Does it make sense to try to "time" a first time home purchase?

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MNS CA
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Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:50 am

I realize it probably is a bad idea to try to time the stock market, and typically just invest a bit more every month in my retirement and taxable accounts as I get my paycheck.

But what about trying to time a first time home purchase? Would that make sense, or should I buy as soon as I find something I like?

To be more specific, I'm looking in Los Angeles, on the West Side. Prices are high, have shot back up since the 2008-2011 back to 2006-2007 levels, and are generally pretty volatile and well correlated with the U.S. stock market (>0.8). Real estate seems to be slightly less volatile and to go up more slowly than the stock market.

Unemployment is very low, and interest rates are low, so it seems like it's a very bad time to buy real estate. There are lots of competitive situations with good places going for well above asking price.

I'd rather buy when unemployment is high, interest rates are high, and prices are low. (My job is secure, so high unemployment won't adversely affect me).

I only get to buy for the first time once, and it's all a big lump sum with lots of leverage (2X minimum, maybe 4X).

In this context, does waiting for a recession to "time the (housing) market" make sense? In the mean time, I'm investing in the stock market, but I have enough in reserve for a downpayment.

boglerdude
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Re: Does it make sense to try to "time" a first time home purchase?

Post by boglerdude » Sun Jan 07, 2018 7:01 am

Even if this is near the peak, it could easily be 2+ years before prices drop below where they are now. That's a lot of waiting and hand-wringing. And how are you going to define the bottom...

Decide if you want to own, for all the other reasons besides market sentiment. Primarily if you'll be living there for many years

btw there are value buys in improving areas e.g. around West Adams and Northeast LA
Last edited by boglerdude on Sun Jan 07, 2018 10:48 am, edited 1 time in total.

RRAAYY3
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Re: Does it make sense to try to "time" a first time home purchase?

Post by RRAAYY3 » Sun Jan 07, 2018 8:27 am

All I know is I won’t be buying in my area anytime soon

800K houses with small property ... and high taxes ... not happening

runner3081
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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner3081 » Sun Jan 07, 2018 8:39 am

Absolutely makes sense to time it...

Time it and buy when you have found the area you want to stay in, have the money for 20% down and can comfortably afford the mortgage and other costs while continuing to fund your other financial goals.

The other stuff is all noise. No one has a crystal ball. For all we know, they could go up another 20% and then "crash" but only lose 30%. Who knows.
Last edited by runner3081 on Sun Jan 07, 2018 8:40 am, edited 1 time in total.

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bottlecap
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Re: Does it make sense to try to "time" a first time home purchase?

Post by bottlecap » Sun Jan 07, 2018 8:40 am

No it doesn't make sense.

But your problem isn't the housing market. It's the market you're looking in. It will always be expensive compared to other areas.

JT

runner540
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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner540 » Sun Jan 07, 2018 10:18 am

I'm supportive of trying to time the housing market for these reasons, which are different from the stock market:
1. You can't dollar cost average a home the way you can with stocks.
2. You can't diversify: you buy one house, in one neighborhood in one city/state.
3. There are good substitutes for shelter: you can rent. Theses subsitutes also provide good benchmarks for the price of houses.

I'm a renter who has been doing a lot of research on the rent vs buy decision.

For a potential buyer like yourself:
Check out this rent vs buy index
http://business.fau.edu/news-events/new ... px?nid=729
http://business.fau.edu/departments/fin ... nd-graphs/

It highlights Houston, Denver and Dallas as 3 cities where things are out of whack in favor of renting. I read their 2012 paper that details the methodology of the index, and it called the trough in the national market using that methodology.

Also check out the American Enterprise Institute's housing risk research. It's updated monthly and has metro level data for TX andCA. http://www.housingrisk.org

mega317
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Re: Does it make sense to try to "time" a first time home purchase?

Post by mega317 » Sun Jan 07, 2018 10:47 am

This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.

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Pajamas
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Re: Does it make sense to try to "time" a first time home purchase?

Post by Pajamas » Sun Jan 07, 2018 11:06 am

I have friends who moved to a new city with an overheated housing market just before the 2008-2009 financial crisis. I advised them to rent before buying, both to get used to the new city before deciding which neighborhood to live and because of the state of the national housing market and particularly the local housing market.

They didn't want to move twice, so they found a house and bought it anyway. The market value of their house only recently recovered to what they paid for it. The loss of value caused them some stress, but overall they have liked living in their house and they have generally felt like they made the right decision.

Since no one knows what the future holds, in the end you have to make a decision that you can live with. Bottom line, you need a place to live, and how you should best achieve that depends, and can be fluid. You have to balance general factors (economy, housing market, etc.) with personal factors (resources, stability of income, etc.)

Sounds like you don't feel it is the right time for you to make a first-time home purchase, so you shouldn't.

runner540
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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner540 » Sun Jan 07, 2018 11:11 am

mega317 wrote:
Sun Jan 07, 2018 10:47 am
This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.
Good points. On the interest rate question, I think OP would be relatively better off than other first time buyers, since OP will have down payment of 20%+ and will need to borrow less. (According to the AEI's research linked above, the median down payment for ALL homebuyers is 5%).

surfstar
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Re: Does it make sense to try to "time" a first time home purchase?

Post by surfstar » Sun Jan 07, 2018 11:41 am

after adjusting for inflation, prices are still not as high as the 2006-07 peaks

definitely do not use timing to alter your purchase decision

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Watty
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Re: Does it make sense to try to "time" a first time home purchase?

Post by Watty » Sun Jan 07, 2018 11:51 am

In the analogy to market timing you might also consider that in the stock market people often will try to overweight sectors that they think are undervalued, like when International stocks might seem better priced than US stocks.

Similar to that I moved from the Bay Area, which has always been expensive, to a less expensive area when I was ready to buy my first house. For me that was one of the best financial and lifestyle choices that I ever made. In some ways that could be considered like buying a stocks in a market that is seems to be better priced.

I have been accused of sounding like a broken record by suggesting that people consider moving to less expensive areas when faced with buying in a very expensive market, but there are lots of nice areas where you can buy a nice house for $200K(or less) and $400K will get you a McMansion. It sounds like you could probably pay cash for home in 80% of the country.

This means that if you try to "time the market" and interest rates go up, or housing prices keep going up, then you will always have the alternative of moving someplace where you can just pay cash for a home.

You might have strong family ties to that area which would make moving difficult but if you have kids also consider what their housing prospects will be when they are adults which will happen surprisingly quickly. I have a kid that is in his late 20's now and he and all of his college friends have easily been able to afford to buy their own homes here in Atlanta where homes are still pretty affordable. He and his wife and kid now own a house that is about ten minutes from us and we usually get to take care of our grandkid once a week which we enjoy. If he had to live an hour or more away to be able to afford a house then we would see them much less often.

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 1:06 pm

Regarding interest rates and whether you should wait for mortgage interest rates to be higher. I don't believe that is a wise approach.

