jumped in too soon?

[Humanoid]

show me a 2 bedroom condo in decent parts of LA for 250K, then i will believe you

Huh? In 2000 you could find 2 bedroom condos in decent parts of LA for $200k very easily. Adjust for inflation and those condos would be worth around $250k today.

of course im not a professional but i just dont see it.

Of course you don't see it, you just purchased a property. If you "saw it" you would've rented a place instead. But seriously lets suppose 2 bedroom condos in "decent areas" of LA stay in the $400k range. That means people that make less than $100k can't even afford a 2-bedroom condo. Where exactly are your teachers, police man, fire fighters etc going to live? I will tell you, in another state. People and businesses are leaving California left and right, the only thing that is going to stop the drain is dramatically lower housing costs. Hell, my family has been in LA for 3 generations and I will move shortly if things don't improve dramatically. I can afford to stay here, but what is the point given that I can live much more cheaply somewhere else?

I see prices dropping another 20% in your market in the next 2 years, so I would say you overpaid by about $50K

Perhaps your calculator isn't working today but 20% of 400k is $80k. I would suggest the nominal price of the condo would be at most $300k, but more likely $250k given that the place would rent for around $2,000. I base this on the fact that the PITI on a place for around $250k would just be a bit more than $2,000/month (Assuming the HAO are around $200/month and cover insurance). I know someone who is renting a condo for $2,000 right now, the owner was trying to sell it for $420k but gave up. They purchased it for $215k in 2001. I would bet that condos like the one the OP purchased were selling for around $200k 7-10 years ago and therefore the inflation adjusted price is around $250k. The only thing that would push it much above $250k would be if the area is "up and coming" and changing its demographics, then I think you are looking at most around $300k (Which isn't that different from your 20% haircut over the next 2 years). The OP didn't say where they are located so I gave the range of $250k~$300k.

You should break even in my estimation after 7 years.

What is the basis for this estimate? It took longer than 7 years to "break even" during the last bubble in Southern California and it was much smaller. Why would despite the fact that this bubble was some 5 times longer this time it be shorter in duration? I think you may be underestimating how crazy things go over here. Lower/med range properties (those selling for <$250 in 2000) tripled in price over 8 years in Southern California!! A place that sold for around $200k in 2000 would sell for around $600 at the peak of the bubble.

[Humanoid]

I'm not quite sure why Humanoid keeps on dismissing the calculations I made based on Patrick's formula

Because its complete junk and not historically sound? Its junk because it over-estimated the tax return, it doesn't take into consideration that the tax-return is reduced each year, that your down payment would compound if it was invested. In general in the long term the opportunity cost on the down payment and the tax deduction wipe each other out, so you can safely look at the PITI for the full price of the house to determine matters. All of these fancy calculations were used to try to justify higher house prices, it was all nonsense (I have no idea why Patrick is playing the game, but he doesn't exactly know what he is talking about...).


Anyhow the calculation is simple if PITI <= rent then buying usually makes sense if you are planning to live there 5+ years. That is how things have been historically in Southern California and for good reason.

Also, to the "enjoy your house and ignore everything!" meme. This isn't exactly a good way to go about life, I think being proactive about matters is much better. For example, perhaps they can start putting more down on their principle so they won't be underwater in 7 years when they want to sell.

[chuck22b]

Originally Posted by Humanoid

Because its complete junk and not historically sound? Its junk because it over-estimated the tax return, it doesn't take into consideration that the tax-return is reduced each year, that your down payment would compound if it was invested. In general in the long term the opportunity cost on the down payment and the tax deduction wipe each other out, so you can safely look at the PITI for the full price of the house to determine matters. All of these fancy calculations were used to try to justify higher house prices, it was all nonsense (I have no idea why Patrick is playing the game, but he doesn't exactly know what he is talking about...).

Obviously, it doesn't count compound interest or the amortization schedule and has its' flaws. I did say that it's a snapshot. It also doesn't account for rising rent over time (if it rises) or increasing / decreasing interest rates.

Anyhow the calculation is simple if PITI <= rent then buying usually makes sense if you are planning to live there 5+ years. That is how things have been historically in Southern California and for good reason.

Also, to the "enjoy your house and ignore everything!" meme. This isn't exactly a good way to go about life, I think being proactive about matters is much better. For example, perhaps they can start putting more down on their principle so they won't be underwater in 7 years when they want to sell.

Of course being ignorant isn't ideal, and that's why I'm guessing he's asking about what others think etc.. In some places in Sol Cal, PITI is approaching or at <= rent. So, the affordability gap has definitely narrowed drastically in the last year. Putting more down on principal is a good idea and it'll reduce the interest costs as long as you can afford it and the rate of return on those extra payments are less than the mortgage rate.

