Now: Before I so rudely interrupted myself, I believe I was going to write about the areas I'm considering?
First, some general background, which I alluded to in my inaugural post.
I suppose I can roughly divide my location desires into two categories, business and pleasure. Business-wise, I mainly hope to live somewhere that minimizes my commute time, both now and in the future. Since I already spend about 3.5 hours every day commuting, it would be hard to pick a location that would be much worse in that regard. I do want to find a place close enough to work proper or to public transit so that I don't need to rely on an automobile.
Planning for future commutes requires a bit more crystal ball gazing. I currently work in San Francisco's SOMA neighborhood. My previous job was in Los Gatos, at the very southern tip of Silicon Valley. Odds are very likely that any future job would be located somewhere between those two extremes. My particular focus - mobile software engineering - seems to be most active in San Francisco, the Peninsula, and Silicon Valley. Less likely but still possible would be a location in the East Bay - Oakland/Emeryville being the biggest contenders, followed by Walnut Creek, followed by the Fremont area.
Again, it's impossible to know what the future holds, but fortunately I can rely on transit to get me at least to the general area of most places. It's more a question of time and minimizing transfers to determine what would be a pleasant commute and what would be merely possible.
Finally, on the personal front. Part of this comes down to location: again, I want to minimize the time required to reach places I want to visit. Here, I put a premium on being able to walk places. The big things for me here are grocery stores, farmers' markets, libraries, and trails. I would also dig being able to visit a commercial area, maybe with things like bookstores, restaurants, and a gaming store. And since I go hiking almost every weekend, the shorter of a drive to the mountains, the happier I'll be.
In terms of just living in the place itself, I'm hoping for something relatively quiet - I don't expect silence, but neither do I want to front on Highway 101. Sunshine is great. This is a region of microclimates, and a few blocks can easily separate regular fog from frequent sun.
Okay. With all that background in place, here's the big-picture breakdown of places I'm considering.
General region: San Francisco
Particular areas/neighborhoods: SOMA, the Mission, the Richmond, Hayes Valley, Noe Valley, Potrero Hill
Summary: Living in an urban center, of what may be my favorite city in the world.
Advantages: Perks of urban living. I could easily live without owning a car. My commute to my current work would be incredibly easy. There are some surprisingly good deals on new condos. Weather in the eastern neighborhoods is usually pretty good. All major Bay Area transit systems run here, often including the fastest options.
Disadvantages: The affordable neighborhoods also feel pretty marginal, with very visible indigency. This is the extreme northwest of my employment region, so future jobs would likely require an extended commute. While I love the city, I wouldn't take as much advantage of it as others - I'm more likely to hang out in my living room than hop between coffee shops.
Conclusion: Still the dream, but may not be worth the premium in price. I'm increasingly drawn to the idea of living somewhere where I can easily access The City without actually living there.
General region: The Peninsula (San Mateo County)
Particular cities: Daly City, San Bruno, Millbrae, Burlingame, San Mateo
Summary: Smack dab between SF and SV. This area feels conventionally suburban, but has the goodness of California and great access.
Advantages: Very quick travel to SF. Southern section is generally sunny. Low crime and high quality of life. Good Caltrain throughout, and BART in the northern section. Fairly decent range of prices, generally cheaper further north. Santa Cruz Mountains (really hills this far north) and the Pacific Ocean. Good commuting times to most areas I would work.
Disadvantages: Northern section is among the foggiest/cloudiest in the Bay Area. E-X-P-E-N-S-I-V-E - especially so for housing, where it has been least affected by the downturn, but also in regular costs. Commute times would be the worst for the East Bay.
Conclusion: If I can swing the price, I'd love to live here. That's a really big "if", though.
General region: South Bay / Silicon Valley
Particular cities: Mountain View, San Jose, Campbell
Summary: My stomping grounds of nearly four years. If it wasn't for my present job, I probably wouldn't hesitate to remain here.
