Woodbury Condo as a Home

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duplicitron_IHB

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My wife and I bought our first home in 2004 in Corona for $390000 and sold it a year later for $490000. We didn't buy it as an investment, but ended up hating the neighborhood and wanting to move closer to work.





We then spent the next six months renting in Irvine (I anticipated a drop) and saving as much as we could. But, honestly, after six months in an apartment, I couldn't stand it anymore. The feeling of "temporariness" bothered us both and our upstairs neighbors kept us up late. I missed the tax write off, and couldn't stomach another day of waiting for some sense of permanence.





So, in October of 2006, after a $25k reduction in price and another $25k in incentives, we purchased a detached condo (1030sqft) in Woodbury for $513000. We love the floor plan and the location. So, while prices have slipped further since, we are both very happy with our home and intend on staying here for a long time. I don't know if another year in that apartment would have been worth even $50k to me.





I just thought I'd offer a personal experience with a slightly different perspective.
 
<p>Thanks for your story duplicitron. It's always good to get a different perspective, and I am glad you and your wife are happy and living well.</p>

<p>However, I would caution anyone reading your comments to stop and think about the huge opportunity cost you have decided to pay for your dissatisfaction with being a renter. You have paid $513000 for a unit whose market rent is at most $1800 to $1900. And I am talking about a private-owner condo here, not a 2/2 apartment (those can be had for $1700 or less - I know I rent one nearby for $1650). Any rent vs buy calculator online can tell you that this is a really bad deal, even if you assume that OC property values are not about to decline precipitously. With a $513000 loan, you are paying $2,560 in interest each month, before you even count loan principle. Your HOA fees are probably around $200 / month. You must pay for your own insurance and maintainence. And your tax benefit is mostly canceled out by the property taxes you must now pay. So the way I see it, you are giving up at least $1000 a month to avoid that feeling of "temporariness". If it's really worth that much to you, then more power to you. But again, I would caution anyone looking at your situation to ask themselves whether it is worth that much to them before buying. </p>
 
My math comes out a little differently than yours.





My loan was for $363,000 at 6.25%.





After the tax reduction for interest and property tax, assuming this property rents for $1900, I'm paying $500 more a month to own this unit rather than rent it. If you want to count the interest I would gain by leaving my money in the bank and renting, I guess it could closer to $750 after capital gains reduction.





Regardless, my point was, for me there is a difference in where and how I live and where and what I invest in.





Also, it sounded like you were suggesting that the real estate market will eventually correct itself according to current rental prices? Is this what determines the price of real estate? (This is a genuine question. I'm not a big real estate person.)
 
I would like to see more of your type of posts duplicitron. I sold my house in Rancho Cucamonga 4 years ago and moved back to OC with plans to buy in a couple years. Wrong decision. At least living in Tustin Ranch is better even if we are renting and we will eventually buy in the Tustin Ranch / Irvine area. Woodbury is one area we will seriously look at. Maybe I'll be your neighbor someday. A little trivia - about 22 years ago I designed the drip irrigation system for the asparagus fields on what is now known as Woodbury.
 
duplicitron,





First I would like to attempt to answer your question: "Also, it sounded like you were suggesting that the real estate market will eventually correct itself according to current rental prices? Is this what determines the price of real estate? (This is a genuine question. I'm not a big real estate person.)" The market price for real estate is determined by whatever buyer and sellers can agree upon for price. In a normal real estate market there is a strong correspondence between rental rates and mortgage payments which translate to sales prices. Prices generally don't fall much below a corresponding rental rate price because investors will buy the property and rent it out in order to generate some positive cash flow. For instance, if a property can be rented for $2000 a month, that is $24,000 a year. A little quick rule of thumb is that you can multiply the yearly cashflow times 12 to get to a reasonable cashflow value: in this case $288,000. It is more complicated than that because you have loans and taxes and HOA fees and stuff like that, but the quick calculation can get you in the ballpark. The danger in the real estate market right now is that prices are nearly double their stable cashflow value. This happened because people started betting on appreciation rather than sticking to the fundamentals of cashflow. Speculating on future appreciation is the basis of all financial bubbles, and all signs are that residential real estate is at the top of a massive speculative bubble.





