[Requesting Suggestions/Recommendations] - First time home buyer

[qwerty]

Did qwerty become Panda?

At least for my recommendations you only need to cross jamboree vs the entire country

 

[Cares]

Folks,

I have been renting in Irvine (UCI area) for the past 7 years. Considering the interest rates, I have decided to buy a new home. I just started looking

So far all the advice you received is where to look for a home that fits your budget (clearly not irvine based on responses).  I will give you advice that is completely different.  Id wait and see.  I personally think it is a horrible time to buy.  Its taboo on this website to tell people not to buy a house because most people bought homes here when they were actually affordable and they have done well.  Unfortunately I think times are different for younger new buyers and the past performances of most people on this website should not influence the decisions of new younger buyers today.

Rates are rock bottom, prices have accelerated in the past few months, inventory is very low.  All these things are working against you right now.  Will things get even worse?  Perhaps.  However when things are usually at one extreme, it cannot continue.  I think FOMO is driving you and many others to make the decision to buy in this current climate. 

Good luck to you.

Here's a thought exercise, would you rather pay a higher purchase price with low interest rates or lower price with higher interest rates? Let's say you buy a home today at $800k with 20% down and the rate is roughly 2.5%. Versus the alternative of waiting on interest rates increase by 0.5% but you get lower home price of $775k?

$800,000 at 2.5% = $2,528
$775,000 at 3% = $2,613

The same home price would have to drop to $750,000 (-6%) in order to equal to buying now at $800,000. I think it is something to consider. There is a cost of waiting associated with waiting out a "bubble." I also do not think starter homes in Irvine are going to experience such a decline in value due to limited supply.

Yes, but that exercise excludes the gain. Provided the home is owned for less than 24.5 years, and excluding refinance possibilities, one would be better off paying less for the house and more for the borrowed money.

I totally agree with you that we are getting a lot of FOMO out there based upon what I'm seeing out there.  When my buyers are dealing with homes that have 10+ offers on just about every home they are making offers on it's clear the FOMO cool-aid is flowing strong. Biggest problem is the lack of inventory as I mentioned, it's inventory levels that determine where prices are heading in the short term. Unfortunately, current inventory levels along with the demand do point to further price increases (especially in the low and middle market). I personally don't think these mid 2% interest rates won't last beyond 2021 once inflation starts kicking in when the majority of the world is vaccinated.

Like all you have mentioned, FOMO is definitely playing a part (given the rates). However, due to limited inventory, I personally also feel prices (price/sqft) are on the higher side. (Not that it is wrong. It is simple demand and supply). Just that folks like me in a similar boat are having a tough time deciding if now (~Mid 2021) would be a right time to own a home. Only, time (next couple of months) will tell, where we as a country/economy will be. For now, it is wait and watch from the sidelines for me especially with how things (Covid and its downstream effect) is again on the rise. Although, I doubt if Covid had -ve impact  (if any) to the housing industry and Irvine specifically.

Covid did cause a 3-5% price drop (one the lower side for the low-end market) for homes that closed in April/May that got into contract in late March/April so the dip was very short-lived. Then interest rates started decreasing with the Fed purchases and the lower end buyers started coming back in May (the lower end is most interest-rate sensitive as they tend to focus on the total monthly cost) and the rest was history.

I helped my buyer open escrow in April and close in June on a home $100k under original asking price in the South Bay. Seller was motivated to sell and of course COVID shut down all buyers. I got at least 20 calls from agents and appraisers asking about my transaction for comp purposes.

 

[Nguyen80]

Folks,

I have been renting in Irvine (UCI area) for the past 7 years. Considering the interest rates, I have decided to buy a new home. I just started looking

So far all the advice you received is where to look for a home that fits your budget (clearly not irvine based on responses).  I will give you advice that is completely different.  Id wait and see.  I personally think it is a horrible time to buy.  Its taboo on this website to tell people not to buy a house because most people bought homes here when they were actually affordable and they have done well.  Unfortunately I think times are different for younger new buyers and the past performances of most people on this website should not influence the decisions of new younger buyers today.

Rates are rock bottom, prices have accelerated in the past few months, inventory is very low.  All these things are working against you right now.  Will things get even worse?  Perhaps.  However when things are usually at one extreme, it cannot continue.  I think FOMO is driving you and many others to make the decision to buy in this current climate. 

Good luck to you.

I love when I read post like this. Reassures me there?s always lifelong renters for my properties.