Advantages: More affordable than SF or SM. Excellent weather. High density of major tech employers. Good transit options - Caltrain now, and BART coming soon (access to East Bay) and high speed rail in a decade or so (quick access to SF and points south). Access to great hiking in Santa Cruz and Diablo ranges. Familiarity with the area. Friends in the area.
Disadvantages: Long commute to SF. Far enough away from SF that it's impractical to visit for fun - other than work, I only make it there on special occasions, and it takes a lot of commitment in time to do so. The most suburban-feeling area.
Conclusion: A tempting option, and will get more tempting once BART is running. Because of my immediate employment situation, this is probably a non-starter, with the possible exception of a place within walking distance of the Diridon station.
General region: East Bay
Particular cities: Oakland (Piedmont Avenue, Montclair, Rockridge, Temescal), Berkeley, Fremont
Summary: Relaxed and easy living on the other side of the bridge.
Advantages: By far the cheapest of the four regions; steals available in marginal regions, and the best areas are still reasonable. Friends in the area. Great hiking in the Diablo range. Generally good weather. Good transit to SF and other areas in the East Bay. Great cultural activities around UC Berkeley. Culture seems pretty friendly and upbeat.
Disadvantages: Inconvenient access to the Peninsula and Silicon Valley - commute would be easy at first, but painful if I shifted later. Oakland has a lot of problems, and the political situation there is pretty depressing right now.
Conclusion: When I first started looking at getting a condo a few years ago, this was the only region that looked at all affordable. It's good to have more options. If I was confident in remaining in SF or the East Bay for work, I'd take advantage of the great deals out there. As it is, I'll probably focus my search westward, as long as it's reasonable to do so.
I've been doing occasional "walking tours" through various neighborhoods for the past half-year or so, specifically thinking about how it would feel to live in each area, and also been mulling in general about the various tradeoffs. My current inclination is to focus on the Peninsula. It feels like it has the best chances of offering a great work/play combination. I really love the idea of being able to scoot up to the city on nights and weekends to attend concerts, plays, book readings, etc.; and doing this would physically position me well for likely future employment. Depending on where I end up, my current commute could be as short as 20 minutes each way - not bad at all! Price will be the limiting factor here, but if current personal and broader trends continue, I may be able to squeeze into something. Stay tuned for more!
Tuesday, May 5, 2009
Wednesday, April 29, 2009
Tips & Traps when Negotiating Real Estate
Oh, look at what we have here: Another book summary! Please don't expect this pace to continue - there really are just a handful of real estate books that I plan on reading, I just happened to grab a bunch of them on a recent trip to the library.
I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce. I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything. However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods. For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it. In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars. This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.
I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon. "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.
The book itself is extremely well written, though. Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority. The structure is very sound as well. On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across. On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation. As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.
If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable." Nothing is off-limits, even though it is in other people's interests to make it seem so. Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.
At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage. Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask. Leverage is crucial to get the best terms possible. Whichever party has the most leverage can drive the other party. In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from. However, Irwin also describes ways that you can increase leverage in any market. These all make sense, although I wouldn't necessarily have thought of them on my own. For example, simply investing time can increase your leverage. If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met. Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.
The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection. Make sure that your agent represents you and not the seller. Give yourself enough time so you don't rush into a bad situation.
While everything is negotiable, you need to recognize that not everyone has the power to negotiate. It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions. New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder. Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.
I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations. While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal. A late chapter describes why in some cases you might want to negotiate without using a real estate agent. As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry. They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers. You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get. When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.
A lot of the negotiation-specific things he describes are worth keeping in mind. For example, "Never negotiate at offer that cannot be closed." He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?" You reply, "We're asking $450,000, but I could go as low as $425,000". You've just given away $25,000 - and, worst of all, you haven't gotten anything for it. The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position. The correct response is, "Are you offering $390,000?" Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.
I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars. By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal. Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape. I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property. As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away. (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)
All in all, this was a great book, Irwin's praise of Nixon notwithstanding. I'll probably revisit it once more before I head out into the field for real. After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.
