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Tuesday, February 20, 2007

"Quite frankly, it's time to buy."

I think maybe there is some kind of virus infecting the minds of potential homebuyers. The virus settles into the brain and causes the victim to lose the capacity for rational thought in matters of real estate. Symptoms include the delusions that "I need to buy now or I'll be priced out forever," "I should use whatever kind of financing I can get my hands on," and "owning any old dump is better than renting." Possible evidence of that last one can be found in today's P-I:

For those undeterred by the sales flier that warned a 96-year-old Columbia City house is "an extreme fixer, to be entered at your own risk" or by the "hazardous environment" sign on the door, Al Johnson left a flashlight just inside the entry.

"I'm on my second battery," said Johnson, an associate broker with Windermere Real Estate, during an open house earlier this month. He posted this listing on a Sunday evening and got calls about the house every half-hour the following day.

"One, it's about the cheapest thing around," Johnson said. "And two, people just get drooly about projects. ... People get weak in the knees and say, 'Oh, I can do this. I love this.' "
...
Johnson's weekday open house, set up so other agents could get a look, attracted a decent number of visitors. After looking through the house, Windermere agent Susan Sellin said she recently saw a Capitol Hill house in similar condition sell with multiple offers, despite a $500,000 asking price.
...
The increased interest in fixers over the past few years drove up prices beyond where many projects pay off for those who want to fix a house, then sell it right away, according to agents and builders.

"Everybody and their uncle was in this business," said Mark Johnson, who started renovating houses and building new ones in 2001, after five years as a contractor.

Johnson, no relation to Al Johnson, recently paid $360,000 for an old West Seattle house and said he poured about the same amount into overhauling it before putting it on the market last year. When the offers that came in were lower than he wanted, he decided to move in himself.

He said he knew the market was slowing when he started the project, "but I was kind of a little cocky, I guess, and thought that I could beat it."
...
But despite the slowing market, [Mark] Johnson sees an upside.

"As far as flipping, it's going to be a good thing, because there's not as much competition," he said. "Quite frankly, it's time to buy."
Oh yeah. For sure now is a great time to buy an overpriced dump. When isn't it a great time to buy one?

(Aubrey Cohen, Seattle P-I, 02.20.2007)

31 comments:

Brian said...

The house in question, if I am right, would require about 125% of the list price to make it HABITABLE.

Brian said...

My bad... it sold for over list. But I really think the $150k quoted in there is a ballpark figure. I still stand by needing to put 250k into it. What a riot. Columbia City is the new Hollywood Hills!

Daniel said...

This is my first time posting here... been a reader for a few months now. So anyway, I'm interested to hear Seattle Bubble readers' thoughts on the following question:

"When IS it a good time to buy?"

Thanks in advance.

Daniel said...

Are there any formulas that serve some value in determining if it is a good time to buy, for instance?

rentalbliss said...

"When IS it a good time to buy?"

-when you are not speculating
-when you are not depending on appreciation
-when you can afford a traditional loan at 3X income for 30yr fixed
-when you plan on staying for more than 5 years
-when owning is no more than 1.5x renting the same place
-when you know and are comfortable with the area you are buying in
-when you are not settling for a dump just for ownership privlages
-when their has not been a run on prices followed by stagnation and rising foreclosures
-when you fully understand all hidden costs and risks involved

Banteringbear said...

Pay no mind to all of the little people paying these prices, for they share a common affliction; greed and stupidity. Unable to think for themselves, they listened to the media and followed the herd, jumping happily on the illusional gravytrain of easy money and endless appreciation, all the while parading themselves around as clairvoyants. For the past several years, they could be heard jabbering away, wearing out even the most forgiving of ears. But while a blind squirrel may stumble upon an acorn, he will never eat like a king. And the same will prove to be true for these obtuse commoners. As they feign their positions as the creme de la creme, they slowly but surely solidify their future in serfdom.

The Tim said...

I'll second everything on Rentalbliss' list.

Lake Hills Renter said...

I love your posts, banteringbear -- both here and on Ben's blog.

Daniel said...

rentalbliss, thanks very much for the thoughful post. I've run across that "1.5x rent" in other places... what's the reasoning behind that exactly? Would the padding for "hidden" costs involved with ownership?

rentalbliss said...

