Buying a house in a city with historically declining housing prices?

[TechieTechie]

Hi Bogleheaders,

I moved from the Boston area to greater CLE in the summer...mostly to be closer to family. Renting a very nice house for the time being and dipping my toe into looking at houses. Need some advice on buying in a type of COL area I'm not used to.

Background: the CLE area market has historically been a declining RE market for the last 20 years. So much so that even the toniest of suburbs were forced to bulldoze some properties because they sat vacant. Between 2000 and 2015, housing prices fell 10%. (they fell 25% between 2000 and 2008). But up 25% since 2015. Over the last 5 years, commercial investment in the area is WAY up here and population flight is pretty much abated. And, RE prices have rebounded (finally) after TGR. However, CLE area still needs time to rightsize fundamentals: Greater job growth, less folks in poverty, fewer foreclosures, etc. I'd equate CLE to PIT 10 years ago.

Current: If I buy, it will be in of the 5 top inner ring suburbs for schools/stable home values. However, I have spent the last 25 years in Boston, where our RE market has become Seattle or Bay area insane. So this risk of losing money on a house is just not in my vocabulary.

Question: If we put COVID aside...are there specific analysis/buying strategies for buying houses in stable to slightly declining local RE markets? Of course, being a former financial analyst, I pull comps, factor in $$$ into key renovations into my offer prices, and so forth. And I'm not looking for a flip. But I want to do everything I can to guard against losing money if I buy now and decide to sell in 3/5/10 years time. I can pay cash or mortgage, either one, if that makes a difference.

Or, do I even buy? RE taxes are high here. My rent payment is EDIT: 12k per year more than RE taxes ALONE for a similar house. I think I would prefer to buy, but I don't know what strategies I should use TO buy in this type of local market

TIA

[KlangFool]

Hi Bogleheaders,

I moved from the Boston area to greater CLE in the summer...mostly to be closer to family. Renting a very nice house for the time being and dipping my toe into looking at houses. Need some advice on buying in a type of COL area I'm not used to.

Background: the CLE area market has historically been a declining RE market for the last 20 years. So much so that even the toniest of suburbs were forced to bulldoze some properties because they sat vacant. Between 2000 and 2015, housing prices fell 10%. (they fell 25% between 2000 and 2008). But up 25% since 2015. However, over the last 5 years, commercial investment is WAY up here and population flight is pretty much abated. And, RE prices have rebounded (finally) after TGR. However, CLE area still needs time to rightsize fundamentals: Greater job growth, less folks in poverty, fewer foreclosures, etc. Local economic indicators have stabilized, but need time to improve. I'd equate CLE to PIT 10 years ago.

Current: If I buy, it will be in of the 5 top inner ring suburbs for schools/stable home values. However, I have spent the last 25 years in Boston, where our RE market has become Seattle or Bay area insane. So this risk of losing money on a house is just not in my vocabulary.

Question: If we put COVID aside...are there specific analysis/buying strategies for buying houses in stable to slightly declining local RE markets? Of course, being a former financial analyst, I pull comps, factor in $$$ into key renovations into my offer prices, and so forth. And I'm not looking for a flip. But I want to do everything I can to guard against losing money if I buy now and decide to sell in 3/5/10 years time. I can pay cash or mortgage, either one, if that makes a difference. Or, do I even buy? RE taxes are high here. I pay only about 5k per year to rent a beautiful home than I would pay in RE taxes for a similar house.

I think I would prefer to buy, but I don't know what strategies I should use TO buy in this type of local market

TIA

TechieTechie,

<<I pay only about 5k per year to rent a beautiful home than I would pay in RE taxes for a similar house.>>


It is very simple. Don't buy a house.


KlangFool

[123]

A home is more than a financial transaction. As a former homeowner you can appreciate the intangible feeling of home ownership that is different than a rental. With a rental you are pretty much free to move anytime (subject to lease and month-to-month requirements) whereas selling and buying houses is normally heavy with transaction costs. With your own home you can change anything you want anytime you want (subject to local codes) with a rental that's not so easy (or economical).

I don't see anything wrong with browsing houses as time permits. I likely wouldn't suggest buying anything until you've been in your current city for at least a year. Housing prices go up and they go down. If you find a "forever" home in your "forever" city it doesn't matter what direction the real estate market goes since your plan would be to use it as a permanent residence.