I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce. I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything. However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods. For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it. In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars. This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.
I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon. "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.
The book itself is extremely well written, though. Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority. The structure is very sound as well. On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across. On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation. As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.
If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable." Nothing is off-limits, even though it is in other people's interests to make it seem so. Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.
At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage. Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask. Leverage is crucial to get the best terms possible. Whichever party has the most leverage can drive the other party. In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from. However, Irwin also describes ways that you can increase leverage in any market. These all make sense, although I wouldn't necessarily have thought of them on my own. For example, simply investing time can increase your leverage. If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met. Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.
The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection. Make sure that your agent represents you and not the seller. Give yourself enough time so you don't rush into a bad situation.
While everything is negotiable, you need to recognize that not everyone has the power to negotiate. It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions. New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder. Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.
I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations. While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal. A late chapter describes why in some cases you might want to negotiate without using a real estate agent. As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry. They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers. You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get. When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.
A lot of the negotiation-specific things he describes are worth keeping in mind. For example, "Never negotiate at offer that cannot be closed." He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?" You reply, "We're asking $450,000, but I could go as low as $425,000". You've just given away $25,000 - and, worst of all, you haven't gotten anything for it. The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position. The correct response is, "Are you offering $390,000?" Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.
I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars. By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal. Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape. I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property. As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away. (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)
All in all, this was a great book, Irwin's praise of Nixon notwithstanding. I'll probably revisit it once more before I head out into the field for real. After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.
Tuesday, April 28, 2009
Your New House
As part of my preparation, I've been reading a fair amount of real estate information. A good chunk of this takes the form of news articles and online sources, but I also have several books that I've read or that I plan to read. I'll try and summarize such books here, to describe both the good and the bad of each.
"Your New House" was written by the husband-and-wife team of Alan and Denise Fields. It covers a relatively narrow category of real estate: purchasing a new house, with extra emphasis on overseeing construction. In other words, rather than looking at a set of existing houses to find one that you like, working with professionals to build a house to your specifications.
The book has a lot of personality and is pretty enjoyable to read. They stuff the book with anecdotes, a couple from their own experience and many more from readers who contacted them after reading earlier editions of the book. This isn't a dry, detached, clinical look. It self-advertises as being part caution, part information, and part rant.
They don't put any effort into being "objective," and just call 'em like they see 'em. They are relentlessly harsh towards builders and subcontractors. If you take one thing away from this book, it will be the importance of choosing a good builder and watching them like a hawk. They also sneer at real estate agents, only begrudgingly allowing that, in certain circumstances, it may be wise to find an exclusive buyer's agent. On the other hand, they are generally glowing about architects, and speak fairly well about lawyers.
Which does bring up an interesting point that they regularly raise: home-building is NOT a profession. To become an architect or a lawyer, one must go to school for many years, study, and prove themselves. Most real estate agents have no college degree, and anyone who picks up a hammer and (depending on the state) gets a license can become a builder. I'm sure that there are bad architects and good builders out there, but when you consider how much money we spend on homes, it does seem pretty surprising that we don't have true systems for certifying professional builders.
While the breezy writing of the book is entertaining, it also makes it feel a bit loose and even untrustworthy. In one example, the authors off-handedly mention that in an earlier edition of the book, they recommended that people frame their houses with 2x6 beams instead of 2x4s. The reason for this was to permit more insulation, saving on energy bills. Since the book came out, they had learned that the cost of the extra lumber and extra insulation was far too high, and the savings on lost heat far too low, for this to make sense. On an average house, it would take about 75 years to recoup the extra money on materials. So, never mind: 2x4s are fine!
Now, I'm delighted that they owned up to this mistake and talked through it, but it does shine light on a problem with this book: it's heavily anecdotal. The authors aren't experts in the field. Throughout the book, they're reporting what other people have told them. Some of that is good advice; some of it is not. You can't take this book as gospel. Instead, you should treat it the same way you would treat a funny and opinionated guest at a dinner party.