 

[kpatnps]

Folks,

I have been renting in Irvine (UCI area) for the past 7 years. Considering the interest rates, I have decided to buy a new home. I just started looking

So far all the advice you received is where to look for a home that fits your budget (clearly not irvine based on responses).  I will give you advice that is completely different.  Id wait and see.  I personally think it is a horrible time to buy.  Its taboo on this website to tell people not to buy a house because most people bought homes here when they were actually affordable and they have done well.  Unfortunately I think times are different for younger new buyers and the past performances of most people on this website should not influence the decisions of new younger buyers today.

Rates are rock bottom, prices have accelerated in the past few months, inventory is very low.  All these things are working against you right now.  Will things get even worse?  Perhaps.  However when things are usually at one extreme, it cannot continue.  I think FOMO is driving you and many others to make the decision to buy in this current climate. 

Good luck to you.

I love when I read post like this. Reassures me there?s always lifelong renters for my properties.

Perhaps my advice may not make sense to those who will not have anything to gain from it.  However to others in an unfortunate situation as it is for current first time buyers, it may be somewhat reasonable. 

Since you are so reassured of the supply of renters, I suggest you go buy another rental in Irvine.  lm sure you will do great with it.

 

[Kenkoko]

From your experience, what are other things a first time home buyer should consider in the grand scheme of things.[/list]

Consider how different you are from the average person/ homebuyer. The newest data indicates people change homes every 5 years. (down from 7 years a decade ago)

If you are going to be in a Irvine starter home for 5-7 years, then missing out on the appreciation wouldn't be that much of a deal to me.

Even if you are optimistic and price in an annual appreciation of 2%. In 5-7 years when you sell your starter home, about half of that gain will go towards the transaction cost. ( perhaps to one of these lovely realtors x2)

In much of Irvine, especially the GP neighborhoods, it is still cheaper to rent vs buy. There is financial and life wisdom in saving up & skipping the starter home all together.

 

[Kenkoko]

I love when I read post like this. Reassures me there?s always lifelong renters for my properties.

It always gives me a good chuckle, reading posts like these.

A rental property in Irvine is nowhere near the top choice for any savvy investor.

And having lifelong renters is not even a top consideration of the advantages of investing in real estate.

 

[irvinehomeowner]

• From your experience, what are other things a first time home buyer should consider in the grand scheme of things.

Consider how different you are from the average person/ homebuyer. The newest data indicates people change homes every 5 years. (down from 7 years a decade ago)

If you are going to be in a Irvine starter home for 5-7 years, then missing out on the appreciation wouldn't be that much of a deal to me.

Even if you are optimistic and price in an annual appreciation of 2%. In 5-7 years when you sell your starter home, about half of that gain will go towards the transaction cost. ( perhaps to one of these lovely realtors x2)

In much of Irvine, especially the GP neighborhoods, it is still cheaper to rent vs buy. There is financial and life wisdom in saving up & skipping the starter home all together.

Sure... but this just depends on the person's situation.

There are many people on this board who have bought a "starter home" and even after selling just 5-7 years later were able to roll that up to a better home. Or they can wait longer to get a better return (which is why I always talk about having the tolerance to stay at least 10 years). Had I rented instead of stretching to buy my first home, I would not have been able to leverage that appreciation to where I am now.

There is financial and life wisdom on both sides, I can't say either is the "right" decision, only that person can.

 

[Kenkoko]

Sure... but this just depends on the person's situation.

There are many people on this board who have bought a "starter home" and even after selling just 5-7 years later were able to roll that up to a better home. Or they can wait longer to get a better return (which is why I always talk about having the tolerance to stay at least 10 years). Had I rented instead of stretching to buy my first home, I would not have been able to leverage that appreciation to where I am now.

There is financial and life wisdom on both sides, I can't say either is the "right" decision, only that person can.

Of course it depends on the person's situation. A few people I know stayed in their home over 15 years. Unicorns do exist here.

But most people I know, myself included, falls somewhere along the average spectrum.

So there's a lot of wisdom in discussing "the average person / homebuyer", especially in broad stroke general discussions.

My only question with your personal example is the seemingly incomplete opportunity cost analysis.

If you didn't stretch to buy your first home. Were you just going to let your down payment sit in a 0% interest checking account?

I think people who are savvy enough to be homebuyers are at least savvy enough to put their money in some sort of investment generating more than 0%.

