Wednesday, March 21, 2012
WarchestSM Buys a House
I started this blog back in August 2007 because I was tired of hearing so many people say "it's different here, prices can't go down in Santa Monica/the west side". Back then it was hard to find a lot of distress to feature on the blog. I had to start by looking at crappy one bedroom condos in non-prime locations. But not too long after the blog got started it became more apparent that things were really going to unravel. I think I did a good job of recognizing the inevitability of price declines, even in the most desirable areas of Santa Monica.
However, I think I was wrong alongside just about everyone else in thinking that prices would dip more than the 20-25% that they did at the bottom. I don't recall forecasting declines of 50% but I do remember thinking declines of about 1/3 seemed likely.
I did however do a great job of recognizing the extreme cheapness of many asset classes in late October 2008 when I said debt (high yield, investment grade, convertibles, bank debt, etc) and many equities would be better investments than Santa Monica real estate at that point:
If you are an investor right now looking to put capital to work, I would suggest that there are a lot of more attractive opportunities out in the world than still overpriced SM real estate. Bank debt, high yield bonds, and investment grade bonds are all trading at record wide spreads. Convertible bonds are trading at record cheap to theoretical levels. And yes, even stocks (at least some) appear to be "cheap" as you can find a plethora of names trading through tangible book value and near cash levels that have been absolutely ravaged by forced selling, margin calls, record hedge fund redemptions, record mutual fund redemptions, etc. - October 2008
I think I was mostly wrong in 2009 when I kept thinking that any temporary stability in the housing market would be short lived. Prices basically bottomed in Q1 or Q2 of 2009 but I didn't turn more positive until late that year. Looking back, I did start highlighting some "better values" in mid and late 2009 but I was wrong to be passive and think it was just a temporary stabilization. In late 2009 I also mentioned that activity on well located 2005 rollback properties was brisk and that there was a lot of demand out there. Finally, on January 3rd, 2010 I said the following:
We are now entering the "2010-2012" time period where I have been thinking that buying property is going to make sense in Santa Monica. The trick of course is to do your homework and not overpay like the people currently buying 2006 priced merchandise. I think prices will generally stay flat at best over the next few years but most likely decline somewhat...so there is no rush to buy something that isn't priced attractively. - January 2010
So ultimately I think I got most of the big picture stuff right but I also didn't turn positive enough early enough. But here we are today, almost 25% of the way through year 3 of my "2010-2012" window for buying. I still don't think there should be some kind of crazy urgency to buy, but I feel more strongly than ever that the "wait for prices to come down" game is absolutely over. I derive this confidence from the fact that many properties are at or near rental parity, the economy is growing and improving, and supply of real estate is down dramatically.
But what really matters is your own situation. My job is stable and my family and friends are here on the west side. I bought a house which is pretty conservatively at rental parity although in reality I think it is even cheaper than renting. Throughout the last year or so of serious searching, I found out that high quality, well located properties will generate a ton of interest if they are priced right. It doesn't matter if its raining and the listing pops up on a holiday weekend. There is stiff competition for the good stuff and I see no reason why that will change. So I think you need to emotionally prepare yourself to face competition along with a limited amount of inventory. I wish I could have just woken up and gone to a bunch of high quality open houses and picked something...but the reality is you will have to wait and wait until a fresh listing hits the MLS. Of course, all the other families are waiting, stacking more cash, and doing the same thing. Nothing really prepares you for this dynamic. I bid on several houses. I was "too low" in one less competitive situation where the seller was asking way too much. In another situation I was one of a handful of buyers trying to pay full offer price (we all tried to lift the offer at once)...multiple rounds of bidding ensued and I was quickly blown out of the water. Then, finally, the right opportunity presented itself and everything worked out.
I'm not ending the blog and I'm not (yet) making any major changes. I think I may take things in a different direction eventually but for now it will be business as usual. I just got an e-mail from Redfin which mentioned all the bubble bloggers who have bought properties recently. I actually did a post not long ago when Rich at Piggington (San Diego blog) announced his own purchase. Well, I guess you can add me to the list now.
It's easy to speculate endlessly about things on the internet...but after running the numbers myself and being involved in the market for some time, I've put my money where my mouth is. I don't know if prices will rise much at all over the intermediate term but I think it is pretty likely that we will look back and see that buying a quality property in 2012 wasn't a bad thing at all.