Prices are STILL coming down:
203 Cheswick Court, Alameda Ca 1,891 sq.ft.
sold 4/15/08 for $868,000.

234 Cheswick Court-same model house
sold April, 09 for $633,000.
One year drop over $200,000.

248 Cheswick Court- same model house
asking $624,900.
unsold for 6 months-still on the market

Do NOT buy now- you have plenty of time

Well, sounds like you know exactly what you're doing, bidding on foreclosures in first-rate neighborhoods, so more power to you, MD Account! Your story is fascinating. I hope you'll keep us up to date on how it's going. Wouldn't be surprised at all to hear in just a few months that you've found the ideal situation.

Thanks for the cheer, Janis -- it can be a little lonely to be a first-time buyer in this market!

A few other details. First, I'm a minister, which means there are additional tax advantages to owning property. A portion of my salary equal to the fair market rent of a property can be designated as "housing allowance" and thus not subject to income tax (though ministers do pay self-employment tax on my entire salary). I am also allowed the usual mortgage interest deductions, which makes ownership that much more attractive.

I am 44, so this decision has been a long time coming. I am also single, so this is also about establishing some security for my later years. Finally, I am lucky that a very well-off couple in my parish found out I was trying to buy a house and came forward with the offer to help. As they put it, "we have lots of money" and they do. Their plan is to own an equity stake for five years, then have us all sit down and see whether to keep going or whether I'm in a place to take over their share. The ultimate goal is for the ownership to be 100% mine, and they are fine with a low rate of return on the investment. Their real interest is in helping me. That said, a colleague who is also a lawyer will be reviewing anything before I sign it.

My primary concern with low priced homes at the moment is the difficulty of selling them if the need should arise. These were the first to get hit and the longest on the market, and in a worse case scenario, I worry the same might happen to me. In an equity-share arrangement, I can buy in a strong neighborhood where prices have dropped but not plunged. The question is whether a continued drop is likely. If it's bad enough, even in five years I might be left holding a nice house in a nice neighborhood on which I'm still likely to lose money or make very little. No one has a crystal ball in a market like this, but I just wonder what the safer bet might be.

I've bid on two houses already btw -- both foreclosures in first-rate neighborhoods (the perfect combination of value and resale). On the first I was outbid; on the second the home inspection showed an additional $150K worth of work was needed ASAP on a $239K house. I opted out, which is when my equity angels appeared.

Redfin agents don't cover Vallejo (yet), but the site has been vital to my search; I'm grateful to have access to the listings and information!

You scarin' me, David. Maybe it's time to move back to Gainesville, Florida, where I went to college and was really happy.

MD Account, I'm thrilled to hear from you, and here's a big ol' C*O*N*G*R*A*T*U*L*A*T*I*O*N*S to you for doing the right thing, saving your money, avoiding exotic instruments like no-interest loans and now being able to buy!

Incidentally, I used my IRA for my downpayment on my house when I bought in 2000, and agree that it is a sort of retirement investment.

I am always prejudiced toward buying something on your own to avoid any possible disputes or problems should circumstances change for you and the friend purchasing the home together. For sure if you do buy with a friend, I can tell you are so savvy I needn't tell you to be sure to get a very specific contract drawn up by a lawyer.

However: There are MUCH smarter and better-informed folk than I reading this blog, so I hope they'll chime in with ideas in response to your questions, esp. the one on which type of house is likely to keep falling. Meanwhile, I'm going to ask around about that question.

This has all been helpful. For me, the subject isn't theory. I'm a lifelong renter who thought CA ownership was impossible. Now that the market has collapsed, I've begun to look in Vallejo, where I moved when Oakland rents got crazy. I'm looking in Vallejo because A) I'd like to find a good value; B) the prices drops have hit early and hard; and C) the direct ferry to SF makes this a highly accessible alternative to other east bay cities if commuting is involved.

Part of my downpayment will come from an IRA, so I view this as another sort of retirement investment. I anticipate living in the house for at least five years and likely many more. I don't need to find the absolute bottom of the market, but I also don't want to find myself holding the sharp edge of a knife.

My choices are to either fully take on the purchase of a lower-end home (approx. $275K -- the median in Solano is currently $300K) or take a majority equity stake in a higher-end home which I'll purchase with a friend (who won't live there) -- something in the $300K -- $400K range.

Is there any information about which type of house is most likely to keep falling? The lower end houses are either small or need some work; the higher-end are usually in good neighborhoods and in good shape. (In this crazy market, however, there are many exceptions to these rules.)

All thoughts on the best investment (including staying in my rental and waiting some more) welcome!

Um, yeah. I'm sure they said the same thing about Detroit 50 years ago

:)

But unless that happens, like I said, buying a house for less than 18X annual rent would seem to be close to the bottom looking at the past 30 years.

Eek! The next Detroit! What do you mean, David? Surely the high-tech companies of Silicon Valley and the wide variety of other businesses in the Bay Area will help keep it from the fate of Motor City!?

It's not that hard to work out a spreadsheet to figure out what a house "should" sell for. The usual caveats apply, which amount to a "fudge factor" of I'd say about 10-15%.

