Million Dollar FOMO−Buying a House in 2018

Lennar House
Credit: Lennar Homes

Since the end of the financial crash in 2008, buying a house has always been in the back of my mind.  In the beginning it was about setting up roots in San Diego and having a place to call my own.  All my friends and community was down here and the aerospace job prospects were more plentiful as compared to the Bay Area where I am from. 

Pretty much every year since graduating I have talked and even begged my parents to help me buy a house down here.  Many times they would visit and we would look at homes, but never pull the trigger.  Typically this was always because of some internal divisions within the family with regards to spending money. 

It wasn’t until Thanksgiving of 2017 when I visited my aunt’s house for a quick get together that she convinced my parents that helping me purchase a home was actually a good idea!  Since then I have been on the hunt for a place to call my own.

Now I know my situation is very unique.   I count myself extremely blessed and fortunate that I have loving parents who are willing to help me put down money for a down payment on a home.  I understand that many people in this country are not in the situation I am in.  In addition, I absolutely understand my privilege and I am grateful for them.  With that said, this article isn’t necessarily about me, but about my views on the 2018 housing market.  I want to walk you through my research and thought process when it comes down to buying a home.

The Reason

Before we get into that I want to walk you through why I want to buy a house.  As I said before, I long for a place to call home.  I also hate paying someone else’s mortgage and seeing my money go into what I feel is a black hole.  With where I am in life right now, I am looking for a place that is close enough so that I could bike to work.   This would allow me to save hundreds of dollars a year and also get my much needed cardio in.

Being a long term strategic thinker (hyperlink to old article), I would also want a starter three to four bedroom townhome from which I could raise a family.  I am very fortunate that my company is located in a school district that is known for its amazing schools.

Even if I were to change jobs, this would be a great neighborhood to raise a family as there are a plethora of things to do outdoors nearby.  With so many parks, community pools, and trails there is plenty to do around here even if you don’t want to drive to the beach.  In addition, there are many other aerospace company nearby which doesn’t change things up too much. 

Honestly at the end of the day, I am ready for that next stage in life, which is to marry someone and start a family with them. 

The Search Begins

With the blessing and full support of my family, my search began in earnest.  I reached out to one of my college friend’s parents who are real estate agents and the listings started to poor into my email inbox.  Soon thereafter, we started visiting homes or going to open houses that fit my profile.  Over the first couple of months in 2018, we found a couple of homes that I liked and put offers in for.    

It was a really frustrating start as I typically would lose out on the house.  Typically what I saw was that within the first 48 hours of the house going on the market, it would receive up to five offers.  On some homes that I put in an offer for, there was at one point even 10 other offers!  All of these homes sold within a week of being listed.  The housing market in early 2018 was simply out of control! 

As I continued to look at homes, I also began to do some research to ensure that I was making the right decision.  I literally typed “housing market” into Google and one of the search results was Financial Samurai’s article “It’s Time to Start Worrying about the Housing Market Again”.

In the article, Financial Samurai (Sam Dogen), goes through six reason why he believes that now is a precarious time to be buying a house.  He starts off by taking a look at how rents of peaked in many of the most expensive cities in the United States.  Just by looking at the data, one can see that median asking rents are down from their record peak.

 

Lower Rents Per Zumper

He then notes that mortgage rates are rising and as a result that will affect affordability of house.  His third reason is that homes have blown past their 2006-2007 highs.  He goes on to talk about the possible negative impacts of the recently passed tax reform, how inventory is slowly increasing, and that housing tops take a bit of time to realize. 

Overall his recommendation was to hold off on taking on large amounts of debt to buy a home in these expensive coastal cities. 

A couple of months later, Financial Samurai would publish another article and presented this chart.

Housing Market Cycle Chart

As you can see, San Diego was categorized in the early exuberance column.  Exuberance meaning prices and volumes surge, weakened affordability, frenzied consumers, and capital grows cautious. 

The Local Market-First Half 2018

When comparing what I saw on the ground and experienced first-hand to that chart many of the bullet points were checked off.  With all the offers coming in for any single house, we can check off the frenzied consumer box. 