If the mortgage is more than 1.5 rent then generally the property is over priced since rents are not speculative and generally reflect the true market value of what people are willing or able to pay. There is no fancy financing your rent.

Would the padding for "hidden" costs involved with ownership?

I did not get this one.

Daniel said...

Wups, that was a typo... it should have read:

"Would that represent the padding for "hidden" costs involved with ownership?"

In fact, I should have asked something to the effect of: "Why is it ok to pay nearly a 50% premium on mortgage vs. rent?"

I suspect the benefit of deductible mortgage interest would be part of the equation?

witzend said...

When the offers that came in were lower than he wanted, he decided to move in himself.....

He said he knew the market was slowing when he started the project,... "thought that I could beat it.".....
"Quite frankly, it's time to buy."

Is this guy high, or what!?

Eleua said...

I'm old enough to have been interested in real estate back in the '80s, and I can tell you that the big scare tactic back then was "buy now or be priced out forever."

That was almost 20 years ago.

Ponder that.


I would say, "buy now and be stuck in your house forever."

Terry said...

Reflecting and perhaps inspiring this trend, television shows such as "Extreme Makeover: Home Edition" and "Flip This House" now compete with more staid programs such as the PBS warhorse "This Old House."

It's interesting that the article mentioned the above listed TV programs. I watched "Flip This House" for the first time the other night. The show I watched put such a positive spin on the process that it almost seemed like free money - buy a house with minimal / nothing down, hire a contractor to replace the carpets, install granite countertops, do some other cosmetic upgrades for $30,000 and then sell the house for $100,000 more than what you paid all within 3 months. Hey, why work? This is the way to instant wealth.

rentalbliss said...

Anybody check out MSN homepage they have episodes of sell this house in bellevue and seattle.

DebtFree said...

Property Ladder on TLC is a good. It shows the flippers as the idiots they are, and usually tells how long the place takes to sell.

Flip That House on TLC now shows reruns with updates. It seems like only the pros sold their flip (always less than what the original show said). Alot of the amateurs are still living in their flips "waiting for the market to comeback".

I figure more than 50% of the flippers on those shows will end up in BK.

Banteringbear said...

Thank you, lake hills renter ;O)

Grivetti said...

...people just get drooly about projects. ... People get weak in the knees and say, 'Oh, I can do this. I love this.' "

Ah sheeple, gotta love their reckless abandon and optimism, I dunno, maybe knowledge breeds pessimism and ignorance breeds bliss but something tells me the kharmic bill at the end of the day is much less...

Know a gal who over-did a remodel in the central district on a place with absolutely no curb-apeeal. Had it listed at 401K, languished for 3 months, dropped the priced down to 355K, still languishing...

"Oh I can do this!!", yeah sure. I thought that when I strapped a bed sheet to myself and jumped out of a plum tree, a few stiches later...

Tai said...

Here's a question,

If you could go back in time to 2002, but in order for you to do any serious RE investment, you have to Option ARM. Would you do it?

If the answer is yes, then how are you different than those that are doing it now? Most of the cases that are being posted here aren't big time flippers, they're just small time Joe's trying to catch the train. If anything I feel bad for anyone that thinks the train is still there.

If the answer is no, perhaps you shouldn't wonder why you are still renting.

The Tim said...

If you could go back in time to 2002, but in order for you to do any serious RE investment, you have to Option ARM. Would you do it?

That depends on whether or not I have 100% certain foreknowledge of what will happen in from 2002 to the present. If I knew for sure that the mania would not start to slow until late 2006, sure why not. I'd buy as many properties as I could, with as little of my own money as possible, then sell them all in 2005 and retire.

If the answer is yes, then how are you different than those that are doing it now?

Because in the suggested time travel fantasy, I'm not gambling on future appreciation, I'm cashing in on a sure thing.

In the real world "sure things" don't exist, and it's stupid to gamble with your financial future.

synthetik said...

BanteringBear: I second LHR's endorsement! Please post here more often!

betamax said...

OT: just talked to a friend who works for a large construction company with offices all over. My friend said there's been a bit of a slowdown in new construction in Seattle, and a huge drop in Oregon.