The only thing that concerns me about your decision to buy is that you might become somewhat trapped there. If you have bought at the peak, and if the market declines significantly, you may be waiting a very long time to get back out at breakeven. If you are going to be happy for the next 12 to 15 years in the place you bought, you have nothing to worry about; however, if you are planning to move in 3 to 5 years, you may be underwater (selling prices might be lower than what you paid or what you owe). When California had its last bubble, people who bought at the peak in 1990 had to wait 10 years for the market to come back. That was a small bubble relatively speaking compared to the one built up over the last 5 years.





Nobody knows what will happen in the market, but we all have to assess the risks and act as we see best. For me, that is renting until payments come back in line with rents, probably 3 to 5 years from now.
 
Feeling trapped is never fun. I guess I knew there would be a possibility/probability of a dip of 10-20%, but I guess I didn't think it would be as severe as everyone on this board thinks it will be. It sounds like a lot of people expect prices to be reduced by 40%.
 
<p>HI duplicitron,


To answer your question, yes, I do believe that OC home prices are going to drop a lot in the next few years. You can safely put me into the 40%+ camp. In fact, I think this is probably the best reason to wait; I didn't bring it up for your situation because it sounded like you were more concerned with maximizing your present value. As IrvineRenter said, throughout history we see a strong correspondence between rental rates and home sales prices. If you think about it this makes perfect sense. What something costs to rent should be a reflection of what it costs to buy, and vice versa. For example, if you go to a car dealer, you should expect a $50000 BMW to lease for about twice as much as a $25000 Toyota, right?</p>

<p>Let's take the car analogy a little further. Suppose that 6 years ago, you went down to the dealer to get a new car. A Toyota Camry cost $20000 to buy or $400/month to lease. Some people choose to lease, some to buy, depending on their circumstances. Today, you go back to the same dealer to get a new car. But now, the a Camry costs $50000 to buy or $500 a month to lease. <em>Hmmmmmmmmmmm</em>, something strange has happened. The relationship between rent and buy has changed dramitically for some reason. Obviously it is now a better deal to lease than it was before. It still may be better to buy for some depending on their circumstances, but for most leasing is now the better choice. The same thing has happened to homes in the OC; relative to price, renting has become a much better deal than it was.</p>

<p>What you think will happen next depends on what you think cause the change in the rent/buy relationship. If you think the change is permanent, then there is no reason for worry. However if you think the change is temporary then either prices have to fall <strong>A LOT</strong>, or else rents have to rise <strong>A LOT</strong>, or some combination thereof. I and others one this board see some strong evidence that the change is temporary, and that wages will constrain rents from rising very much.</p>
 
Housing prices are affected by many factors. Some internal, others external. For example Panama's RE prices jumped up a lot due to all the wealthy Americans and Europeans buying properties there, and now they've moved into Costa Rica. In Los Angeles K-Town (Korean Town), they're getting an influx of Korean investors, because the S. Korean government recently moved the cap ($1 or $3 million?) on amount of $ you could take out of the county to inverst in foreign RE without tax penalty.





Immigration, demographics, and population shift all affect RE prices. The demographics shift in last 20 years caused a boom in areas North, East, and South of Los Angeles. For example, Camarillo, Diamond Bar, and Irvine. At one time Diamond Bar was considered the pits. Today it has one of the best school districts with expensive homes. The first time I was in Irvine, before Tustin marketplace was built, I remember lots of farmland and single family homes were avail for $110,000. Today the same house is valued at $700k+.





When housing prices climb in desirable areas, people will "double up" to afford it. We've already seen this with some Hispanic immigrant families, where 2 families pool their resources together to buy a single family home. The neighbors don't always like it because it results in many cars parked on the street & lawn. In England it's also common to find 2 couples pooling $ to afford a home. Heck when my buddy was attending UCI, he was renting a 2-bed apartment with 3-4 other students, and they only had 1 assigned parking spot, LoL.





