Tuesday, January 4, 2011

Why did I buy now?

Someone asked my motivation for buying right now. I clearly don't think this is the bottom in home prices. There clearly is a lot of distressed inventory on the sidelines yet to come on market. So why buy?

I promised myself a couple years into this (I started house hunting in late 2005) that I wouldn't try to time the ultimate bottom. I would just pick some parameters (area, age of home, square feet, etc) and when those parameters were met relative to a rent / debt service ratio and debt service amount I had selected that I would buy. Mortgage rates hitting 4% helped the debt service side of the equation and ultimately a seller accepted my offer during a slow time of year where most transactions that are being made are because of seller compromising on price.

There were personal financial factors that also led me into thinking that this wouldn't be a horrible spot to fix costs in time. Also knowing that I would be in this house for a long time helped sway the decision. I'm well aware that the mortgage interest deduction is on the firing line but I am betting that it's repeal will apply to loans above the conforming loan limit. That is if it gets passed at all. I've also planned on it being appealed completely but that would make the purchase decision less favorable over renting but not so much that I couldn't handle the difference.

My view of the economy has gotten much less bearish and in some ways bullish and that helps the purchase go/no go decision. We clearly have a lot of things to get through as a country but the fight now is really how much inflation are we going to have as opposed to an inflation/deflation argument in which taking on long term debt is a much dicier proposition. Growth is happening, and whether that growth is organic or only happening because of the Fed printing money is irrelevant. In the former scenario we are in a true recovery and in the latter scenario I don't see the Fed stopping printing if they think the recovery would falter.

I'm of course not thrilled with the price I paid for the house but the low mortgage rate takes the sting out a bit. Rates have spiked 75bps since I locked and that would mean the same house would be $200-300 more a month. That would be almost the same as getting the same house today for $50,000 cheaper (property tax drops so it isn't 100% the same).

When prices fall in the future some may ask if I am pleased or displeased with my purchase. Financially, it would come down to what is going on with rents and interest rates. There are scenarios where I would still come out ahead by buying now. The numbers were close enough that if you erred on the side of inflation it looks like all the numbers work (I'm talking 1 to 2% not any rampant inflation scenario which makes taking on long term debt a trivial proposition).

Renting during the boom turned out to be a good decision. I don't expect that the buying decision will compare as clearly favorably that renting did during the boom/bust but I don't expect it to be a huge mistake either but it could be a small/medium mistake. Only time will tell.

If you have any other questions please post in the comments.

8 comments:

Jazzie Casas said...

Last year was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.





home buyer

Richie said...

You forgot to mention the emotional benefit of buying a house. That's still one of the main reasons I want to buy a house - so I don't have to keep wondering where I'm going to live 6 months from now.

But I still don't get enough emotional benefit to make up the difference between what I can afford and what the prices are.

Noz said...

All I can say is good luck with your decision.

I personally think things are going to get much much worse. There is no real foundation for recovery...the jobs in this country are not coming back to us...it's going to be a jobless recovery.

What many don't realize or want to admit to is that there is a very real (and necessary) reduction in workforce, reduction in consumption, reduction in waste, reduction in over-production.

The global economy was running on cocaine. It has to give at some point and we are merely at the beginning stages of the reductions.

We are no going through phases of "withdrawal." There will be times where things may pick up again only because we are true consumption junkies. But it needs to slow down...we need to take a break from our ridiculous levels of consumption.

My wife and I were hoping to buy a place last year. The problem was not only with the prices...they are simply still too high. HOWEVER, the biggest issue was the quality of homes out there....

The homes we were coming across for a "mere" $600K were complete shit...complete, utter shit. Old, needing work, updating, new bathrooms, kitchens, etc.

Sellers are still completely delusional and arrogant as hell...they feel entitled to making money the "easy" way...money that they really didn't even earn but feel they can ripp-off someone in a RE transaction.

The buyers who buy these overpriced homes are equally delusional (not saying you are...I don't know your circumstances specifically) based on the homes we were seeing sold...dilapidated crap for $500-700K.

I'm all for having a home...but when sticking myself with a $3000 mortgage and then still having to do $50K in repairs....that's freaking insane.

As far as recover and stability go...I'm a good case in point.

I work for an organization that has been known to be stable and somewhat immune to ups-and-downs...but guess what...my salary is now cut in half as of January first....I only have half time work available to me now. And the foreseeable future isn't much better...my project ends permanently in June.

We are no on a recovery. We are still in the midst of a recession. The government is trying very hard to make people think and feel as though things are going to get better.

This year is going to be a very tough year I think. Worse than last.

But I have no crystal ball...time will help solve all issues eventually.

Effective Demand said...

Richie,

I'm knee deep in remodeling and a honey do list 6 months long so I'm not able to enjoy any emotional benefit yet. So it's a tradeoff, but eventually I'm sure there will be some relief, I'm just not there yet.

Effective Demand said...

Noz,

There is simply not a lot of good choices. The government programs have been designed to limit inventory on market and they have succeded very well so far. So we have these low sales rates but months supply locally isn't very high. I think the government programs were designed for more distressed markets than ours, ours would be in a much healthier place sooner if we got some market clearing. But that policy wouldn't work in the NV, AZ, OH, MI, FL type markets.

On the economy, I think we have clearly turned a corner. If you watch the data coming out, Auto Sales are beating consensus and are growing rapidly from their very low bottom. Both ISM reports have beat consensus and are expansionary. Bond market is spiking in the belief the economy went from "Really bad/double dip" to "less bad". The NFP on friday will be in the 100-150k range and that is a huge turn of events from mid-year when everyone was predicting a double dip. Xmas sales absolutely killed. Announced corporate layoffs are extremely low. Online job postings have increased dramatically YoY. Lots of bullish signs.

I hope your personal situation improves and I hope quality inventory comes on market. For me personally my metrics were met so I bought. But metrics are very dependent on a whole host of factors (and belief in the economy getting better was a factor, so your belief it isn't would also be a factor against) and I definitely support people not buying now. Clearly it's an engineered housing market, I just don't know when the engineering will stop.

Anonymous said...

Thank you for the post on your reasoning.
We are probably in a very similar situation, having rented through the bust, and have been looking for a while now as well.
I'm glad you've found what you've been looking for and that you feel that the momentum may have shifted in the game to your advantage. Homebuying is also so emotionally wrought, that it's understandable when that component of the decision can no longer overwhelm those other perhaps more quantitative aspects.
Behavioral Economics at its best!
I tend to agree that news is better these days than a year ago. One hopes that the emergent political situation will not put a spanner in the works there, and that private sector job creating will gain momentum.
Regarding the post by another commenter, I do tend to agree that among modest older homes, there have been very few of what one might consider of good value, and those are snApped up quickly. The rest languish for reasons apparent to buyers alone, it would seem.
And so the hunt goes...

Many wishes for a happy new year in your new home. I have derived much from perusing your Blog on and off for years and so thanks for the effort and time there as well.

djviking21@yahoo.com said...

Wow ED congrats...while I remmain bearish as some posters here as far as foundational faults with our economy I do see some of those potential "shoots" emerging. I just want to thank you from the heart for your insight and wisdom in these areas. I credit you with saving my wife and I from financial ruin due to rushing to buy during the fall. your blog led to my education in the "real" real estate scene and I held back on a potentially devastating real estate transaction. It will be interesting to see if you continue this blog now that you are a homeowner but I will continue to follow your posts as long as they exist.I have followed your posts for years know and will miss your astute observations if you stop. Good luck brother,thanks again and enjoy your new digs-DJ

Effective Demand said...

DJ,

Thanks for the kind words it means a lot.