If you plans down the road include retirement to another area / warmer climate I might be reluctant to buy.

[mega317]

Your current rent is on par with what your RE taxes will be in a comparable house?? On my street annual rent would be 4-5 times annual RE tax. But I don't live near you.

I have a neighbor who has been in a nice house for almost 10 years, kids are 12 and 8, and they got booted with barely a month notice because the owner had to move in a sick parent. I can't believe how lucky they were to find another rental in our same neighborhood which does not have many rentals or much turnover. If they couldn't (and schools were open) it would have been a major upheaval in their kids' lives. I have been kicked out on short notice from 2 rentals. I personally am willing to pay a premium to avoid that.

If you can pay cash for a house you might have enough money to afford to lose some money on a house.

[jjunk]

Since you already have a place you're renting which isnt that far off from what you're looking at from a P&I perspective, I'd only think about buying if being a home owner is a lifestyle choice you are interested in vs. investment return.

The one thing with Cleveland is that the "nice" areas tend to stay that way, especially the established ones. I grew up in Cleveland and my folks moved when I was a teenager. I used to go home all the time into my 40's before I moved to the west coast and those same nice areas were still nice. So, if prices have stabilized and you find something you like, I'd say go for it so long as you're not looking to make money and want to be a home owner. Otherwise, I dont know why you wouldnt just continue to rent.

[Watty]

It would be good to double check your numbers about how much the property tax costs compared to rental income. If they are right then there would be little reason for a landlord to keep a property as a rental.

However, I have spent the last 25 years in Boston, where our RE market has become Seattle or Bay area insane.

One thing to do is look at the areas are like in different directions around Cleveland when you drive a half hour outside of the city. I am not familiar with that city but I would suspect that you would be getting into pretty open areas and even farm land within a 30 minute or so drive. This would mean that there is lots of space to build new housing on which could greatly limit upward pressure on housing prices.

In contrast the Bay Area and Seattle have severe geographic building contraintes and even in Boston you would likely need to go a long way to find much undeveloped land that new housing could be built on. In some places like the Bay Area you might have a $2 million dollar property that is a $200K house on a $1.8 million dollar lot.

You mentioned that even in some good areas areas of Cleveland some houses had been torn down. That would also leave a lot of empty lots that could be built on if the housing market recovers.

There can be lots of other factors like inflation that might cause housing prices to go up but it is hard to picture a city that does not have a lot of geographic constraints having a Bay Area or Seattle style price boom because if prices go up a lot then people can just build new housing.

I think I would prefer to buy, but I don't know what strategies I should use TO buy in this type of local market

You could just keep renting for a few more years to see if you will get to the point where you really want your own house even if it does not make a lot of financial sense.

If interest rates go up that will put downward pressure on housing but you can pay cash so the future mortgage rates really don't make a lot of difference to you. Some people are in a hurry to buy now in part to lock in the current low interest rates.

Another idea is that there are lots and lots of reasons not to do it by one option would be to buy a very nice buildable lot in a good location that you could build on some day if owning a home makes sense then. You might be able to buy a lot like that very inexpensively now.

[JoeRetire]

I have spent the last 25 years in Boston, where our RE market has become Seattle or Bay area insane. So this risk of losing money on a house is just not in my vocabulary.

Question: If we put COVID aside...are there specific analysis/buying strategies for buying houses in stable to slightly declining local RE markets? Of course, being a former financial analyst, I pull comps, factor in $$$ into key renovations into my offer prices, and so forth. And I'm not looking for a flip. But I want to do everything I can to guard against losing money if I buy now and decide to sell in 3/5/10 years time. I can pay cash or mortgage, either one, if that makes a difference.

Or, do I even buy?

If you are looking for an investment, don't buy there.

If you are looking for a place to live, buy. But if it keeps you up at night worrying about how much you can sell your house for in 10 years, just rent.

[Tattarrattat]

Keep renting! Makes sense in so many ways. Financial, lifestyle. The mythology of home ownership is way overdone.

[celia]

If you want to buy, I would think the most important thing is to find a stable, upscale neighborhood that has already been stable for 10 years. That would be more important to me than the specific house. Sort of like buying the cheapest house in the best neighborhood.

[awval999]

I live in CLE. Some of what you say isn’t exactly true.
Feel free to PM me and I can tell you where to buy, it’s not terribly difficult.