If the prices become too high, what you'd see is schemes like government & bank-sponsered 60-year low-interest & interest-only mortgages for condos on leased land. The land owner agrees to lease the land for 60 years, and the multi-story high-rise condo is built on top and intended to last 60 years. The "buyer" gets a 60-year mortgage and basically gets fixed rent for rest of his/her life. When the 60-years period is up, the lease expires and the building is demolished, and a new one built in its place. If you think that's silly, in Japan and Switzerland they have 90 and 100 year mortgages.





Will RE prices drop in OC? Yes, it will (in the short term). But if you look at the demographic and immigration trends, we're getting more and more people every year, and California's population is growing. Duplicitron may have paid "too much" for his home today, but unless if some serious environmental disaster occurs that sinks the whole area, I think that $500,000 home will be worth $1.5+ million in his children's time. Americans suck at saving $$ in general, so buying a house is kind of like savings for them. I'm using this analogy because home value and rental income actually apperciate slowly over time like savings account. What happened over last 5 years is uncommon and you have to look at the big picture.





There are people who are good at fixing up homes, they buy a house, fix it up over 2 years, sell it, repeat. It works for them but not for me. IMO your primary residence should not be a short-term investment. Buying a "home" is an emotional decision on where you want to live and how you feel about the property, it's totally different from choosing an investment property where you only care about the numbers and can care less about being a slumlord. If you want an investment property, go buy an investment property and flip it via 1031-exchange. Do not live there yourself, and do not manage it yourself. Get an experienced property manager.
 
<p>You make an excellent point momopi. When the underlying factors that drive demand change, prices will change as well. Obviously, when the cultural amenities, job opportunities, and other important factors that make an area desirable change dramitically, then we would expect prices to change as well. You are certainly right to say that OC, and especially Irvine, has changed dramatically with regard to these factors in the last few decades. Because of this, it is not suprising at all that prices here have gone up quite a lot. But you know what's funny? Rents have gone up quite a lot as well. About the same amount as prices, in fact, up until about 2001. That is my main point. All the things that make a place more desirable to buy a house, also make it more desirable to rent a house. You cannot simply ignore that the breakdown in historical relationship between rents and prices... it demands an explaination. And please don't say interest rates. Yes, they explain a small part of the rise, but nowhere near all of it. A $300000 mortgage at 7% is a much smaller payment than a $800000 mortgage at 5%.</p>

<p>So why has the rent on my apartment gone up 25% in the last six years, but a similar condo has tripled in price. Immigration, demographics, and population clearly do not tell the whole story, because they would have pushed rents up too. In fact, the people most likely to "double up" as you say, are poorer people and immigrants, the very same people who are more likely to rent than to own. There are always some families that will double up, but there are a far larger number of families that will just move to IE or out of state. Think about it. Which do you know more of in your own circle of friends, families who double up with other families, or families who have moved out of California partly because of the high cost of living? A big news story came out a few weeks ago about how California is now a net loser of population to other states. Paying $300000 to double up with another family in OC doesn't look so hot when you can buy your own house in AZ or TX for $200000. Or for that matter keep your job and bear the commute to Riverside.</p>
 
<p>I am not sure what to make of the weird mortgages you mention. The payment on a 40 year, or for that matter, a 100 year mortgage are not very much lower than a 30 year at all, especially once you factor in the slightly higher interest rates that banks would charge. The difference is almost nil, since interest is most of the payment. Don't take my word for it, go find the mortgage calculator of your choice. And as for the 60 year demolishion plan, that hardly inspires the "pride of ownership" that people seem so eager to pay extra for. Funny you should mention Japan. The 100 year mortgages sure didn't do much to prop up home prices there, did they? The average home price in Tokyo is about half (no, really, that's not a typo, half) of what it was back in 1990. A lack of developable land clearly doesn't help prop up unreasonable prices either, apparently.</p>