Not even talking about anything fancy or difficult. Just parking the down payment in a Dow / SP500 / Nasdaq index fund, would have generated some sort of return.

That vs. your appreciation in buying your first home (minus the 6% selling transaction cost) would be a better comparison.

 

[irvinehomeowner]

I think I've said this before but I started with a 3.5% down payment. I barely had that but lending practices for FHA were pretty loose. I was single, my first job... etc etc. Interest rate was really high too and I had to pay PMI.

And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.

Also, back then rent/buy parity favored buy... so there's that to consider.

 

[usctrojancpa]

I tell my current buyers that ask me where I think prices are going that if they are going to buy a home today they need to make sure to own it for at least 5+ years because I have no idea where prices will be next year or the year after but I'm fairly certain that prices will be higher in 5 years than they are today.

 

[Kenkoko]

I think I've said this before but I started with a 3.5% down payment. I barely had that but lending practices for FHA were pretty loose. I was single, my first job... etc etc. Interest rate was really high too and I had to pay PMI.

And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.

Also, back then rent/buy parity favored buy... so there's that to consider.

Thanks for providing your own personal #s.

So your first home was a highly leveraged investment that worked out. 100% + appreciation is likely over a very long time correct?

In that same time span, if you invested your small 3.5% down into an index fund using similar leverage %, you would likely come out the same or better.

I say that because there has not been any 5-7 year period  (or perhaps longer in your case) in the past 2 decades (my entire adulthood) where Irvine real estate appreciation significantly outpaced the three major index funds.

 

[Kenkoko]

And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.

Not harping on the 1% difference, whether that's 5% or 6%. Even at 5% it's a huge inefficiency.

In your case, that 5% transaction cost is actually more than 10% of your original investment! ( since you have more than 100% appreciation)

RE transaction cost structure makes RE investments highly inefficient. And this is something people do not often think about. 

 

[irvinehomeowner]

So your first home was a highly leveraged investment that worked out. 100% + appreciation is likely over a very long time correct?

Wasn't my first home that appreciated significantly, but in a short 3 years it allowed me to move up and buy an Irvine home with 20% down (most from equity).

In that same time span, if you invested your small 3.5% down into an index fund using similar leverage %, you would likely come out the same or better.

Sure, but... my "rent" did not increase, I had a proper SFR with a driveway and backyard, and my kids had the stability of the same home for that amount of time. There is more than just financials.

I say that because there has not been any 5-7 year period  (or perhaps longer in your case) in the past 2 decades (my entire adulthood) where Irvine real estate appreciation significantly outpaced the three major index funds.

But remember I said 10+ years. Who is that population that moves every 5 years? I think we took a poll here at TI and most were over that... so it's all relative. But then again, I know some here who have moved more frequently and even with transaction costs they do alright.

Not harping on the 1% difference, whether that's 5% or 6%. Even at 5% it's a huge inefficiency.

In your case, that 5% transaction cost is actually more than 10% of your original investment! ( since you have more than 100% appreciation)

RE transaction cost structure makes RE investments highly inefficient. And this is something people do not often think about.

I dunno... when you factor in good appreciation, that 5% seems nominal (although that's why other RE places are touting lower fees). There are inefficiencies in many financial transactions, but I don't think RE is as significant as you do. Nor do many others or people would not be buying/selling homes.

 

[Kenkoko]

@IHO

I definitely agree buying a house for many people is more than just financials. But if one doesn't separately analyze the financial aspect of it, how would one know what price tag to put on his/her enjoyment of a proper SFR with a backyard & driveway etc etc ?

Also in an environment where it is cheaper to rent vs to buy, you aren't really missing out on the "proper SFR with a backyard & driveway" experience. You can even rent a better version of it or do the same and save some $.

There is no right or wrong answer when you bring in human aspects into a financial investment. I just wanted to point out buying a home as investment (or partly as an investment) is far from the slam dunk win/win it is often portrayed to be. Especially if you consider the opportunity cost, it is often not the best financial investment.

Lastly, I disagree with your take on RE inefficiency in comparison with other legal financial investments.

You said there are inefficiencies in many financial transactions. I have a pretty diversified investment portfolio, but I can't think of one that would even be within the same ball park as RE. Care to name a few to enlighten me?

 

[usctrojancpa]

I think I've said this before but I started with a 3.5% down payment. I barely had that but lending practices for FHA were pretty loose. I was single, my first job... etc etc. Interest rate was really high too and I had to pay PMI.