That said, I am really glad that I read the book. On the downside, it doesn't directly speak to my situation - the word "condo" isn't mentioned once in the entire book (fair enough, since it's "Your New House" and not "Your New Home"), and I won't have the opportunity to make many of the decisions they discuss (picking an architect, selecting a building site, etc.). Nonetheless, all of those decisions will be made, and I now know how important it is to learn about them after the fact. As a condo buyer I don't have as much choice, but that doesn't mean that the foundation is any less important, or that I should be less concerned about the builder's quality.
Probably the most valuable part of the book for me was the section towards the end that discusses the various choices available for components of the home: different styles of roof, materials for roofing, bathroom fixture manufacturers, siding, and so on. Again, these aren't choices I'll be able to make, but after reading this book I now have a much better understanding of what the various options mean. I now have a better understanding of the trade-offs between stucco, wood, brick, vinyl, and so on. This extra knowledge will help me better evaluate various condo options and decide what I want.
Part of the book did make me seriously re-consider whether I wanted to stop being a renter at all. The sections on builder scams and especially home-warranty fraud were especially distressing. Once again, you would think that if you're spending so much money on something, you'd get some level of assurance of quality, but it's quite clear that a lot of people get into deep trouble.
That said, it's far better to read and think about these problems now than when I'm about to sign a check. "Your New House" isn't gospel, but it is worth reading and thinking about.
"Your New House" was written by the husband-and-wife team of Alan and Denise Fields. It covers a relatively narrow category of real estate: purchasing a new house, with extra emphasis on overseeing construction. In other words, rather than looking at a set of existing houses to find one that you like, working with professionals to build a house to your specifications.
The book has a lot of personality and is pretty enjoyable to read. They stuff the book with anecdotes, a couple from their own experience and many more from readers who contacted them after reading earlier editions of the book. This isn't a dry, detached, clinical look. It self-advertises as being part caution, part information, and part rant.
They don't put any effort into being "objective," and just call 'em like they see 'em. They are relentlessly harsh towards builders and subcontractors. If you take one thing away from this book, it will be the importance of choosing a good builder and watching them like a hawk. They also sneer at real estate agents, only begrudgingly allowing that, in certain circumstances, it may be wise to find an exclusive buyer's agent. On the other hand, they are generally glowing about architects, and speak fairly well about lawyers.
Which does bring up an interesting point that they regularly raise: home-building is NOT a profession. To become an architect or a lawyer, one must go to school for many years, study, and prove themselves. Most real estate agents have no college degree, and anyone who picks up a hammer and (depending on the state) gets a license can become a builder. I'm sure that there are bad architects and good builders out there, but when you consider how much money we spend on homes, it does seem pretty surprising that we don't have true systems for certifying professional builders.
While the breezy writing of the book is entertaining, it also makes it feel a bit loose and even untrustworthy. In one example, the authors off-handedly mention that in an earlier edition of the book, they recommended that people frame their houses with 2x6 beams instead of 2x4s. The reason for this was to permit more insulation, saving on energy bills. Since the book came out, they had learned that the cost of the extra lumber and extra insulation was far too high, and the savings on lost heat far too low, for this to make sense. On an average house, it would take about 75 years to recoup the extra money on materials. So, never mind: 2x4s are fine!
Now, I'm delighted that they owned up to this mistake and talked through it, but it does shine light on a problem with this book: it's heavily anecdotal. The authors aren't experts in the field. Throughout the book, they're reporting what other people have told them. Some of that is good advice; some of it is not. You can't take this book as gospel. Instead, you should treat it the same way you would treat a funny and opinionated guest at a dinner party.
That said, I am really glad that I read the book. On the downside, it doesn't directly speak to my situation - the word "condo" isn't mentioned once in the entire book (fair enough, since it's "Your New House" and not "Your New Home"), and I won't have the opportunity to make many of the decisions they discuss (picking an architect, selecting a building site, etc.). Nonetheless, all of those decisions will be made, and I now know how important it is to learn about them after the fact. As a condo buyer I don't have as much choice, but that doesn't mean that the foundation is any less important, or that I should be less concerned about the builder's quality.
