bostonbubble.com

[melonrightcoast]

Hi! I haven't posted here in many months, and used to post as melonleftcoast. Now I've moved back to Boston and my husband and I are considering purchasing a home soon. We are not liking what our money will buy, and it seems many sellers have pulled their homes off the market and rented them out on craigslist.

So, I'd like opinions on the situation:

It seems Obama's solution to the banks' reckless lending practices and subsequent credit crunch and deflation of the housing market is to reinflate it with an $8,000 first time homebuyers credit, halt foreclosures and cramdown mortgages, and subsidize the interest rates for mortgages (I know not all of these are final, but they are being talked about).

I'm guessing many of you have done the math and know that it is much better financially for a buyer to have $50,000 off the price of a $600,000 house than it is to have an interest rate lowered by 0.5%, so all these attempts to keep housing inflated is pi$$ing me off ... and a cause for concern because I'm starting to lose my patience after renting for 3 years. I REALLY want to buy a house and live there for 20 years. I know renting costs less financially, but I am sick of moving and we typically have moved every 1 to 2 years when we have rented. With two kids, one of which will be starting kindergarten in 2010, renting and moving semi-frequently can be very disruptive to kids ... I know, my parents did it when I was a kid in the 80s.

So, I am looking for good arguments to keep on renting. We are the "perfect" buyers, meaning we don't have a house to sell, have excellent credit and can put 20% down ... the problem is, we don't like what we can get for $600K and under in our target town. Should we wait, and hope the attempts to reinflate the bubble flop and that prices keep coming down? Or should we buy, because chances are inflation is going to run rampant once the government starts printing money for the $787b stimulous and our 20% down payment will become worth less AND the Asian economies can no longer afford to buy our bad debt because Americans aren't spending as much anymore and the interest rates skyrocket?

Until the past month, I was planning on renting for another year or two, but now I'm beginning to wonder if we wait too long to buy, the attempts to reinflate the housing bubble work, and/or interest rates rise, and/or inflation eats at our downpayment... and we still cannot afford a house that we are comfortable living in for 20 years.

Please, opine away ...

Thanks,
melonrightcoast

[JCK]

If you really think you're going to stay put for 20 years, I think buying is probably OK.

My concern with these $600k homes is that you might be down $50-100k for a couple years. If you have to sell at that time, you'd be out a lot of money.

I would do the cost comparison; if you're spending only a few hundred more a month to buy vs. rent, then it may be worth it, given your situation, and associated hassles you are experiencing with renting. If, on the other hand, you're going to be paying $1-2k more per month, I'd probably try to grow my down payment for the time being.

Just keep in mind that owning involves additional costs, as you become responsible for the cost of capital repairs and routine maintenance, which are not inexpensive.

[balor123]

As you point out, owning is a losing proposition here and will likely be so for a long time. Recognize that just because you want to buy a house and stay in it for 20 years doesn't mean that you'll be able to. If you lose your jobs or your income decreases and you have an expensive house, then remember that in Boston you burn through cash very very quickly. When interest rates start to rise, housing prices will drop and you'll be stuck in that house of yours. If you are going to buy, then at least wait until next Spring after unemployment has had its chance to break stubborn sellers down. I think that you should instead focus your energy on finding a stable place to rent so that you don't have to move every couple of years.

[john p]

We are in unchartered waters.

[melonrightcoast]

I hear all three of you. We are being fairly conservative with our price
range because in this economic environment, we feel we need a minimum of 6 months of expenses in the bank.

I agree that the layoffs are just getting started around here, and it SHOULD have an impact on prices in the next year.

I definitely agree that if we had a better renting situation, I might be a
bit less anxious to buy. And we are DEFINITELY in uncharted waters, and
maybe I'm having a bit of a nesting reaction to it.

As for renting, it is challenging finding any decent rental with young children because landlords do not want to rent to us if they have not deleaded. I have been looking for a rental as well as a house to buy in our target town and we are planning on renting if we do not find a house to buy in the next few months.

Sigh. Maybe I should just throw the towel in for a few years until the kids are in school and I go back to work. That is the rational thing to do. However, I have started to have this craze to buy the last couple months. Maybe it's cabin fever ... I don't know.

Thanks for your opinions.

[Boston ITer]

Ok, I know I'm going to get flamed for this but consider this...

If both you and your spouse were both unemployed... think about how far that $100-120K deposit can go, in either re-locating to a job growth region or in surviving a very nasty job market, locally. That money is a huge safety net for both you and your children.

In effect, that's what I see in our collective futures. Cash (or money) is king and it gives one the the maximum flexibility. Buying a highly leveraged depreciating asset, on margin ('cause that's what it really is), is disastrous for a society in flux.

Now, I'd been renting this whole time and somehow, I'd only had to move once, after a six year stay, due to a landlord flipping his property. All and all, if you do your homework, you can find a place where people stay for blocks of 5 to 12 years. They do exists and the kids in these places end up becoming friends. It's a lot different than the typical suburbia Cul De Sac, where half the people don't speak to each other for years at a time. And finally, if you do decide to leave Boston, in the future, for let's say Dallas, that deposit can pretty much pay for most of your homestead in cash. Imagine a mortgage equal to an ordinary car payment.