Mortgage rates follow inflation expectations very closely. When nominal mortgage rates are high, that is usually paired with higher future inflation expectations. Inflation benefits mortgage borrowers by eating away at the real value of their mortgage balances. It's the inflation adjusted mortgage rate that matters and that number is a lot more stable than the nominal number. In addition, during periods of rising inflation expectations that might cause people to overweight hard assets like real estate to be shielded from the devaluation of the dollar.

I think you should look at what happened to home buyers who purchased in the Late 60s/early 70s. That was just prior to very long period of rapidly rising inflation and mortgage rates. Mortgage rates hit 18% in 1981!!! Was 1981 a good time to buy? In hindsight, yes.

But should you have bought in 1971 with a mortgage rate of almost 7.5%?
see: http://www.freddiemac.com/pmms/pmms30.html

Buying in 1971 at the start of a 10 year period of rapidly increasing mortgage rates would have been better vs trying to time the market and waiting until the mortgage rate peak in the early 80s. Those people who bought in 1971 with a rate of 7.5% had a *LOT* of their mortgage paid via inflation. Not only did they have their mortgages paid by inflation, but the nominal value of their homes likely increased in a pretty steady fashion as the underlying inflation worked to prop up the value of the home.

I wasn't able to find data on the 60's but I believe rates were very low in the 60s. Buying then with low rates would have been a phenomenal deal.

In summary, i wouldn't try to time the market and wait for higher mortgage rates. It seems like buying at rock bottom mortgage rates and buying with peak rates are more or less equally as good. The high mortgage rate buy will benefit from refinancing and value increases on the way down and the low mortgage rate buyer will benefit from inflation. Of course this is all speculative, the rates could remain very low for a very long time.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 1:24 pm

mega317 wrote:
Sun Jan 07, 2018 10:47 am
This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.
I'd like to wait until interest rates are high because then prices will be lower and my mortgage payment will be about the same. I can then refinance when interest rates come back down.

There's no "undo" button if I buy when prices are high and interest rates are low.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 1:31 pm

Watty wrote:
Sun Jan 07, 2018 11:51 am
In the analogy to market timing you might also consider that in the stock market people often will try to overweight sectors that they think are undervalued, like when International stocks might seem better priced than US stocks.

Similar to that I moved from the Bay Area, which has always been expensive, to a less expensive area when I was ready to buy my first house. For me that was one of the best financial and lifestyle choices that I ever made. In some ways that could be considered like buying a stocks in a market that is seems to be better priced.

I have been accused of sounding like a broken record by suggesting that people consider moving to less expensive areas when faced with buying in a very expensive market, but there are lots of nice areas where you can buy a nice house for $200K(or less) and $400K will get you a McMansion. It sounds like you could probably pay cash for home in 80% of the country.

This means that if you try to "time the market" and interest rates go up, or housing prices keep going up, then you will always have the alternative of moving someplace where you can just pay cash for a home.

You might have strong family ties to that area which would make moving difficult but if you have kids also consider what their housing prospects will be when they are adults which will happen surprisingly quickly. I have a kid that is in his late 20's now and he and all of his college friends have easily been able to afford to buy their own homes here in Atlanta where homes are still pretty affordable. He and his wife and kid now own a house that is about ten minutes from us and we usually get to take care of our grandkid once a week which we enjoy. If he had to live an hour or more away to be able to afford a house then we would see them much less often.
Good points. I think many people in California would like to move somewhere where housing costs and taxes are lower. I have to be here for my job, and I'm not likely to change jobs anytime soon, so that's not really feasible for me. Maybe when I retire.

Some more details

Thanks so much for all the great thoughts. Some more wrinkles for my particular situation below, which are unusual.

On the point about underweighting or overweighting different sectors, yes, I'm basically deciding between renting a smaller and less expensive place now and putting more money into the stock market every month, or buying a larger and nicer place and putting more money into real estate every month with a mortgage payment and leverage. My after tax monthly payment would jump about 70% and my living space would almost double (from 1 br to 2br).

I don't need the space yet (although I'd enjoy it). I'd basically be locking in today's real estate prices out of concern that they keep climbing, even though they seem insanely high to me.

Down payment subsidy: Cash v. Real estate v. Stock market and the ticking clock

I'd also be moving a significant chunk of money effectively out of "cash" (equal to around 15% to 20% of the purchase price, equal to around 18 to 19 percent of my current net-worth) into real estate. Real estate presumably will give me a higher return than cash (0%).

I can't just put this "cash" into the stock market because it's a downpayment subsidy from my employer that can only be used to buy a house or condo--it does not grow over time, so in real terms and relative to the value of housing, it is declining as time goes by. The subsidy also vests over 10 years of service, so it's better to use it sooner in case I change jobs within the next 10 years (In the unlikely event I changed jobs within the next 3 to 5 years, transactions costs of selling would totally consume the vested portion of the subsidy).

Because of this subsidy, I feel additional pressure to buy sooner rather than later. (Even though I'm comfortable living on my own in 1 br don't want to buy anything smaller than a 2 bedroom, because then it will be very expensive to sell and upgrade if I start a family).

But the money I take out of the stock market and put into housing will probably get me a lower return than if I left it in the stock market.

So I'm trading off higher monthly costs and reduced stock market exposure against starting to get the benefit of a downpayment subsidy and locking in current prices.

I don't know for sure whether real estate in Santa Monica and Brentwood is more or less overvalued than the stock market right now. It feels like it is.

I do know that I would not lever up 2X or 4X to buy more stock in the current environment. So doing the same to buy real estate that is correlated with the stock market seems like a bad idea.

One thing I'm strongly considering is increasing my stock market exposure outside of the down payment subsidy to around 90 to 95 percent, which would bring me up to around 75 to 80 percent counting the down payment subsidy as cash. That should still leave me enough cash for an emergency and to supplement the downpayment subsidy if I'm ready to buy, while helping me keep up with rising real estate values (which I've noted are highly correlated to the stock market).

I'm young (30s) so this is probably fine.

The main downsides of this are:
1) Both stock AND real estate might be overvalued
2) If I have to sell stock to buy real estate later, I'll incur capital gains, whereas if I buy real estate earlier with leverage, I won't have to realize gains as it goes up. California charges another 9 to 10 percent in income taxes on capital gains on top of federal rates of 15 to 20 percent, so that's a big chunk of money.

Sorry for the long post. Would love to hear peoples thoughts and advice!
Last edited by MNS CA on Sun Jan 07, 2018 2:23 pm, edited 2 times in total.

chevca
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Re: Does it make sense to try to "time" a first time home purchase?

Post by chevca » Sun Jan 07, 2018 2:05 pm

MNS CA wrote:
Sun Jan 07, 2018 1:24 pm
mega317 wrote:
Sun Jan 07, 2018 10:47 am
This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.
I'd like to wait until interest rates are high because then prices will be lower and my mortgage payment will be about the same. I can then refinance when interest rates come back down.

