Thursday, July 17, 2008

Reality Shows Up

I looked at buying a house in the early '90s and couldn't even think about affording one.

Then in the mid-'90s during the tech bubble, I had a lot more money and prices had come down drastically, so I bought one. My credit was bad due to some hospital bills, so I got an adjustable 11-point-something%. It seemed high, but I remember my mom buying a house with a 17% mortgage.

The house I bought was well under what I could afford, according to various calculations. It cost about what I was making in a year at the time. After three years of payments, I refinanced at 7% and now I'm at 5.65%, looking at sub-5% on a shorter term loan, if possible. (Think I missed the window on that, unfortunately, as it was a race between rates and declining property values.)

Anyway, after about 10 years, the house had gone up to where it was appraised at nearly 4x what I had paid for it. But, I thought (and think), who can possibly afford that? Certainly not me. Over the first ten years my income dropped to--well, first to 0%, then to 40% (bye-bye tech bubble), and now I'm at about 2/3rds of what it was at its height.

(I've been poor and I've been slightly less poor, and slightly less poor is better.)

But my humble little home is still "worth" over 2.5x. I don't see how that can stand. I make more than most, though granted single income and innumerable offspring cost heavily. Even so, a house should be a matter of security and an asset, not a crushing liability.

Real Estate in Southern California is like the changing tides. Or maybe like a grunion run. It's actually kind of funny. At least three times in my life, I've seen real estate runs. Everyone you know starts working in real estate, whether it's becoming an appraiser, a loan broker or an agent. Everyone starts talking the lingo.

I remember being in a traffic school class and using the phrase "single family dwelling" (a street with 50% SFDs is legal to u-turn on) and the sheriff teaching asked if I was an RE agent. I didn't say what I should have, which is that I'm a Southern Californian, and we know real estate.

Of course, we don't really. What we know is that there's tons of money being thrown around and we want in, so we quit our day jobs (if we're really, really, em, "optimistic") or go to night school, and start trying to cash in. Because one thing we know for sure? It's going to last forever.

When I pointed out on many, many occasions over the past five years, that the market was going to crash, my father, a usually sensible man, would actually say "Well, not necessarily." He's not the real estate type, mind you, so he didn't chase after this gold rush. Nonetheless, it was a conversation killer. What can you say to that?

But my point, over and over again, was "Who can afford that?" My father's reasoning seemed to be that people were buying houses and therefore they were driving up the demand, and why should that change?

Perfectly sensible, I suppose. As an ignoramus, I just looked at the pattern and said, "I don't know what causes it, really. I just know it's something that happens over and over again." What seems to happen is that the premise of "prices will rise forever" is used to justify stupid investments. The same thing that seems to fuel every bubble, whether in the RE market, the tech market, or the freakin' crash of '29.

This, by the way, makes me think we might just see an oil price crash. Ultimately this kind of price pressure has to result in new oil sources opening up. I know I wouldn't invest in oil future right now.

But for houses, I just can't see how people can afford even the current houses. I mean, assuming you come up with 5-20% of the down, you're still looking at $2K-$2.5/month mortgages, or about $25K per year, plus another, say, $5K for property taxes and that's $30K. The median income for the area is $50K.

Even with $50K household not paying income taxes, that's an unmanageable chunk. (If you're renting that house, it'll run you $18K-24K/year, but you don't have to directly pay for any big maintenance, or come up with a down-payment.) Even at $75K/year, that's too big, if not completely unmanageable. But drop that down to $200K, you've halved everything, including the taxes, and you're only looking at about $12.5K.

Of course, these are numbers that I'm more comfortable with, and I try to live as though I might suddenly quit my job and go into full-time banjo busking.

And then, what will happen, at those rates, is that the demand will start building again, and the prices will start climbing, and your plumber will start working on his RE license again....

It's sort of the circle of life in SoCal.

But when I bought this house, there was a castle for sale not far from here that was $600K. It wasn't huge, mind you, but it was a castle on a nice piece of land overlooking the nearby serfs. Those sorts of prices strike me as a much better opportunity for people (even ones who already own property) than the one where we all pretended we were rich because a toolshed with a tin roof was going for $450,000.


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  2. Real Estate is one of the few really protected investments in this country. The government will come in and prop up these banks and loans as they have done in every real estate bubble since the revolution. It might take ten years or so but the prices will rise again, just you wait and see.

  3. Oh, for sure. Although I'm not sure the government's intrusion is necessary to drive the prices back up.

    Although, if we're talking gov't influence, they could repeal the home interest deduction, and that would cause home prices to crash.

    If I were a renter, that deduction would piss me off no end.

  4. In Massachuets they have instituted a tax credit for renters who have to list who they pay rent to and how much they actually pay with the tax id's of the landlords. Then they go and check to see if the landlords pick up the rental income. That is the wave of the future my friend.

  5. Since I'm house-hunting right now, I'd like to say something sensible here; but I since I find the California real estate market incomprehensible, I don't think I can. But someone mentioned a banjo. Isn't the Venice boardwalk a fine place for banjo busking?

    Is the banjo another of your accomplishments, blake? Maybe we should talk about banjos, a little bit. Avoiding the jokes, though. All banjo players know those.

    Just to veer in the direction of sensibleness for a moment, though: If you could rent a house for $1500 a month, that would be $18,000 a year. I think there's a lot more downside in this housing market, which would be good for people wanting to buy a house they could afford. If you think the price of the house you like will drop by more than $20,000 or so over the next year, wouldn't it make sense to rent while you watched the market? Although one does become fond of a house. And that's worth something, too, though it's something that's hard to put a dollar figure on.

    I do like a nice Gibson or Vega banjo. How fortunate am I to have one of each. Were I to go busking, I think I might want to pick up a Deering Goodtime just for that. Sounds good, works Ok, if you lose it you can get another.

  6. I'm not much of a banjo player. When I was younger, I played guitar pretty religiously, and then expanded to other string instruments, like the lute, the dulcimer, the banjo, etc.

    I've not given them as much attention as I should of late. But I was thinking of adding music to this blog.

  7. If you think the price of the house you like will drop by more than $20,000 or so over the next year, wouldn't it make sense to rent while you watched the market?

    Most certainly. And we're not talking twenty thousand out here, we're talking two hundred thousand. I expect my house to drop by that much.

    Although one does become fond of a house. And that's worth something, too, though it's something that's hard to put a dollar figure on.

    Yeah, I had a pal who bought a house 18 months ago who's upside down now (that's mortgage-speak for "owes more than its worth") about $100K but it's a really nice place--and it's just a matter of time before it goes back up.

    And none of it matters much when you're planning to live there.

    I'm hoping to rent this place and move to a bigger one when the market bottoms out.

  8. What is different to me is the transient nature of America where people move from one house to another and one neighborhood to another. I have moved about six blocks from where I was born and can't imagine moving any further away. But that's old school since most of the guys I grew up with have moved away.

  9. Well, again, here in SoCal, the average length of stay in any given location is about 5 years, I think.

    And that's the average, not the mean. I lived in five different houses the first twenty years of my life, then five different places the first three years away from home.

    But I'm one of the few who stayed in California, much less L.A.

    And I could buy a freakin' mansion somewhere else. Don't think I don't think about it....

    But the folks are still here, so I'll probably not be moving out.


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