But some fun facts: East Bay houses have historically (30 year average) rented for LESS than the statewide average of 5.4% rental "yield" (18.5X annual rent). Prices have averaged 6X income,etc etc (detailed in HSBC's "Froth finding mission" published in 2006).

So, if you're renting a house for $1800 or so, which I think is pretty typical rent in the East Bay, or even on the low side for a decent house in a decent 'hood, you're looking at a bit less than $400K for a price on the historical average. Now things can always over correct to the downside, but if you can find a "deal" like that, you probably won't lose too much money. Prices will not go to zero, unless of course the Bay Area fulfills its promise of turning into the next Detroit.

dg's point is good. A friend of mine tried to sell her Berkeley Hills home during the last down cycle in the 1990s and she told me it took something like three years to sell her beautiful three-bedroom home with a mother-in-law downstairs and a pool.

MikeW, I'm glad you brought up the fact that a $50,000 to $100,000 drop is a HUGE amount of money! As Susan Kuchinskas said, the important thing is to determine what works for you, what you can afford, and as jackalope pointed out, where you would like to live (as opposed to where the numbers say it's possible).

I think Michelle had a specific area in mind when she said we are close to the bottom, yes?

and as jackalope said, Great thread, all!

The areas at the low end of the market are a little harder to figure; since many of these have gone REO, these areas have fallen 40, 50%. So there are properties that meet the 160x rents rule of thumb. However: if the construction is poor, or the property is old, there can be horrendous maintenance costs. A 15 year old place can need a new roof for $15000, water heater for $800, siding or paint, carpets, replacement of warped floors....
Also, rents do decline; silicon valley rents dropped considerably after the tech boom crashed, this little recession could really kill rents if a lot of low paid folks give up on this area. Or if the REO's get trashed, the whole neighborhood could decline. I had a rental where a murder took place across the street... you really do not want that to happen.
Chances are very good that it will be 5 to 10 years before we see rapid appreciation again, so any investment in rental property should have definite cash flow. Don't buy the headaches and work without adequate reward.

Janis - No, I would not buy in Antioch because I have no desire to live there. My point though was that prices there have dropped dramatically due to foreclosures, and therefore prices are less likely to fall considerably further there than in more desireable places which have not fallen much.

Michelle - With all due respect, I think you are wrong, and the East Bay cannot be considered one market. Waiting for prices to fall further makes absolute sense for many people because many people cannot qualify for the necessary loan to buy the home they would find acceptable and/or desireable. Many of these people in the far east bay got into these homes in the first place only because of risky loans, and could never qualify now. So for a new buyter the choices are to either buy a distressed property in the far east bay or overstretch to live in a more desireable area closer in. For these people, waiting makes absolute sense.

We are not even 3 years in to this bust and gas prices have only recently become part of the equation - that alone will further impact prices. As prices farther out continue to plummet, neighboring areas closer in will be drawn down, until ultimately it reaches all the way to SF.

On the other hand, if losing money is not a concern and/or you have a family and just want a home despite the foreseeable loss, and you can afford it under traditional models, go for it. But for most people buying, a further $50,000 or $100,000 drop is extremely meaningful.

Janis, my thoughts on Richmond are this: until they clean up their exorbitantly high rate of violent crime, very few homeowners or investors are going to want to buy there.

Weather and deals aside, it's not a good deal no matter what the numbers say when daily personal safety is compromised.

Not to pick on Richmond, certainly there are zones in Oakland where bargains would abound and the same issues of personal safety exist.

Numbers and analysis can only go so far, as Susan K noted above. At the end of the day, you're sinking a boatload of cash into a down payment, you're locking into a long-term commitment (I'm guessing most people are done flipping), and YOU have to be comfortable with where you are living, your daily existence, and your mortgage, taxes and upkeep commitments.

You can analyze all day long, and sure the price might go up, it might go down, but as long as you are at the point where YOU are comfortable with the price, interest rate, terms, neighborhood, go for it. Prices may go up, they may go down, but it should be immaterial. It's a home, not a stock. Raise your family, live your life, make smart decisions with the data you have, and realize that none of us have a crystal ball and can predict what the housing market or interest rates may or may not do.

Great thread, all!

An investor is only a knife-catcher if she gets cut, right? Trying to figure out where the bottom is may be fun, but should be irrelevant to a smart investor. As long as you can rent a property for a positive cash flow after expenses, maintenance and repairs, you've got a good deal.

Regarding the rent vs. buy issue, these arguments don't take into account the non-financial benefits of owning. (I rented for decades before buying my first home in 1993.) How much is it worth to know you won't get kicked out because your landlord decided to sell the place? How much for knowing that when you plant that cherry tree, you'll be around to enjoy its fruit? How much for getting to decide what color to paint the bathroom? etc. etc. etc.

It takes a long time to reach a bottom - several years - not just a year or 2. Look at every past RE cycle.

The only places near a bottom right now are way the hell out there like Brentwood, Modesto, Stockton, Antioch, and maybe the worst hoods of Oakland and equivalents. There is room to go in every other area of the bay area.