<p>


It is correct, of course, that Duplicitron's condo (or at least that land it is built on) will be worth 1.5 mil someday. Like you said, home values and rents appreciate. Inflation will play a big part too. But that is irrelevant to what we are talking about, becuase it doesn't really say anything about whether the condo is a good investment compared to the alternatives. Historically, home prices in "built-out" areas appreciate only slightly faster than inflation. What happened over last 5 years is indeed quite uncommon and very unlikely to continue. I think that $500000 in an SP500 index fund is going to turn into $1.5 million a lot faster than Duplicitron's condo. And even if I am wrong, think about how much I have to gain by waiting a few years and buying the condo at a lower price. I am sure that someday the NASDAQ will go to 10000 points. Does that mean that it was a good idea to buy tech stocks when it was at 5000 points in March 2000?</p>

<p>


Nothing you said explains the breakdown of the traditional price/rent ratio that has happened here in OC. I think the hardest thing for a lot of people here to accept is that the real explaination has nothing to do with OC at all. If it did, we wouldn't be seeing the exact same thing happening at the exact same time in markets all over the US. Let's face it - a speculative bubble swept over the nation. Now it is ending. If you are in a good situation like Duplicitron and don't really care, then fine. But I still think the bulk of evidence favors waiting if at all possible.</p>
 
See, this sounds like trying to time the market and enter at the best possible place. I'm just not that kind of guy. Sure, I would have liked to bought at the rock bottom, but, in reality, I think it is really difficult for a "joe schmoe" with a wife to do something like that with his primary residence. If it was a second home or investment property, I would view my current situation much differently.
 
<p>That's what really burns me about the housing run-up. You are right dup, ordinary people like you and me should just be able to buy when we are at the right time in our lives and not worry about timing the market. But prices got so high - crazy, unjustified, once-in-a-generation-high - that if you don't try to time the market at least somewhat you could easily lose a couple hundred grand, or get foreclosed on and have bad credit for the next several years. I just turned 27; I mainly just want a place to live and maybe raise a family. But the stakes of buying at the wrong time have gotten so high that unfortunately people really need to educate themselves about what is going on.</p>
 
Hello,





First, I'd like to return to my original point that a "home" and an "investment property" should differ. Buying a home is an emotional decision, you want to buy a home that you WANT to live in and feel good about it. It's good for yoru mental and physical health. A home is a long-term residence and not a short-term investment.





Currently we're in the BM-1 (buyer market 1) phase. The prices are definately higher than BM-2 (later), but you get to pick and choose what you want without a lot of competition, because the other people aren't buying. If you're shopping for a home and you find EXACTLY what you want and can afford it, by all means, go ahead and buy it, you can even dictate terms to the seller.





Recently I sold one of my investment properties in north OC. The buyer wanted a condo for his daughter who was attending college nearby. Had I put the condo on the market in 2005, I could've sold it as is at asking price. But because it was late 2006, the buyer offered $50k below asking, plus various repair conditions, AND he wanted the keys by MONDAY so he can surprise his big girl with the gift. In 2005 I'd have been in the strong negotiating position. In 2006 I was the wimp who had to bend over to please him, because I doubt I'd have found another buyer soon.





On the other hand, if you're buying an investment property, you should make your purchase decision based on hard numbers regardless of market condition. The value of a multi-unit rental building is very much dependent on its rental income, but the value of a rental single family home or townhouse/condo is subject to wild RE market swings.





================================================================





60, 90, or even 100 year mortgages that exist in other countries are mostly government-backed and subsidized loans with low interest rate. In many countries the government offers subsidies to first time home buyers, even for 20 or 30 year mortgages, and the interest rate is not always based on the same "math" like us. For example in Taiwan, first time home buyers are eligible for special loans with interest rate as low as 3%, or "postal interest rate +1%". In countries like Taiwan and Japan, they didn't used to have banks everywhere, so the local post office doubled as a savings bank with low interest rate. So if the post office was offering 2.5% savings rate, your first-time home buyer mortgage rate would be 2.5% + 1% = 3.5%. This means people from those countries can get into homes easier and possibly have more $ cash to bring with them when they immigrate to Orange County.