There's no "undo" button if I buy when prices are high and interest rates are low.
Is there some guarantee you're aware of that prices will be lower when/if rates go up? What if it's a long slow rise in rates, prices level out and hold steady, and then you're looking at similar prices and higher interest rates? Are you prepared to wait 10 or 20 years before you get your higher rates? Look up rates from the 1950s era. They were low back then too. Then look at the post again about how rates got real high in the 1970s. Look at the rates not long ago when prices were low... they were higher than they are now. Getting a 6% mortgage was a good deal not that long ago.

Having a low, fixed rate mortgage as rates rise isn't a bad thing either.

Basically, there's no guarantee that your timing plan will play out the way you think. Do you want to be a homeowner or not? Make it a lifestyle choice instead of a time it perfectly choice. Most folks don't stay in their first home that long anyway. So, no, don't try to time it.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:15 pm

chevca wrote:
Sun Jan 07, 2018 2:05 pm
MNS CA wrote:
Sun Jan 07, 2018 1:24 pm
mega317 wrote:
Sun Jan 07, 2018 10:47 am
This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.
I'd like to wait until interest rates are high because then prices will be lower and my mortgage payment will be about the same. I can then refinance when interest rates come back down.

There's no "undo" button if I buy when prices are high and interest rates are low.
Is there some guarantee you're aware of that prices will be lower when/if rates go up? What if it's a long slow rise in rates, prices level out and hold steady, and then you're looking at similar prices and higher interest rates? Are you prepared to wait 10 or 20 years before you get your higher rates? Look up rates from the 1950s era. They were low back then too. Then look at the post again about how rates got real high in the 1970s. Look at the rates not long ago when prices were low... they were higher than they are now. Getting a 6% mortgage was a good deal not that long ago.

Having a low, fixed rate mortgage as rates rise isn't a bad thing either.

Basically, there's no guarantee that your timing plan will play out the way you think. Do you want to be a homeowner or not? Make it a lifestyle choice instead of a time it perfectly choice. Most folks don't stay in their first home that long anyway. So, no, don't try to time it.
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.

Unless everyone in my market can buy all cash, I think prices have to be lower when interest rates are higher. Otherwise too many people can't afford the monthly payments. Plus higher rates might drop the stock market, which should drop West LA real estate based on historic correlations.

I'm more confident in higher unemployment at some point in the future than much higher rates. I think unemployment actually hits real estate harder than the stock market.
Last edited by MNS CA on Sun Jan 07, 2018 2:16 pm, edited 1 time in total.

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unclescrooge
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Re: Does it make sense to try to "time" a first time home purchase?

Post by unclescrooge » Sun Jan 07, 2018 2:15 pm

Home prices in Los Angeles maybe be back up at 2007-2008 levels, but rents are considerably higher than they were back then. Up to 50% higher in many places.

So, on an inflation adjusted basis, homes are a better value today than they were in 2007/8.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:20 pm

unclescrooge wrote:
Sun Jan 07, 2018 2:15 pm
Home prices in Los Angeles maybe be back up at 2007-2008 levels, but rents are considerably higher than they were back then. Up to 50% higher in many places.

So, on an inflation adjusted basis, homes are a better value today than they were in 2007/8.
Very Interesting.

Where I am, rents don't seem that high relative to cost to buy because there are a lot of rent stabilized apartments. The local government does a lot to encourage renting over buying (it's much easier to build rentals than condos and very hard to convert rentals into condos).

I'm living in a rent stabilized apartment (it's not income or means tested, it relates to when the building was built), so my rent will basically go up 2 or 3 percent per year. I'm not worried about being priced out because of rents going up.

chevca
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Re: Does it make sense to try to "time" a first time home purchase?

Post by chevca » Sun Jan 07, 2018 2:26 pm

MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?

chevca
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Re: Does it make sense to try to "time" a first time home purchase?

Post by chevca » Sun Jan 07, 2018 2:28 pm

MNS CA wrote:
Sun Jan 07, 2018 2:20 pm
unclescrooge wrote:
Sun Jan 07, 2018 2:15 pm
Home prices in Los Angeles maybe be back up at 2007-2008 levels, but rents are considerably higher than they were back then. Up to 50% higher in many places.

So, on an inflation adjusted basis, homes are a better value today than they were in 2007/8.
Very Interesting.

Where I am, rents don't seem that high relative to cost to buy because there are a lot of rent stabilized apartments. The local government does a lot to encourage renting over buying (it's much easier to build rentals than condos and very hard to convert rentals into condos).

I'm living in a rent stabilized apartment (it's not income or means tested, it relates to when the building was built), so my rent will basically go up 2 or 3 percent per year. I'm not worried about being priced out because of rents going up.
Purely financially, you should keep renting at that place probably. Are you not wanting to live there, or be a renter any longer?

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:30 pm

panchilly wrote:
Sun Jan 07, 2018 1:06 pm
Mortgage rates follow inflation expectations very closely. When nominal mortgage rates are high, that is usually paired with higher future inflation expectations. Inflation benefits mortgage borrowers by eating away at the real value of their mortgage balances. It's the inflation adjusted mortgage rate that matters and that number is a lot more stable than the nominal number. In addition, during periods of rising inflation expectations that might cause people to overweight hard assets like real estate to be shielded from the devaluation of the dollar.
Do you think the federal reserve would ever let inflation get that high? If Paul Volker was willing to cause a recession to break inflation in the early 1980s, I can't imagine a Trump appointee letting inflation run wild just to keep the unemployment rate down.

I think the fed will jack up rates if there are signs of trouble.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by Watty » Sun Jan 07, 2018 2:31 pm

MNS CA wrote:
Sun Jan 07, 2018 1:31 pm
I have to be here for my job, and I'm not likely to change jobs anytime soon, so that's not really feasible for me.
People often underestimate the job opportunities in other parts of the country. I can think of very few jobs that would not be available in any major city. It would be good to spend some time what the actual job market is in different areas since it doesn't sound like you have a high enough income to make the high cost of living there worthwhile.

Even if you have to take a reduction in pay having a paid off house and small mortgage and low, or no, state income taxes could make you come out far overall.

Moving in retirement may be harder than you think. Long after I left the Bay Area I took a corporate transfer to Atlanta when I was in my late 40's which worked out well but we had planned on retiring somewhere else. By the time I was ready to retire my son was married and we have a grandkid here so the family ties made moving not be an option. Things still worked out well, and Georgia actually has great tax laws for retirees so there are no complaints but it is not what we planned.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by unclescrooge » Sun Jan 07, 2018 2:33 pm

MNS CA wrote:
Sun Jan 07, 2018 2:20 pm
unclescrooge wrote:
Sun Jan 07, 2018 2:15 pm
Home prices in Los Angeles maybe be back up at 2007-2008 levels, but rents are considerably higher than they were back then. Up to 50% higher in many places.

So, on an inflation adjusted basis, homes are a better value today than they were in 2007/8.
Very Interesting.

Where I am, rents don't seem that high relative to cost to buy because there are a lot of rent stabilized apartments. The local government does a lot to encourage renting over buying (it's much easier to build rentals than condos and very hard to convert rentals into condos).