[X528]

What is "CLE"?

[Dottie57]

What is "CLE"?

Cleveland. Three letter I’d used by Airlines.

[TechieTechie]

Thanks all...but we sorta veered off topic...

Which are

1. Strategies to buy in a market that has not historically had the kind of growth I'm used to on the coasts
2. Analysis considerations for Buy v Rent (given the historically high tax rates in NEO)

I'm not looking for an 'investment' per se, I just want to limit my exposure to potentially losing money on a residential RE transaction (granted, I've bought/sold 3 homes and haven't yet, but maybe I've just been lucky).

Not interested in building a new home or living in the sticks. I am pretty sure I am a pre WWII home in a near suburb kinda gal (because I gotta be within 20 minutes of lot of excellent restaurants, symphony and art movies).


Thx

[TechieTechie]

If you want to buy, I would think the most important thing is to find a stable, upscale neighborhood that has already been stable for 10 years. That would be more important to me than the specific house. Sort of like buying the cheapest house in the best neighborhood.

Excellent strategy. Thanks

[TechieTechie]

Since you already have a place you're renting which isnt that far off from what you're looking at from a P&I perspective, I'd only think about buying if being a home owner is a lifestyle choice you are interested in vs. investment return.

The one thing with Cleveland is that the "nice" areas tend to stay that way, especially the established ones. I grew up in Cleveland and my folks moved when I was a teenager. I used to go home all the time into my 40's before I moved to the west coast and those same nice areas were still nice. So, if prices have stabilized and you find something you like, I'd say go for it so long as you're not looking to make money and want to be a home owner. Otherwise, I dont know why you wouldnt just continue to rent.

Thanks. I do have a great deal on a great SFH in literally one of the nicest suburbs around. I do like having freedom to upgrade and self manage, but then again, I LOVE not having to financially think about 'crap the roof needs done'. But it kills me to see less than perfect electrical systems, gutters that aren't sloped property, etc. It's a weird, yet oddly thrilling thing to be a renter after almost 20 years of home ownership.

But the tax rates in the suburbs I like are nuts. It helps keep flippers and absentee landlords out. Which I don't mind. Because the housing prices are so low, people are willign to make the tradeoff for higher taxes. EDIT: The tax differential is more like $12k a year (I was comparing current rental to a MUCH bigger house that I was considering buying, not apples to apples). So financially, it probably WOULD be somewhat better to buy v. rent. I like the idea of stability. But I will not overpay (in my valuation) for a house. So it may take me a few years to find one, much less an accepted offer. I have a 2 year lease, so I'm in no rush.

[Bud]

One option and one recommendation...

Rent for a year before deciding where to buy. This will give you time to understand the CLE market from within and see where makes sense. There

Make sure whatever house you buy is one of the less expensive homes in your neighborhood. Buying a lower cost home in the neighborhood can minimize downside and maximize upside.

In general, it seems lower interest rates have driven the housing market the last five years. When there is an uptick in mortgage rates, prices will stabilize or may fall. Real estate markets are very localized.

All the best...

[onourway]

For me rent vs. buy doesn’t even enter the equation. Other than possibly renting short-term while we got to know a new market, I want to own the place I live in. Whether that’s a good or bad financial decision doesn’t really enter the equation.

Having been a homeowner in Boston for 20 years, I would suspect buying something reasonable in Cleveland is relatively small potatoes for you in comparison. If this is the case, I would do what makes you happy, not what a financial analysis says is the best move.

[Nestegg_User]

OP

in your original post, you mentioned 3-5 years as possible ("3,5, 10 years").... in most markets (not Bay area, Boston, Seattle) the transaction costs for that timeframe would clearly outweigh buying vs rent (and your situation clearly shows that you have found something that you felt was quite worthwhile renting)... so continue to rent

if, for some reason, the landlord decides to sell then you could revisit. By examining other areas nearby or that would meet your needs you could then target properties in those areas if the need arose. As you said you are in a two year lease so you have time to examine whether CLE area even has what you want long term (BOS doesn't worry about lake effect snowstorms but also has more congested traffic; CLE has a poorer demographic, as you should already know, which also puts a limit on the potential buyers of any property you might consider selling in the future). Some areas just don't recover that quickly.... I've known those in Dayton area that had to bring money on the house that they were selling when they had to move and even with a modest uptick in their employment situation the market is still depressed.