Is there a traditional price/rent ratio? Yes, though the curve isn't always perfect due to monopolies (cough irvine company) and government (rent control, subsidies). There's no doubt in any of our minds that Irvine's RE prices are over-valued right now, even as rentals ($1450/mo for 500 sq ft apartment?!). But like I said, a home should not be treated in the same way as an investment property. If you're buying a home, you shouldn't care if they're building 14,000 homes at Rancho Mission Viejo to drive down your home value, because it's a house that you want to live in, not flip with.





Is RE better or worse investment than stocks? Depends. With stocks you could at most buy on margain and borrow 100%. With RE you could do 5% or even no $ down and borrow a bucket of $ and have a tenant pay your mortgage. You could also look overseas for RE to invest in. The British are VERY savvy at this and own a lot of properties from Spain to Eastern Europe. If you like living in the OC, buy a home in the OC. If the prices are over-inflated and make bad investments, then shop for your investment properties elsewhere.
 
<p>momopi, you are saying a lot of interesting things, but I'm afraid I don't really understand the conclusion you are trying to draw.</p>

<p>So let's just look at your original point and focus only on buying a home to live in and ignoring all investment aspects. I agree with you that this should be highlighted, since it's the core of what most people (like me and dup) care about anyways.</p>

<p>Buying a home is an emotional decision. But even emotions have a price. People like to feel pride of ownership, and the mental and physical benefits that may come with that. People are willing to pay a premium for that. They always have been, and probably always will be. But this premium, whatever it is, is finite. Has anything changed in the last 6 years to suddenly make this premium vastly higher than it used to be?</p>

<p>6 years ago, a young family with the median household income for Irvine could comfortably afford a decent 3/2 starter home. Now they cannot come even close. That change matters. That change is important. That change is worth thinking about even if you don't care about RE as an investment. I'm sorry, but just because buying a home involves emotions doesn't mean you should stick your head in the sand and ignore the hard numbers.</p>
 
Interesting back and forth going on. I see eye-to-eye with bigmoneysalsa. I probably would see things like momopi if the disconnect between prices and rents wasn't quite so great. If houses were only 30% overvalued, I might think about stretching to buy if I REALLY wanted a property, but at 100% overvalued, there is no justification. Houses are 100% overvalued. This is no small bubble: This is probably the biggest bubble in the history of residential real estate. We might have stopped at 30% overvalued if lending practices weren't abandoned about 3 years ago. The introduction of interest only and negative amortization loans sent prices into the stratosphere. Once the easy money credit drys up and foreclosures force properties on the market: look out below. IMO, whether the drop is 40% or thereabouts depends on how quickly it happens. I believe we will see a 35% drop over the next 2 years followed by a 3 year period where the market drifts slightly lower until rents and prices align again.
 
Naw, we had a pretty godo run, but it isn't the biggest. From 1970 to 1983, the median price for OC homes jumped by almost 500%. This time, from 1997-2006, the increase is about +320%. Granted, the dollar amount is a lot higher toady, but in % terms we didn't beat the 1970's. The biggest RE buble I can think of in recent history would be Tokyo Japan in 1980s, Orange County doesn't come close in the size of that bubble.





Yes OC RE is over-priced. Yes it'd prolly continue to drop in near future. No it's not going to crash by 50% suddenly like the stock market. RE crash is a slow multi-year event ("creeping doom"). In Japan, when Tokyo RE prices went, it was a 17-year event where RE prices fell by as much as 80% in the extremes. In comparison our little bubble is tiny. If Irvine RE prices drop by 30%, you'd have investors like me jumping for joy and snapping up whatever I can afford near UCI area and turning them into rentals. The population of CA is growing, so are the university student population, and it grows a lot faster than student housing. Students are more willing to double up to save $$ and it translates to more rental income for you.





