Buying and Selling: December 2023 Archives
I have said repeatedly that buyer's markets are not the time to be selling a property if you have any choice.
There is one exception: People looking to turn around and buy a more expensive property.
If you're looking to move down market, do it when things are hot. But moving up works best when the market is cold. This is because the price of the more expensive property is what influences these moves the most.
It's still better if their budget will stretch to hanging onto the current property while buying the new one, because when the market turns they'll still be able to sell the first property for more than they can now. Nonetheless, it's still a good idea to move up in a buyer's market - even if you need to sell your current property - provided you can afford to do so.
Let's do some math! I'm going to use a real example. Let's say you bought a condominium ten years ago for $150,000. At peak of the seller's market, it was probably worth about $330,000 or more. Now it might be worth $260,000. Even if you bought with 100% financing, as long as you haven't taken cash out, you only owe roughly $130,000. Less 8% cost of selling, you're netting about $110,000 from the sale. Less roughly $10,000 for closing costs, and you're looking at having a 20% down payment for a $500,000 property, and you're still a conforming loan. In my favorite zip code at this update, that buts a really nice 4 bedroom 2000 square foot detached home with a panoramic view of the city and no Homeowner's Association! Not to mention the commute is pretty darned friendly for most folks and the public schools are top notch. Total monthly outlay, for loan, taxes, and insurance: just over $2500 per month ($2507. at more typical loan rates we're likely to see soon, more like $3000). Income to qualify: Just under $5600 per month, and that's with a thirty year fixed rate loan that I could lock right now without any points to the borrower, so the closing costs for the loan and property would be well under $10,000. About half that, in point of fact.
Now, let's say you wait for the market to recover. Let's say everything is a straight linear computation, even though it won't be - I'll bet you money that the more expensive home goes up further, faster, not to mention relative bargaining positions of a condominium owner versus a detached property owner. Let's say the loan rates stay exactly the same as today, which they won't, because in a period of high demand and increasing prices, there's more competition for money and therefore, higher rates. If you waited for that condo to be worth $330,000 again, that property you can get for $500,000 today becomes a $635,000 property. Straight line proportionality. You net roughly $173,000, again less $10,000 for closing costs on the new property. Now you do have slightly better than 20% down payment, to be sure, but you've still got to borrow $471,000. You can either do so with a Jumbo loan, or via a conforming first with a Home Equity Loan on top of that. Even using the full $10,000 for closing costs, your rate ends up higher. Equivalent cost per month that way: $3760. Income to qualify: a little over $8350. For making the exact same exchange, under conditions that I'll bet money are going to be less favorable than this. At this update, the market for desirable single family residences has definitely come back strongly; the market for condos is still languishing.
If you decide to go the route of the conforming first with an equity loan on top, it's a little more favorable: Assuming a 720 credit score, you can have a rate of 8.25% on a fixed rate 30 due in 15, giving you a total of just over $3650, saving you about $100 per month and cutting your income to qualify to about $8120, as opposed to the $6650 you'll need to document to make this exact exchange right now. Some people can work a little harder or longer hours, charge more for their services, etcetera, but most people make what they make. The one is less than a standard deviation over area median income; the other is almost two and a half. That's an awfully large number of people priced out. Assuming a normal distribution of incomes and given San Diego's median and standard deviations, (via Hyperstat) we're talking about the difference between 20.46 percent of the population and 1.30 percent of the population, a factor or 15 decrease. The difference between more than one family in five and less than one in 75 being able to afford said property, holding assumptions constant.
It is to be admitted that market constraints in the latter case might keep the prices down somewhat, but that's only as a counter-weight to all of the other forces, and it is quite easy for a mathematician or economist to prove that the actual equilibrium point will still be significantly less affordable than the current state of affairs. Don't worry, I'm not going to drag you through that. Nor are we talking properties that the average family can afford with this particular example, but the principle applies to every affordability range, from a bottom of the market condo to the top of the line. Nor does it take any great mathematical skill to tell you that the affordability of a good that everybody is trying to buy right now is less than that of the same good when large numbers of people are trying to sell and very few people want to buy. Think any number of hot tech gadgets or "must have" Christmas toys. Real estate isn't that much different, economically, but people can have perfectly great financial futures without the latest tech gadget. It's unlikely they will have an equally bright future without owning at least the property they live in. In a buyer's market, property is affordable because lots of people want to sell and very few want to buy, leading to a huge disparity between the number of people who could afford a given property if they wanted, and the number of people actually willing to buy, and thence to greater affordability. When a larger number of people are ready and willing to buy, the affordability will decrease. It's all a matter of simple supply and demand.
