Is It Time to Buy?

Last Sunday marked the end of the Los Angeles Times’ Real Estate section – a victim of the cutbacks affecting The Times and many other metro dailies.  The Times promised that there would still be plenty of real estate coverage in other sections, particularly its Business and Saturday Home section, where Hot Property will run.confusion.jpg

True to its word, Sunday’s newly monikered Business, Personal Finance and Real Estate section published a story headlined “Should You Buy a Home Now?” It was the most e-mailed story on The Times’ Web site on Sunday — an indication of how many people want an answer to that question.

The story makes the point that buyers are slowly returning to outlying areas, where price drops have been most severe.  The closer you get to the ocean, the more moderate the price declines have been.  In the most desirable areas of L.A., affordability is still an issue.

More than half of the adults in the Los Angeles metropolitan area own their homes. But because of the price run-up that began in the late 1990s, fewer than 11% of adults in the L.A. area earn enough to buy a median-priced home of $412,000, according to a National Assn. of Home Builders index. As recently as 2001, when the median was lower, that figure was about 38%.

One measure of whether buying makes sense is calculating its rent ratio.

The ratio of home prices to annual rents in the Los Angeles area was 20 as of March 31, meaning the median home sale price was 20 times a year’s rent for a comparable property, according to Moody’s Economy.com. The 15-year average ratio in Los Angeles is 16.4.

Experts expect prices to continue to fall in SoCal.

Los Angeles economist Christopher Thornberg believes that home prices will stabilize when homes are affordable to about 25% of the adult population. For that to happen in Southern California, home prices would have to come down 20% to 35% from their current levels, Thornberg said. “There’s no way in hell the house you buy now will be more expensive next year,” he said.

For those in the market to buy, the story advises to keep in mind the following:

* Don’t count on price appreciation.

If you can’t afford a house now, don’t presume you’ll be able to tap an increase in your home equity to refinance it — that’s a mistake made by many people who are now in foreclosure.

Likewise, don’t divert retirement savings to buy more house than you can afford, expecting to make up the shortfall later through a jump in home values.

* Don’t expect a house to make you financially stable.

Experts advise home buyers to have a steady and reliable income stream; don’t buy in the belief that simply owning a home will provide financial stability.

* Don’t buy if you think you may be moving soon.

If you’re not sure how long you are going to live in a house, move slowly. If you are forced to sell after a short time, any price appreciation may be outweighed by closing costs and agent commissions — and prices could decline.

Typically, people should avoid buying a home unless they plan to live in it for at least five years, advises Richard Green, director of USC’s Lusk Center for Real Estate, but a safer target these days may be seven or eight years.

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  • eternal summer

    Hi Cindy,

    Since there is so much renter bashing in the blogs and the Government (how ’bout helping out homeless people instead of idiotic home buyers), I thought of the perfect reason to rent in California: freedom to move if the big one hits!

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    LOL, Summer. Man, there is a lot of renter-bashing in the blogs. What do you make of that?

  • Patrick

    I think the bashing is from jealous owners who have had to drop the rent on their properties or real estate folks who have seen their incomes drop 50% in a year. :-)

  • Pete

    One Thing to keep in mind about the price ratio, it includes the ratio during the bubble. I’d be curious what to see the ratio was in 2001 to see where our bottom will be. Citing 16.8 % like that’s where the bottom will be, where rational prices are is not founded in recent bubble history.

    Remember opportunity costs. The money you sink into realestate is the money you can’t invest in milk futures, rice paddies, or tanzanite mines.

  • Arash

    Real estate purchase has never been a good investment. Those who bought 30 years ago, if they had rented (rent controlled) and invested their mortgage payments in a 5% CD would’ve been MUCH richer now. There is opportunity to buy anytime as long as you ignore the asking price and set your own offer INDEPENDENTLY. Take the value of the house from 10 years ago (I use Zillow for 10 years ago value) and add 5% per year and set your offer based on that. You cant use 5 years ago value, the numbers are too skewed.

    Here is an example of my rule of thumb:
    In 1998 was worth In 2008 (Probably worth)
    $100k $265k
    $200k $325k
    $300k $488k
    $400k $652k
    $500k $814k
    $600k $977k

    And so on….

  • Arash

    Needless to say it is the worse time to buy anyay, the prices are DROPPING like a rock in the water, slow and steady.

    Housing market is not like the stock market, when a trend starts its a very slow changing trend, when its down turning it takes 4-5 years to change direction or even stop. The uptrend started in March 2003 (Coincidentally with the Iraq invasion) and stopped in Feb 2008 when all hell broke lose. Look for the new uptrend to start around 2013.

    In my opinion the housing market has left such a bittyer taste in everyone’s mouth that most people will run away and stay away from it for a long time and invest in other commodities especially food (cooking oil, rice, corn, wheat).

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