A search on MLS showed that Irvine now has several 3 bed / 2 bath homes avail for under $500,000. It's getting cheaper but still out of reach for young families just starting out. So the solution is to make your neighborhood attractive enough to buyers who has the $$ and is willing to pay a premium to live there. Yes it's elitist but we live in a capitalist society. Mission Viejo has done a pretty good job at it and Irvine followed its example. I think only recently that the median family income in Irvine exceeded Mission Viejo's to near $100,000.








p.s. I tend to think in multiple directions at one time, so you guys will have to excuse me for appearing scatter-brained.
 
The 1970 to 1983 bubble also corresponded to a period of rampant inflation, so the actual gains were not that great. Only the last year or so of that time period saw real dollar gains. The recent bubble happened without inflation eating away at the value of a dollar. In inflation adjusted terms, this bubble is bigger by far. Now the Japanese, that is another story. That was a bubble on steroids.





If you want to read a really good primer on real estate bubbles in California, go to Professor Piggintons site and read:


<a href="http://piggington.com/bubble">Evidence of a California Housing Bubble</a>





<a href="http://piggington.com/risks">Risks of a Serious Home Price Decline</a>





I doubt house prices will cut in half because it will take some time for the bubble to deflate, but if it happens relatively quickly (3 to 5 years) you could see 40% declines. I don't think you will see too many investors jumping in until the rents create a positive cash flow. If momopi is jumping in at a 30% decline (which would be in advance of the breakeven point) I am guessing it would be because the projected growth in rental rates would create a near term breakeven point. Personally, I will wait until the cost of ownership is about equal to the cost of rents because I know the market will get back there, and I can be patient.
 
<p>duplicitron, </p>

<p>I don't think a 50% nominal drop is very likely. But a 50% real drop is certainly possible and would not suprise me at all. Please take a look at the links IrvineRenter sugests if you want to know why I hold such an opinion. Pigginton has a lot of good numbers and a good sense of humor to boot.</p>

<p> </p>

<p>momopi, </p>

<p>I really enjoy the discussion we are having. But now you are starting to say things that are just not true.</p>

<p>You really need to be careful with numbers that are not inflation adjusted. A 1983 dollar was worth 2.64 1970 dollars. A 2006 dollar was worth only about 1.21 1996 dollars. So, using your numbers, the 1970-1983 time frame saw a real increase of 92% (500 / 2,64 = 192) whereas the 1997-2006 time fram saw a real increase of 164% percent (320 / 1.21 = 264). So actually the recent bubble has actually been much larger, and occured over a much smaller time frame.</p>

<p>You are also incorrect about Japan. During their bubble from 1980 to 1990, Japanese home prices increase approximately 105%. Again, much smaller than our current run up here in various bubble market throughout the US such as OC. Whatever steroids they were using, ours are way better. If Japan could have a 50% decline after a 105% run-up, why is it so hard to believe that we could have a similar fall after our 164% run-up? After all, they are even more land-constrained then we are here in So-Cal.</p>

<p>As far as the gleeful investors go, I am not worried. I have heard this before and frankly, I think it is a misleading and dishonest scare-tactic intended to get people to believe the whole "buy now or be priced out forever" nonsense. Here are my reasons. First ,even at 30% todays prices rental units aren't that great of an investment cash-flow wise. Investors were not snapping up rental properties back in the 1990s when they had much better PE-ratios than 30% off todays prices would be. Second, investors are a very small part of the market. Any major shift in demand from normal people can produce price movements that will dwarf what investors do. Third, many investors are going to get burnt bad by the coming decline, and will have bad feelings about real estate. For example, tech stocks were undervalued in 2002, 2003 because so many people got burned and didn't want to touch them. </p>

<p>The population of CA is growning, but the population of homes is growing faster. See piggington for the hard numbers. Or heck, just take a drive through northeast Irvine, north county SD, or just about any city in the IE.</p>

<p>The median household income for a family in Irvine is $97,592. Using a conventional 30 year mortgage, it would not be easy for such a family to afford $400,000 (assuming 20% down). 4X income is pushing it affordability-wise, especially if you are raising a couple kids. And by the way, I just did a search on ziprealty for detached single family homes in Irvine under 500K. My search returned exactly three results. The cheapest was $479,000. All three had only 2 bedrooms.</p>

