Good Deals

Mike in LBC writes:

El Bee,

Is there anywhere on this blog site, where you throw out a couple steps to follow, for noob real estate dummies like me, to see if a property is a good deal? What steps do you take, when you want to see if a property is a good deal?

And this is just a suggestion, but I would really like to see you find a property that you think IS a good deal, and maybe tell us why, and how to find them.

My permabear permafrost has thawed considerably this year, and I'm not afraid to tell my readers when I think something is approaching a decent buy. The reason I don't feature more "good deals" on this blog is because, frankly, the few that exist don't last long on the market. And for good reason. In fact, sometimes I'll have a finished post in the can only to discover the property sold before I could publish it.

And with all of the government intervention (whatever you think about all the taxpayer cash being dropped from B-2 bombers, you have to admit it seems to be working as far as spreading the pain gradually instead of the precipitous equity-destroying tailspin we saw in 2007-2008) it's even more difficult to determine what the "real" value of a property is.

I think everybody's biggest fear is that they will put all their hard-earned money into purchasing a house, only to watch the value plummet immediately.

But why is being a little bit underwater such a big deal? Sure, nobody likes to think they paid too much for anything (just listen to people brag about the "deals" they get on car purchases and how they "raked that salesman over the coals"--you don't often hear about the people that got home only to realize they got cornholed on the "clear coat protection"), but assuming you bought a house you love (or at least see yourself in for a decade) who really cares about timing the bottom perfectly?

The real question is: If you buy today will you be more than "a little bit" in the red a few years down the road?

I can't tell the future. Anybody who claims they can is certifiably full of it.

But what I can tell you is if the Superbears are waiting for $99 per square foot in coastal Long Beach, you'll be grousing about "unsustainable" home prices until you're living in a home staffed with nurses. I don't want people to hang their hat on a "tsunami" of REO properties flooding the market and crushing prices. I just don't see that happening anymore. What incentive does the government have to force banks to release their inventory?

I also don't want buyers to pin their hopes to rising interest rates bringing values down. First, we don't know for sure that that will happen. The conventional wisdom is that higher rates equal lower values because people can't finance as much, but what if as rates rise more people jump in before rates get out of control, thus raising home prices? Then what? Second, do you really think the goverment is going to let that happen?

Look, I'm still pretty bearish, but I have to say the incessant doom and gloom is getting old (if the Mad Max theorists are correct, our currency will collapse and blogs like this will be pointless. All property without tall gates will become worthless and we'll be scrounging for water and ammo and won't give a crusty crap about granite countertops). Because although some delusional sellers set "Wishing Prices" I think some permabears are holding out for unrealistic prices. Just like those idiot sellers are never going to get $900,000 for that 1 bed/1 bath with ocean views, you're not going to get it for $90,000.

Housing in Southern California is expensive. It always will be. The maintenance alone will ensure that. It's a luxury item, a consumable. And just like there is a reason BMWs cost more than Scions, if you want to own a nice home you're going to pay for it. So please don't let the perfect (price) be the enemy of the good.

If you have to buy and the numbers are "close enough," then buy. Do it. But understand it comes at the cost of being a bit underwater for the next few years--maybe five or more if things really hit the skids. If not getting a "great deal" doesn't bother you (and judging by the sales activity of late, it doesn't seem to be troubling too many) then go for it.

BUT, also don't get in way over your head if the fundamentals aren't right. Sometimes "expensive" things are completely worth it (a Shelby Cobra Mustang costs about twice what a stock GT does, but I'll gladly pay the premium to hear that supercharger whine every day). I realize that people, after being priced out during the last eight years or so, are champing at the bit to buy and "get it over with," but just understand that we're not at a true bottom in coastal Southern California. Prices are still way out of line with incomes.

My guess is that we're in a dead cat bounce right now fueled by government spending and attempts to kick the can down the road (Hell, Fannie Mae today just approved a plan to avoid realizing losses on their disastrous portfolio by allowing deadbeat homeowners to rent their house from FNM at no more than 31% of gross income. Hey shitbrick, don't you think implementing that rule on the mortgages you insure would have avoided this clusterfuck in the first place? Anyhow, there's a bunch of homes that should be REO inventory that won't see the light of day for at least another 12 months. Kick the can, kick the can). But after this temporary re-inflation, we'll continue our gradual decline and scrape along the bottom for a few years. In other words, the idea that we're going to have another monstrous housing bubble and you'll "miss your opportunity" if you don't buy now is a total crock.

I simply don't see dangerously loose lending practices or massive statewide wage increases on the horizon to support increasing prices (but I do see significantly rising taxes, which will put a dent in housing budgets. How did you think we were going to pay for the California budget deficits, housing tax credits, and financial bailouts?).

To answer your core question, Mike, here is how I determine whether a primary residence is a good deal:

1) It's as nice or nicer than your rental, and the cost is roughly the same (if your monthly PITI is less than your rental rate, that is a SMOKING deal). If you get in trouble and have to move, and renting it out will cover your monthly payment, you got a good deal.
2) You're proud to show it off, yet the purchase price is only 3.5 times your annual income (4x income, although riskier, seems to be what most Californians are comfortable with, but we're talking about what makes a "good deal")
3) You are spending no more than 31% - 33% of your gross monthly income on housing--including principal, interest, HOA, taxes and maintenance (that's not my number--that's the "safe" number determined by mortgage lenders before they took crazy pills. For fuck's sake, EVEN FANNIE MAE IS NOW ADMITTING THAT 31% IS THE MAXIMUM AMOUNT THAT PEOPLE CAN PAY FOR HOUSING AND REASONABLY EXPECT TO MAKE THE PAYMENTS!).
4) You can afford it without stretching too far, while simultaneously being able to afford to live a good life.
5) You're buying it to live in and not as an "investment." If it's an investment, it will never seem like a good deal because the constant flow of money you'll be putting into maintenance and taxes will be little red daggers on an Excel sheet and not the trade off for homeowner pride. If it's a home, that stuff won't matter.

But really, #1 is the most reliable. And that's because rents are tied DIRECTLY to income. Since there is no way to finance your rent, your monthly payment comes only out of the money you take home each month. Simple, right?

I don't know if I answered your question, but those are my coffee-addled thoughts.