housing market question: bay area

[gnahc79]

My wife and I have been looking to get a home here for the past few years, waiting for this bubble to burst. Or not, depending on who you believe. I have a question, let me know if my assumptions are wrong:



1) People get an ARM because they can`t get a fixed rate loan, e.g. not enough $$ for down payment, credit rating, etc.

2) Many people overextend themselves and end up using a high percentage of their income to just pay the initial interest only payments.



Question:

1) What do these people plan to do as the rates increase and when they have to start paying principle when the 3,5,whatever year term ends? Sell, use the profit for a down payment, and get a new home with a fixed rate loan? Would this work?



Both of our parents are willing to help with the down payment for us to secure a fixed rate mortgage. I just don`t know if we should buy now or later....we`ve been waiting a while for this damn bubble and it isn`t happening. Prices have flattened I guess, but there`s no major drop in prices.





i`m very confused :wall

[JeffM]

I would not look into a loan like this. These loans work good for investors, but i would not ever get myself in one of them.

[imported_Picus]

My only advice is to buy now. Regardless of speculation of a bubble burst I think most everyone agrees that when the market does slow it will not be a burst, but a gentle "letting out of air". Bay Area housing, as crazy as it is, is not going to see a decline in prices. The percentage increase from year to year will go down but I highly doubt that buying a house now will net you a loss any time in the foreseeable future.



When we bought out first house there we thought more than once "We`ll never make money on this, it`s $600sq/ft", we sold it two years later for over $1150sq/ft. The idea being no matter what you think the "cap" is on a house in the bay area, someone else is willing to pay more. :)

[gnahc79]

I would not look into a loan like this. These loans work good for investors, but i would not ever get myself in one of them.



Oh, we`ll never get an ARM loan, I only mentioned it because many people here have it and I was wondering what effect that would have on the housing prices (too many people owning homes that shouldn`t)

[DETAILKING]

Depends on your situation. If you are looking for a place, I would look now and buy now. Real estate has never had a yr of negative appreciation in 50 yrs. Now that interest rates are getting higher, the pace as slowed but I don`t think there is any "bubble" and if it does "burst" it will only do so in areas that had extraordinary gains like NYC, Miami,etc.



A lot of people get ARM mortgages because they can`t afford the payments on a 30 yr fixed. They figure in a few yrs maybe they will be making more salary and then they can refinance at that time. If you are not careful you can get yourself into trouble if you get an ARM mortgage, but there are a few ways to look at it.



I myself have a 7 yr arm mortgage. At the time I got it I saved about 1.5% over a 30 yr fixed. It is a faact that the average person moves or refinances every 7-8 yrs. I justified the ARM because now I live in a townhouse and that is to be a stepping stone for me. I plan to sell it, realize my gains and get into a house in the next 2-4 yrs. Because of this the ARM was the way to go. The monthly savings was very considerable. Even if I did stay there and kept my arm, it isn`t so bad either. If I look at the money I save in the first 7 yrs over a 30 yr fixed, it will take to yr 10-11 to break even assuming that the rate goes up the max every year after that 7 yr period is up.



The spread now a days between an ARM and FIXED is not that great, but look at your situation and do the math. If this is your dream house...definately go fixed.....if not, an ARM can save you a ton of loot!



Hope this helps.

[the other pc]

...1) People get an ARM because they can`t get a fixed rate loan, e.g. not enough $$ for down payment, credit rating, etc.

2) Many people overextend themselves and end up using a high percentage of their income to just pay the initial interest only payments....That`s true for some but others can afford the fixed rate and choose the lower monthly payment option for a variety of reasons. It`s a gamble but it can be a prudent risk with the right property, loan and long term plan.




...2) Many people overextend themselves and end up using a high percentage of their income to just pay the initial interest only payments...Sometimes true. I don`t know what the statistics are but it`s only a problem if it`s a large percentage.




..1) What do these people plan to do as the rates increase and when they have to start paying principle when the 3,5,whatever year term ends?...Most plan to convert to a new loan or sell the property before then.




... use the profit for a down payment, and get a new home with a fixed rate loan? Would this work?...You don`t need to sell to benefit from the "profit" of rising values. Any increase in value, i.e. equity, is yours (on paper anyway) and getting a new loan (fixed or otherwise) is easier the more equity you have.




...we`ve been waiting a while for this damn bubble and it isn`t happening. Prices have flattened I guess, but there`s no major drop in prices...Bubbles aren`t based on real estate prices alone. They`re based on combination of factors, the most important thing is the economic base that allows people to make payments (let`s all start our own dotcom!). Since the economy is "moving along" but not exactly "flying high" I`d expect the market to flatten a bit but I wouldn`t hold my breath on any overall decrease.





PC.