Prices were indeed surging as many homes were selling up to $15k more than asking.  Not only that but prices were getting a bit out of hand with the raising of interest rates and the homes selling for record prices.  Even I myself got into a $10k bidding war with another buyer.  Prices were simply just silly.  I felt like I was barely getting any house for the amount of money I was paying!  $600K “Starter homes” in San Diego were disappearing faster than they could be put up for listing. 

Of course even with all this data, it didn’t prevent me from looking for a house.  Sometime in early February my parents came down to visit and we decided to go look at new homes again.  We looked at the a new single home development and my parents told me at this point they were willing to help out a bit more given how hard it was for me to buy a house. 

As we toured the model homes and the potential lots, we found what we thought would be a good home for me.  We had noticed that there were two homes that were sitting on the market for about two to three months at that time that had not sold.  They were perfect in that I could buy one of those homes and rent out the other rooms to help pay my mortgage.  In addition, they would probably be my one and done house.  It would be the home I would live in for the rest of my life and raise my family in. 

The only problem was the asking price.  These homes were nearly $1,000,000!  When my mom and I got back to their hotel room later that night we did an analysis of what we thought the homes were worth.  I also ran the numbers through a couple of spreadsheets and see if indeed I could afford the house with renters.  It turned out I did, but would have had to sacrifice large portions of my 401(K) and IRA contributions to do so.  Other than that, my lifestyle wouldn’t have changed very much.

We then began the dance with the builders of shooting over offers and counter offers.  Three months would go by and when all was said and done we ended up sending over a final offer that was $50K below asking price.  At this point I was exhausted with the process.  We would do this song and dance for what seemed like eternity only to be rejected by the builder.  This time was different though.   Out of nowhere the builders got back to me and agreed to sell me the house at my asking price.

Alas the house was mine and at what I thought was a bargain, but that soon didn’t turn out to be the case.  As my family started the preparations for buying the house and scheduling their travel to come down the following week, the house sold within days to another buyer at asking price.  The house had slipped out of my hands. 

At first I was pissed off with myself, missing on that opportunity.  For four months, I had been so invested in getting that house that it sucked to lose.  So many what ifs went through my mind.  It was a tough loss, but now when I look back at it, it definitely was a blessing.

Present Day Market

In all, that house sat on the market for 144 days.  This is important to note because if you were to read what I wrote before about how competitive the market was, you would think this home should have had no problem selling.

Other homes in that development sat unsold for up to 170 days before being sold.  This trend was not just limited to this new housing development, but you also saw a similar trend in the existing homes in the immediate area.  Homes that were trying to sell in the low $900k’s to low one million were sitting on the market for 30 days or more.  This trend still persists to this day (September 2018).  Once I saw this trend in the high end of the market, I knew that the housing market was beginning to meet some resistance.

Homes are Sitting on the Market Longer

As we move into September, the trend on the high end of the market has also begun to spread down into the lower ends as well.  Townhomes that I described earlier, that would have sold within a week are sitting on the market 90+ days.  This is what I see as the beginning of Phase 4 (Contraction/Early Downturn) in the Housing Cycle Chart.

In addition, sellers have reduced the asking price to below what were previous highs.  Case and point look at the two homes below.  The one on left sold back in April and the one on the right is still on the market and is priced $40K below!  Mind you both these homes are the same exact floor plan and are located in the same development.

Home for Sale
Home Currently On the Market
Home Sold San Diego
Identical Home that Sold in March

I could continue to bring up many more similar cases, but just don’t take my word for it let’s see what the Redfin CEO, Glenn Kelman, just recently said during his company’s latest earnings call.

