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[quote=solarballoon;30047391]My wife and I are moving back to Chicago in August (we both grew up in Chicagoland). I work from home and she will be staying at home with the newborn, so location is really irrelevant to our lifestyle. Our long-term plan is to find some land and build a home, so this near-term purchase is an interim solution. We're thinking two years.
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To me, 2 yrs is a short term plan. My advice is to rent then build your long term home or just build your home now. Why wait?
Residential real estate lacks "risk mitigation facilities"...
Lookout Kid is a smart poster and has been on the boards long enough to know that many of us who have been investors as well as home owners or real estate agents understand what researchers have tried to do with the Case-Schiller index but unfortunately the focus on JUST recent sales makes the tool less than useful for mitigating risk. In a perfect world it would be very beneficial to mortgage lenders and home owners to be able to limit their downside exposure or even sell futures contracts for future appreciation potential but the volatility of real estate stymies such attempts...
The basic "spreadsheet math" that the OP has done here is reasonable but the situation fresh in the minds of folks like LK and others points out just how important "unexpected anomolies" are real estate prices. And these potential swings should come as to no surprise to ANYONE with real world experince buying / selling resedential property: it is an emotion filled roller coaster in even the best of economic times!
The "rule of thumb" that left LK and others holding a big bag of empty is largely replaying itself in some of the "hot" areas of Chicago right now, with folks that have grown tired of renting finding the appeal of shiny new condos hard to resist with their "walk to every pleasure a young college educated office working person could imagine". I have seen this sort of bubble many times before. When the realities of pie-in-the-sky efforts of marketing driven flash-in-the-pan jobs collides with the fiscal realities of city / state / federal financial mismanagement the swings that will combine into a potential storm of downward asset price pressure many very well resort another round of young homeowners massively underwater.
Quote:
Originally Posted by Lookout Kid
Back during the early 00's real estate boom, the widely distributed conventional wisdom was to only buy a house if you planned to stay there for at least five years. First-time buyers who listened to that from 2003-2007 ended up under water after just a few years, and in a real pickle (myself included). Eight years later we finally recovered enough to sell our condo and move on.
I personally will never purchase any home again unless I plan to stay there a LONG TIME. Of course life changes unexpectedly, and plans change accordingly. But the "Great Recession" has taught us that real estate investing perhaps carries more risk than previously believed, and no one knows what will happen over that very short 24 month window. But of course, I got burned, so my personal experience may be affecting my judgement here.
Back during the early 00's real estate boom, the widely distributed conventional wisdom was to only buy a house if you planned to stay there for at least five years. First-time buyers who listened to that from 2003-2007 ended up under water after just a few years, and in a real pickle (myself included). Eight years later we finally recovered enough to sell our condo and move on.
I personally will never purchase any home again unless I plan to stay there a LONG TIME. Of course life changes unexpectedly, and plans change accordingly. But the "Great Recession" has taught us that real estate investing perhaps carries more risk than previously believed, and no one knows what will happen over that very short 24 month window. But of course, I got burned, so my personal experience may be affecting my judgement here.
If you look in other parts of the country ( like where I live), where no signficant housing bubble, nor subsequent bursting happened, the defining factor on whether to buy or rent is based on what the average income person can afford. We experienced single digit percentage declines in home prices. But our average home is about 150 - 160K with the vast majority being within 25K up or down.
What is average? Perhaps we should ask what is not average and work backward from there: Naperville is considered the wealthiest midwest town, with a median family income of about 130K.
A little closer to REAL average, is Aurora, wither an average family income in the 60's.
Prudent debt management says that anything that requires debt beyond 2 - 2.5 average annual income is going to be difficult to sell. So, looking at that, if you want to minimize risk to yourself, don't buy much above average for the region. Sure, Naperville (and many other places, too) have MUCH HIGHER priced homes, but how many are under water, how many ended in foreclosure, and how many are still underwater?
The greatest volatility occurs in that price region that's out of reach of the "the masses", because the demographic market truly is "that small".