Nicely done, San Mateo Sellers. Yeah, I totally agree with you - far from the bottom in San Mateo. But to me, San Mateo is a super-desirable area, yes?

Well, as to lower end properties. I used to live in a 3 bedroom condo in Brittan Heights in San Carlos. The 3 bedrooms were selling for $650k pretty regularly in 2005. Right now it's still going for around 600k. See recently sold listing here: http://www.redfin.com/CA/San-C...

Anyway, my rent in 2005 was $650 for one of the bedrooms, and I had 2 roommates so the total rent was $1950. So 650000/1950 was 333 back then.

Now you can rent the 3 bedroom for 2500: See http://sfbay.craigslist.org/pe.... So taking the current price of these condos you have a multiple of 600000/2500=240x.

Additionally the place has an HOA of $400+ so the landlord is really making 2100 on the 2500 rent.

I would say it's far from the bottom at least in San Mateo.

jackalope, I love your phrase, "inlying areas are ripe for bargains, outlying areas - watch out for the knife!" Do you think Richmond home prices will fall further? It's not a desirable city, but closer in and not subject to the sweltering summer temps?

Red, that was smart of you to track down those places on craigslist. It would appear to me that those people are renting for less than their mortgage payments probably are, yes? Sheesh!

But how about the bottom for lower-end properties, Red?

As long as you can find an equivalent rental for a lot less money, we have not found the bottom.
And there are now lots of terrific rentals available. Many of the nearly new ( built in last 5 years) homes I looked at recently in the $1 Million to $1.5 Million range disappeared from the market, but they did not appear in the SOLD data. So I started checking out Craigslist rentals; there they were!
(value as rental uses 160 x rent as rule of thumb)
Ask price: $1.2 M rental: $4500/mo value:$720K
Ask price: $1.5 M rental: $4995/mo value:$800K
Ask price: $900K rental: $3500/mo value:$560K
Figure out the ownership costs on these and the owners are bleeding $30K to $50K per year. Wouldn't you like someone to spend that kind of money on you? Eventually these poor owners will realize that being a landlord is lots of work and expensive, and they will sell ( or let them go to the bank); but then the homes are ... rentals and not so new. So they will sell for even less than they would have now.
These folks just could not bear to sell at market value now, so they will bleed for a few years. Eventually they realize that it is eating them alive, and they accept reality and sell for market. This is why it will take years before the true bottom is reached for the higher end properties.

Very interesting comments! MikeW, would you really buy in Antioch, though? Sounds like there's a lot of crime and scary 'hoods full of foreclosures? Or are you talking about buying as an investment you'd rent out? Meanwhile, I just love "Easy Bay." Was that a typo for East Bay or is it an expression I've not heard? Either way, it's great!

SMHIT,I agree. If you can afford the house (MikeW seems to agree with this too), and you're going to be there a long time, go for it. You may not catch the absolute bottom, but you're still getting a deal, eh?

Michelle, your viewpoint is refreshing. I hope you're right that we're close to the bottom, since I bought in 2000 and am not yet underwater. Do you think we're close to bottom in outlying areas and places like Antioch, or overall?

I think there's going to be a little ying and yang yet. Interest rates are up, so prices may drop a little to offset rising rates.

That said, simple laws of supply and demand in close-in areas in decent to good neighborhoods by public transportations will still exist and will be relatively sheltered from price drops.

Outlying areas (Antioch, Vallejo, Brentwood, the usual suspects) - will they drop more? Sure. The cost of commuting is going to deter even those who are lured by superlow prices. Lots of supply, wilting demand, high commute costs, high energy costs (hot = A/C in the summer).

To sum it up, I'd say inlying areas are ripe for bargains, outlying areas - watch out for the knife!

I think we are very close to the bottom if not already there. There are thousands of people who aren't going to buy no matter how low things go. Foreclosures are pricing at 2003 levels and sometimes below. Of course that doesn't mean you can find a foreclosure you want but if you do, waiting for prices to go ~even lower~ is rather naive.

Depends on which part of the East Bay. From a pure when is the bottom viewpoint, I would be far more comfortable buying a foreclosure bargain in Antioch at 60% off the previous sale prices than an 850k 3/2 in Lafayette that peaked and then plateaued.

I cannot imagine any scenario in which the Easy Bay as a whole has "bottomed out" however. So once again it goes back to whether you can truly afford the home you are interested in. Now is absolutely not the time to stretch.

Okay, obviously I am one of the fence sitters, but I think there are good deals out there if people try to find it. I consider it a good deal if it's a house I want to live in and the cost isn't more than 10 to 15% of my rent. Unfortunately, I haven't found that deal, but many others have higher tolerances as to what they're willing to spend. Right now a lot of fence sitters are jumping into the market, and once they all become homeowners the prices will go down some more just because the pent up demand is gone. So are these new homeowners knifecatchers? Well, if they are happy with their purchase and intend to live in it for a long time, then they shouldn't look at where the market goes in the next 10 years.