I'm living in a rent stabilized apartment (it's not income or means tested, it relates to when the building was built), so my rent will basically go up 2 or 3 percent per year. I'm not worried about being priced out because of rents going up.
Well, that's the dream!

If you're happy living in a rent controlled apartment then buying might not make economic sense.

But from my experience (purely anecdote, with rather small sample size), rent controlled apartments on the west-side were substandard. Generally built in the 60's/70's, poorly insulated, no central heating or air, no sound barrier between units, and overall there was a lot of deferred maintenance. But the rents are considerably below market so no one complains.

This situation will exist until a major earthquake takes out all the old inventory that doesn't meet modern building code.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:36 pm

chevca wrote:
Sun Jan 07, 2018 2:28 pm
Purely financially, you should keep renting at that place probably. Are you not wanting to live there, or be a renter any longer?
I actually mostly like being a renter because I don't have to worry about home maintenance or earthquakes or wild fires. There are three reasons I want to buy:

1) Employer downpayment subsidy (see post above) which would effectively boost my pre-tax income by ~12%+ over the next 10 years if I buy.

2) The current place has a lot of minor inconveniences that I can't change (no dishwasher, communal laundry, carpeting instead of hard floors). And yes, the sound insulation leaves much to be desired.

3) Real estate values have gone up so fast that there's fear of being priced out. Which seems irrational, since I'm probably much better off financially than most of the cowboys and girls who are willing to bid higher than me with no financing contingency in the current environment.
Last edited by MNS CA on Sun Jan 07, 2018 2:37 pm, edited 1 time in total.

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 2:36 pm

MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
chevca wrote:
Sun Jan 07, 2018 2:05 pm
MNS CA wrote:
Sun Jan 07, 2018 1:24 pm
mega317 wrote:
Sun Jan 07, 2018 10:47 am
This is a funny post, I lived in West LA in 08-11 and thought housing was ridiculous. It's "shot up" since then? Good luck to you.

I think timing is fine. In some areas, as mentioned in the previous post, renting probably favors buying, and in many places it's at least very close. As long as renting works for your family, there's nothing wrong with it.

But, just like timing the stock market, prices could go much higher before they drop, as you might be seeing now.

Also, why do you want to wait until interest rates are high? Your mortgage would be more expensive.
I'd like to wait until interest rates are high because then prices will be lower and my mortgage payment will be about the same. I can then refinance when interest rates come back down.

There's no "undo" button if I buy when prices are high and interest rates are low.
Is there some guarantee you're aware of that prices will be lower when/if rates go up? What if it's a long slow rise in rates, prices level out and hold steady, and then you're looking at similar prices and higher interest rates? Are you prepared to wait 10 or 20 years before you get your higher rates? Look up rates from the 1950s era. They were low back then too. Then look at the post again about how rates got real high in the 1970s. Look at the rates not long ago when prices were low... they were higher than they are now. Getting a 6% mortgage was a good deal not that long ago.

Having a low, fixed rate mortgage as rates rise isn't a bad thing either.

Basically, there's no guarantee that your timing plan will play out the way you think. Do you want to be a homeowner or not? Make it a lifestyle choice instead of a time it perfectly choice. Most folks don't stay in their first home that long anyway. So, no, don't try to time it.
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.

Unless everyone in my market can buy all cash, I think prices have to be lower when interest rates are higher. Otherwise too many people can't afford the monthly payments. Plus higher rates might drop the stock market, which should drop West LA real estate based on historic correlations.

I'm more confident in higher unemployment at some point in the future than much higher rates. I think unemployment actually hits real estate harder than the stock market.
Mortgage rates won't just go up in a vacuum like that. The key driver for an increase in mortgage rates will be an uptick in inflation. If you truly believe mortgage rates will become "high" in the tear future, then if you buy now you can lock in a low rate and watch as the increased inflation wipes away your mortgage balance.

I would look into the data on purchases in the late 60s and very early 70s. Mortgage rates went from 7.5% in 1971 to 18% in 1981 thats more than double in 10 years. Yet i'm pretty sure the data shows a home purchase in 1971 was a very wise move as it was out ahead of the runup in inflation. Purchasers in 1971 paid very low nominal prices and had their mortgages wiped out with inflation.

If your theory is a rising mortgage rate environment will crash the property market then this would seem to contradict your theory.
Last edited by panchilly on Sun Jan 07, 2018 2:42 pm, edited 1 time in total.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 2:40 pm

MNS CA wrote:
Sun Jan 07, 2018 2:30 pm
panchilly wrote:
Sun Jan 07, 2018 1:06 pm
Mortgage rates follow inflation expectations very closely. When nominal mortgage rates are high, that is usually paired with higher future inflation expectations. Inflation benefits mortgage borrowers by eating away at the real value of their mortgage balances. It's the inflation adjusted mortgage rate that matters and that number is a lot more stable than the nominal number. In addition, during periods of rising inflation expectations that might cause people to overweight hard assets like real estate to be shielded from the devaluation of the dollar.
Do you think the federal reserve would ever let inflation get that high? If Paul Volker was willing to cause a recession to break inflation in the early 1980s, I can't imagine a Trump appointee letting inflation run wild just to keep the unemployment rate down.

I think the fed will jack up rates if there are signs of trouble.
I do not believe inflation will get that high. I think you are missing my point...

This is why your plan isn't very wise. Your plan is to wait for higher rates but those higher rates may never come. What makes you so sure about rates increasing? Your theory is also that higher rates will cause a sudden decline in the housing market - what makes you so sure that will be the case? Why wasn't there a sudden decline in the late 60s and 70s as rates rapidly went higher?

I was trying to point out that there are scenarios where buying in a low rate environment like we are in today can be beneficial.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 2:47 pm

chevca wrote:
Sun Jan 07, 2018 2:26 pm

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?
The longest I would wait is 4 to 5 years. If I have a kid sooner, I'll buy sooner.
chevca wrote:
Sun Jan 07, 2018 2:26 pm

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?
Yes, I'd be much happier with a higher interest rate and a lower purchase price for 4 reasons:
1) Interest payments are tax deductible
2) Property taxes are a percent of the purchase price + inflation (California does not assess at market value because of prop 13)
3) I can refinance when rates come down
4) I'll probably have enough savings / income to prepay a lot of the mortgage or increase my down payment if rates get really high.

I have no romantic attachment to being a homeowner. Since I can rent something similar to anything I can buy, why would it be anything other than purely a financial decision?

I don't want to paint the walls purple or anything, although hardwood floors would be nice.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 2:57 pm

MNS CA wrote:
Sun Jan 07, 2018 2:47 pm
chevca wrote:
Sun Jan 07, 2018 2:26 pm

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?
The longest I would wait is 4 to 5 years. If I have a kid sooner, I'll buy sooner.
chevca wrote:
Sun Jan 07, 2018 2:26 pm

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?
Yes, I'd be much happier with a higher interest rate and a lower purchase price for 4 reasons:
1) Interest payments are tax deductible
2) Property taxes are a percent of the purchase price + inflation (California does not assess at market value because of prop 13)
3) I can refinance when rates come down
4) I'll probably have enough savings / income to prepay a lot of the mortgage or increase my down payment if rates get really high.

