Is the 2012 market ever going to return? (Orange: real estate, 2013)

[redrocket2]

A friend of mine bought a beautiful SFV in Orange for $450k, standard sale, upgraded kitchen, large backyard, 2600sqft, great quiet neighborhood, 3-car garage. There were a few other listings at the time in that area for around the same.

For a few reasons I decided not to buy in 2012 but was planning to buy in the summer of 2013 believing that the market had flatlined for a bit. Never did I imagine in my wildest dreams that the market would shoot up like a rocket without any warning... virtually all I spoke to, realtors, mortgage brokers etc. and even 1 financial advisor were of the same opinion - that we are going to be flatlined for a bit and there was no immediate need to hurry.

Now my friend's home has a ZEstimate of $710,000 HOLY COW! and similar listings in the area for an equivalent home are listed at around $650,000 or so (around 40% higher).

Is that buying opportunity permanently gone? I somehow believe high prices are here to stay and we are going to escalate from here upward, i'm not quite sure how people are going to afford homes but I believe they will stretch or make do with lowering their standards.

For me, I prefer to move out of Southern California if that is going to be the case as I would rather compromise a bit on the weather to have a decent home to live in. Obviously there is a lot of envy (human nature hehe), I do attend parties at my friend's place and am constantly reminded of what I could be living in LOL I am MUCH more accomplished career-wise and income wise than my friend, but obviously I was slow to move and he grabbed the opportunity quick.

Oh BTW, at the time he was buying the home the Realtor told him not to buy it because it was too expensive and he could not afford it (he earns $80k/yr), lesson - never EVER listen to a realtor!

[Joe Van Fossen]

Originally Posted by redrocket2

Oh BTW, at the time he was buying the home the Realtor told him not to buy it because it was too expensive and he could not afford it (he earns $80k/yr), lesson - never EVER listen to a realtor!

Personally, I don't really offer financial opinions unless they're solicited. I leave that up to the buyer and their lender to figure out. However, I do think a $450K home on $80K/yr is stretching it, unless he put a lot down.

[redrocket2]

Originally Posted by Joe Van Fossen

Personally, I don't really offer financial opinions unless they're solicited. I leave that up to the buyer and their lender to figure out. However, I do think a $450K home on $80K/yr is stretching it, unless he put a lot down.

He put 20% down which these days is quite a huge amount, I don't think there are a lot of 20% down buyers now as the trend is 5-10%. He does agree he stretched a bit but he is renting out a room in the home to one of his buddies for several hundred dollars which is a small compromise to own such a huge house!

My point is that it worked out for him, he has $200,000 in equity in 12 months... which job can provide that kind of return? And with home prices projected to rise 6% per year after this that is $40,000/yr in appreciation, that's half his income and in addition he gets to live in his house!

[Electrician4you]

Originally Posted by redrocket2

He put 20% down which these days is quite a huge amount, I don't think there are a lot of 20% down buyers now as the trend is 5-10%. He does agree he stretched a bit but he is renting out a room in the home to one of his buddies for several hundred dollars which is a small compromise to own such a huge house!

My point is that it worked out for him, he has $200,000 in equity in 12 months... which job can provide that kind of return? And with home prices projected to rise 6% per year after this that is $40,000/yr in appreciation, that's half his income and in addition he gets to live in his house!

Which means absolutely zippo. What return are you talking about? There is no return. His house hasn't sold. He doesn't have anymore money in his account because that 200k equity might as well be smoke but it looks good on paper. It's ABSOLUTELY WORTHLESS at this point because it only has a value by either selling or going in debt to borrow against it. If he is another of the HELOC homeowners out there he will see it as wealth and borrow " his" equity. Debt is not wealth. That kind of thinking is exactly what created the crash in 08. Hopefully he is smarter than the average bear.

So can he still swing the payment if his buddy moved out?

I've been buying houses since 1993. I've seen the market swing up and down. In California wildly swing up and down as we all know. Eventually the market will change to a buyers market. It always does. I always hear the " its gonna get hot it will never go back down buy now buy buy buy" usually uttered by people who stand to make money off your purchase.