Probably the most valuable part of the book for me was the section towards the end that discusses the various choices available for components of the home: different styles of roof, materials for roofing, bathroom fixture manufacturers, siding, and so on. Again, these aren't choices I'll be able to make, but after reading this book I now have a much better understanding of what the various options mean. I now have a better understanding of the trade-offs between stucco, wood, brick, vinyl, and so on. This extra knowledge will help me better evaluate various condo options and decide what I want.
Part of the book did make me seriously re-consider whether I wanted to stop being a renter at all. The sections on builder scams and especially home-warranty fraud were especially distressing. Once again, you would think that if you're spending so much money on something, you'd get some level of assurance of quality, but it's quite clear that a lot of people get into deep trouble.
That said, it's far better to read and think about these problems now than when I'm about to sign a check. "Your New House" isn't gospel, but it is worth reading and thinking about.
Saturday, April 25, 2009
Fannie Mae and Condo Mortgage Rates
Well, my second post and I'm already off plan!
I wanted to step back briefly from my personal search and also share/vent about larger issues that will impact me. My current annoyance is the new financing rules from Fannie Mae.
Some background: most mortgage loans are made by banks, credit unions, or other organizations who typically keep the loan for a year or so, and then turn around and sell it to Fannie Mae or Freddie Mac. This system has been in place for decades, and may be changing thanks to the government takeover of these companies. Fannie and Freddie encourage loaning (and hence homeownership) by removing the risk of default from the people who make the mortgages. If it weren't for them, then after you made a loan, you'd spend the next 30 years worrying about whether the loanee would continue making payments. By selling the loan, you can clear your books and make a new loan.
Because of this power, Fannie and Freddie have enormous influence in how everyone else makes loans. They won't purchase certain loans, and hence these loans will be more expensive, due to the increased risk taken by lenders. The best example of this is the $417,000 limit in the size of a loan. Traditionally, if you needed more money than this, you'd need to get a "Jumbo" loan. "Jumbo" just meant "Too big for Fannie and Freddie."
Those of you who follow the news and/or listen to This American Life know that the loan-selling business is a big part of the reason why we got into the current housing mess. Banks were making crazy loans because they wouldn't need to worry about whether people could make their payments over the next 30 years. Fannie and Freddie's rules shielded them from the worst of this, but it was clear that they would need to be leaders on two fronts: on the one hand, continuing to purchase loans so the financial machinery that drives home-sales can continue; and, on the other hand, pushing out rules that will encourage more responsible loan origination.
In general, I'm fine with most of these changes. For example, it makes a lot of sense to increase the required minimum credit score - more responsible borrowers are more likely to pay off their obligations, and so they should get the lowest rates.
What really ticks me off, though, is that the latest set of rules are anti-condo. The single worst example: ANY condominium loan will AUTOMATICALLY be charged 0.75% more than a traditional single-family house. That means that a 5% loan would instead be a 5.75% loan. The rates climb even higher if you put down less than 30% (!!!) as a down payment. And they may refuse to buy a loan altogether if the building includes rental units, or if there are commercial tenants.
I can imagine how they justify these rules: more condos have gone into foreclosure than traditional homes. Once again, someone has forgotten a cardinal rule of statistics: correlation does not prove causation. There isn't some mystical material in condominium buildings that makes them inherently more likely to cause the owners to miss payments. No: they're more likely to be foreclosed upon because condos were the prime targets of the speculative boom. When people were buying homes as investment properties, condos, with more affordable price tags and locations in major metro areas, were the best game in town.
The RIGHT way to fix the problem would be to focus on the root cause of the problem. Make loans more stringent for people who are purchasing homes that will not serve as their primary residence. And, again, make sure that borrowers are responsible (by requiring a 20% down payment and possessing a good credit score). But don't take the lazy route of punishing all condos.
