bostonbubble.com

cueball · Joined: 10 Sep 2007 Posts: 5

I'm a single renter that has been lurking on this forum for years.

I was planning to buy a house back in 2003-2005, but I knew prices were too high and completely irrational at the time. There was only a specific kind of house that I was willing to purchase. It had to be near a subway/train station, in semi-decent condition and in my price range. I quickly found out that it was nearly impossible to find any houses that matched this description. Luckily, I'm stubborn, so I've waited and waited...and waited and waited and waited. Here we are, years later in 2009 and I'm still waiting.

Prices across the country have dropped to reasonable levels by now, but the Boston area is still sky high. I see a lot of these 'handy man specials' being sold for very large amounts of money. I don't understand why people are willing to pay such a premium for these WW2 money pits. I also don't understand how or where they're getting all of the money they need to perform these renovations. I personally think it's ridiculous to pay 300k+ for a home that needs to be renovated. Especially if it sold in the 150k range 5-10 years ago.

The reason I'm asking now is because I've finally found a house that matches my criteria after years of waiting. It's in a good location, it's in decent condition and it's near a train station. So what's the problem you say? The problem is that the owners still want 280k for it. It sold in 2002 for 220k and again in 2005 for 350k. Ten years ago it was worth a little above 160k. Renovations (new fence, new bathroom, wood floors, new cabinets) have been performed on the inside of the house between 2002 and 2005.

So this is what I'm asking myself: does this still justify a 120k increase on the house over the past ten years? Am I being cheap? Should I be willing to spend this amount of money on a house?

I can't tell if we're still in a bubble. Ten years ago, prices like these would have been blasphemy. Today, it's completely acceptable. For the first time in my life, I don't know what I should be doing. I've never felt this lost.

I'm single and make close to six figures. I've set aside 60k for a down payment and closing costs, but I can't bring myself to pull the trigger. I feel like I'm wasting my hard earned money by investing in an assett that I know will be declining for the next 5-10 years. I could see myself living in the house for the next 5-10 years, but I still feel like I'm throwing my money away. I don't view housing as the stable/solid investment that I once viewed it as in the past.

What do you think? Is the market irrational or am I? Don't worry, you won't hurt my feelings.

GenXer · Joined: 20 Feb 2009 Posts: 703

What if you lose your job? How are you going to pay for the mortgage? If you spend all of your cash, will you have enough to survive a job loss? What are repair costs? What happens if your estimate of repairs is wrong and you need to spend 2x the estimated amount?

If you are not maxing out your retirement accounts, what is the point of buying a house with no cash left? Also, what happens if you sink all this money into it, and then meet somebody and move somewhere else (or if you have to move because your job moved)? You will have to take a big loss if the prices move downward in the next 5-10 years.

A house is a huge liability, so you are right to think 10 times before you plunge. It may be better to rent indefinitely until you can get another income and/or the prices move further down. Right now the inventory is much smaller than normal, and so the prices are in no hurry to move downward.

WestCoastXPlant · Guest

I think the answer is within you. Assuming you're buying a house to be in for a long long time, you'll probably break even on the cost some day...

But I would ask the following question: If you were to sign a 30 year lease at the cost of PITI, would you do it? Once you buy the house your payment will be what it is for a long long time...If you can justify that cost go for it. On the other hand, if you're already doubting it's worth it, imagine how you'd feel if prices did dip another 10-15% in the short term...

Then too the part that GenXer mentioned -- can you carry the house for some time with no job (I like to think a year but I think the traditional measure is 6mo). Can you carry the house if your income dropped by some %age (don't know what you do but I'm fairly sure most of us aren't curing cancer). Can you still maintain a lifestyle you like and add a bit to savings if you replace rent with PITI? I'd want to answer yes to at least these questions before jumping in...You also might want to think about life changes hard as these are to predict -- we have friends who entered the property ladder in a horrible school district. No kids at the time but guess where they're stuck now?