<p>For everyone else reading this: DON'T TAKE MY WORD FOR IT. Go out there on the web and form your own opinion. Here are my sources for all the numbers above:</p>

<p><a href="http://www.westegg.com/inflation/infl.cgi">http://www.westegg.com/inflation/infl.cgi</a></p>

<p><a href="http://www.laalmanac.com/economy/ec37.htm">http://www.laalmanac.com/economy/ec37.htm</a></p>

<p><a href="http://en.wikipedia.org/wiki/Japanese_asset_price_bubble">http://en.wikipedia.org/wiki/Japanese_asset_price_bubble</a></p>

<p><a href="http://en.wikipedia.org/wiki/Irvine">http://en.wikipedia.org/wiki/Irvine</a></p>

<p><a href="http://www.ziprealty.com">http://www.ziprealty.com</a></p>

<p><a href="http://www.piggington.com">www.piggington.com</a></p>

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Oops -- my bad for neglecting inflation. Unfortunately inflation rate is one of those things that we cannot control and have to live with.





Please note that in my prior post, I specified Tokyo (not Japan as a whole) and UCI area (not OC/CA as a whole). Tokyo city was prolly the biggest bubble in recent era and OC does not compare. I've read Professor Piggington's articles and I'm not overly concerned. Yes if you look at the average number of residents per house and the sq ft per person, you could claim that there is no housing shortage as a statistic. But it's a lot easier to sprawl toward the desert and built more homes, than it is to get the state to build a new unviersity. I believe student population will out-grow student housing, and college kids will always need off-campus housing (rentals).





Let me make a rough calculation. If RE drops by 30% from now until 2008, I'd look for 2/2 condos/townhomes (note: not single family homes) around zip codes 92612, 92618, etc. Currently 2 bed condos around that area is priced roughly from $400k to $500k USD. A 30% drop would reduce the price to $280k - $350k USD. With 20% downpayment and ~7% interest rate at 1 point, you can prolly make the purchase with only $60k-$80k down with monthly mortgage of ~$1500-$1850, plus HOA, management fees, and possibly mello roose (ugh). It's do-able and rent will slowly creep up. If you're willing to make an extra payment every year, you can have the property paid off in 22 years and it'd generate a tidy sum every month in rental income toward your retirement expenses. Or you can just give the keys to your grown kids and boot them out of your house.





I'd only do this if I found a property that I like and it's exactly what I'm looking for -- walking distance to UCI campus would be a plus (I haven't seen school expansions eat homes via eminent domain yet). If the numbers look good then I'd buy it. I could sit and cross my fingers for the price to drop some more, but by then I might not find exactly what I want. Buying an income property that you want to keep for long time is not the same as a short-term investment. University areas are good bet because schools don't usually move, unlike aerospace industry. Hmm maybe I shouldn't be posting this and create my own competition...





However, if you're looking to flip the property in couple of years, then no, I wouldn't recommend buying at this time.





Going back to my original point, a "home" should not be treated the same as an investment/income property. If you're shopping for a home today, and you found one that's exactly what you want and you'd live there for the next 20+ years, then by all means, if you can afford it, go ahead and buy it. The benefit of waking up every morning in a house that you love and feeling good about it is more important than short-term depreciation. It's hard for me to find a home that I feel really good about, your own experience may vary.





But if you're in a position where you have no hope of affording what you want in the area and cannot move yet due to job situation, you can still invest elsewhere. As I mentioned earlier the Brits are really good at this and they've bought investments from Spain to Eastern Europe. As a general rule I'd suggest investing in stable first world countries and renting in 2nd or 3rd world countries. If you can afford to buy an income property in a cheaper part of US and have it paid off in 15 years or less, you could retire to Philippines or Panama and live really well off your rental income. Rent a nice home, get a maid, retire early and go fishing every day.
 
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