What is the effect of this change? It's most drastic for - surprise! - people like me who live in high-cost regions with little available land. A condo may be a lifestyle choice in a place like Chicago or Miami, but out here, it's the only game in town for people who can't slap down a cool million on a single-family detached home. Far from being speculative tools for irresponsible investors, condos are a practical and conservative choice for first-time home-buyers.
What does this mean for me, personally? First of all, I'm hoping that these rules change before I buy. There seems to be growing public anger about the changes at Fannie and Freddie - not specifically due to the condo rules, but if Congress steps in to correct some other problems, I hope they will sanitize these as well. Second, it means that I'll have to pay a higher rate, which means a less attractive home, or, in the worst case, no home at all. An extra 1% won't kill me, but it does have a pretty dramatic impact on how much I can afford. Third, over the long run, if it seems like these rule changes are here to stay, the net effect is that condos across the board will become less attractive. Fewer will be built, and the ones that already exist will fall in value. If I wait until after that finishes happening, then the net effect may be a wash for me - higher interest rate, but lower sales price, resulting in about the same total monthly mortgage check for the same unit.
I'll continue following this issue. I was upset enough to write my representative and senators about this issue - there's no chance that my letter alone will make a change, but if enough homebuyers complain, we may see some action. In the meantime, I'll continue my search, and hope for the best.
I wanted to step back briefly from my personal search and also share/vent about larger issues that will impact me. My current annoyance is the new financing rules from Fannie Mae.
Some background: most mortgage loans are made by banks, credit unions, or other organizations who typically keep the loan for a year or so, and then turn around and sell it to Fannie Mae or Freddie Mac. This system has been in place for decades, and may be changing thanks to the government takeover of these companies. Fannie and Freddie encourage loaning (and hence homeownership) by removing the risk of default from the people who make the mortgages. If it weren't for them, then after you made a loan, you'd spend the next 30 years worrying about whether the loanee would continue making payments. By selling the loan, you can clear your books and make a new loan.
Because of this power, Fannie and Freddie have enormous influence in how everyone else makes loans. They won't purchase certain loans, and hence these loans will be more expensive, due to the increased risk taken by lenders. The best example of this is the $417,000 limit in the size of a loan. Traditionally, if you needed more money than this, you'd need to get a "Jumbo" loan. "Jumbo" just meant "Too big for Fannie and Freddie."
Those of you who follow the news and/or listen to This American Life know that the loan-selling business is a big part of the reason why we got into the current housing mess. Banks were making crazy loans because they wouldn't need to worry about whether people could make their payments over the next 30 years. Fannie and Freddie's rules shielded them from the worst of this, but it was clear that they would need to be leaders on two fronts: on the one hand, continuing to purchase loans so the financial machinery that drives home-sales can continue; and, on the other hand, pushing out rules that will encourage more responsible loan origination.
In general, I'm fine with most of these changes. For example, it makes a lot of sense to increase the required minimum credit score - more responsible borrowers are more likely to pay off their obligations, and so they should get the lowest rates.
What really ticks me off, though, is that the latest set of rules are anti-condo. The single worst example: ANY condominium loan will AUTOMATICALLY be charged 0.75% more than a traditional single-family house. That means that a 5% loan would instead be a 5.75% loan. The rates climb even higher if you put down less than 30% (!!!) as a down payment. And they may refuse to buy a loan altogether if the building includes rental units, or if there are commercial tenants.
I can imagine how they justify these rules: more condos have gone into foreclosure than traditional homes. Once again, someone has forgotten a cardinal rule of statistics: correlation does not prove causation. There isn't some mystical material in condominium buildings that makes them inherently more likely to cause the owners to miss payments. No: they're more likely to be foreclosed upon because condos were the prime targets of the speculative boom. When people were buying homes as investment properties, condos, with more affordable price tags and locations in major metro areas, were the best game in town.