Caveat Emptor
Original article here
(This was originally written February 16, 2006, but it's relevant still)
One of the occasional questions I get from people has to do with why the housing bubble got so big (or if you're one of those still in denial about it, how prices jumped so far so fast).
This has to do with several factors. Legislation made real estate investments more attractive. Interest rates got low, and nontraditional loans proliferated. People took their money out of the stock market because of the tech bubble popping, and wanted to invest it somewhere. The feeling that the housing market could never go anywhere but up. And I will address all of these issues in the coming paragraphs, but the largest factor is and was psychological. People were simultaneously scared that if they didn't buy now, they would be locked out of the American dream, and avaricious in anticipation of buying and flipping properties for multiple tens of thousands of dollars profit.
The first enabling factor happened in 1996. President Clinton sponsored legislation giving huge tax exemptions to gains from the sale of personal residences. There were and are good arguments for doing so, nonetheless it had the effect of making real estate a more attractive investment. When a married couple can make up to $500,000 tax free over their basis every two years, that's a major incentive to start moving into a new house every two years in order to fix it up, or at least hope for a gain in fast growing areas. By itself, this was a minor factor initially, but by making real estate such an attractive investment (literally the best there is, considered in a vacuum), it started the bubble off. Since it hasn't been repealed yet and may never be, the value increase from this aren't really a bubble component, but the value increase for what was a one time systemic shift whetted appetites, even while the dot com bubble (itself a fear and greed phenomenon) was going on.
The second enabling factor was that interest rates got low. This meant prices had the leeway to rise, as most people buy homes (and other property) based mostly upon the payment. When 30 year fixed rate loans go to 5 percent, the same payments buys a lot more house than it does at 7.5 percent. If you could have afforded a loan for $100,000 at 7.5 percent, you can afford a $130,000 loan at 5 percent. Instead of a $300,000 loan, you can afford $390,000 for the same payment. $500,000 becomes $650,000. Even though rates went up after early 2004, this helped start the phenomenon.
The third enabling factor was that people had gotten burned in the stock market as the dot com boom deflated, and the real estate market was doing well. With both sides of "fear and greed" working the equation, this amounted to quite a bit of incentive to chase returns in the real estate market. "I just took a bath in tech stocks, but look at how the real estate market is going!" This is known as chasing last year's returns, but large numbers of people do it. Consequently, quite a bit of personal wealth was dumped into the real estate market. This had negative consequences on the stock market, exacerbating that decline, and for the real estate market, dumping a couple trillion dollars into the demand side of the equation didn't exactly hurt real estate prices. Supply and demand are always working. The important trick is to separate fear and greed, which are real but have mostly short term effects, from real long term changes to the market.
The thing that really drove the whole thing from behind the scenes was that the federal government "encouraged" lenders to expand their creditworthiness criteria. Thirty agencies of the federal government got together and used the Community Reinvestment Act (as renewed in 1995) as a bludgeon to force lenders to lend to minorities at the same rates (and rates of approval) as non-minorities. Since certain minority groups are statistically less scrupulous about doing things that maintain creditworthiness and financial stability (just as other minority groups are statistically more scrupulous), that meant relaxing standards. The loan market controls the real estate market. When practically anyone could get a no income documentation loan they couldn't afford for 100% of value, macroeconomic constraints upon price vanished.
Members of my professions, meanwhile, did absolutely nothing to slow the madness. Indeed, they added as much fuel to the fire as they could. As I have said elsewhere, buying a home really is a fantastic investment, all things being equal. It literally clobbers renting and investing over the long term, with those last four words being the critical part. There are limits, and many agents and loan officers went over them and three states beyond. Anybody who takes any real estate agent's unsupported word for investments and sustainability probably needs a guardian. Reality check: Here's a person who makes thousands of dollars if they tell you you can do something, and nothing if they tell you you can't, and has very little responsibility in the law for telling you lies. They're not financial advisers, after all. What do you think the average person will tell you in this position? (And before anybody sends me email or comments about the "superior ethics of Realtors®" they were just as bad statistically and worse morally, because they were holding themselves out as ethically superior, thus using the propaganda to allay legitimate concerns. I'll believe Realtors® offer some ethical advantage when I start seeing the Boards of Realtors® imposing some real disciplinary measures upon significant numbers of scumbags that the state regulators don't. Aside from advertising to build brand awareness, I haven't seen anything that the Boards of Realtors® contribute to real estate practice, and they actively work against consumer interests in significant ways.)
So there we are, with these factors doing everything they can to drive values up. This goes on for a little while, and now psychology starts becoming a real factor. "They're not making any more land!" making a scarcity argument. "Real Estate always goes up over the long term!", making a safety argument, and ignoring any number of past bubbles and downturns. Heck, I remember four previous ones in southern California! "You can always sell for a profit!", ignoring transaction costs, which are significant, and flat out misrepresenting liquidity. Real Estate can beat anything else, investment-wise, but it is certainly the least liquid class of investment that comes to my mind, as well as being sensitive to many factors beyond your control.
