Monday, February 04, 2008

South Bay-Beach Cities: Cramer Says It's Time to Buy a House

Redondo Beach Homes under $800,000

Why are you waiting... Jim Cramer says it's time to buy a house it must be time to buy!

Looks as if the recent FED cuts have really stirred the pot. Jim Cramer, who just a few months ago, was telling anyone within shouting distance that buying a house was a stupid move and everyone who owned one should sell.. fast.. has had a change of heart. Not only does Cramer think it might be a good time for the general public to buy a home but he may even do it himself... WOW!

For a change, Cramer may be on the right track... If you need to buy then now might be a good time. It is definitely the time to refinance if you have a loan that will reset within 2 years. OK..take a breath and wait a minute before you start to beat up on me... If you need or want to buy a home within the next six months you should really do some homework. There are more properties available in the entry level in the Beach Cities then at any time in the last few years.

Manhattan Beach:
There are 17 properties under $1,000,000... 9 homes and 8 townhomes/condos.

Hermosa Beach:
There are 20 properties under $1,000,000...10 homes and 10 townhomes/condos

Redondo Beach:

North Redondo:
There are 54 properties under $700,000...22 homes and 32 townhomes

South Redondo:
There are 49 properties under $800,000.. 7 homes, 22 townhomes and 20 condos

El Segundo:
There are 27 properties under $800,000... 9 homes and 18 townhomes/condos.

These are much higher numbers for affordable properties then we have seen in a long time. No these are not 3000 sq ft less then 10 years old but they are the types of properties that most buyers used to buy as a first home. They are starter homes.. homes that start you on the way to your dream home. It made a lot of sense then and it still does... buyers need to get away from the idea that their first home should be bigger and better then the one that was the dream home of their parents. This is what got a lot of people into a lot of trouble.

So why does Jim Cramer think this might be a good time to buy then wait for the mythical 50% decline in price. Well for starters let's look at rates and loan limits. It is pretty much assured that conforming rates will bump up to about $729,000 in CA. If current conforming rates are 5.5% you would get the benefit of that rate up to $729,000. That difference from $417,000 to $729,000 can save you a bundle. Here's how it would work...Suppose you could buy a little home in Redondo Beach for $800,000 with 10% down that's a loan of $720,000.. Let's look at 3 different scenarios for the same house.

#1 Today you would either have to get a jumbo loan at 6.75% or try and do a blended loan with a first of $419,000 and a second around $300,000. With a first of $419,000 your rate would be about 5.5%.. the second would be about 7.5% giving you a monthly P+I payment of $4,460 + property taxes of 833 and insurance of about $80 for a grand total of $5373....WOW..
#2 However if you could get a conforming loan of $720,000... The P+I = $4070 + taxes of $833 + Insurance of 80= $4983. Hmmmm...not bad..

#3 Now let's say the price drops 8% to $740,000 and the interest rate goes up 1% to 6.5%.. The new loan with 10% down is is now $666,000. Cheaper house, lower loan amount.. looks good.. but at 6.5% your P+I payment is $4164.. your lower tax is $771 and insurance is till about $80 and the payment is now $5015 or $32 more a month.. What...this can't be true.

Here's the quirk.. every 1% increase in the interest rate is roughly the same as if the property price increased by 10%. The opposite is true also.. every 1% decrease in the interest rate equals about a 10% decrease in price. The difference in the property tax rate is not significant compared to the difference in the interest rate.

If prices dropped by 15%.. and rates went up 2% which is 7.5 % you would still be paying more every month then at the current price with a low interest rate. But... but .. if I buy it cheaper I'll be able to refinance.... Maybe.. maybe not. I've seen rates as high at 17% and for most of the 80's rates were hovering around 10-11%. In the 80's I never thought I would see single digit rates again. We've been very spoiled by some historically low rates. I'm amazed they have stayed this low for so long. 7-8% is pretty cheap money.. but not as cheap as 5.5-6.5%. Make no mistake rates are going to go up... the question is when and how much. My guess is they will go up in May .. come back down in September and begin to increase again in 2009 after the election.

If you put off buying and prices fall but rates increase not only will you have a higher payment but you will have also lost a year or so of tax deductions. Here is something else to consider....In today's real estate market you are going to have to qualify using more stringent guidelines. You may be required to come up with 20% or more down rather then the 10% still available. You may also lose the ability to qualify for the loan amount you need to purchase if rates go up. You could wind up with less house when you finally do decide to buy. I know.... this isn't what you expected... but it is how the market works.

Let's be clear... I'm not advocating you should buy a home now...but if you are thinking about buying then as Jim Cramer notes it might be a very good time to buy.


Anonymous said...

Kaye......Lots of investors (including myself) consider Cramer to be a counter indicator.

Why? Because Cramer is ALWAYS WRONG.

I have to say, I laughed when I heard that he was advocating buying real estate (I heard this through the financials the day after his freak show).

Don't get me wrong, enough people watch his show that you will typically get a 1-2% pop the next day, buy a quick correction not too long afterwards.

Come on, this dude had Mozilo guest host his show last spring and was talking up CITIBANK. How did that work out.

Anyways, good strong counter-indicator. And good general advice, never listen to that clown.

Kaye Thomas said...

Anonymous 10:09.
I always keep my BS meter running with Cramer. I found it amusing that after his diatribe in August he made this statement a few months later..

Or as a friend noted.. you can't help but wonder who told him it was time to change course.

Anonymous said...

"You may be required to come up with 20% or more down rather then the 10% still available."

If that is true, then 20% down will also be required of all of the other potential buyers...and they will not be able to afford 20% down as well. Isn't that exactly the same as knocking the demand even lower (even less people can qualify at 20% down), which would put pressure for house prices to fall even lower, until those same people could afford 20% down? It sounds like Jim is making an argument for NOT buying now. Just a thought. - arroyogrande

Kaye Thomas said...

"You may be required to come up with 20% or more down rather then the 10% still available."

This was my thought... not Cramer's... as I'm hearing reports about lenders requiring larger down payments..

Technically they can't discriminate by zip code but would be surprised if they didn't fudge a bit.. that said there will be changes.. the biggest one being that if not FHA or VA 5% down will probably disappear.

You are right if we suddenly see a demand for 20% down across the board it would most definitely impact sales..

Anonymous said...

Since when has 1M been considered a starter? Not
since the insane run up of the past 5-7 years..This
is very easy for a preschooler to figure out! What goes up, must come down. Now why would anyone buy in this market that is clearly coming down, just because of interest rates? Interest rates always adjust, cost of houses are fixed. The housing prices on steroids has created the debtor society that currently exists today ! My humble opinion: Be patient, wait for the market to normalize and hold onto your hard earned cash; a lower purchase price trumps the interest rate argument!

Kaye Thomas said...

Anonymous 4:56,
In Manhattan Beach depending on the location this is a starter price for a house. Townhomes and condos are less expensive.

It has always been all about the land in the beach cities. The house has never had much value unless it had been upgraded or was considered "charming". Hermosa is slightly less expensive as is El Segundo and North Redondo is in the mid $600,000's depending on lot size.