Our formula for buying now - we need rsources

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whynowwhynot_IHB

New member
<p>Hello, </p>

<p>My wife and I are the Plankton, those lowliest on the food chain that hold the economy, the first time housebuyers. We have potential, but no equity, and barely 5% downpayment. </p>

<p>Our reason to buy now is that we currently rent a 2br for $2,000. We would like to start a family, and a monthly payment of $3,300, interest only+ taxes&ins, would (maybe) get us a 3br in Univ Park. With the tax benefits of home ownership, we figure $3,300 interest on mortgage = $2,000 rent. So, if we can find a $500K in Univ Park, we would be getting a 3br instead of a 2br for the same price. We are planning to keep our house for the next 5 years. </p>

<p>Our formula for negotiating with sellers is as follows:</p>

<p>1. Rent=payment: Monthly rent should equal to the mortgage in order not to lose our shirt. We hope we may be able to rent any 3br a few years down the road for $3,300. </p>

<p>2. We looked at the graph for the San-Diego price drop in the last recession, where average prices dropped 20%. So we calculate as follows: Let's see how much this property was worth in the peak, at the end of 2005, take off 20%, and that will be our offer.</p>

<p>However, to do this, we actually need to know how much comparable properties were sold for at the end of 2005/ early 2006. </p>

<p>What do you think of the formula?</p>

<p>Can anyone help us find resources for finding out prices from two years ago in Irvine?</p>

<p> </p>

<p> </p>
 
If you look at properties on Redfin, they will show the previous sales price and date. It takes some searching, but you can probably find a comparable property which sold near the peak.





If you do a bit more work on the rent vs. own calculation you will see there is no way to make the math work. The $3,300 interest will not equate to a $2000 rent. And even if it did, aren't you just renting from the bank? I fail to see much difference between "buying" with an interest only loan and renting. Read this: <a title="Permanent Link to Financially Conservative Home Financing" rel="bookmark" href="http://www.irvinehousingblog.com/2007/03/01/financially-conservative-home-financing/" linkindex="25" set="yes">Financially Conservative Home Financing</a>.





Keep in mind that this bubble was more than twice as large as the last one. If you bid 20% off the peak, you may still be buying half way to the bottom. If you can wait, you should wait. Prices will be a lot lower in a few years.
 
<p>Yeah, we thought about that too, "isn't interest only just renting from the bank?" Well, the big difference is that $2,000 gets us a 2br and the other, $3,300, get us a 3br, which is more livable with a baby + home office. </p>

<p>Looking at your wise analysis, we have not choice but agree that the spec properties can become a 40% discount bloodbath in the next few years. However, we are concerned that this will not be the case for 3br single-family houses or even 3br condos. We were driving around this weekend, looking at 3br houses, and the vast majority of sellers were traditional, i.e. empty nesters, mover-uppers, etc. By the way, there was also a decent amount of would-be buyers driving around. </p>

<p>So, we are concerned that 3br properties will not see a drop in valuation, and if we wait too long others in the sidelines might join the hunt. Also, with credit tightening, we are concerned our payments may rise. </p>

<p>We have no experience in the last bubble. Were 3br properties relatively immune, or did they go belly up like all the rest?</p>
 
Everything will get hit hard. Everything.





Don't be scared into buying because loan terms are tightening. <em>This is what will drive prices down.</em>





Your assumption is that the price will remain constant as credit tightens and therefore your payment will increase. I am telling you this is a faulty assumption. As credit tightens all buyers will be facing the same tightening credit terms; therefore, other buyers will not be able to outbid you for real estate. As bids drop, so will prices.





In fact, I would say you would like to buy when credit terms are as tight as possible. You want to see 20% down, 28% DTI and high interest rates. This will cause prices to crater. Later when credit loosens again (much later) you will be able to refinance and lower your payment. You can always refinance into better loan terms, you can't refinance into a smaller mortgage (unless you bring cash.)





Try reading this one: <a set="yes" linkindex="12" href="http://www.irvinehousingblog.com/2007/05/07/your-buyers-loan-terms/" rel="bookmark" title="Permanent Link to Your Buyer?s Loan Terms">Your Buyer’s Loan Terms.</a>





Imagine if you bought the house today, and 3 years from now 20% down, 28% DTI and 9% interest rates are the norm. How much will your buyer pay you when you want to move up? It will be far less than you paid using today's standards.
 