[redrocket2]

Electrician, I am usually a bear...but this time I think it is different. The reason real estate has skyrocketed is due to government intervention. Ridiculous amounts of cheap money being available to investors and also to buyers in the form of interest subsidies. I don't believe interest rates are going to rise anytime soon and I do believe real estate purchases are about psychology and prices can keep going up. The next Fed chief Janet Yellen is even more determined than Bernanke to keep money cheap. This will devalue the dollar but real assets like homes will then rise relatively speaking.

So, perhaps going forward, there will be only three types of homeowners - those that lower their standards immensely and are willing to pay $400,000+ for a 1000sqft condo (we're already there in many neighborhoods and demand for those kinds of properties is still hot), rich people who don't really care about a few hundred thousand dollars here and there and homeowners who bought pre-2002 and between 2010-2012.

Regarding the $200,000 equity, that IS real wealth creation. Prediction for next year is a 6% gain on the low end and 10% on the high end. I do think that $200,000 is locked in given the demand that we are seeing even at this price point.

[Electrician4you]

I agree with most of what you said but the wealth creation is really on paper wealth. It's not tangible until he sells. He can have 20% equity increases its still nothing till it's sold. If he borrows against it there is no wealth there its debt. He either has to pay back or sell to pay back.
If house prices keep getting higher the only thing you will have is a lot of loan owners. Nobody will ever pay the house off and what happens when/if house prices drop. Those people who bought at today's high prices with low interest are screwed because if rates go up house prices will drop and they are screwed. You will not get high prices and high interest rates. Just doesn't work. How many people do you know stay in their houses till paid off? Not many these days.

You said this will devalue the dollar but real assets like homes will rise relatively speaking. Yeah prices will rise because the dollar is weak/devalued. Banks know absolutely exactly what they are doing. Interest rates eventually. Will go back up. You can only buy so much MBS and will only be able to borrow so much take so much debt before you collapse.

[redrocket2]

I don't believe prices will ever drop below what they are today, I used to think that but I do not think that anymore. Even Robert Shiller has said that prices now are historically normal.

I was in Spain last year and if you look at the home prices there it is truly shocking...US homes prices by comparison look like someone was having a fire sale!! In Barcelona a 2 bd, 1000sqft condo in a central location sells for the equivalent of $700,000. And most people in Barcelona are broke, unemployed and do not earn even 50% of the US salary for the same job. But somehow prices are still absolutely insane in Europe... no reason that cannot happen here as well...and I think it will. I cannot explain the economics behind it, but all I notice is that it can happen.

[fumbling]

Originally Posted by Electrician4you

I agree with most of what you said but the wealth creation is really on paper wealth. It's not tangible until he sells. He can have 20% equity increases its still nothing till it's sold. If he borrows against it there is no wealth there its debt. He either has to pay back or sell to pay back.
If house prices keep getting higher the only thing you will have is a lot of loan owners. Nobody will ever pay the house off and what happens when/if house prices drop. Those people who bought at today's high prices with low interest are screwed because if rates go up house prices will drop and they are screwed. You will not get high prices and high interest rates. Just doesn't work. How many people do you know stay in their houses till paid off? Not many these days.

You said this will devalue the dollar but real assets like homes will rise relatively speaking. Yeah prices will rise because the dollar is weak/devalued. Banks know absolutely exactly what they are doing. Interest rates eventually. Will go back up. You can only buy so much MBS and will only be able to borrow so much take so much debt before you collapse.

I agree with this, you can't spend home equity and the worst is to treat it like an ATM as people learned to their detriment in the mid-2000s.

[thelopez2]

Unless your friend is willing to sell, make his 200k and rent , it is just paper wealth. If he sells and buys again , a comparable property will carry the same price and loan. What many people did in the past was keep buying up. Getting larger loans and pulling out their equity was a big mistake.

So did you learn from your friend to buy two homes, so if the value goes up , you can make real wealth versus paper wealth by selling one . Do FHA and buy a million dollar four plex. Then down size to a single family later. I'd rathe have two small homes now rather than the largest one home I can afford and stretch myself.

[redrocket2]

How do you do FHA for $1 million? FHA does not go that high? And in addition is that cash flow positive?