Here's why I'm concerned... Boston was a hi-tech hub for four decades, starting with DEC/Ken Olsen of the 60s. Today, it's a place full of so-called *healthcare* facilities, not technology development centers. Our mainstays, including Gillette, EMC, Wyeth, Boston Sci, are all downsizing and in a lot of trouble. Polaroid & Arthur D Little are both gone and they were around for a whole century.

Finally, the mutual fund industry is imploding with Fidelity, Putnam, and MFS moving jobs to other states. State St is also in the similar boat and that's the last of our bulge bracket (see big time financial operation like First Boston or John Hancock of prior decades).

My point is that our region is in flux; the ideas of yesteryear won't apply to a region which doesn't have a type of mainstay job concentration.

[Guest]

I think you have to wait

unless you madly fell in love with something

that is the right price and location

Key word, madly

[balor123]

Boston ITer makes some very good points. Since you are conservative with a $600k house, I'm guessing that you're husband must be making at least $200k/year. If he does, then he's a big risk for unemployment cause that's a lot of money for one person to make, even if he's a doctor. If he's not a doctor, then its even worse. And if he doesn't make $200k/year then you aren't being conservative. I don't know your line of work but you may have trouble reentering the workforce after being out for several years given the amount of competition you'll have. I don't mean to be mean and I hope that you are taking this as constructive advice, even if you don't think it is correct.

As for renting, if you can afford a $600k house then you can afford some darn nice rental units. Aim for the corporate units and you won't have to move ever virtually. I've lived in 5 different complexes in MA and my current landlord, Equity Residential, treats repeat renters the best of the bunch so you should see if they have something in your area. They tend to renew you at below market rate. Most others renew you slightly above though that may change since rental demand is decreasing. If you can't bring yourself to live in a traditional apartment complex, then you could consider a townhome style one. Windsor Village has some good places and they tend to be very kid friendly. I don't know what area you are looking to live but you can get a 3br/2.5 bath townhome at Windsor Village in Waltham, from which you can commute to just about anywhere, for about $2k/mo. It has multiple playgrounds, view of a lake, private patios, pool, clubhouse, and lots of families. Waltham has an up and coming school district as well (all of the elementary schools were just rebuilt).

I don't know what brought you to Boston but if you had the ability to leave there are plenty of places to give your kids a good education and get a nice house at a much cheaper price and with steadier employment. That being said, Boston has its advantages (family, culture, etc) just low cost of living isn't one of them

[Mark]

melonrightcoast, we are in a similar situation. Our plan is to rent through this year and part of next, probably buy sometime in mid to late 2010.

By the way, we' are looking in your price range so watch out!

My advise, one we are taking to heart, is to be patient.

[G]

I think it is true, or should be true, that regardless of the market you need to have saved 100k or so in a money market/CD and/or short term bonds, especially with a single earner family. Going back to work after years of raising children may not be as easy, and it will be much more expensive to pay for childcare given the relative costs vs. potential salaries (unless you are a lawyer or a doctor).

And anybody who is out of their mind (that is, 'madly' in love with a piece of property) should visit a shrink. If you can NOT afford a house, don't buy it. NOBODY has ever been able to predict what will happen tomorrow, much less what will happen in 20 years, thats why God created the concept of AVERAGE. Average time that people stay in houses is 5-7 years, and don't expect to deviate from this by more than two standard deviations - your luck will not be with you if you try. In that time, we know the markets will NOT recover and you may still be terribly underwater, since the prices have not reset enough to reach historical norms (which may or may not happen, but you'd be gambling away here, which is not a good idea to begin with).

As far as renting, there are entrenched renting communities, but mostly people move around. With the rents going down, prices going down, many owners will be happy to rent even if you have kids. No danger of flipping, but you can always do a background check on the owners to make sure they are solvent. You can probably rent a nice house or a townhouse for a fraction of what it costs to maintain a 600k house (try the luxury apartment/townhomes in Waltham, Lexington, Newton, etc).
The rents are not bad (you can get a big 2-b with a garage for under 2k a month), and are going to be falling within the next year or two.

[JCK]

[john p]

If you come from the West Coast, you have to think about the conventional "wisdom" and pedestrian knowledge/ disinformation people had in order to rationalize buying homes at 10 times their household incomes. I mean the whole market, the whole bunch of realtors, mortgage brokers, buyers and sellers were all singing the wrong tune. I think you need to acknowledge that.