<p>I've been watching 3br condos drop in Westpark for 18 months now. They ARE coming down, and when the lowest priced unit on the block sells, another low-priced unit pops up in its place within a few weeks.</p>

<p>Oh, and you can rent a 3br SFR in Irvine for $2400 all day long. </p>
 
<p>Whynot,</p>

<p>So have you looked around for a $500K 3br in Irvine? They'll be pretty tough to come by these days. By my calculations, the Interest, tax, insurance, and HOA (assume $250) minus tax deductions should run you around $2400/mo. for a $500K place. Keep in mind that this does not include PMI which you will have to pay with only 5% down, and does not include mello roos. These two would add $350+ per month. So while paying down no principal, you are looking at a $2700-2800/mo payment, plus $25K "security deposit" for down payment. Since you can get a 3br rental in Irvine for around $2400, you'll be out $300-400 per month plus $20K for "buying" a place and not paying any principal. </p>

<p>By my calculations, that home needs to come down to around $450K to be rent equivalent. So if you can find a 3br in Irvine for $450K, by all means go buy it. If you can find one for $500K, you're probably not in a horrible position as long as you can afford to begin paying the pricipal down in the near future and you're prepared to stay in it for the foreseeable future.</p>
 
<p>I just went back and looked over some of my old blog features to see what was out there last year versus now. Amazingly, there were some better bargains to be found last year BUT many of the units listed in the high 500's in 2006 did not sell and have been rented out. My experience watching the market tells me that many these listings will be back on the market within a year.</p>

<p>There is definitely not an appreciation trend in the comps. </p>
 
<p>Hi Whynowwhynot,</p>

<p>My wife and I were in your situation over 2 years ago...we were tired of renting (10 years), wife just got out graduate school and studying for her board exams, we were getting married and had relatives coming over, and i was living with the in-laws for a few months (yuck!).</p>

<p>I went through the same rent versus own calculations, and to make it work, I had raised my appreciation % on my house purchase so that buying was better than renting. Basically, we had an EMOTIONAL need to own a house and even though I knew that prices were unsustainable, I bought my first condo in Tustin Ranch anyways...thinking that I'd be out in under 5 years and ready to move up since our incomes would basically double after my wife started working.</p>

<p>All was great until we realized that 2bedroom was too small for us, since we found out my wife was expecting a few months after we got married. Flash forward 2 years, house appreciation didn't jive with my initial calculations and we wanted to buy a bigger home. With the current market, I barely sold it for the price that I bought, and after factoring in upgrades (about 20k) + sales cost, I've burned a large hole in my pocket and I wasn't even a flipper.</p>

<p>My advice to you is to balance your need for a home while listening to the financial advices provided to you by IrvineRenter and others. Don't count on price appreciation to save your butt if you don't intend to stick it out in your house for the medium term. You have to think of the scenario where if you put 5% down on your house, and the house goes down in 15% in value in 3 years and you have to leave the house (due to job transfer, wife wants to stay home or work part-time, etc.), are you willing to make up that difference or be able to wait it out until the dust clears? If the answer is no, you're better off renting and saving up a wad of cash for your home. On the other hand, the experience of owning a home can't be replaced, and it shouldn't be a ruinous financial experience...unfornately, in this environment we find ourselves in, current house prices in SoCal are hazardous to your financial health!</p>
 
<p>Not that I recommend that you buy now, </p>

<p>Because your home will only be worth less in 2 years and you don't have much money to put down. But let's hope your income in the next few years will show significant growth.</p>

<p>This one is a REO $504.5K 3bd, 2.5 ba condo in nice area of Irvine with low taxes. DOM 78 days.</p>

<p>8 Mozzoni, Irvine, CA</p>

<p>http://www.redfin.com/stingray/do/printable-listing?listing-id=758902</p>
 
<p>Odd... That listing is missing from Zip. I wonder why.</p>

<p>Edit: NIR gave us the agent comments a while back: "<em>Agents, see storage area in garage which has standing water in the step down area. HOA is working on resolving problem. Listing Office has reports from Water Expert. Please bring prequalified buyer with proof of funds and good FICO scores. Property to be sold in as-is conditions with no expressed or implied warranties"</em></p>
 
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