Honestly, I never understood why someone who makes 150K wanted to buy a 400K home on a 30 year mortgage. Just run the numbers. It makes no sense to be in debt. As far as investment? You dramatically minimize your risk by keeping what you invest in "in reach of the masses". It makes sense. It's also why there's really not a lot of money there.
...
The greatest volatility occurs in that price region that's out of reach of the "the masses", because the demographic market truly is "that small".
Honestly, I never understood why someone who makes 150K wanted to buy a 400K home on a 30 year mortgage. Just run the numbers. It makes no sense to be in debt. As far as investment? You dramatically minimize your risk by keeping what you invest in "in reach of the masses". It makes sense. It's also why there's really not a lot of money there.
Nice thought, but this just hasn't worked out for you in Chicagoland. It has almost always worked out better to stretch if necessary to buy in an affluent community. The old real estate chestnut advising you to buy the smallest house in the nicest neighborhood you can afford has been borne out again and again.
In the south suburbs, how happy is the person who stretched themselves fifty years ago to buy in affluent Homewood rather than merely middle-class Harvey or Hazel Crest? In the west suburbs, didn't they have the better idea, those who bought a smaller place in 1963 in River Forest or Elmhurst, rather than the bigger home in more-accessible-to-the-masses Maywood or Villa Park? In the city, how did the person who fifty years bought a place in tony Beverly, Chicago do, compared to the salt-of-the-earth fellow who bought a rock-solid bungalow in Washington Heights or Gresham?
Quote:
Originally Posted by pnwmdk
...
What is average? Perhaps we should ask what is not average and work backward from there: Naperville is considered the wealthiest midwest town, with a median family income of about 130K.
A little closer to REAL average, is Aurora, wither an average family income in the 60's.
...
Sure, Naperville (and many other places, too) have MUCH HIGHER priced homes, but how many are under water, how many ended in foreclosure, and how many are still underwater?
I agree that it makes sense to "budget conscious" but folks have the ability to shop in a desirable area will be have less downside to worry about then folks shopping in even areas a little more affordable but less well situated.
If you find a rare bargain priced place with no "unremiadable negatives" in a nice town it will be far more likely to have greater appreciation than either a similar bargain-discounted home or a similar priced home in a less desirable area.
I could illustrate with actual rental homes I owned in towns like Countryside or Westmont vs homes that started out at similar purchase price in Elmhurst. The rent I was able to collect was only a little higher but the price appreciation was orders of magnitude better in the more desirable town. The same patterns are documented by folks that have written books about the rental real estate market like Robert Bruss...
Quote:
Originally Posted by pnwmdk
If you look in other parts of the country ( like where I live), where no signficant housing bubble, nor subsequent bursting happened, the defining factor on whether to buy or rent is based on what the average income person can afford. We experienced single digit percentage declines in home prices. But our average home is about 150 - 160K with the vast majority being within 25K up or down.
What is average? Perhaps we should ask what is not average and work backward from there: Naperville is considered the wealthiest midwest town, with a median family income of about 130K.
A little closer to REAL average, is Aurora, wither an average family income in the 60's.
Prudent debt management says that anything that requires debt beyond 2 - 2.5 average annual income is going to be difficult to sell. So, looking at that, if you want to minimize risk to yourself, don't buy much above average for the region. Sure, Naperville (and many other places, too) have MUCH HIGHER priced homes, but how many are under water, how many ended in foreclosure, and how many are still underwater?
The greatest volatility occurs in that price region that's out of reach of the "the masses", because the demographic market truly is "that small".
Honestly, I never understood why someone who makes 150K wanted to buy a 400K home on a 30 year mortgage. Just run the numbers. It makes no sense to be in debt. As far as investment? You dramatically minimize your risk by keeping what you invest in "in reach of the masses". It makes sense. It's also why there's really not a lot of money there.
Really, I don't see how your argument, which doesn't address my main point at all, applies.
The original question was about how to avoid ending up deeply underwater, and not being able to get out from under a deflated home - or at least not being able to sell it rather quickly.
