2) you need to sell.

The housing prices are a result of the availability of easy money. Absent that, the prices will fall and fall because buyers can't get those easy monthly payments anymore.

[rachits]

Re: Best time to buy a house?

There are flaws in your logic. The biggest flaw is what happens if 1) prices fall nominally and real-ly, and 2) you need to sell.

The housing prices are a result of the availability of easy money. Absent that, the prices will fall and fall because buyers can't get those easy monthly payments anymore.

Part #2 is true, but lets assume for now I'm extremely confident that its not a risk. (barring a major natural disaster -- oops i live in an earthquake zone)

As for #1, lets take an example. 1 million dollar home today (any amount will do, i'm just choosing this for ease of calculation).

Lets say I buy it now, i put 200k down, borrow 800k at 6.5%. My monthly mortgage payment will be 5,057. Lets say I wait a couple years, the house drops by 20% nominally, but interest rates rise to 10%. Payment after 200k down is now 5,265. If we take tax deductions into account we are probably talking roughly the same amount.

The million dollar question here (no pun intended...) is will rates rise higher than 10% and/or will house prices drop more than 20% nominally. And how quickly will this all happen. Obviously the questions are related, higher interest rates mean lower prices.

Of course noone knows for sure. I just thought it would be an interesting question to throw out what people think.

[touchring]

Re: Best time to buy a house?

The million dollar question here (no pun intended...) is will rates rise higher than 10% and/or will house prices drop more than 20% nominally. And how quickly will this all happen. Obviously the questions are related, higher interest rates mean lower prices.

If rates rise to 10%, will prices only drop 20%?

20% drop seems like an impossible figure if rates rise to 10%.

You may also want to consider the effects of the coming recession on home financing and affordability.

[rachits]

Re: Best time to buy a house?

If rates rise to 10%, will prices only drop 20%?

20% drop seems like an impossible figure if rates rise to 10%.

You may also want to consider the effects of the coming recession on home financing and affordability.

What recession? :rolleyes:

Thinking about it again, you are probably right, I need to think of house prices differently. I should stop thinking about housing prices and think like most Americans do, ... what is the monthly payment. A recession / credit tightening is going to drive the monthly payment down, the nominal price is just an artifact of the monthly payment and the interest rates.

I guess I have to keep renting.

[zoog]

Re: Best time to buy a house?

.... The million dollar question here (no pun intended...) is will rates rise higher than 10% and/or will house prices drop more than 20% nominally. And how quickly will this all happen. Obviously the questions are related, higher interest rates mean lower prices.

Of course noone knows for sure. I just thought it would be an interesting question to throw out what people think.

The Case-Shiller index for San Francisco is down 10.48% from peak as of November 2007. 18 months of decline, many more to go. IMO, another 20%+ nominal is assured, no matter how high inflation and interest rates go.

[SeanO]

Re: Best time to buy a house?

What recession? :rolleyes:

Thinking about it again, you are probably right, I need to think of house prices differently. I should stop thinking about housing prices and think like most Americans do, ... what is the monthly payment. A recession / credit tightening is going to drive the monthly payment down, the nominal price is just an artifact of the monthly payment and the interest rates.

I guess I have to keep renting.

My concern with the advice above is that it may not fully contemplate the current inflationary pressure on rents. So while I agree that prices are largely a function of mortgage rates as discussed above, they do have a floor which is based on the cap rates from current rents.

I've been looking for a chart showing historic rents expressed as cap rates over time. I'd like to overlay that with mortgage rates over time. I think that combination would help shed some light on this.

One of my employees needs to move and asked if maybe he should buy instead. His reason was that he could buy a similar house for about the same monthly payment as renting. The cap rate was also a reasonable, though not fabulous, 6%.

Knowing the local foreclosure situation my immediate reaction was that he shouldn't buy. But rents are up 10% yoy, and I think they will continue to move upward as there is considerable demand for rentals now. If he were to lock in a fixed 30 year loan now he'd be break even with renting today, and likely be ahead next year --- even if prices declined considerably. So long as he's confident he won't need to sell in the near term - buying may be his best bet, especially when you believe, as I do, that mortgage rates are likely to increase.