I have no romantic attachment to being a homeowner. Since I can rent something similar to anything I can buy, why would it be anything other than purely a financial decision?

I don't want to paint the walls purple or anything, although hardwood floors would be nice.
What if mortgage rates AND prices rise in the next 4 years? How will you feel then will you wish you bought now?

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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 3:05 pm

panchilly wrote:
Sun Jan 07, 2018 2:57 pm
What if mortgage rates AND prices rise in the next 4 years? How will you feel then will you wish you bought now?
Yes, I would most likely have regrets. It would depend on how much real estate prices went up in real (inflation adjusted) terms and relative to the stock market.

If real estate went up 3% per year and the stock market went up 10% per year, I might not mind so much, since I might still be able to afford something nicer.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner540 » Sun Jan 07, 2018 3:07 pm

chevca wrote:
Sun Jan 07, 2018 2:26 pm
MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?
Not the OP, but here are my triggers to buy:
1. Lifestyle: need/want more control over the space, and expect to stay 10+ years.
AND
2. Monthly costs excluding mortgage principal and interest (insurance, taxes and maintenance) less than rent for an equivalent property.
Right now in my market, even if I could pay cash for the house (say $400k), I would have the same monthly outflow (for taxes, insurance, and maintenance) as I have today for rent, AND I would have to move $400k from liquid, diversified investments, to an illiquid, concentrated position in one house. No thanks.

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 3:09 pm

runner540 wrote:
Sun Jan 07, 2018 3:07 pm
chevca wrote:
Sun Jan 07, 2018 2:26 pm
MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?
Not the OP, but here are my triggers to buy:
1. Lifestyle: need/want more control over the space, and expect to stay 10+ years.
AND
2. Monthly costs excluding mortgage principal and interest (insurance, taxes and maintenance) less than rent for an equivalent property.
Right now in my market, even if I could pay cash for the house (say $400k), I would have the same monthly outflow (for taxes, insurance, and maintenance) as I have today for rent, AND I would have to move $400k from liquid, diversified investments, to an illiquid, concentrated position in one house. No thanks.
What market is this?

runner540
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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner540 » Sun Jan 07, 2018 3:16 pm

panchilly wrote:
Sun Jan 07, 2018 3:09 pm
runner540 wrote:
Sun Jan 07, 2018 3:07 pm
chevca wrote:
Sun Jan 07, 2018 2:26 pm
MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?
Not the OP, but here are my triggers to buy:
1. Lifestyle: need/want more control over the space, and expect to stay 10+ years.
AND
2. Monthly costs excluding mortgage principal and interest (insurance, taxes and maintenance) less than rent for an equivalent property.
Right now in my market, even if I could pay cash for the house (say $400k), I would have the same monthly outflow (for taxes, insurance, and maintenance) as I have today for rent, AND I would have to move $400k from liquid, diversified investments, to an illiquid, concentrated position in one house. No thanks.
What market is this?
Dallas. Rent has risen quickly over the last few years, but house prices even more so. And tons of new luxury construction in the pipeline that should hold rents down.
Check this out: Dallas, Denver and Houston strongly favor renting right now.
https://business.fau.edu/departments/fi ... phs/#DA-TX

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whodidntante
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Re: Does it make sense to try to "time" a first time home purchase?

Post by whodidntante » Sun Jan 07, 2018 3:19 pm

I bought my current house in 2005. The real estate market seem grossly inflated and highly leveraged to me though it was probably a bit below in nominal terms where it is now. This was back when most people thought they would get rich selling their houses to each other. However, rentals in my area were generally low quality apartments or undesirable places to live. I responded by buying less house than practically everyone encouraged me to, certainly less than some of my peers. I'm very glad that I made that decision because being house poor with the volatility of housing prices would have been like wearing a weighted vest. Still it's a mcmansion in a good area.

- There is no shame in waiting, if that's really what you want to do. Prices could rise for years before a correction and that's the risk you are taking.
- There is no shame in buying a more modest house, if that's what you are comfortable doing.

Basically, listen to others but don't be led around by what others think. It's your mortgage, your wealth, and your happiness at stake.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 3:37 pm

panchilly wrote:
Sun Jan 07, 2018 3:09 pm
runner540 wrote:
Sun Jan 07, 2018 3:07 pm
chevca wrote:
Sun Jan 07, 2018 2:26 pm
MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?
Not the OP, but here are my triggers to buy:
1. Lifestyle: need/want more control over the space, and expect to stay 10+ years.
AND
2. Monthly costs excluding mortgage principal and interest (insurance, taxes and maintenance) less than rent for an equivalent property.
Right now in my market, even if I could pay cash for the house (say $400k), I would have the same monthly outflow (for taxes, insurance, and maintenance) as I have today for rent, AND I would have to move $400k from liquid, diversified investments, to an illiquid, concentrated position in one house. No thanks.
What market is this?
This is the OP. My market is Santa Monica / Brentwood, where a 1 BR condo would cost $700K to $1MM and a 2 BR condo would cost $1.1 MM to $1.4MM. You could get a 3BR townhome for maybe $1.3MM to $1.6MM. Cost per square foot are around $1,000.

The cheapest house you could buy would be $1.7 MM to $2 MM and you'd basically be buying a shack for the value of the land underneath it (less the cost of demolishing the shack).

In 2009-2011, you could buy a totally decent house for $1.7 MM and a nice 3 br newly built townhome for $900K to $1MM.

LA is really boom or bust in real estate. I just saw a post on economists forecasting a recession in 2018 to 2019
viewtopic.php?f=10&t=237177&p=3706802#p3706802

Which is part of the reason for the timing question. I'm about 95 percent sure my job will be secure and my income will be basically stable even if very bad recession.

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 3:42 pm

runner540 wrote:
Sun Jan 07, 2018 3:16 pm
Check this out: Dallas, Denver and Houston strongly favor renting right now.
https://business.fau.edu/departments/fi ... phs/#DA-TX
Very interesting, thanks so much! It looks like LA as a whole is just barely in "buy" territory or about even. I suspect this is not true for Santa Monica, where rents are basically stable and prices have risen very quickly.

How are you supposed to interpret the AEI mortgage risk index?

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 3:55 pm

MNS CA wrote:
Sun Jan 07, 2018 3:37 pm
panchilly wrote:
Sun Jan 07, 2018 3:09 pm
runner540 wrote:
Sun Jan 07, 2018 3:07 pm
chevca wrote:
Sun Jan 07, 2018 2:26 pm
MNS CA wrote:
Sun Jan 07, 2018 2:15 pm
When the cost of real estate is equal to more than 10 years of savings and investing, it's an expensive lifestyle choice. Buying a house is not like picking out an outfit or even a car. I'm deploying massive amounts of capital relative to my networth and expected lifetime earnings.
You are not unique here. :happy

That is the same situation the majority of home buyers face. Especially in HCOL areas.