The RIGHT way to fix the problem would be to focus on the root cause of the problem. Make loans more stringent for people who are purchasing homes that will not serve as their primary residence. And, again, make sure that borrowers are responsible (by requiring a 20% down payment and possessing a good credit score). But don't take the lazy route of punishing all condos.
What is the effect of this change? It's most drastic for - surprise! - people like me who live in high-cost regions with little available land. A condo may be a lifestyle choice in a place like Chicago or Miami, but out here, it's the only game in town for people who can't slap down a cool million on a single-family detached home. Far from being speculative tools for irresponsible investors, condos are a practical and conservative choice for first-time home-buyers.
What does this mean for me, personally? First of all, I'm hoping that these rules change before I buy. There seems to be growing public anger about the changes at Fannie and Freddie - not specifically due to the condo rules, but if Congress steps in to correct some other problems, I hope they will sanitize these as well. Second, it means that I'll have to pay a higher rate, which means a less attractive home, or, in the worst case, no home at all. An extra 1% won't kill me, but it does have a pretty dramatic impact on how much I can afford. Third, over the long run, if it seems like these rule changes are here to stay, the net effect is that condos across the board will become less attractive. Fewer will be built, and the ones that already exist will fall in value. If I wait until after that finishes happening, then the net effect may be a wash for me - higher interest rate, but lower sales price, resulting in about the same total monthly mortgage check for the same unit.
I'll continue following this issue. I was upset enough to write my representative and senators about this issue - there's no chance that my letter alone will make a change, but if enough homebuyers complain, we may see some action. In the meantime, I'll continue my search, and hope for the best.
Wednesday, April 22, 2009
Origins
I intend to use this blog to chronicle my attempts to purchase a dwelling in the San Francisco Bay Area. The blog will serve several purposes. First, much like my primary blog, it is a journal of sorts, something that I use today to capture my thoughts and experiences in the expectation that I will re-read it years from now to get a fuzzy nostalgic feeling. Second, since this process will likely be long and confusing, I hope that by setting out my thoughts "in stone," as it were, I will be able to ground myself in the process. Merely by articulating what I want, I hope that I will be forced to fully understand my desires. And, months from now, I hope to be able to re-visit posts to remind myself of my priorities, and see if they have changed (unlikely) or if my judgement has grown clouded (much more likely).
For the most part, I imagine this blog as being an irregularly updated progress reports, perhaps with one or two posts a month, describing the home search. When things are slow, posts will be less frequent; when it picks up, I'll write more often or longer. In addition, I may write about more general thoughts that aren't tied to specific experiences but that seem relevant to my overall goals.
So, first things first: where am I right now?
I think I've more or less finished the self-education phase of my search. I have a very rough plan of action in mind that, if everything goes smoothly, should see me in a new home within a year. I have a pretty decent idea of what kind of building I want, and a slightly more vague idea of where I want to live.
Where do I go from here?
Again, I'm speaking very roughly here, but I'm thinking of applying for mortgage pre-approval in July and collecting real estate agent recommendations. I'd like to settle on an agent around August or September, and start touring homes a bit after that. Because I'm pretty flexible on my moving timeframe, I think the ideal time for me to move would be somewhere in the December to mid-February timeframe, which is traditionally when the market is slowest and prices are lowest. I'd like to be able to take action earlier if a great opportunity presents itself, though, and not feel pressured to buy by any particular time.
What am I looking for?
Several things are most important to me. One of the biggest is having good access to urban centers. I wouldn't be able to stand living in, say, the central valley and being a super-commuter. Ideally I would be able to get to my office in a very short time and minimize commuting. One complication here is that my office will probably change location before I do - either from changing jobs or because we've outgrown our space. So I'm really looking more at zones or corridors than points - identifying spots that will be most convenient to the most likely employment locations.
On a very related note, I'm focusing on public transit options. Right now I live more than 50 miles from where I work, but it's surprisingly bearable because of the transit options available. Distances that would drive me nuts to drive can be tolerated if covered by train or on bicycle. I'm not a fan of buses, but appreciate Caltrain and BART. Looking to the future, I expect that the coming decades will see a return to rising energy costs, and employers increasingly supporting transit by employees, meaning that as long as I can reach a major station nearby, I'll be able to rely on them to get me the rest of the way there.