Anyone have more data on how rents behaved in the last cycle? Or have data on rents over time, especially expressed as cap rates???

Sean

[rachits]

Re: Best time to buy a house?

Anyone have more data on how rents behaved in the last cycle? Or have data on rents over time, especially expressed as cap rates???

I know you are looking for hard data, but I know that the dot com bust really hit the rental rates hard in the bay area. If the recession hits the tech industry, rents will decrease again.

I've been looking for a chart showing historic rents expressed as cap rates over time. I'd like to overlay that with mortgage rates over time. I think that combination would help shed some light on this.

That may be actually be misleading. All other real estate "busts" (in recent history) have been a result of increasing unemployment, not the other way around. As people often like to say, "this time it's different..."

[rachits]

Re: Best time to buy a house?

My concern with the advice above is that it may not fully contemplate the current inflationary pressure on rents. So while I agree that prices are largely a function of mortgage rates as discussed above, they do have a floor which is based on the cap rates from current rents.

AFAIK, with back of the envelope numbers, cap rates are negative for almost any property in the SF bay area.

Whenever my wife tries to get me to buy a house, I keep telling her if she can make the numbers work out assuming 0% appreciation for the next 5 years, we'll go buy a house. She never could.

[touchring]

Re: Best time to buy a house?

You have nothing to lose if you wait and see another 6 or 12 months. We're now in transition mode, the overall picture should be clearer towards the end 2008.

What recession? :rolleyes:

I guess I have to keep renting.

[SeanO]

Re: Best time to buy a house?

AFAIK, with back of the envelope numbers, cap rates are negative for almost any property in the SF bay area.

Cap Rates, while low, are absolutely NOT negative in the SF bay area. I think you mean cash-on-cash rates which is applicable when financing is used.

Cap rate is (annual rent-expenses)/price. For example $2k/mo rent minus $500/mo expenses (tax, insurance, maint) = $18k. If price was $300k the cap rate would be 6%, at $600k it is 3% - meaning that owning the property outright would give you a 6 or 3% return on CAPital.

Cap rates in my area (east SF bay) got as low as 2%, and now vary between 3 and 6% depending on the property. They are actually rising quickly as prices fall and rents increase simultaneously. Finally we are seeing a lot more investor interest as we begin to get over 5%.

Cap rates are even better in places like Stockton where prices are off 40% or more but rents are still strong. I've seen a number of opportunities there to get an 8 cap. Bottom line, there is a floor - and it will be driven by rents.

So whether or not you should buy really comes down to a) how long you plan to stay and stability of your situation (don't want to get caught having to sell while upside down), b) your view on where rents are headed, and c) your view on where mortgage rates are headed.

I certainly think we will continue to see price deterioration in the near term simply due to rising for sale inventories. But it isn't clear to me that this will translate into lower rents (as supply so far hasn't spilled over to rentals), or into lower payments (as mortgage rates may rise).

Sean

[SeanO]

Re: Best time to buy a house?

The Case-Shiller index for San Francisco is down 10.48% from peak as of November 2007. 18 months of decline, many more to go. IMO, another 20%+ nominal is assured, no matter how high inflation and interest rates go.

While Case-Shiller's repeat sales methodology helps to remove some of the problems with median price analysis, their index is still too broad and lagging to be useful for purchase decisions.

So even if you are right about the 20% nominal in the index, you see pockets of relative strength and weakness within that. And if your trying to time a bottom you'll likely miss it.

A home is primarily for shelter, and peace of mind, not investment. If rachits finds a place he really likes, and can afford to stay in long term, he may find it a huge mistake to try to time the market looking for the perfect bottom on price. An increase in mortgage rates could easily offset the price decline leaving him in essentially the same position unless he is paying cash. If fed manipulation results in significant inflation he could end up far worse having not purchased. While I personally think he still has plenty of time, I don't think it is a bad idea at all to start getting ready to buy.

Sean

[jimmygu3]

Re: Best time to buy a house?

If rates rise to 10%, will prices only drop 20%?

20% drop seems like an impossible figure if rates rise to 10%.

I created a table of monthly payments vs interest rates in a previous post. Rates going from 6% to 10% would mean you could buy 28% less house for the same monthly payment.