If you want to wait and try and time it, feel free. What would be your trigger to buy.... what rates need to be reached... what home prices need to be reached... what if that never plays out together... are you prepared to not buy if things don't line up?

If you buy when rates are lower compared to rates higher in your scenario, the payment is about the same, but more is going to interest. Are you happier with paying the bank more money, but you got the home at a lower price?

Again, do you want to be a homeowner, or is this simply a financial decision... what do you want more?
Not the OP, but here are my triggers to buy:
1. Lifestyle: need/want more control over the space, and expect to stay 10+ years.
AND
2. Monthly costs excluding mortgage principal and interest (insurance, taxes and maintenance) less than rent for an equivalent property.
Right now in my market, even if I could pay cash for the house (say $400k), I would have the same monthly outflow (for taxes, insurance, and maintenance) as I have today for rent, AND I would have to move $400k from liquid, diversified investments, to an illiquid, concentrated position in one house. No thanks.
What market is this?
This is the OP. My market is Santa Monica / Brentwood, where a 1 BR condo would cost $700K to $1MM and a 2 BR condo would cost $1.1 MM to $1.4MM. You could get a 3BR townhome for maybe $1.3MM to $1.6MM. Cost per square foot are around $1,000.

The cheapest house you could buy would be $1.7 MM to $2 MM and you'd basically be buying a shack for the value of the land underneath it (less the cost of demolishing the shack).

In 2009-2011, you could buy a totally decent house for $1.7 MM and a nice 3 br newly built townhome for $900K to $1MM.

LA is really boom or bust in real estate. I just saw a post on economists forecasting a recession in 2018 to 2019
viewtopic.php?f=10&t=237177&p=3706802#p3706802

Which is part of the reason for the timing question. I'm about 95 percent sure my job will be secure and my income will be basically stable even if very bad recession.
How much do you pay for rent right now?

In my market (Boston area) prices are much more reasonable. Even in the most expensive close-in suburbs (Lexington, Weston, Newton, Wellesley, etc) prices are 500-600/foot. I think in the absolute hottest downtown urban areas (Boston, Cambridge, SOmerville) prices are around 700 a foot. Incomes and jobs in the area are booming. My total compensation went from 125k to over 200k in just a few short years. Population has also been increasing due to the jobs. Tech jobs are bursting out the seams in these parts.

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Garco
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Re: Does it make sense to try to "time" a first time home purchase?

Post by Garco » Sun Jan 07, 2018 4:00 pm

I think timing the L.A. housing market in expectation of lower prices is foolish. You could get lucky. You could end up feeling like a fool. In the meantime, if you wait to purchase you're paying rent to somebody who's making a profit on money that you could be putting into your own property. True, you may end up putting a lot of money into improvements on your new home. But those would likely raise the property's sale value.

My family faced a question several years ago. Should we sell the parents (inherited) home now, or should we wait for a further rebound? This home was in the San Fernando Valley in L.A. The Zillow value a couple of years earlier had been $1 million. The then current Zillow estimate was $790K. Should we sell now or should we rent it out? (We were one of several of the "children" who were inheriting the estate, which included investments and cash in addition to the house.)

We decided we wanted to uncomplicate the estate management process by putting the house up for sale then. It sold for $838K within 2 days of coming on the market. That was 4 years ago. The Zillow estimated value on that house now is $1.170 million -- an increase of 39.6%. But none of us regrets the decision. We've had the cash for the last 4 years, and I've invested it (1/4 of the total -- split equally between me and my siblings). In that same period, my "retirement account" has increased 36.5%. So I earned close to the same amount as the property appreciation. And in the meantime, no negotiating and fretting about whether to buy now or later. No side issues to deal with.

Sometimes you just have to make your decisions, uncomplicate your life, and things will likely play out equally from a financial standpoint. If I were you I'd be looking for a place I want to buy now, and if I find it, I'll put in a bid. Why futz around for years?
Last edited by Garco on Sun Jan 07, 2018 4:01 pm, edited 1 time in total.

randomguy
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Re: Does it make sense to try to "time" a first time home purchase?

Post by randomguy » Sun Jan 07, 2018 4:01 pm

runner540 wrote:
Sun Jan 07, 2018 3:16 pm


Dallas. Rent has risen quickly over the last few years, but house prices even more so. And tons of new luxury construction in the pipeline that should hold rents down.
Check this out: Dallas, Denver and Houston strongly favor renting right now.
https://business.fau.edu/departments/fi ... phs/#DA-TX
For fun, think about how accurate those charts have been. The person who bought in SF (some depends on exactly what you consider SF) in 2000 for example did much better than the renter. House prices rose steadly til 2007, had a correction for about 3-4 years and then kept on rising. The person that chose to wait to buy until 2009 end up paying 50% or so more for the same property (and then has to pay more property tax for the rest of their ownship period). There was only a brief period (say 2006-10) where renting paid off. Obvously it would be better to go in with exact results to see how well those predictions turned out.

In the end you have to decide are you willing to wait say 10+ years for the markets to correct. If you have say a 6 year old kid, that is commiting to rent for pretty much their whole childhood (for good or bad). The other question of course is what happens. A lot of people expect 2008 type housing crashes. We could also just end up with a decade of low/no appreciation.

I haven't seen anything to suggest market timing a house is any easier than market timing in general. The only difference is that house prices are no where near as efficient so if you are patient you might be able to snap up a good deal

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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 4:04 pm

panchilly wrote:
Sun Jan 07, 2018 3:55 pm
MNS CA wrote:
Sun Jan 07, 2018 3:37 pm

This is the OP. My market is Santa Monica / Brentwood, where a 1 BR condo would cost $700K to $1MM and a 2 BR condo would cost $1.1 MM to $1.4MM. You could get a 3BR townhome for maybe $1.3MM to $1.6MM. Cost per square foot are around $1,000.

The cheapest house you could buy would be $1.7 MM to $2 MM and you'd basically be buying a shack for the value of the land underneath it (less the cost of demolishing the shack).

In 2009-2011, you could buy a totally decent house for $1.7 MM and a nice 3 br newly built townhome for $900K to $1MM.

LA is really boom or bust in real estate. I just saw a post on economists forecasting a recession in 2018 to 2019
viewtopic.php?f=10&t=237177&p=3706802#p3706802

Which is part of the reason for the timing question. I'm about 95 percent sure my job will be secure and my income will be basically stable even if very bad recession.
How much do you pay for rent right now?

In my market (Boston area) prices are much more reasonable. Even in the most expensive close-in suburbs (Lexington, Weston, Newton, Wellesley, etc) prices are 500-600/foot. I think in the absolute hottest downtown urban areas (Boston, Cambridge, SOmerville) prices are around 700 a foot. Incomes and jobs in the area are booming. My total compensation went from 125k to over 200k in just a few short years. Population has also been increasing due to the jobs. Tech jobs are bursting out the seams in these parts.
I'm paying $2850 for a 1 bedroom, around 760 square feet. It's nothing fancy, but decent space, light, and location. There's no dishwasher. There's communal laundry. It's earthquake retrofitted and safe re: property crime. I'm guessing if it were a condo it would sell for $700K to $800K, but I probably wouldn't buy a place like this.