What's keeping the company alive is that so much of the recent new construction by others has been built so poorly. They don't expect slowdowns in renovations & repairs any time soon.

Tai said...
This comment has been removed by the author.
Tai said...

In the real world "sure things" don't exist, and it's stupid to gamble with your financial future.

I think you have just summarize why you shouldn't give anyone advice on investment.

So given what you have seen in 2002, you're saying is if similar events were to take place again, you would pass on it.

Wow, I take you as a conservative, but you are truly an ultra conservative. I don't think you will ever buy a home, not unless the home was "given" to you.

T,V & Mr.B said...

Tai, That is really a stupid question. If you knew that Indy was going to win the superbowl, would you put evetrything you own on it? If so, then why not put everything you own on them to win next year. Or maybe you know the Seahawks are gonna win?

The Tim said...

Wow, I take you as a conservative, but you are truly an ultra conservative. I don't think you will ever buy a home, not unless the home was "given" to you.

Your statement is almost correct, it's just missing one little phrase. Let me fix it for you:

Wow, I take you as a conservative, but you are truly an ultra conservative. I don't think you will ever buy a home as an investment, not unless the home was "given" to you.

There we go. When I'm in a good financial position to do so, and the market is not in essentially its riskiest position to date, I'll buy a home. But I'll buy it to live in, not as some kind of sure thing investment vehicle for my money.

stephen said...

daniel said,
"When IS it a good time to buy?"


We've been in the market for the past couple of months. Eastside, modest (350k 30 yr fixed), trying to stay within 30 minutes of our jobs in Redmond.

No go, one perfectly fine home for 400 and a half a dozen extreme fixers for 330-380k, one of which sold in a few days after a flipper spent a few grand covering up as much as they could (rotten roof and buckled hardwoods be damned).

At this point our ONLY buying choices (staying in budget) are to buy a dump, go East to Goldbar (kinda sucks) or north to Mill Creek/Lake Stevens.

The fixers that are left are pretty far gone, very small and are selling at a huge premium.

To be fair a few of the houses in the under 400 range are not dumps but just 150k overpriced :-)

The time to buy for us in now but the house for us is simply not there right now. We might very well rent for a year to see what happens next. Stretching in this market would not make any sense.

My best advise is don't push it. Keep looking and if you find the right house for the right price buy it. It is of course a calculated risk that prices will go up another 5-10% this season (which is why we started looking in January) but many of the properties out there now seem to be the end of the party folks really going for it. They are asking just massive appreciation to what many of them paid in the past year or so.

All in all, be patient.

betamax said...

Wow, I take you as a conservative, but you are truly an ultra conservative.

tai, you're suffering from hindsight bias - investment results only seem obvious in retrospect.

Historically, housing is a lousy investment vehicle, and flippers can quickly get stuck owing more than their now illiquid asset is worth.

I was looking at various investments in '02, but housing wasn't one of them, because no one then expected housing prices to double in 4 years.

Comrade Chairman Greenspan said...

"When IS it a good time to buy?"

When buying is as painful as NOT buying has been for the last few years. When everyone hates real estate and laughs at you for even bringing up the subject. When they say "only losers buy real estate...the place to be right now is [stocks/gold/tulips/whatever]."

Comrade Chairman Greenspan said...

'I'm old enough to have been interested in real estate back in the '80s, and I can tell you that the big scare tactic back then was "buy now or be priced out forever."

That was almost 20 years ago.'

Jim Grant's "Money of the Mind" has a great recounting of the 1920s Iowa farmland bubble. Word for word, the same garbage we've heard the last few years. "There's only one corn belt and they're not making any more of it." "Who cares about crop yield (cash flow)? The price can only go up." "Buy now or miss the boat." Etc etc.

Comrade Chairman Greenspan said...

"What's keeping the company alive is that so much of the recent new construction by others has been built so poorly. They don't expect slowdowns in renovations & repairs any time soon."

Yep. As someone on Ben's blog pointed out, try to buy something that was built during a bust. At least then the builders weren't throwing it up as fast as they could to cash in on a mania.

I can only imagine what we're going to learn about all these mushrooming condo towers in the next 10 years.