You're a brave man, FB. We were tempted to buy in San Francisco about ten years ago. I'd be a wealthy man if I had! RMT may have some advise for you on LA neighbourhoods. I think he recommends you avoid the coast......by about 1500 miles! Good luck.
I would strongly look at an older home vs. a new home. There are 'gems' to be found in older homes, especially if they are under market valued. Just shop well, do homework on appraisals and selling price, and look for value. Be sure you get an inspection and you are aware of all the local building codes and any zoning. If you find a home you can afford comfortably and you are not at risk of being unemployed - no worries, interest rates are still low and I would recommend a fixed rate loan. New homes are much more influenced by the credit bubble because they are bearing the inflation bubble in their pricing. If you find a real deal in an older home and you can fix it up yourself (as much as you can) you can still build value in your home purchase that won't be affected as interest rates climb and inflation really heats up. Find a good old home in a high value location and you will be making a good investment. The bubble simply means that home prices have been driven up by demand due to the glut of easy credit and also these inflated prices do not necessarily reflect the buying power of the general public. That means that people who have bought homes with high payments have been able to squeeze out these payments because nothing else has been inflating in price like homes (and gasoline) Once inflation starts really digging into groceries, utilities and consumer goods you will see that those high monthly payments are not as friendly to the monthly budget.
Usually Interest Only loans are not IO for 5 years, at least not at a fixed rate. Most are Interest Only for 1 year, and during the IO period, if you have a neg am loan your principal acutally increases. Once the reset date hits, the monthly payment will jump from: higher interest rate, principal payment, increased total principal amount. If the house price drops, there are a lot of risks involved. Imagine when you sell the house, you have to write a check to the bank. If interest only is the only way to get in the housing market, then you are better off wait til the market cools down a bit.
Are there a lot of people using interest only payment to buy homes they plan to stay in? They must be either brave or stupid or both.
The IO loans I have been offered were at 5 years, and couldn't be re-financed until after 2 years. You are absolutely correct about if the market goes down, you could sell your home and still owe money to the bank. That would be absolutely awful. However, you have to look at the particular home you are buying, the particular market you are buying in and gauge the risk. Spending the mortgage amount on rent instead of putting towards buying something may not be worth it. Certain homes in certain areas are a bigger risk than other homes in other areas. If anyone is going to buy on interest only they need to be fairly certain that their home will appreciate. A large downpayment may also offset a portion of the risk if that is an option.
Everytime I see the price on a home now, I wish I could have bought it 3-5 years ago. The appreciation over that time is insane. People are bidding over the asking price especially on entry level homes. The demand is so great despite the crazy prices. Because of price, work locations for my wife and me we are pretty much limited to the valley, and if we want a nicer neighborhood and longer drive, the Conejo valley. The market is so insane, we are looking pretty much everywhere at a wide variety of places.
I would think that interest only loans would ONLY make sense if you were planning to stay in the house? Otherwise you are really speculating on rising prices...enough to cover your selling costs, and neg am (if that's the case), or prepared to be seriously out of pocket when you sell. This would only make sense if your ownership costs (interest pmt, ptax, maint, etc -- net of tax benefits) is much much less than rental costs. I know quite a few people that have made a bundle when selling after owning for a couple of years. I know quite a few others who've lost a bunch too. Are you feeling lucky?
In an uncertain market, that's faulty reasoning. Rents come down during a downturn; mortgage payments do not.
