Advertisement
YOU ARE HERE: LAT HomeCollections

YOUR MONEY

Should you buy now?

The drop in home prices may mean it's time to jump in. Or maybe it's too soon. Here are pros and cons.

August 03, 2008|Peter Y. Hong | Times Staff Writer

Southern California median home sale prices are down about 30% from their peak. That's about as far as they fell in the 1990s real estate downturn, and enough of a decline to have many asking: Is it time to buy?

Some are already answering with their checkbooks. In the inland areas where prices have crashed hardest, buyers are slowly returning.

But many of those who study housing markets say the worst is yet to come for real estate. Buy now, they warn, and you'll regret it as prices continue falling.

Others contend that prices are low enough that renters who aspire to own should buy now so they can start building their equity.

Predicting price trends is a dodgy business, and there's no one right answer for everyone. But if you are thinking about buying now, here are some pros and cons to consider.

--

Buyer beware

The main argument against buying a home now is that values are still spiraling downward. Stay on the sidelines and you'll be able to buy that dream home for a much lower price than now -- about 25% less in Los Angeles County, predicts Celia Chen, director of housing economics for Moody's Economy.com.

Chen bases that guess on several factors, including the high inventory of unsold homes and the gap between current prices and income.

During the housing boom that began in the late 1990s, the relationship between home prices and incomes grew increasingly out of whack. Mortgage lenders offered subprime loans with low introductory teaser rates, as well as "no-documentation" loans that didn't even verify a borrower's income.

This allowed people to buy more expensive homes than they could afford, helping inflate values. But many of those loans have gone into default as teaser rates expired and borrowers couldn't make their payments. And lenders are no longer handing out loans to people who can't demonstrate their ability to repay them.

That has made the relationship between home values and incomes relevant again, economists say.

More than half of the adults in the Los Angeles metropolitan area own their homes. But because of the price run-up that began in the late 1990s, fewer than 11% of adults in the L.A. area earn enough to buy a median-priced home of $412,000, according to a National Assn. of Home Builders index.

As recently as 2001, when the median was lower, that figure was about 38%.

Los Angeles economist Christopher Thornberg believes that home prices will stabilize when homes are affordable to about 25% of the adult population. For that to happen in Southern California, home prices would have to come down 20% to 35% from their current levels, Thornberg said.

"There's no way in hell the house you buy now will be more expensive next year," he said.

Home prices are also relatively high compared with rents. The ratio of home prices to annual rents in the Los Angeles area was 20 as of March 31, meaning the median home sale price was 20 times a year's rent for a comparable property, according to Moody's Economy.com.

The 15-year average ratio in Los Angeles is 16.4.

It's true that rent checks don't generate returns. But renters can take the money they would have spent on a down payment and invest it in stocks, mutual funds or other investments (20% down on the median-priced Los Angeles home would be about $82,000) and are spared the costs of home maintenance and repairs.

Another reason not to buy is the current economic uncertainty. The mortgage payment that looks affordable now will be harder to make if you lose your job.

"You want to have enough savings or cash flow to weather a downsizing in the workforce," said Judi Martindale, a San Luis Obispo financial planner. If not, she said, keep renting.

Those who would depend on their homes as a form of retirement savings also should hold off, Martindale said. A house is not liquid, and relatively few who plan to generate cash by downsizing to a cheaper home in the future actually do so, she said.

"It's very difficult for people to move down" when the time comes, she said.

--

Why wait?

Those who say now is a good time emphasize the benefits of homeownership. The market may or may not be near the bottom, but take that off the table, these people say. Instead, consider the advantages of owning versus renting.

As long as you can afford your mortgage, for instance, you won't be evicted. With a fixed-rate mortgage, your payments remain the same over time, while rents generally rise. Over time, you can build equity in your home and own it free and clear -- and then won't have to worry about monthly payments at all.

There's also the advantage of living in an environment that you control, where you can remodel or decorate as you please, without having to seek a landlord's permission.

"Houses are lifestyle assets, not investments," said Brent Kessel, a Pacific Palisades financial planner. Kessel believes that those waiting for a market bottom may be approaching homeownership the wrong way. As long as one stays within one's means, the financial risks of homeownership diminish over time.

Advertisement
Los Angeles Times Articles
|
|
|