Waiting for the market to rebound?

Question

I want to buy a 2 bedroom house in the bay area and live in one room while renting the other room out. However, the volatility of the housing market makes me very concerned that I am buying at the wrong time.

On one side the market in Northern California is very frothy and it is always a bad idea to buy high. On the other hand it's also bad to wait because there is never a 'right' time. Until I take some kind of action I will just be sitting on the side lines paying 3k in rent.

Is it better to wait for the market to rebound to a lower price or to try to find a good deal now?

Tom Unger · Answer

People tell me all the time, "You are lucky to have gotten in when you did. Prices are crazy high right now." The reality is that I bought when I bought-those people have no idea how much my properties have lost on "paper" over the recent years. WHAT they do see is the checks I cash coming in every month. Some of the stuff I've bought literally tanked-hundreds of thousands of dollars. But, who cares. I wasn't selling then nor am I now. I am now working on paying off mortgages, rents have increased significantly and the checks keep coming in every month. I dont try to time the cycles. I get in when I can get in.

Chris Mason · Answer

@Anthony Z., welcome.

I hate to give a ham-handed answer, but the only pattern I can find for those with >$1m in equity in my database is that they purchased as soon as they could and rode out / ignored the rollercoasters.

Jay Hinrichs · Answer

if your intention is to live in the property long term and or turn it into a long term rental once you can afford a home that you live in solely.   then I think to wait is a mistake.. interest rates are historic lows.. I like locking in 3% money .

history shows us that BA real estate goes up goes sideways and goes down a little all over about 10 year cycles.. so you simply do not sell in a down cycle.

benefits to owning in the bay area now with a house hack is pretty straight forward

1. you interest is a write off and this should save you money on your tax return . so factor that in.

2. instead of rent your paying down a asset you own.. ( that's huge).

3. stability never have to worry about lease terminating.

4. If you can rent a room your in really good shape.

Get a home that you own that is yours first and foremost I think that should be goal number one for anyone who is going to live in the SF bay area long term... then start investing.  Again personal opinion.. But as someone who bought their first home to live in   In Milpitas circa 1979... I can vouch for the benefits of owning bay area Real estate.. the tax free 250k or 500k exemption on owner occ is one of the best if not the best tax treatments we have in the US... and the bay area and west coast and prime East coast areas  along with north side Chicago is were this comes into play its simply a life changer for most folks who enjoyed a huge run up in values.. I have used it 4 times in the bay area personally over 30 plus years.. I know it changed my life !!!  by simply owning the home I lived in.

Neil Evangelista · Answer

I'd lean towards buying a 2 bedroom place at a 30 yr fixed rate around mid 3% and get the help from my tenant in paying down some equity if holding for > 5 years ( are you talking prime SF or Peninsula or outskirts like Antioch?) . If prices do decline and interest rates go up, at least you're locked in so essentially offsetting costs. If rates go down, maybe demand moves prices higher and again you're in and can just refinance. If you keep renting, rental rates probably keep increasing over time (so a benefit if you buy a place now). Yes a lot of maybes but over the last 30 years prices and rents significantly higher and 30 yr rates from 10% to 3% (average around 6-7%) so the chance of timing a downturn and saving huge $ in the Bay Area is very slim. Good luck to you!

Account Closed · Answer

My wife was the ultimate bay area house hacking queen. She bought a house in 2005 that cost almost 10X her annual gross income. Remember those days? SHe filled it with roommates and I joked that she would rent the kitchen floor by the hour if she could. But she still owns the place and has gathered $600K in equity over the last 10 years. Plus had minimal living costs. She still owns it and now it generates over $1K per month positive cash flow plus mortgage pay down plus appreciation. If you have the kind of personality that can deal with roommates (I don't) its a great financial strategy.

Ryan Landis · Answer

@Anthony Z. the Bay Area is a bit of a unique beast.

Chris Mason put it greatly. The issue in the Bay is your time horizon, not when you buy really. If you are purchasing in SF proper or strong markets in the Peninsula/South Bay you should be fine as long as you can afford to ride out any roller coaster.

Sam Shueh · Answer

You do not control timing of the market.  You buy and hold. In the 1980s with hyperinflation interest rate was 16.5% people were still buying and selling.  Never mind cap rate.

You look at cash flow. Many were in the hole each month as landlord.  Then you have tax benefit. Each tenant moves out you raise the rent to break even point. You still have the equity as properties go up in value.

Those who procrastinate all blew it.   An friend told me in the 1990s he bought in Palo Alto a small cottage for $95,000 on a 9500 sf lot.  The rent was never that much he probably gets $2400/mo today on rent.  The lot is worth 1.2M today. He claimed he did not care when to enter as he knew it was for long term.

John Casmon · Answer

@Anthony Z. Think about it this way, your proposed alternative is to continue paying $36K in annual rent. If you wait for 3 years, that's $108K paid to someone else, instead of equity you're building. Even in volatile times, YOU still have to live somewhere, right?

Ryan Canfield · Answer

@Anthony Z.  Hi Anthony,  I'll second what @Jay Hinrichs said above.  If you're planning on turning the property into a rental down the line, lock in the low interest rate now.  My wife and I are house hacking our second 3 flat on the north side of Chicago.  The first property we bought has an interest rate of 4.0% and the second property has an interest rate of 3.6%.  We have a really good agent who emphasized to us the importance of buying when interest rates are low.

We've also noticed that the market in our area has gotten more competitive over the last 1.5 years.  In the fall of 2014 when we first started looking all the way through this winter, there was always a good selection of houses to chose from.  Over the last 6 months, prices have really seemed to have risen and the price we paid on our 1st house last summer, the market is asking $25-$50K more now, for a lesser quality of property with less amenities.  Those same houses are on the market for usually a handful of days before they are under contract.

I have a feeling that when we go to look for our third house, given the market around us right now, we will have to taper our expectations and accept that we may have to pay more than we previously have and the quality will be less.

If you have the ability to buy now, my suggestion would be to do so.  You have to go get your goals, you cannot wait for them to come to you.

Waiting for the market to rebound?

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