July 8, 2008

Why I May Never Buy a House Again

Back in 2006 my anxiety level peaked from finding myself with oodles of equity in the Sherman Oaks bungalow that I’d bought in early 2002.  The problem?  It was all just paper:  theoretical, hypothetical, unrealized profit.

The gnawing sense that things weren’t quite what they seemed, my disbelief in the illusion that the rainbow stretched on across the horizon boundlessly, that the laws of gravity were suspended, had been building up in me for some four years. 

Finally, I snapped.  To hell with the spreadsheets I’d put together showing how, at the current rate of home appreciation, I’d be a millionaire by 2012.  Yes, the logic was inexorable, my home’s value was rising at vertigo-inducing speed, but it was the sheer fantastical nature of the thing that led me to panic, call a realtor, and sign the documents to put my house on the market.  It was May 2006.

By August, I had lured - umm … found - a willing buyer - and completed the legal transaction.  Minus the absurd amount of skim deducted by the army of agents, agencies, title services, tax collectors, ratcatchers and bugchasers involved, I had managed to convert the chimera of paper profit into good old hard U.S. currency, depositable in a banking institution of my choice.

I relaxed and breathed a metaphorical sigh of relief, content to sign a lease-back agreement to rent my old home’s guest house from the new owner for a year.  I didn’t even have to move.

Still, it seemed a given that I would eventually, in the fullness of time, after the real estate bubble had burst and home prices descended to what passes for sane in southern California, turn around and plow a portion of the proceeds back into another home as a down payment.  After all, who wouldn’t want to own a home here?

Well, after pondering that question for almost two years:  me, maybe.

Here’s why:  first, while it’s abundantly clear that prices have not yet bottomed out (see Pete Viles’ latest L.A. Land blog median home list price report showing another $15,000 drop in the last month), it’s even more evident, to me at least, that when they do, it’s going to be hard to tell the bottom from the long, slow - let’s just get on with it and call it endless - recovery.  Because the old sky’s-the-limit market isn’t going to be recovered.  Ever. 

It’s not just that prices will fall some more.  Even more to my point, they’re not going back up in the next ten years or so.  Oh, after a few years, they may edge up a fraction year-over-year - 2% or 3% - but that’s not even going to make up for inflation, the way this economy is going.  So what I’m saying is, a home you buy now, or in the next few years, will see essentially NO APPRECIATION for a decade or so.  If you’re lucky.

On top of this unpalatable prospect comes increasing evidence that the cost of borrowing funds - to purchase property that will show no gain in value - is heading up.  Mortgage rates on fixed 30-year home loans (you weren’t planning on getting a “pick-a-payment” loan this time around, were you?) have increased almost half a percentage point in the last month.   The cost of borrowing money is increasing at a rate that more than negates the price declines we’re seeing, steep as they are.  It’s what I call a lose/lose situation.

On top of those factors, there’s some tantalizing evidence that renters in southern California are beginning to see actual reductions in rents, and may continue to do so.  See Cindy Allen’s Redfin post where she points out the rent on a unit she moved out of was reduced 10%.  At the recent San Fernando Valley Economic Summit, seasoned real estate executive Laurie Lustig-Bower of CB Richard Ellis hinted that residential rents were softening in the Valley by about one per cent.  Reports suggest rents are down in the OC by some 3%.  The trend downward may well continue.

So I should buy a house … why?

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