Off the Sidelines and Into the Game…a Reader Report

We know this letter was sent and intended for another destination, but oddly enough it showed up in our inbox. Actually, the sender apparently swings both ways and sent it to us too. Since we live in SF, we’re totally cool with it, and we figured we’d share it with you.

Dear [other site],

I’ve noticed lately that the mood [of your site’s] commentators ha[s] turned decidedly bearish. Perhaps the market in SF is finally started to strain and people are figuring it out. I am personally very bearish on the market. In fact, I sold my home in the summer of 2006 and rented for almost a year and a half due to expectations about the market.

Having said that, I recently jumped back into the market. … I bought a place that sold in 2005 for $1.1m but I snagged it for $800k (following a foreclosure). This is what peaks my curiosity: when do fellow readers [of your site] think that the time is right to enter? Seems like most of [your] commentators are content to sit on the sidelines forever. But is a 20% haircut on a property a good deal? 30%? What would it take?

I read an article in the WSJ this week that analyzed previous housing downturns and illustrated that when they occurred, they were always followed by large rate hikes. This makes sense. If assets are declining in value (or likely to do so) banks are going to want a higher risk premium at some point, to protect themselves. We have not seen that yet. Rates are exactly where they were last year. This is what prompted me to jump. A steep discount and still-low rates. But if rates climb next year, will prices decline enough to offset the increase in payments? Nobody knows.

In any case, I’m pretty convinced that prices will continue to decline. I also see risk spreads increasing, which means that whatever the Fed does is not going to matter too much. They can’t force banks to lend cheaply to consumers, even with low overnight lending rates. Mortgage rates can move in the opposite direction of the Fed and I think that’s likely. If the Fed has to stop due to inflationary concerns, it could get ugly.

Anyway, this just seemed like an “angle” that most aren’t considering. When exactly is the right point to re-enter? I get the sense that most people are expecting 50% haircuts, but it doesn’t seem realistic…



“When exactly is the right point to re-enter?” We’d have to think the other site’s answer will be never, but we’ll go ahead and say the time is right when you, and you only, are ready. Apparently, that time came. Good on ya!

Cheers to you “Dave”, thanks for sharing, and congratulations on your purchase.

4 thoughts on “Off the Sidelines and Into the Game…a Reader Report

  1. I think a lot of bear-rents (to coin a phrase) have no interest in buying in SanFrancisco because they are not certain this is a long term (5+) investment. If I knew for a fact that I’d be here in 2013 than I would buy now with a lot of confidence. But I’d take my time to find the right property / deal for me.

    It’s hard to say “jump-in” for the first time buyer. “Dave” was smart in that he got out before the same boat that rose with the tide sank with it. Not many homeowners are that motivated to put up with the hassle of moving twice. Anyway, sure, you could argue that he bought low, sold high, and bought lower. But like investing in stocks, it’s hard to time the market. But it’s hard to argue with his strategy too.

    Anyway… the buy when “you,and only you, are ready” is a bit generic. Perhaps a bit more comprehensive post on varying factors on when to buy for various category of buyer is a feature.

    When to jump in for the first time buyer?

    When to trade up for the existing home owner?

    When to plunk down an investment on a multi-million dollar mega mansion?

    I’m a would be first time buyer and I think there are a lot of factors preventing me from making the investment….. but that’s for another post! :-)


    [Editor’s note: You’re killing me! But thanks for the ideas for some “other posts”. Care to help with that?]

  2. First time buyer.

    * personal situation. You know your significant other (or lack of), if you love your job, if you plan on extending the family. You know your prefered lifestyle (downtown NYC vs north dakota). Re your significant other. This is quite important as joint ownership and other “details” can be important. You can use realestate to transfert assets from one spouse to the other OR you can use realestate to secure you personal belongings “against” your spouse. Thus motivating a buy at an odd time (rather risk to loose 20% in the real estate market than loose 50% in a divorce)

    * your personal wallet and piggy bank. I dont believe you should buy and invest your last shirt. Start by saving with automatic transfert to a saving account. buy CDs or other no risk bonds. See after a year how you do. See how you FEEL about saving money.

    Ideally, I’d say that you should give a thought about buying realestate when your piggy bank is twice the size you need to reasonably buy.

    What’s that reasonable size?

    a wild guess is 30% of a north dakota home. So if the home is 80K. You can safely buy with 20% down + 10% cushion for the bad days. (or 10% + 20% depending on the quality of the financing your find).

    another wild guess is 40-50% for a sf property. something like keeping your cushion at 20-40% of the pruchase value of your house. the first 20% of your cushion should be invested in ultra safe investments, and anything above can go agressive trying to beat the return rates.

    IMO those numbers are ultra conservative. Of course, you can start with less – but you need additional guts. And waiting to have more … then, you take some risks by lacking diversification of investments. For that purpose.,

    Another aspect is your own roof. How do you feel about your own roof. Rent or own? are you a compulsive remodeler? is owning your own roof a security for the coming years? or could it be a chained ball? Are you ready to tie your life to a large investment? or do you feel better starting smaller?

    First time buyer. From my few investments, I’d say that each was unique, was made under unique circumstances, and for unique reasons. And at the end, I reached diversification with properties that are very differents from one to the other – the oddest one being a frozen asset for the next 10 to 30 years. Your first buy doesnt have to be your very own SFH and CERTAINLY NOT your “multi-million dollar mega mansion”. If you have enough money to buy a 8 digit property in SF, be nice to yourself, and buy a tiny liquid place first – even at a loss so you can dry run the whole buying cycle, and dry test everything.

    Better waste 6% in commission on a 800K condo, then gain the experience and get a 2% discount on your 8 digits, than be a newbe on a 8 digits. (assuming you dont want to buy “at anycost because you wouldnt care less about so earthly money”)

    trade up. if you have the choice, i’d go for sell low buy low. or even sell high, buy low. Low not being the price tag, but your affordability index (includes but not restricted to mortage rate).

    If you are ready financialy to trade up, but not ready physically (money but no need or unindentified needs), buy something else small elsewhere. Small is usually very liquid. So when you need to trade up, sell your investment property, put your house on the market, and start house hunting. The small property money being your downpayment and easing the process. You might not even need to sell your small property, and gain twice in the deal.

    Where to buy small properties? that’s “stock market” investment. you can win, you can loose. But the amount size is usually worth some risks. I have a sweet spot for tiny units in downtown. rentals for (advanced) college students and young graduates.

  3. 50% haircut in SF real estate, not due to a 9.0 earthquake, would mean the US economy is experiencing some kind of catastrophic meltdown. Just don’t see that happen, especially with sovereign funds trying to scoop up good values along the way down.

    My gut says a 15% correction in SF RE value means the price is brought down to a reasonable, rational level. An additional 5% reduction would mean to me people have taken out the “San Francisco Premium” (for being ‘san francisco’ and there are no more stuff being built and its surrounded by water on 3 sides and it’s a great place to live). A further 10% reduction (total of 30%) would mean the entire economic mood in the US and world is so pessimistic that people have decided to cash out and put everything in gold or put money under their mattresses.

    So I would go with 20-30%.

  4. I think 50% off for the crappier units in the crappier parts of San Francisco is going to happen. This boom brought everything up in value and some of the crappiest stuff is the stuff that is the least sustainable. Nicer parts of SF might only drop 20-30%.

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