That is usually the caes, though they may go down at different amounts. However it depends on when the market goes down, and how long it stays down. In addition there may be properties that continue to increase in value despite a general market plunge. It is also true that once you are on the lease your rent will be that amount, and unless you move to another place it is doubtful that apt. mgt. will start charging you less rent. I'm not advocating an IO loan. I am not going to be using one for the my home that my wife and I are hunting for daily, and may or may not have our offer accepted on. But if the only way to own something is to take out an IO loan it may be a worthwhile risk to do so. I have mentioned some of the factors involved that may or may not make it worthwhile. Again with your mortgage you can get a huge tax break, that you don't get with rent money, and you are also paying for ownership of something so that you have something in return. If you plan ahead and research the areas and neighborhoods you are going to buy, what type, style and home you are buying in, and if you have a larger than 20% down payment to down the risk might be worthwhile. If you are selling the place soon, in order to upgrade and the market holds for two years you will come out way ahead, in tax rightoff, home appreciation etc. What isn't talked about is if the housing market continues to climb at the current rate, or even a fraction of the current rate. People who are on the minimum of being able to afford a place now and need an IO loan to do it will make money because of the appreciation, tax break, and any sweat equity they put into the home. However the risk in not getting in now is that, as the article points out housing costs are rising faster than wages. If they can barely afford it now, and the market continues to rise, rather than saving money and being able to catch up and buy a house later, they will soon not meet the requirements for home ownership at all.
The sad thing is that even if the bubble did burst in San Diego it would still be extremely unaffordable!
I don't know if you've looked at Santa Clarita or Palmdale. Stevenson Ranch also looks like a pretty nice area - and very new too. Santa Clarita or Palmdale are cheaper than Chatsworth, Porter Ranch, etc. or Agoura Hills, Westlake, etc. I bought last year in Granada Hills. Didn't know there were any bbsers were in the area.
Neg Am and option ARM loans are for the speculators who wish to sell the home in 2 years and are banking on the profits. When the bubble does pop, it'll be a slow fizzle. One estimate is a drop in housing values by 20% in the next 5 years. I'm not too sure about that in the Southern Cal area though... It's one giant basin, so there's no real room to expand except east. Riverside and San Bernardino Counties are booming, yet if anyone has lived in the area 10 years ago, they'll know that no one wanted to live there. People are willing to tolerate the dirty air for a 450k home.
Thanks! Yeah we looked in Santa Clarita when we first started our search last year. There were some nice places, but we decided that it was just a little far out from LA proper where both my wife and I have to go semi-regularly for work. Palmdale is too far as well. It is great that you bought last year. I wish I had planned a little differently to get something back then when we first started looking. Granada hills is a good area too. Hopefully before too long we will get our home as well.
You live right by the frickin Valley.....and you shamelessly tried to lecture me on the 'quality of living' in the Euro thread!
My friend who only makes around 90K per year just bought a house in Los Angles for $590,000, an interest only loan with $0 down. Mortgage is around $3800 per month. Crazy.
this is truly what the housing bubble represents. People can tell me all day how well we are priced in Houston, but with over 11thousand new single family residential starts in the last three months, most of which are targeted to first time buyers, Houston is in for a staggering hit. With the wonderful interest rates for the past few years, more and more consumers that were previously never able to buy a home have. Moreover, many people refinanced with variable interest rates to afford things that they couldn't. With the stabilization of the economy, rate increases are going to force a large amount of the population into bankruptcy. Yes, the pricing is better in Texas than California, Florida, Arizona, etc.. but because of this, there is a larger contingency of fringe buyers who are on a "snickers" budget who will be screwed in a short time. Let me reiterate that there are over 11,000 new housing starts this quarter in the greater metropolitan Houston area! Coming off of a year in which Houston saw more than 40,000 new housing starts, we are on the precipice of doing it again. What's worse is the fact that many of the large production builders are not keeping a safe eye on their speculative housing levels. IOW, if rates take a quick up-turn and it forces out a large portion of buyers while these builders still have a large portion of these 11k homes unsold, be prepared for some hard times in the housing market.
Maybe I'm just not rich enough to buy Austrian crystals and Belgian fabrics. And all I can afford is one those low-quality Japanese cars. Valley has good and bad parts. Van Nuys, North Hollywood suck. Porter Ranch is very nice. Granada Hills, Chatsworth are sort of in between.
Van Nuys and N. hollywood to a certain extent have both good and bad parts. Some of the side streets in what is called E. Van Nuys are very nice. Cruise down Firmament and Van Owen and it is absolutely a nice residential quaint street, with houses that approach the million dollar mark. On the whole though there are many areas to avoid.