And you're right to question this a lot -- it's a huge decision (and I'm guessing your income disqualifies you for the 8K credit, so no rush there Laughing

)

balor123 · Joined: 08 Mar 2008 Posts: 1204

Are you planning on staying single? If not, then I would wait until you get married. That person will have a huge say in where you live. Plus, there's no need to pay the house premium of Boston when there's just one of you. Also remember that typically sufficient income for one is less than it is for two. What you think is affordable now might look unaffordable in the future. I married a grad student, for example, so one income had to cover two people. Then it became three. I'm glad that we have the flexibility in controlling our spending. I was looking to buy around 2004 as well by the way, though I decided not to mostly because I didn't like the area.

balor123 · Joined: 08 Mar 2008 Posts: 1204

I decided to check out the area I was looking at before. Looks like I would have done quite well. I was looking at Natick Green 2br units at the time asking $150k - $160k. Looks like they were selling for $260k in 2005. Now asking $170k - $310k.

Hard Rain · Guest

Brian C · Joined: 13 Feb 2009 Posts: 98

GenXer · Joined: 20 Feb 2009 Posts: 703

mpr · Joined: 06 Jun 2009 Posts: 344

mpr · Joined: 06 Jun 2009 Posts: 344

Brian C · Joined: 13 Feb 2009 Posts: 98

GenXer · Joined: 20 Feb 2009 Posts: 703

In CA they've been saying that for a while, until it happened. House prices are like stock market prices. Just look at the Case Schiller index. A good rule of thumb that I mentioned before is that the downside can easily be greater than or equal to the upside. For some reason nobody was commenting on how fast the real estate prices have risen, but now some are denying that they can fall even more. We'll let the future sort that one out, but the possibility is not remote or distant - it is real. That is, this outcome is just as likely as any other outcomes, so simply saying that "It didn't happen yet, so that is proof enough that it will not happen" is nothing more than confirmation bias.

I know it is hard to believe that house prices are not like the stock prices. In some ways they are not. But in one aspect they are - and that is the volatility. You may not observe this volatility, but it is there. I think zillow aludes to it - you are able to see the price 'fluctuations' of houses almost daily, which is not really a good measure, but the concept is quite similar. Now, as I mentioned before, the absense of evidence is not the evidence of absense, so just because last fall the prices fell only by so much is no evidence of anything. In CA they've since collapsed more than 50% in some places. This is typical of a stock market - not all stocks move alike, and some can even rise. But if the volatility is there, prices can move any way the market takes them.

As far as repair costs, if anybody could estimate repair prices to within a 10% with a 95% confidence interval, they'd be in big demand. The point is that you can not estiamte your costs with any great degree of precision. The best you can do is to (sometimes) postpone the repairs, but if you haven't seen the HGTV house shows, I think that even professionals can completely underestimate the cost of repairs. If you do 100 houses, you may be able to get it right more than you get it wrong. If all you are doing is buying a single house, your chance to underestimate is extremely high, therefore this would add more risk to your purchase. So to plan something like that you may need a 100% cash cushion lying around in case you ever need it, which is probably not what most people do (because they do not have the extra 100% of repair costs, or else they'd probably buy something in better shape).

balor123 · Joined: 08 Mar 2008 Posts: 1204

balor123 · Joined: 08 Mar 2008 Posts: 1204

jak · Guest

"Natick is getting hammered...." You can argue some mix in sales, but Natick appears to be doing okay. I would bet $/sq ft. is at near peak prices in Natick. Some new developments, especially condos are probably not doing well, but a decent house in good neighborhood is fine. Number of sales is down about 15% from last year and well below long-term rates.

Per Warren Group, Natick median single family home price Jan-May, in thousands

2009: $450
2008: $377
2007: $408
2006: $400
2005: $445
2004: $383
2003: $390
2002: $364
2001: $350
2000: $289
1999: $249