I have, for the last 4 months, been studying the history of real estate prices all over chicagoland. From 1995 to 2005, home prices spiraled wildly, with double digit annual "price inflation" going on until the late 2000's.
During this time, a LOT of people borrowed to the maximum they could afford. A very significant amount of those people then eventually defaulted and dumped a lot of substandard, used homes they didn't care for and were deeply in debt for, and then foreclosures dumped them on the market and they sold for 10k to 60K in great numbers, creating a not reliable statistic. The unstable ones defaulted and walked away. The rest HELD their property and many are underwater. This has caused a statistical change which doesn't reflect actual home values. Home values have fallen... but real estate affordable by middle class homebuyers (the kind that live in quantity in Aurora) is still moving at those sustainable prices.
The original question had to do with being able to liquidate quickly at a profit, with low risk. There is no such thing as profit without risk. Since the ultimate goal is to build their own, the smartest idea is to minimize risk so they can build what they want.
My whole point was that (as was pointed out more than once) volatility is high, riduce risk by buying what will be the easiest to liquidate (meaning the largest market demographic with ability to buy) in a narrow time range.
...and the analogy I would use for homes around $60k would be cars probably means $1500 rust buckets with blown engines.
I doubt that anyone that needs relaible transportation would give serious consideration to a vehicle priced at less than $5000 which would probably translate into homes witha floor price of about $200k or so.
In most desirable towns any piece of real estate priced under $200k is likely going to need so much work that it will likely be a candidate for tear down, just like the blown engine rust bucket is likely to end its life on the boneyard at Victory Autowreckers...
You do not "minimize your risk" buying homes that have serious unremieadable problems -- the locations can be assumed to be unsafe with poor government services / schools and the "house" such as it is can be assumed to be seriously deficient. At best shopping for very inexpensive homes will only be an ineffective way of reducing the magnitude of ones losses in true "walk away" situations.
Last edited by chet everett; 06-17-2013 at 07:47 PM..
...and the analogy I would use for homes around $60k would be cars probably means $1500 rust buckets with blown engines.
I doubt that anyone that needs relaible transportation would give serious consideration to a vehicle priced at less than $5000 which would probably translate into homes witha floor price of about $200k or so.
In most desirable towns any piece of real estate priced under $200k is likely going to need so much work that it will likely be a candidate for tear down, just like the blown engine rust bucket is likely to end its life on the boneyard at Victory Autowreckers...
You do not "minimize your risk" buying homes that have serious unremieadable problems -- the locations can be assumed to be unsafe with poor government services / schools and the "house" such as it is can be assumed to be seriously deficient. At best shopping for very inexpensive homes will only be an ineffective way of reducing the magnitude of ones losses in true "walk away" situations.
LOL, ok. To each his own, I guess.
I can find anyone a good reliable, nice vehicle for 5K or less all day long, every day. But then, I happen to know cars well.
I'll take your word for it, that where you have looked, you can't find a house under 60K that's not structurally deficient.
As far as your assumptions go, I guess you know what they say about assumptions.
Nice thought, but this just hasn't worked out for you in Chicagoland. It has almost always worked out better to stretch if necessary to buy in an affluent community. The old real estate chestnut advising you to buy the smallest house in the nicest neighborhood you can afford has been borne out again and again.
In the south suburbs, how happy is the person who stretched themselves fifty years ago to buy in affluent Homewood rather than merely middle-class Harvey or Hazel Crest? In the west suburbs, didn't they have the better idea, those who bought a smaller place in 1963 in River Forest or Elmhurst, rather than the bigger home in more-accessible-to-the-masses Maywood or Villa Park? In the city, how did the person who fifty years bought a place in tony Beverly, Chicago do, compared to the salt-of-the-earth fellow who bought a rock-solid bungalow in Washington Heights or Gresham?
I think the reason is that there are more wealthy people living there due to the higher population of wealthy people.
OP---I think it is best for your property values to buy the worst house in the best area you can. Therefore, everything else being equal, it may make sense to get a fixer upper in a Hinsdale, than a huge house way out in the middle of a rural area.
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Residential real estate lacks "risk mitigation facilities"...