Couple this with a couple of years worth of twenty percent returns, and the feeding frenzy really kicks in. There starts being a real fear factor - people get afraid that if they do not buy now, they are never going to be able to afford a home. When prices rise by 50 percent in two years and wages rise by six, who can really blame them? Most people do not have the economic background to sit back and consider who buys houses, and what controls housing prices. So the mentality of "buy now or rent forever!" took hold, further exacerbating the rise. People were willing to do literally anything they could to qualify for a home, lest they be unable to qualify forever. And with the thinking detailed in previous paragraphs, they were told that "Even if you have to sell in a year, you'll still come away with a huge profit!" Yes, that's greed again, rearing its ugly head.
Up until this point, things were within reason. But into this situation stepped the lending community, particularly the sub-prime lending community, driven by the federal government breathing down their necks. More and more lenders started being willing to loan 100 percent of the value of the home. "Hey, why risk your own money when the bank will lend theirs?" This drove market leverage to never before seen heights. Furthermore, in an effort to sustain volume, lenders started a trend of competing ever harder for the most marginal case. Stated Income, Interest Only, and short term hybrid ARMs proliferated (The most common sub-prime loan is only fixed for two years). Finally, lenders started pushing the Negative Amortization loans, for those borrowers who couldn't really make even the payments required on the short term interest only alternatives.
Lest anyone think otherwise, the community of real estate agents was fully on board with this. Always higher, and fast increasing, prices meant they made more money in commissions from selling the same number of homes, and the apparent virtues of real estate as an investment of the moment kept seducing those who did not know any better. Those few voices of sanity were drowned out, and many left the business. There just aren't that many people who really qualify to buy homes at the peak prices we had based upon the traditional metrics, even relaxed as they have become, and if you won't put them into something they can't afford, somebody else will. Furthermore, during this period, more and more real estate agents were starting to do their own loans, further isolating any voices of sanity in the loan community. Speak the truth that a client probably cannot afford a loan once, and the real estate agent will never bring you another client again, and will try everything they can to pry any clients that they can away from you. After all, you 'cost' them a commission once. Interest only, and negative amortization loans further proliferate, as agents try to persuade prospective clients that they "really can afford those payments." Forty year loans start making a comeback, where they were all but extinct, and fifty year loans are introduced. Sub-prime underwriting standards are loosened until they ignore what happens when these hybrids adjust (or Option ARMs recast) and concern themselves only with the minimum starting payment. A larger and larger portion of purchasers is forced into the sub-prime market if they want to qualify. And still property values rose.
Or, more correctly, prices rose. The actual property value certainly wasn't growing that fast, only the common perception of value, aka price. People were getting away with these terrible loans, complete with prepayment penalties, because even though they weren't able to make their payments in many cases, prices were still increasing fast enough such that even if they sold relatively cheap, in order to unload the property in a hurry, and paid a prepayment penalty, they were still coming away with money, further aiding the illusion that there was no way not to make money. When workers are making more money buying a house and holding it for two years then selling than they are at their jobs, that's an incentive to keep doing it. That's an incentive for more and more people to get in on the act. And the feeding frenzy builds. Fear and Greed. When someone holds a house for two years and sells for a huge profit despite the fact that they did nothing to enhance the home's value, that has the appearance of easy money. When people start buying with the intention of short term flipping without doing any work (We call this "Hoping for a bigger fool"), and when they'd call to see if I knew of any such properties and hang up when I'd start telling them about properties that really were good investments but needed work, I knew the end was coming very soon.
The first group to holler "enough!" was not the lower income folks who were getting priced out of stuff even at the lowest end of the market. It might be what you'd expect, but it wasn't the case. My theory is that those people simply don't know any better, and didn't think they could afford to wait. It was the better paid, more economically savvy buyer at the higher end who first called "Bull****!" At least here locally, higher end McMansions and such were the first to start sitting on the market. These prospective buyers made plenty of money, and knew they weren't on the verge of being priced out completely. If they were right, they'd buy a better property when things fell apart. If they were wrong, such is life, and they could still afford something. Meantime, they were going to rent.
Lessons here: Always separate psychological factors from real market shifts. The general rule is that once they find an investment that appears to be working right now, the crowd always overreacts. Many times you will make more money in the long term by bucking the obvious trend, particularly if that trend is Fear and Greed driven.