Unemployment is now very low in Los Angeles and there's population growth, but I don't think incomes are generally that high. I think people move here to retire, and there are a lot of foreign buyers, which is probably part of why property values are so highly correlated with the stock market.

Maybe with tax reform people won't be as attracted to CA because of high taxes. Moody's is forecasting a drop or around 10% (or 10% slower appreciation) by 2019 because of tax reform.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by Agggm » Sun Jan 07, 2018 4:15 pm

MNS CA wrote:
Sun Jan 07, 2018 2:50 am
I realize it probably is a bad idea to try to time the stock market, and typically just invest a bit more every month in my retirement and taxable accounts as I get my paycheck.

But what about trying to time a first time home purchase? Would that make sense, or should I buy as soon as I find something I like?

To be more specific, I'm looking in Los Angeles, on the West Side. Prices are high, have shot back up since the 2008-2011 back to 2006-2007 levels, and are generally pretty volatile and well correlated with the U.S. stock market (>0.8). Real estate seems to be slightly less volatile and to go up more slowly than the stock market.

Unemployment is very low, and interest rates are low, so it seems like it's a very bad time to buy real estate. There are lots of competitive situations with good places going for well above asking price.

I'd rather buy when unemployment is high, interest rates are high, and prices are low. (My job is secure, so high unemployment won't adversely affect me).

I only get to buy for the first time once, and it's all a big lump sum with lots of leverage (2X minimum, maybe 4X).

In this context, does waiting for a recession to "time the (housing) market" make sense? In the mean time, I'm investing in the stock market, but I have enough in reserve for a downpayment.

Are lending practices loose goosey again? Not sure. That might inform your decision.

You can skip the rest of my reply, it's just me ranting about supply/demand and prices of homes:
Home inventories have been low and demand relatively strong (the new tax law seems to have softened the demand a tad). This has led to moderate increase in home prices over the last year of about 6%.
I think the 08 housing crash forced many would be sellers to hold. For how long? No clue. This puts upward pressure on home prices. When they all sell (let's say when they all die), that would flood the market with pent up supply and lower prices. The dynamic working in the other direction is new home formation has been unusually low after 08 but has recently started to pick up. When (or if) that ever fully adjusts back to normal levels, demand for homes will shift right increasing prices. Which of these two phenomena will have more impact on home prices is out of my area of study. But fun to think and read about. Should require some cool math.
The other undercurrent to keep in mind is that home price changes should be linked (in theory) to wage changes. So at current 2.5% y/y wage gains and home prices up 6%, that should be pealing off some of the demand. This should not impact the upward home price trajectory though (just slow the acceleration) because on average a home for sale is getting about 3 offers. Reduce that to 2 offers and prices should still move up. At less than 1 offer, then prices should drop. That's aways away given current high relative demand. Just for fun: At 1 offer on average not much movement in price in excess of the wage increase rate.
So, should you wait to buy at lower prices? Well, say the stock market doesn't crash for another 12 years. Would the total real cost of buying a home drop enough to offset the net real cost of waiting and renting? Maybe, maybe not. I think that's unknowable. Best bet is to buy if that's the lifestyle you want, rent if that's the lifestyle you want, but only well within what you can afford all in.
Good luck.

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 4:20 pm

It seems like your market (Santa Monica) as you described derives a lot of its value from the resort aspects of it: weather, beaches, fame, etc. Lots of retirees, foreign buyers, etc. Its concerning to me when you say the locals don't make that much money...

Personally, I feel much more comfortable buying a home in an area that derives pretty much all of its value from jobs, incomes, and the economy. Nobody would want to live in Boston if it weren't for the job market around here :)

MNS CA
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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 4:34 pm

Agggm wrote:
Sun Jan 07, 2018 4:15 pm

Are lending practices loose goosey again? Not sure. That might inform your decision.
That's a great question. I don't know the answer to this and would love to hear from anyone who does, for the West Side of LA.

My income, assets, and credit history are all pretty solid relative to what I would buy.

The main lender I'm speaking with told me I'm probably a much better borrower than most people in this market, and the banks seem eager to lend. But they do ask for a lot of documentation, so maybe they're just eager to lend to someone who is basically zero risk of default like me.

It's pretty easy to get a loan for a non-warrantable condo, although you need a larger downpayment and they'll give you an ARM, not a 30 year fixed.

A lot of sellers insist that buyers waive their financing contingency (all cash offer) even though most buyers do get mortgages. If you aren't making an all cash offer, you basically have to overbid by $30K to $50K. Sellers also prefer a large downpayment, and you are not competitive at all without pre-qualification for a mortgage and proof of funds for downpayment and closing costs (and probably then some).

I suspect that many real estate agents are worried that properties won't appraise at market value, so they want people with the means to pay more than the banks think is prudent to spend.
Last edited by MNS CA on Sun Jan 07, 2018 4:42 pm, edited 1 time in total.

runner540
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Re: Does it make sense to try to "time" a first time home purchase?

Post by runner540 » Sun Jan 07, 2018 4:39 pm

randomguy wrote:
Sun Jan 07, 2018 4:01 pm
runner540 wrote:
Sun Jan 07, 2018 3:16 pm


Dallas. Rent has risen quickly over the last few years, but house prices even more so. And tons of new luxury construction in the pipeline that should hold rents down.
Check this out: Dallas, Denver and Houston strongly favor renting right now.
https://business.fau.edu/departments/fi ... phs/#DA-TX
For fun, think about how accurate those charts have been. The person who bought in SF (some depends on exactly what you consider SF) in 2000 for example did much better than the renter. House prices rose steadly til 2007, had a correction for about 3-4 years and then kept on rising. The person that chose to wait to buy until 2009 end up paying 50% or so more for the same property (and then has to pay more property tax for the rest of their ownship period). There was only a brief period (say 2006-10) where renting paid off. Obvously it would be better to go in with exact results to see how well those predictions turned out.

In the end you have to decide are you willing to wait say 10+ years for the markets to correct. If you have say a 6 year old kid, that is commiting to rent for pretty much their whole childhood (for good or bad). The other question of course is what happens. A lot of people expect 2008 type housing crashes. We could also just end up with a decade of low/no appreciation.

I haven't seen anything to suggest market timing a house is any easier than market timing in general. The only difference is that house prices are no where near as efficient so if you are patient you might be able to snap up a good deal
Did you get a chance to read their methodology? It is NOT a simple price/rent ratio. Rather, it actually measures whether it is better for net worth to rent or buy. On the graphs, 0 indicates indifference. It accounts for factors including rent inflation, opportunity cost of down payment, price appreciation, property taxes, etc. It's pretty comprehensive and rigorous.

