Well, I thought about going and playing with the Brownie Point tool during lunch, but it seems pointless to me, as well as collapsing under the load[update: and the site has now been deactivated], so I decided to read some more news. In particular, jumbach‘s pointer to an article in the Sacramento Bee made me look at some out of Los Angeles papers. I found some interesting stuff.
The San Francisco Chronicle has a very interesting article on the school conundrum in house selection. I touched upon this early last week. The basic question is: how much importance do you place on schools in selecting a house, and how much impact do they have on resale value. The article puts the question this way: Are there any great public schools secreted away in little-known, not-totally-unaffordable neighborhoods? Is it worth paying an extra $100,000 or even $200,000 for a home in a nice neighborhood to get your kid into a good public school? We’re facing the question as we look, as we contrast the scores of Monroe High School, Kennedy High School, Granada Hills High, and Chatsworth High. We have friends that have opted out of this by using private schools, or by using home schooling. Good questions.
Another concern of folks is whether it makes sense to buy in such high-priced markets. Another article in the San Francisco Chronicle notes that homeowners in so-called bubble markets such as California, Nevada, New England, Florida, the Mid-Atlantic and the District of Columbia are more likely to pay their mortgages on time than homeowners in parts of the country with lower housing inflation rates. The article notes that in California, where interest-only mortgages have been a key factor in lowering monthly payments on high-cost houses, just 1.4% of prime credit-quality borrowers were behind on their loans in the last quarter of the year. It concludes by noting that as long as interest rates remain low and employment growth continues, that could be an indication that bursting bubbles are nowhere in sight.
So what do you do, when faced with these questions? My advice: Talk to your accountant or financial planner (get one if you don’t have one). Turbotax is great, but it really doesn’t work well for planning such as this. You need a “big picture” plan: mortgage (and deductable interest) vs. rent; different commute costs and quality; social activities in the area you will use or abuse; ancillary housing costs such as repair; whether buying now will prevent you from being locked out later. For my family, some of these issue are moot, as we already have our initial seed (house). Yet for others, they are critical questions. Timing is everything in this market. The San Jose Mercury News (registration required) has an article about how the slow creep up in mortgage rates is slowly but relentlessly, pricing more residents out of the Bay Area’s housing market. The article indicates the net result is that some residents can’t buy houses because they won’t be able to afford the higher monthly payments. They indicate that experts say that the rising rates may finally slow sales and prices in the region’s overheated real estate market. I think the same analysis applies in Los Angeles.
However, there are two factors to consider. First, no one is predicting that the prices will go down; rather, they will just slow. The speculator factor that led to the crash in the early 1990s isn’t there. Rather, the rate rise will slow. However, as long as it is well above the salary increase rate, housing will still increase faster than incomes, and more will be priced out. Don’t believe me? Housing values are currently increasing at just over 20% per year. Let’s assume they slow to 10%. How many professionals are seeing 10% annual raises. Unless appreciation goes negative, it still makes sense to buy now and refinance when rates drop.
Turning our attention to the south, the Orange County Register (registration required) has a series on the implications of a housing market where the median home price has doubled in the past four years to half a million dollars. An article in the series from December echos the notion of a cooling, but doesn’t think we’ll be seeing the hills and valleys of the past. Rather, it postulates that homeprices will perform “below par the next few years” – par being the 6.5 percent annual growth they’ve produced during the last 35 years. Again: compare that growth rate with your salary’s growth rate, and then consider what leverage (i.e., what putting 20% down) can get you in terms of growth.
Well, lunch time is about over, so it’s time turn back to work.