When I first wrote this piece in early 2006, the advice I gave was these two paragraphs:
"If you are in an untenable position with your loan right now, whether because it's negative Amortization or interest only or just about to start adjusting: Either sell now for what you can get, refinance into something fixed for at least five years right now, or be resign yourself to disaster. With the yield curve inverted right now, there is practically no spread between the five year ARM and the thirty year fixed rate loan. Even someone who is as huge a fan of the 5/1 ARM as I am has to admit that, at the moment, the thirty year fixed rate loan is looking very attractive by comparison. When you get a much better guarantee of the rate not changing, for the same price, and the the loans are otherwise identical, what's not to like? As I've said before, you can survive and prosper when you're upside down on your home, as long as you have the right loan for it.
If you can make the real payments on such a loan, I would do it now while appraisers still have the ability to appraise your property for near peak values. If you lose the ability to appraise for near peak values, then you may well be a member of that rather large group in many parts of the country where the market will no longer bear a price greater than the loans on your property. When you owe more on the property than the market appraisal, then for all practical purposes you are stuck in your current loan. If it adjusts, amortizes, or recasts, you're suddenly going to be making much larger payments. If you qualified under one of the less sustainable programs I noted earlier, when this happens you are going to be in a world of hurt, and probably unable to refinance. Most common result: Losing the home, credit ruined for years, and a 1099 from the lender that says "we lost money on you!", for which the IRS will demand taxes. If your loan is going to start asking for higher payments soon, and you can not refinance, or cannot afford to refinance, it's time to sell, right now."
Very few people took this advice then. Lots of people wish they had now. Now, my advice is significantly different,
Caveat Emptor (and Vendor)
Original here
The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read
Links to free samples here
The Man From Empire
Man From Empire Books2Read link
A Guardian From Earth
Guardian From Earth Books2Read link
Empire and Earth
Empire and Earth Books2Read link
Working The Trenches
Working the Trenches Books2Read link
Rediscovery 4 novel set
Rediscovery 4 novel set Books2Read link
Preparing The Ground
Preparing the Ground Books2Read link
Building the People
Building the People Books2Read link
Setting The Board
Setting The Board Books2Read link
Moving The Pieces
Moving The Pieces Books2Read link
The Invention of Motherhood
Invention of Motherhood Books2Read link
The Price of Power
Price of Power Books2Read link
The End Of Childhood
The End of Childhood Books2Read link
Measure Of Adulthood
Measure Of Adulthood Books2Read link
The Fountains of Aescalon
The Fountains of Aescalon Books2Read link
The Monad Trap
The Monad Trap Books2Read link
The Gates To Faerie
The Gates To Faerie Books2Read link
Gifts Of The Mother
Gifts Of The Mother Books2Read link
C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information
Questions regarding this website:
dm (at) searchlight crusade (dot) net
(Eliminate the spaces and change parentheticals to the symbols, of course)
Essay Requests
If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!
Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
Add this site to Technorati Favorites
Subscribe to Searchlight Crusade
My Links
-
Heavy Lifters
- Instapundit
- Hot Air
- Wizbang
- Victor Davis Hanson
- Q and O L Places I get to as often as I can
- Soldier's Angels
- The Anchoress
- Argghhh!
- Armies of Liberation R
- Asymmetrical Information
- Belmont Club
- Tim Blair
- Eject! Eject! Eject!
- Jihad Watch
- Michelle Malkin
- Neo-neocon
- Powerline
- Protein Wisdom
- Real Clear Politics
- Mark Steyn
- Strategy Page
- Vodkapundit
- Volokh Conspiracy Personal Finance, Economics and Business Sites
- Bloodhound Blog
- Financial Rounds
- Free Money Financea> Other sites I've linked and visit
- Ace of Spades
- Ann Althouse
- The Anti Idiotarian Rottweiler
- Atlas Shrugs
- Professor Bainbridge
- Baldilocks
- Beldar
- Blackfive
- Classical Values
- Coyote Blog
- Daily Pundit
- Drudge Report
- IMAO
- The Jawa Report
- Just One Minute
- Libertarian Leanings
- Liberty Papers
- Normblog
- Patterico's Pontifications
- Right Wing Nut House
- Samizdata
- SCOTUS Blog
- Stop the ACLU
- Unalienable Right Consumer and Research Sites
- Better Business Bureau
- Consumer Reports
- NASD Home
- California Department of Real Estate
- California Licensee Lookup
- California Department of Insurance
- National Association of Insurance Commissioners (NAIC)
- Do Not Call Homepage
- IRS Charities Search
- Internet Fraud Complaint Center
- SEC Home Page
- Stop Mortgage Fraud
- Report Mortgage Fraud Debunking Many so-called Real Estate Gurus
- John T. Reed Worthwhile Web Comics
- Sluggy Freelance
- Day by Day It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites.