Buyers market.... really? (Phoenix, Scottsdale, Gilbert: jumbo loan, house prices, luxury)

[Captain Bill]

Originally Posted by Friend of Sonic

I didn't figure it was prudent to make another topic that discusses the housing market, so I thought I'd ask her. I purchased a 1600 square foot home on Hawes and Guadalupe in Mesa, AZ. I paid 183k for it-- wasn't a foreclosure so everything is getting fixed up and the appraiser says that he expects the home to be valued a little more than 183k.
Does anyone think I made a mistake by not waiting on the market? I keep reading conflicting articles-- some say the market will start to turn a corner in a few months and others claim the market will drop another 20-30%.
There is time for me to back out, with the inspection period. Wednesday at midnight.

You're in a good area, however, the price of the home seems high, and i think you can do much better.

I'm very familiar with the east Mesa area and own three homes there. Actually 2 now because we just sold one. One is in the gated Marbella subdivision at Hawes just south of Baseline. (very close to your property)

I have to go to our Marbella property sometime today and would be willing to meet you at the house you bought and give you my opinion of value, gratis.

[Friend of Sonic]

Originally Posted by Captain Bill

You're in a good area, however, the price of the home seems high, and i think you can do much better.

I'm very familiar with the east Mesa area and own three homes there. Actually 2 now because we just sold one. One is in the gated Marbella subdivision at Hawes just south of Baseline. (very close to your property)

I have to go to our Marbella property sometime today and would be willing to meet you at the house you bought and give you my opinion of value, gratis.

That'd be good. PM me if you can do this Bill. Unfortunately I'm at work until 6:30 though.

[borborygmi]

Originally Posted by LesterBurnham

I read that article when someone posted the link and I didn't try to track down the original report that the article was based on, but as it was presented at MSN it was complete and utter nonsense.

Basically they're saying every real estate market will return to a point where median houses are 15 times annual rent. This might be an overall average for the country and might work in some markets just by accident. You can also make an argument that the price/rent ratio for a given market should stay pretty constant. But to say that the same ratio should hold up for every city is ridiculous.

Apparently you didn't read very closely. The 15x rule is only a rule of thumb that can be used to judge whether or not a home market is overpriced, and in general, this rule has held up over the years. Notwithstanding booms and busts, this is a baseline that home values tend to follow. It's not exact, just a basic guideline. And according to that guideline, 34 cities they point out- including metro Phoenix- are still overpriced. They also point out 66 other cities in which, according to that rule, buying now does in fact make sense.

The article is quick to point out the fact that affordability and P/R ratios will vary widely between different neighborhoods and areas within a city. And they take into account the fact that prices for rents and purchases in their table are only averages, which reflect certain neighborhoods which may be depressed b/c they're far out in the suburbs, in a location that's becoming less and less desirable, or there's an oversupply. In a metro area like Phoenix, which is so decentralized, with so much exurban sprawl and so much overspeculation and overbuilding out on the periphery, this is going to basically act like an anchor pulling down averages for the whole market.

So, as I wrote before, if you buy in one of these places and have to move within 5 years, there's a pretty good chance you'll be out some serious money. If you stay for the long term, you're probably alright- but you'd also be among a significant minority of people in today's world if you truly do end up living in the same house for 10+ years, even if that's your current plan. Stuff happens, as they say.

I haven't time right now to get into another detailed discussion. But suffice it to say that considering the current conditions faced by the country's large mortgage-underwriting financial institutions, I'd say that further price declines in the market are going to have more to do with scarcity of available financing for the majority of would-be buyers than it will have to do with supply-demand imbalance. I'd keep a very close eye on what's happening with Fannie and Freddie, as well as with Wachovia, Countrywide, etc. If you ratchet up the necessary qualifications in order to be able to obtain a loan, which will certainly happen if the financial troubles continue for these institutions, you're going to remove a huge segment of the buyers' pool. Marginal interested buyers simply won't be able to obtain financing- and there are a lot of those. Which, IMO, wouldn't be a bad thing. Owning a home is not a right.

[LesterBurnham]

Originally Posted by borborygmi

Apparently you didn't read very closely. The 15x rule is only a rule of thumb that can be used to judge whether or not a home market is overpriced, and in general, this rule has held up over the years. Notwithstanding booms and busts, this is a baseline that home values tend to follow. It's not exact, just a basic guideline. And according to that guideline, 34 cities they point out- including metro Phoenix- are still overpriced. They also point out 66 other cities in which, according to that rule, buying now does in fact make sense.

The article is quick to point out the fact that affordability and P/R ratios will vary widely between different neighborhoods and areas within a city. And they take into account the fact that prices for rents and purchases in their table are only averages, which reflect certain neighborhoods which may be depressed b/c they're far out in the suburbs, in a location that's becoming less and less desirable, or there's an oversupply. In a metro area like Phoenix, which is so decentralized, with so much exurban sprawl and so much overspeculation and overbuilding out on the periphery, this is going to basically act like an anchor pulling down averages for the whole market.

So, as I wrote before, if you buy in one of these places and have to move within 5 years, there's a pretty good chance you'll be out some serious money. If you stay for the long term, you're probably alright- but you'd also be among a significant minority of people in today's world if you truly do end up living in the same house for 10+ years, even if that's your current plan. Stuff happens, as they say.

I haven't time right now to get into another detailed discussion. But suffice it to say that considering the current conditions faced by the country's large mortgage-underwriting financial institutions, I'd say that further price declines in the market are going to have more to do with scarcity of available financing for the majority of would-be buyers than it will have to do with supply-demand imbalance. I'd keep a very close eye on what's happening with Fannie and Freddie, as well as with Wachovia, Countrywide, etc. If you ratchet up the necessary qualifications in order to be able to obtain a loan, which will certainly happen if the financial troubles continue for these institutions, you're going to remove a huge segment of the buyers' pool. Marginal interested buyers simply won't be able to obtain financing- and there are a lot of those. Which, IMO, wouldn't be a bad thing. Owning a home is not a right.

I agree with pretty much everything you said and I agree that high price-to-rent ratios are an indication of being overvalued, but my point was that it doesn't make sense to use the same ratio (15) for all metro areas. Nor does it make any sense to project a 4 year equity based on this ratio. As you said, it varies in different neighborhoods. But just as different neighborhoods are different, so are different metro areas. Areas in high demand areas like San Francisco and Honolulu will always have higher price-to-rent ratios than Tulsa or Pittsburgh.

To say that in the next 4 years San Jose is going to drop to 15 and that Pittsburgh is going to jump to 15 AND the the entire change will be due to changing home prices not changing rents (all of which are required to get the projected numbers in the article) is utterly ridiculous.

And note that I wasn't questioning the idea that there are a lot of overvalued markets, but just pointing out the flaws in that particular article.

[borborygmi]

Originally Posted by LesterBurnham

I agree with pretty much everything you said and I agree that high price-to-rent ratios are an indication of being overvalued, but my point was that it doesn't make sense to use the same ratio (15) for all metro areas. Nor does it make any sense to project a 4 year equity based on this ratio. As you said, it varies in different neighborhoods. But just as different neighborhoods are different, so are different metro areas. Areas in high demand areas like San Francisco and Honolulu will always have higher price-to-rent ratios than Tulsa or Pittsburgh.

To say that in the next 4 years San Jose is going to drop to 15 and that Pittsburgh is going to jump to 15 AND the the entire change will be due to changing home prices not changing rents (all of which are required to get the projected numbers in the article) is utterly ridiculous.

And note that I wasn't questioning the idea that there are a lot of overvalued markets, but just pointing out the flaws in that particular article.

Agree, there are certainly some. Trying to cover all the various housing markets in this country under the same general umbrella isn't possible to do- there are just too many differences between them, ranging from demographics to desirability, economic base, etc. etc.

It's hard to say what might happen in a market such as, to use one of your examples, Honolulu. Certainly, in a place such as Hawaii, P/R ratios have always been much, much higher than the national average. But take a look at the cost of living in HI now- it's becoming virtually impossible for anyone who isn't independently wealthy to live there. With the price of oil at the level that it is, and the great distances food has to be shipped to get to HI, it costs practically 8 bucks just for a box of cereal there these days. What if the exorbitant cost of living forces a mass exodus to the mainland? How might that affect their P/R ratio in the long term?

Who knows- a combination of economic and natural forces might one day turn the tides, and the current places which are thought of as highly desirable locations in which to live might become less so- while places which are more easily self-sustainable in the midwest might once again become areas in high demand, as they were a century ago. Hard to say for sure, but the future of our economy, really our world as a whole, is at a level of uncertainty that I don't know if this country's seen since the '30's.

[LesterBurnham]

Originally Posted by borborygmi

Agree, there are certainly some. Trying to cover all the various housing markets in this country under the same general umbrella isn't possible to do- there are just too many differences between them, ranging from demographics to desirability, economic base, etc. etc.

It's hard to say what might happen in a market such as, to use one of your examples, Honolulu. Certainly, in a place such as Hawaii, P/R ratios have always been much, much higher than the national average. But take a look at the cost of living in HI now- it's becoming virtually impossible for anyone who isn't independently wealthy to live there. With the price of oil at the level that it is, and the great distances food has to be shipped to get to HI, it costs practically 8 bucks just for a box of cereal there these days. What if the exorbitant cost of living forces a mass exodus to the mainland? How might that affect their P/R ratio in the long term?