And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.

Also, back then rent/buy parity favored buy... so there's that to consider.

Thanks for providing your own personal #s.

So your first home was a highly leveraged investment that worked out. 100% + appreciation is likely over a very long time correct?

In that same time span, if you invested your small 3.5% down into an index fund using similar leverage %, you would likely come out the same or better.

I say that because there has not been any 5-7 year period  (or perhaps longer in your case) in the past 2 decades (my entire adulthood) where Irvine real estate appreciation significantly outpaced the three major index funds.

It has one a cash on cash leveraged return. Real estate allows you to lever up at least 5x (assuming 20%) and you can?t do that with a margin trading account plus mortgage rates are lower than margin rates. 

 

[Kenkoko]

It has one a cash on cash leveraged return. Real estate allows you to lever up at least 5x (assuming 20%) and you can?t do that with a margin trading account plus mortgage rates are lower than margin rates.

Margin is not the only way to leverage your investment. There are 2x 3x 4x ETFs. Also options trading allows you to leverage even more without doing margins.

 

[usctrojancpa]

@IHO

I definitely agree buying a house for many people is more than just financials. But if one doesn't separately analyze the financial aspect of it, how would one know what price tag to put on his/her enjoyment of a proper SFR with a backyard & driveway etc etc ?

Also in an environment where it is cheaper to rent vs to buy, you aren't really missing out on the "proper SFR with a backyard & driveway" experience. You can even rent a better version of it or do the same and save some $.

There is no right or wrong answer when you bring in human aspects into a financial investment. I just wanted to point out buying a home as investment (or partly as an investment) is far from the slam dunk win/win it is often portrayed to be. Especially if you consider the opportunity cost, it is often not the best financial investment.

Lastly, I disagree with your take on RE inefficiency in comparison with other legal financial investments.

You said there are inefficiencies in many financial transactions. I have a pretty diversified investment portfolio, but I can't think of one that would even be within the same ball park as RE. Care to name a few to enlighten me?

Desirable areas rarely trade at or below rental parity due in part to strong buyer demand. The closest that Irvine came to trading at rental parity with 20% was in 2009-2010 and that didn?t last long. If you rented waiting for rental parity since 2011 you?d still be renting and you could have seen prices increase around 50% from a nominal perspective.  Buying a home for many buyers is much more than a financial exercise, it?s a home that they can call their own and put down roots. I?ve had several buyers who were nudged into buying because their landlords either sold or moved into the homes that they were renting.  As long as buyers don?t stretch too much and buy a little more space than they think they need the probability of having to sell in less than 5 years is lower.

 

[usctrojancpa]

It has one a cash on cash leveraged return. Real estate allows you to lever up at least 5x (assuming 20%) and you can?t do that with a margin trading account plus mortgage rates are lower than margin rates.

Margin is not the only way to leverage your investment. There are 2x 3x 4x ETFs. Also options trading allows you to leverage even more without doing margins.

I know and you can also use options but those trading vehicles are not for the faint of heart or folks that are busy with a family SBs theur career.

 

[Kenkoko]

I know and you can also use options but those trading vehicles are not for the faint of heart or folks that are busy with a family SBs theur career.

If "for the faint of heart" is the criteria, neither is putting down 3.5% down to leverage to buy a home. No offense IHO  ;D

 

[Kenkoko]

Desirable areas rarely trade at or below rental parity due in part to strong buyer demand. The closest that Irvine came to trading at rental parity with 20% was in 2009-2010 and that didn?t last long. If you rented waiting for rental parity since 2011 you?d still be renting and you could have seen prices increase around 50% from a nominal perspective.  Buying a home for many buyers is much more than a financial exercise, it?s a home that they can call their own and put down roots. I?ve had several buyers who were nudged into buying because their landlords either sold or moved into the homes that they were renting.  As long as buyers don?t stretch too much and buy a little more space than they think they need the probability of having to sell in less than 5 years is lower.

Don't really need 2011. There are GP homes that are better to rent than to buy right now.

I don't think anyone is going to argue with " buying a home is much more than a financial exercise"

But at what point does the price tag become too much? Do first time home buyers consider the opportunity cost of putting their savings into a 20% down payment instead of investing elsewhere with higher returns? Do they consider the potential downside such as job lock? In my experience with mentoring young professionals, the answer is often no.

I mention job lock specifically because I think it's much more relevant to potential first time home buyers as they are often in their earning prime.