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Re: Does it make sense to try to "time" a first time home purchase?

Post by MNS CA » Sun Jan 07, 2018 4:50 pm

panchilly wrote:
Sun Jan 07, 2018 4:20 pm
It seems like your market (Santa Monica) as you described derives a lot of its value from the resort aspects of it: weather, beaches, fame, etc. Lots of retirees, foreign buyers, etc. Its concerning to me when you say the locals don't make that much money...

Personally, I feel much more comfortable buying a home in an area that derives pretty much all of its value from jobs, incomes, and the economy. Nobody would want to live in Boston if it weren't for the job market around here :)
Amen, Brother, Amen. There are some doctors and lawyers and such who settle here--and bankers and real estate developers and agents--but basically the people with money moved in relatively recently.

There are many long-time residents who are not particularly rich, except for the incredibly valuable plot of earth on which their modest homes happen to sit. Thanks to Proposition 13, long-time owners' property taxes are super-low, so they rarely face much pressure to sell--unless there's a bad recession.

It's mostly renters, with lots of rent controlled apartments. The supply of housing that can be owner occupied is limited. It's very expensive and it's often not built that well--lots of condo-converted rental buildings built in the 1960s and 1970s with low reserves and deferred maintenance issues.

And it can fall apart in an earthquake.

Even coming from a big north eastern city, you get sticker shock.
Last edited by MNS CA on Mon Jan 08, 2018 12:31 am, edited 1 time in total.

panchilly
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Re: Does it make sense to try to "time" a first time home purchase?

Post by panchilly » Sun Jan 07, 2018 5:27 pm

MNS CA wrote:
Sun Jan 07, 2018 4:50 pm
panchilly wrote:
Sun Jan 07, 2018 4:20 pm
It seems like your market (Santa Monica) as you described derives a lot of its value from the resort aspects of it: weather, beaches, fame, etc. Lots of retirees, foreign buyers, etc. Its concerning to me when you say the locals don't make that much money...

Personally, I feel much more comfortable buying a home in an area that derives pretty much all of its value from jobs, incomes, and the economy. Nobody would want to live in Boston if it weren't for the job market around here :)
Amen, Brother, Amen. There are some doctors and lawyers and such who settle here--and bankers and real estate developers and agents--but basically the people with money moved in relatively recently.

There are many long-time residents who are not particularly rich, except for the incredibly valuable plot of earth on which their modest homes happen to sit. Thanks to Proposition 13, long-time owners' property taxes ares super-low, so they rarely face much pressure to sell--unless there's a bad recession.

It's mostly renters, with lots of rent controlled apartments. The supply of housing that can be owner occupied is limited. It's very expensive and it's often not built that well--lots of condo-converted rental buildings built in the 1960s and 1970s with low reserves and deferred maintenance issues.

And it can fall apart in an earthquake.

Even coming from a big north eastern city, you get sticker shock.
Ever consider relocating? What about San diego?

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Re: Does it make sense to try to "time" a first time home purchase?

Post by sergeant » Sun Jan 07, 2018 6:29 pm

No, it doesn't make sense.
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Re: Does it make sense to try to "time" a first time home purchase?

Post by randomguy » Sun Jan 07, 2018 7:48 pm

runner540 wrote:
Sun Jan 07, 2018 4:39 pm
randomguy wrote:
Sun Jan 07, 2018 4:01 pm
runner540 wrote:
Sun Jan 07, 2018 3:16 pm


Dallas. Rent has risen quickly over the last few years, but house prices even more so. And tons of new luxury construction in the pipeline that should hold rents down.
Check this out: Dallas, Denver and Houston strongly favor renting right now.
https://business.fau.edu/departments/fi ... phs/#DA-TX
For fun, think about how accurate those charts have been. The person who bought in SF (some depends on exactly what you consider SF) in 2000 for example did much better than the renter. House prices rose steadly til 2007, had a correction for about 3-4 years and then kept on rising. The person that chose to wait to buy until 2009 end up paying 50% or so more for the same property (and then has to pay more property tax for the rest of their ownship period). There was only a brief period (say 2006-10) where renting paid off. Obvously it would be better to go in with exact results to see how well those predictions turned out.

In the end you have to decide are you willing to wait say 10+ years for the markets to correct. If you have say a 6 year old kid, that is commiting to rent for pretty much their whole childhood (for good or bad). The other question of course is what happens. A lot of people expect 2008 type housing crashes. We could also just end up with a decade of low/no appreciation.

I haven't seen anything to suggest market timing a house is any easier than market timing in general. The only difference is that house prices are no where near as efficient so if you are patient you might be able to snap up a good deal
Did you get a chance to read their methodology? It is NOT a simple price/rent ratio. Rather, it actually measures whether it is better for net worth to rent or buy. On the graphs, 0 indicates indifference. It accounts for factors including rent inflation, opportunity cost of down payment, price appreciation, property taxes, etc. It's pretty comprehensive and rigorous.
Sure. The question still stands about how often they were right. It is easy to make predications. You need to go back and see how often you were right. Would the person in SF been better off renting or buying in ~2000. They say yes. I look at the actual historical data and go nope and it isn't even close to where buying was much better in most circumenstances (maybe if you had some rent controlled apartment, renting might have worked out. Otherwise buying was a big win). You would have been much better to buy in 2000 versus waiting til 2009.

The other issue this really isn't a binary type choice. You need some estimate about what the up and downsides are. And how well correlated they are to this ratio. It might turn out that if you are +-.33 or so, that the differnece don't matter and that it is only when you get north of .7 (which is pretty much the bubble years of 2004-8), that it becomes a clear signal to avoid the market

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Toons
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Re: Does it make sense to try to "time" a first time home purchase?

Post by Toons » Sun Jan 07, 2018 7:51 pm

"I realize it probably is a bad idea to try to time the stock market"

You answered your question with the first 15 words.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

ccieemeritus
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Re: Does it make sense to try to "time" a first time home purchase?

Post by ccieemeritus » Sun Jan 07, 2018 11:42 pm

DW and I were searching for houses on-and-off from 1997 through 2001 in silicon valley. During that time our income and savings were increasing dramatically. It was very demoralizing searching for houses until 2001. Open house on Sunday -> offers due on Tuesday. Offers had to be above the "asking" price to be competitive.

DW and I got "lucky". We did not get laid off in 2001. We were gathering cash for a down payment so we sold some stock before the crash. We ended up buying a "starter home" in August 2001 for slightly under the asking price (a crazy $400/sq ft).

We were not trying to "time" the housing market. We were just ready to buy a home when we saw an opportunity. But it took years before the opportunity (higher income, higher savings, lower prices, no bidding wars) presented itself. Fortunately the opportunity came when DD was 5 and DS was 1. So they got to grow up in the "starter home".

So get ready to buy and keep an eye out for opportunities. But life happens so you can't wait forever.

Due to Silicon Valley housing prices, we are still in our "starter home". We are keeping an eye out for opportunities to upgrade. But we're out of time for our kids to grow up in a larger home.

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