Who knows- a combination of economic and natural forces might one day turn the tides, and the current places which are thought of as highly desirable locations in which to live might become less so- while places which are more easily self-sustainable in the midwest might once again become areas in high demand, as they were a century ago. Hard to say for sure, but the future of our economy, really our world as a whole, is at a level of uncertainty that I don't know if this country's seen since the '30's.

Absolutely, there will shifts in certain markets relative to others, just another reason that using a single metric for every metro area is silly. And it becomes even worse when you use that metric to predict the equity #'s for a specific short time in the future.

Interesting that you bring up high prices in Honolulu because one of major underlying fundamentals of the P/R=15 "rule of thumb" is that inflation has remained fairly constant and low for a long time. If high inflation kicks in for extended period of time, the P/R ratio everywhere should climb (short term bubble burst aside). Indeed, in my opinion, inflation risk is the best argument right now for ownership. I don't think it outweighs the downside yet - the housing market and economy in general are a mess. I will continue to rent for a while, but long term owning is likely to be a better financial option for me.

[borborygmi]

Originally Posted by LesterBurnham

Indeed, in my opinion, inflation risk is the best argument right now for ownership.

I think in the best of times, this is the best argument for homeownership (see my original post). Right now, it's anybody's guess- if the Fed does what it should do and starts taking steps to strengthen the dollar- hence, deflation- then the advantage of homeownership as an inflation hedge would lose some appeal in the immediate future. IMO, reinvigorating the dollar would be absolutely the best thing the Fed could do right now to stem the rising costs of oil, gas, commodities in general. It would almost undoubtedly help our economy get straightened around.

This just in, by the way- the House has just OK'd the plan to rescue Fannie and Freddie. Translation: our tax burden just went through the stratosphere. F-ing great. Here's a link:

House OKs mortgage rescue - Jul. 23, 2008


An excerpt from that article:

"...the bill offers what they characterize as "a blank check" to the Treasury to spend on helping Fannie and Freddie, despite assurances from Treasury Secretary Henry Paulson and Democratic leaders that the authority granted Treasury by the bill is unlikely to be used."

Uh-oh.

[Friend of Sonic]

Originally Posted by borborygmi

This just in, by the way- the House has just OK'd the plan to rescue Fannie and Freddie. Translation: our tax burden just went through the stratosphere. F-ing great. Here's a link:

House OKs mortgage rescue - Jul. 23, 2008


An excerpt from that article:

"...the bill offers what they characterize as "a blank check" to the Treasury to spend on helping Fannie and Freddie, despite assurances from Treasury Secretary Henry Paulson and Democratic leaders that the authority granted Treasury by the bill is unlikely to be used."

Uh-oh.

This seems scary. That's going to be a ton of money. Although it doesn't seem like we had much choice when it came to letting Fannie and Freddie sink if it ever came to that.

[ArizonaBear]

Originally Posted by borborygmi

Agree, there are certainly some. Trying to cover all the various housing markets in this country under the same general umbrella isn't possible to do- there are just too many differences between them, ranging from demographics to desirability, economic base, etc. etc.

It's hard to say what might happen in a market such as, to use one of your examples, Honolulu. Certainly, in a place such as Hawaii, P/R ratios have always been much, much higher than the national average. But take a look at the cost of living in HI now- it's becoming virtually impossible for anyone who isn't independently wealthy to live there. With the price of oil at the level that it is, and the great distances food has to be shipped to get to HI, it costs practically 8 bucks just for a box of cereal there these days. What if the exorbitant cost of living forces a mass exodus to the mainland? How might that affect their P/R ratio in the long term?

Who knows- a combination of economic and natural forces might one day turn the tides, and the current places which are thought of as highly desirable locations in which to live might become less so- while places which are more easily self-sustainable in the midwest might once again become areas in high demand, as they were a century ago. Hard to say for sure, but the future of our economy, really our world as a whole, is at a level of uncertainty that I don't know if this country's seen since the '30's.

I do agree about what has happened to SoCal......as for the Midwest becoming desirable again-----probably not in my lifetime (I am age 50 now).

Why I say that is many of us warm winter types would remain in the Sunbelt (Climate Zone 8 or higher)-------no matter what.

Now: if Global Warming is for real; read that a 5-10 degree increase in winter temperatures-----that would open up places S of the Mason Dixon Line.

[Friend of Sonic]

Well, I exercised my ability to terminate the contract on the final day of the contract. This will give me more time to save up funds, and see where the market is heading. Hope I did the right thing... thanks to everyone for their insight.