[pontman43]

I dont know much about this kinda stuff, but if I were you I would buy ASAP because the bay area is getting more expensive by the day. We bought our house for under $300k and now its worth well over $600K in 3 years and still rising rapidly. Where exactly are you looking into? I got a neighbor that will probably be putting his house on the market again, its big with a big yard and nice view. ;)

[autoweenie]

I guess it is a very tough call...

We have a friend who has been waiting to "pull the trigger" since 1999.

She has not done it yet.

Right now, she looks like a loser. But if the Bay area goes through a housing market

crash like Houston in the mid 80 (anything in life is possible) , then she will look like a genius.



I do have two anedotal evidences, though.



I ran into our real estate agent last year while shopping in the supermarket.

I questioned her about this whole "unheathy" housing market situation.

She has one word answer for me - "Google".

There is an estimate of ~1000 new millionaires due to Google`s IPO.

Most of them are young engineers who needs their first home. She was telling me that there ain`t an inventory of 1000 homes in the greater bay area. Furthermore, she said that these are likely duo-income family where the average household income should be close to $200k.

So, these guy can easily put down $500K -$800K in down and easily afford another $800k in loan since the interest rate (even the fixed one) is so low. These guys probably can`t afford

multi-million dollars home in Woodside but can easily swing a house that costs $900k to $1.5 million. I am not sure that I believe her totally - but the scenario sounds plausible.



I have another friend who lives in Cupertino and he was claiming that the whole situation is being driven by demographic. I guess you are a casing point of his claim.

He was claiming that he have a lot of neighbors who are old/retiring engineers who are helping their kids with their first "starter" home. These old guys are not selling their houses (since it is so nice here around Bay Area). On the other hands, they are funding their kids first house in the Bay Area too. So, there is still this huge demand.

I am not sure how a young couple (or their "rich parents) can afford a $500-$800K "starter" home.



As for Picus`s comment about $1150 / sq foot. That`s it incredible - must be Los Altos Hill or Atherton in an 3 acre lot.

[imported_Picus]

Nope - El Cerrito (just north of Berkeley), regular 5000sq/ft lot. 720sq/ft house (2bd/1bt) - we bought it for ~$580/sq foot in March `03 and sold it for $1151sq/ft in May `05. It received 31 bids in 3 days on the market. Nothing that special about it, just a solid little house with a nice view. The market there is out of control. But like I said I don`t think it`s going to crash, just slow down a little bit. I`d say no matter when you buy in the next couple years you will not lose money on a house when you sell it provided you live there for at least 2 years.



Oh, and you`re right about older parents helping to fuel the market. I would say of the 15 or so bidders we met during walk-throughs 10 or 11 came with their parents who were helping them with their first home. The parents talked a lot about getting home equity loans on their houses (which were probably all huge and in the hills that they had owned forever) to help the kids with their purchases. Almost all of them were young couples with one or no children. The people that eventually bought our house was a couple in their early 30`s both with their phd`s teaching at Berkeley. A couple professors in a 720sq ft home, kinda makes you think.

[medic]

if you`re going in for the long haul, got get a house assuming it`s something you actually like and would like to live in for the next 10 years. prices may go up or down, nobody knows, but you should be willing to ride out the storm without worrying. don`t just jump into a home because the market is getting out of reach and "it keeps getting worse", make sure it`s what you want.



for the arm, you need to run the numbers and see how long it comes to your advantage. when I did it for my interest and principal, even with a 7 yr arm, you actually come out ahead sticking with the arm even if the interest increases to its maximum, for the first 10-11 yrs. Rates are still pretty low, so we went for a 30 yr fixed, but it really depends on your own estimates of the future.

[gnahc79]

well, maybe I should wait....

Link (http://www.mercurynews.com/mld/mercurynews/13897191.htm)



Home sales hit 5-year low

BUT BAY AREA MEDIAN PRICES RISE IN JANUARY

By Sue McAllister

Mercury News



Bay Area home sales plunged last month to the lowest level in five years, another signal that 2006 won`t bring a repeat of last year`s sizzling real estate market.



In January, 6,004 properties changed hands in the nine-county region, 20 percent fewer than the same month in 2005. Though sales slowed, median prices moved higher compared with a year earlier, according to a report Thursday from DataQuick Information Systems. In Santa Clara County, the median price hit $705,000, up from $700,000 in December, and $615,000 in January 2005.



These numbers set a different tone than that of last year, when competitive buyers and easy money from mortgage lenders carried Bay Area prices nearly 20 percent higher. But experts warned it`s too early to draw firm conclusions from the data, since winter is normally a chilly season for home sales. Most homes sold in January likely found buyers in November and December.



``To me, this is a normalization and rebalancing of the market, and it`s by no means ominous,`` said John Karevoll of DataQuick, which gathered the information from public records. It won`t be apparent until March whether the low sales volume is a temporary lull or part of a significant downturn, he said.