-chuck22b

[SoCal Bottom Rider]

'Also, to the "enjoy your house and ignore everything!" meme. This isn't exactly a good way to go about life'

My sentiments exactly.

[Humanoid]

In some places in Sol Cal, PITI is approaching or at <= rent.

You mean desert wasteland? There are no decent areas I know of where PITI <= rent, its still off by around 20~40%. In California, the low end both appreciated more and has declined faster largely due to the the foreclosure activity in subprime. The med/high end has gone down but not as much. But, as I've said many times here the coming defaults in Alt-a/neg-am junk is going to kill the med/high end. Here is the modified reset schedule(Modified, because most are paying the min payment option, so they will reset faster then previously thought):

Neg-Am Reset*Update - Journal - bubbleinfo.com (broken link)

Here is the estimate in 2007 for everything:

Calculated Risk: IMF: Mortgage Reset Chart

As can be seen most of the subprime will be cooked off this year (but the foreclosures will continue well into 2009 as it takes 200~300 days from default to get the houses on the market). But starting in 2008 (from updated graph) we have a lot of alt-A, option pay rubbish reseting well into 2011.

[Aibutiej]

I am with those who say enjoy your new home and stop second-guessing. Looking at the financial aspect is only one part of the total picture. Were you tired of looking after 3 months? Did you really want to move out of your previous location? Sounds like you were happy to find a home that fits you. Your home will likely depreciate in the short run, but if you stop checking home values and stop thinking about it, it won't really affect you while you enjoy living where you are. 7 years from now you can access the housing situation and decide if you want to sell. No matter what, you'll be able to look back at the many years you enjoyed your home. (That is, if you allow yourself to enjoy it!)

[Humboldt1]

I didn't use my calculator on this one But, my numbers aren't that far off in my estimates as I just rounded to be simple:

I assumed the property is worth $450M today and they paid $400M. I could see this argued as being too generous saying that a property is only worth what someone is willing to pay for it. Fair enough, but I am stick with $450M value. In 2 years I see it being worth $350M, which represents roughly a 20% decline (actually 22.22% decline if it goes down $100M). If the property is worth $400M in 2 years, that is roughly a 10% decline (11.11% actually if it goes down $50M). If you Humanoid, believe they overpaid by $100M, you are saying you think the value of the property will go down $150M before hitting bottom at $300M, which to me represent a 33.33% decline.

And telling people to live in their property and just enjoy it while their equity declines is nice and all, but kinda like the ostrich that sticks their head in the sand, waiting from whatever trouble is outside to pass by. The original poster opened pandora's box by asking their question and I am just giving my opinion as are others such as Humanoid and SoCal.

[SoCal Bottom Rider]

'instead of risking the "wait til it hits bottom".'

WHy is that a risk? You are in SoCal. Do you seriously believe the bottom will come and go overnight? A v shaped recovery IN OUR AREA OF SOCAL it will not be. The bottom will remain for a while, not too hard to miss. Foreclosures keep rolling in so there will be more and cheaper deals to be had. Stop trying to rationalize your purchase after you already pulled the trigger. It's too late! Be happy.

[Humboldt1]

SoCal,

I think the recovery may look more like an "L" for awhile before you can see any major price appreciation.

[Humanoid]

I assumed the property is worth $450M today and they paid $400M. I could see this argued as being too generous saying that a property is only worth what someone is willing to pay for it.

This part of matters doesn't even make sense, how in the world did the property appreciate $50k from the time they purchased it? If they were able to pick up the property for $400k that is a good indicator (better than appraisals, which are based on past activity) what the property is worth. So we can assume that the property is currently worth about what they paid or that it magically appreciated $50k over the course of a few months. I'm thinking the former is the more reasonable option...

for awhile before you can see any major price appreciation.

You won't see "major price appreciation" for a long time. It would require another bubble and there is nothing in the near future to fuel such a bubble. Of course prices will start to move up again with inflation sooner or later, but that is hardly "major price appreciation". During the last bubble (early 90's) it took 10 years for you to "break even", in reality this is a loss due to inflation. In inflation adjusted terms it took longer to "break even". Here is the tiered case-schiller for LA that shows both bubbles:

http://calculatedrisk.blogspot.com/2...e-indices.html

In 8 years from now I would imagine this would look like a bell graph. Potentially things could drop all the way back to 1997 prices, but more than likely to the 2000-2001 prices. But that will take a good 7-8 years, if the former happens then a good 10-12 years of decline. California has a lot of problems so I wouldn't rule the more gloomy option situation.