Year-over-year U.S. home sales declined in June. We expect U.S. home sales growth to have improved slightly in July then to weaken again in August and September…

…But in Seattle, Portland and San Jose, where prices have increased the most, the percentage of homes selling in the first 2 weeks on the market declined in June from 61% to 52%. And the percentage of listings that dropped their price has increased from 31% to 33%. June sales were down in these markets by double digits. And inventory was up, also by double digits. The trend is continuing in July and reports are now coming in from Washington, D.C., Boston, Virginia and parts of Chicago as well that the homes there are getting harder to sell. As U.S. home prices have increased faster than wages for 70 straight months, buyers in markets like these have finally had enough, at least for now. There are still plenty of markets where homebuyer demand is strong. But for the first time in years, we are getting reports from managers of some markets that homebuyer demand is waning, especially in some of Redfin’s largest markets.

This is crazy for the Redfin CEO to say.   Immediately after earnings reported the stock tanked 20%.  I bring up these comments because Redfin has more visibility and data into the market than I do.  They are like the Facebook of real estate.  If Redfin sees a slowing down in market we should probably heed his word.

The Headlines are More Negative

In addition, the data that I am seeing is also being confirmed by other market analysts.  You are seeing more and more articles lately pop up talk about the slowing housing market.  Here are some examples:

·        Mortgage rates hit a four-month low as housing market stagnates

·        U.S July new homes sales fall to nine-month low

·        San Diego Housing market seeing more price cuts

·        Housing market is showing signs of cracking: ‘Anything-goes list-price strategy is no longer working’

·        Nation’s housing market may be headed for biggest slowdown in years

·        Trouble Ahead For The U.S. Housing Market

·       The U.S. Housing Market Looks Headed for its Worst Slowdown in Years

Again, this is just a few headlines and one can argue that these were cherry picked.  That said, you cannot argue with the data and that we are seeing more negative headlines with regards to the housing market.

It is said that traditionally the spring and summer months of the year are the strongest selling seasons.  This is due to the fact that parents want to wait until summer break to move as to not make things difficult on the kids.  With all the data I have presented though, what happened to the strong summer? 

Lessons Learned

Overall I am not calling for a housing crash.  With the data I am seeing though, it is hard to argue that we are seeing a slowdown in the housing market itself.  Things are shifting slowly from a seller’s market to that of a buyer’s market.

As I have mulled over buying a house over the nine months or so, I have learned that when it comes to it you can talk your way into buying just about anything.  You can do this even to the point of stretching yourself financially thin.  Not only that, but I have learned to trust the many countless hours of research and late nights I have spent studying the housing markets.  It basically boils down to ultimately trusting my gut.

Over this entire process, I am extremely thankful for the many friends, mentors, and family members who I have reached out too for advice and counsel.  To stick to my guns and believe in the data I was seeing is no small feat when run up against FOMO (fear of missing out). 

In the end, not buying that house was a blessing.  Now being several months removed from that whole situation, I sleep better at night.  This is because for one I don’t have to spread myself financially thin.  I can continue to max out my contributions to a 401(K) and IRA, which will hopefully compound tremendously over time.  In addition, I don’t have to deal with the stress of being a land lord and finding people to rent out rooms to so that I can ensure I pay my mortgage payments.  The list of burdens and potential pitfalls continues to go on and on.

In doing a thorough analysis of the current housing market, there are simply too many negatives out there to justify buying a house at full price right now.  What I will be doing is taking a wait and see approach to buying a house.  When buying a home, it has been said that there are two things you cannot change.  The first being the location and the second being the purchase price.  

Conclusion

Overall I am not worried about a buying a home and the value of the home dropping because I know that over time, the house will appreciate in value.  That said, given where we are in the housing cycle, I believe that if you can save 10-20% off the purchase price of the home, why not do that.  For me that would equate to roughly a savings of $700-$1500 off of my monthly mortgage!

Should a home that fits my criteria pop up on the market at the price point I am looking at, you can be sure I will be interested.  Until then, I will be looking to make deals on homes at the prices I feel that reasonable to me. 

Anyways, I am looking forward to hearing your thoughts.  I understand that real estate is local and with that I am interested in hearing from you guys and what you seeing in your local market?  Do the trends in your local area mirror what I am seeing here in San Diego?  Have you bought a house recently or are you considering buying a house?  Let me know!

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