Real estate experts couldn`t pinpoint a cause of January`s slowdown. Some blamed flagging consumer confidence after Gulf Coast hurricanes and rising gas prices. Others guessed super-low interest rates in the past few years led homeowners to purchase earlier than they would have otherwise, leaving fewer buyers for 2006.



Another explanation: Buyers couldn`t bear the rising prices any longer.



``The prices have continued to increase so much that the listed properties have priced themselves out of the market for first-time home buyers,`` said Sherry Chris, chief operating officer for Prudential Realty in California, Nevada and Texas.



In one indication, she said, there are currently more homes on the market in San Francisco than at any time in the past five years. It`s normal for the inventory of for-sale homes to rise at this time of year, but ``the difference now is they`re staying on the market longer.``



The number of houses for sale in Santa Clara County has increased steadily since the beginning of the year, with about 1,820 houses on the market last week. That`s up from last February, when only about 1,120 were available -- an unusually small number.



What message should buyers glean from the low number of recent sales and higher inventory?



``Buyers should have no pressure whatsoever from fear of increasing prices,`` said Richard Calhoun of Creekside Realty in San Jose. Calhoun, who crunches real estate data from the multiple listing service each day, said he predicts that sometime this spring the county`s median price will dip below last year`s level. When that happens, he said, some buyers will react to the inevitable media coverage by sitting on the sidelines, which will hold down prices.



Local real estate agents say the market is nowhere near as competitive as it was last year at this time.



``We`re not getting 200 people like we used to`` at weekend open houses, said Dave Clark, an agent with Coldwell Banker in Sunnyvale. Still, 75 people is not unheard of, he said. ``There`s a lot of people looking out there.``



Howard Bloom, an agent with Intero Real Estate who works primarily in Mountain View, said home sellers can no longer expect multiple purchase offers and overbidding. He tells sellers, `` `Don`t put your house on the market at a price you`re not willing to accept,` `` he said.



The DataQuick report showed that in January, the median price of resale houses in the whole Bay Area was $628,000, up 12.9 percent from a year earlier.



The median price marks a midpoint, meaning half the homes sold for less and half sold for more.



In San Mateo County, the median resale price last month was $780,000, unchanged from December, but up 11.7 percent from January 2005. Alameda County posted a median price of $589,500, up 13.1 percent from a year earlier. In Santa Cruz County, the median price rose 4.5 percent from last year, to $730,250.



Compared with January 2005, resale condo prices were up in all counties except San Francisco, where the median price fell 3.4 percent. The median condo price for the Bay Area last month was $475,000; in Santa Clara County it was $490,750.

[LightngSVT]

I cant wrap my brain around the idea that a house, anywhere in the world, that is only 720 sq ft could sell for almost $850k!!!!!!! Are they plated in 24k gold? How high are salaries out there in Cali????? My wife and I boht have good jobs and if real estate was that expensive here we`d be in a 2 BR apartment, even at $400 - 500k for a "starter house" it just blows my mind!



Our new house is going be be roughly 2650 sq ft, with 1100sq ft garage, over 1/3 acre on an inland lake and are paying about $204 per sq ft and we though that was a bit high. But given the state of the economy in Michigan $200+ sq/ft is on the high side and out real estate market bubble has burst. We are STILL trying to sell our current house (over 6 months now) and at $125 per sq ft most people in our current area are being forced to sell their homes for what we paid for them 5 years ago, before the improvments we`ve all made. Our open houses get an average of 2 - 3 couple in 2 hours. Its wierd to think my new house could cost as much as $3,024,500 and our current house $2,300,000 if I could somehow magically move them to the Bay Area in Cali.



I may be mistaken, but I thought you could get an ARM as a traditional loan? I dont think all ARM`s are interest only. Im still debating between a 5 - 7 year ARM, or 30 year fixed for our new house.

[gnahc79]

I`m not sure about the ARM as a traditional loan, it probably exists though.



Over a year ago we looked at some places with a realtor and he said that a good way to do the interest only ARM loan is not to pay just the interest only mortage each month. Instead, pay several hundred dollars over the mortgage to build equity once the interest only term is over...never really looked into that though.



Yes, it boggles my mind how people can afford these homes. My wife isn`t working, so it`s near impossible right now. To somewhat safely buy a home I think a family`s income has to be at least $150K combined. Yeah, I`m not there yet :(.

[LightngSVT]

I thought I bought my current house on a P&I ARM 5 years ago? We have since refinanced so Im not sure anymore. Paying a few hundred monre a month is basically the same thing as a traditional loan because the first few years almost nothing goes towards principal anyway on a 30 year loan.



My wife and I have hit that mark, income wise, but theres no way we could afford a $700 - $800k house!

[DETAILKING]

ARM mortgages are not interest only (they do exsist, but I don`t recommend them). The amortize the same as a 30 yr fixed.