There is not much of a will I have faced as strong as a hen (my wife) that is acting on a nesting instinct. All the logic and data I could produce would pale to the strength of her will. I told her that I wanted to be a "smart couple", you know one that could get beyond emotions and penetrate and make good decisions that would benefit our family long term. We bought in 06, and at the time, I saw that house prices would go down at our price point slower than what people were saying and it might be five years before things bottomed, and what we were really dealing with, in my view, was that things would remain flat and because the M3 (money supply) was being flooded by the FED, I saw inflation coming and I thought that we'd see wage inflation eventually so I just needed to make sure we had an emergency fund available to survive a Pilgrim's winter and prices would go up with inflation. What I didn't see was this massive recession. This was not on my radar. We had the forces present to have a recession in 07 and things held up. I had no real measure to understand the solvency of the banking industry and how much power the subprime and derivatives had to torpedo those industries. At the time, Admin used to say that the downward trajectory might create an irrational downward psychological self fulfilling prophecy spiral kind of like an inverse of the irrational exuberance. I think we're seeing that negative psychology in action today. I didn't weigh that enough. Because I lowball and got a really good deal in an emerging area, my house value hasn't dropped that much, but if I were buying TODAY, I'd imagine that I could get an even better deal. I still get daily MLS listings for the same price point and target markets I was set up for back in 05/06 and I do see more value in certain towns for certain types of homes. You don't see the wildly overpriced capes like you used to, but the typical 4 square colonials are pretty much priced the same way they were in 05 and 06 in many instances. I do see some houses priced more aggressively (much lower than their competition) and I am watching to see how long these stay on the market. I'm not doing my drive-bys so sometimes I get confused when I'm not aware that a house might be along a power lines or across the street from a dump or something.

If I were you, I'd get MLS listings and just watch, pick winners in your mind and watch how long those "winners" stay on the market. If the pent up demand gobbles up the nice places priced right, don't feel bad, and keep waiting. The eager beavers might be short in numbers and they might run out of numbers by late spring and you might be the only ones at open houses in the mid summer. The supply of winners might be fewer, but in today's market, I'm pretty sure you'd be better off buying in the off season, especially if you're a first time home buyer.

Lastly, home prices might not budge at certain price points because if people don't have comparables to base a sale on, people might be stuck without a basis for evaluation. The lower end has more sales activity so it has momentum, but until these lay-offs create solvency issues, or these Alt-A's resets start to heat up other price points, things might remain a bit stickier and like something stuck to a see-saw, even if it is inverted it won't slide off. What is different than 06 and 07 was that there were clear "winners" and "losers" in the economy. Now, it seems that even the financial industry has losers, not many people are winners. If you have a stable job, I guess that qualifies, but so many people are playing conservative that the upward pressure on the high end isn't there any more. I think I'd also keep my eye on the in-between price points in the in-between locations to see which direction and what velocity they drift. Also, think about a kid on a swing. At the top of the swing right before they start to go down, that weightlessness point is the inflection point, notice that it is the slowest point. At the greatest force, it is right past the bottom point right before gravity catches it and slows it down again. This relates to sales velocity. If you start to see lots of momentum in sales activity it might be a sign of a looser market and a clear direction in people's minds about the values. The Federal Government understands that the "gravity" needs to change in property because if the natural course of events takes place, it won't be pretty. If they add more first time buyer incentives that will change the property of the behavior (the gravity) almost like how you see more people buying stuff on the tax free weekend. I'm curious to see if this dislodges any people on the fence.

Your first purchase is the most important. Once you're on the moving walkway things are relative, as you step from one property to another. If you can get ahead of the game by getting a great deal on your first purchase you can really save a decade of your life's savings. The flip side is that we only live once and you don't want to give up a decade of your life living in an area that you don't like. Finding a comfortable place to rent as the guys have said might be a smart move. The only reason why I might disagree is based on the Delta proposition. I just made it up... Anyway, when you have a lot of sales velocity, you're in a mature market where people have a lot of comfort in price points and the price direction. The price structure is more cohesive and you don't see two identical houses priced very differently. In a confused market you can find a person selling a 4 square colonial $50k less than one down the street. I'd keep my eye on that delta value in this down market.

[Guest]

FYI, from what I understand the jumbo loan limits are raised for certain counties such that the interest rate is no higher than a sub-$417k loan. I know the Middlesex and Essex limits are $465k.

In 2008, the pricing was different (i.e. higher than conforming but lower than regular jumbo) because the rate increase was a temporary measure in the 2008 stimulus package.

[Guest]

What would one consider a conservative affordability metric?

Assuming good credit and 20% downpayment, a banks affordability metric is the HIGHER of PITI = 28% of gross monthly income OR PITI + other debt = 36% of gross monthly income.

For this example of borrowing $480k, mortgage + $600/mo taxes + $150/mo insurance is in the neighborhood of $3600/mo. This is only 21.6% of gross monthly income if you make $200k compared to the bank's limit of 28%. And that is not even considering that the bank will lend you even more if your PITI + other debts are within 36% gross monthly income.

I've been thinking a good conservative rule of thumb would be to borrow as much as the bank is willing to give me based on 80% of my gross income. This subtracts out the ~20% bonus portion of my compensation AND my wife's income in case she can't/won't go back to work after we have kids.

[Guest]

Is the Insurance term in PITI referring to property insurance or mortgage insurance that is applicable when equity is < 20%?