Of course, work is only a part of what's important to me. Besides a convenient commute, I also want access to the things I enjoy doing. Fortunately for me, the entire Bay Area is rich in opportunities for things like hiking. Access to a public library and a farmers' market would be nice as well. One thing that would be much better than my current location is convenient access to San Francisco. I can easily get to the city for things, but getting home is more of an obstacle, especially late at night. It becomes a lot less convenient to take Caltrain late at night, and trains stop running entirely at midnight. It's frustrating to have to pass on fun-sounding events, speakers, concerts, plays, etc. when I know that I won't be able to make it home afterwards. I also hope to do more in the city when it becomes easier to go there. Even when it works out for me time-wise, on the weekends it takes over 90 minutes just to get into the city by train, and few activities are worth a 3-hour round trip weekend ride.
Going to San Francisco is a blast, but the truth is that I'm an introvert and ultimately a bit of a homebody... I enjoy going out to do specific things, but by default I spend much of my leisure time at home. As such, having a comfortable space is important. Something fairly quiet would be nice - finances dictate that I'll be getting a condo, so I'm not expecting complete silence, but the less noise the better; I don't want to be edged up against Highway 101 or above a Market Street hot spot. I don't need a ton of space, but it'd be nice to have at least as much as I have now, about 650 square feet... that's enough to comfortably store all the stuff I need, and feel like I have enough room to live, breathe, and move around. I do a decent amount of cooking, so a workable kitchen is important. I don't do much entertaining, so I don't really care about designer accents or anything like that.
And, since I'm paying big bucks to live in California, I want to be able to enjoy it. That means having some kind of balcony, porch, or small yard so I can take full, gleeful advantage of those warm and sunny February days.
One of my litmus tests is that I don't want to live anyplace where I need to mow the lawn. While I do like the idea of becoming a homeowner, the domestic tasks that come with being a houseowner - mowing, painting, gardening, and so on - don't do anything for me. I can't say that they never will, but right now I just feel like there are a lot of things I would rather spend my time and attention on than looking after a physical property. Because of this, and because they're (relatively) cheap, I plan to buy a condominium.
So, there you have it, my first take at what I'm looking for. Coming soon: locations currently under consideration.
For the most part, I imagine this blog as being an irregularly updated progress reports, perhaps with one or two posts a month, describing the home search. When things are slow, posts will be less frequent; when it picks up, I'll write more often or longer. In addition, I may write about more general thoughts that aren't tied to specific experiences but that seem relevant to my overall goals.
So, first things first: where am I right now?
I think I've more or less finished the self-education phase of my search. I have a very rough plan of action in mind that, if everything goes smoothly, should see me in a new home within a year. I have a pretty decent idea of what kind of building I want, and a slightly more vague idea of where I want to live.
Where do I go from here?
Again, I'm speaking very roughly here, but I'm thinking of applying for mortgage pre-approval in July and collecting real estate agent recommendations. I'd like to settle on an agent around August or September, and start touring homes a bit after that. Because I'm pretty flexible on my moving timeframe, I think the ideal time for me to move would be somewhere in the December to mid-February timeframe, which is traditionally when the market is slowest and prices are lowest. I'd like to be able to take action earlier if a great opportunity presents itself, though, and not feel pressured to buy by any particular time.
What am I looking for?
Several things are most important to me. One of the biggest is having good access to urban centers. I wouldn't be able to stand living in, say, the central valley and being a super-commuter. Ideally I would be able to get to my office in a very short time and minimize commuting. One complication here is that my office will probably change location before I do - either from changing jobs or because we've outgrown our space. So I'm really looking more at zones or corridors than points - identifying spots that will be most convenient to the most likely employment locations.
On a very related note, I'm focusing on public transit options. Right now I live more than 50 miles from where I work, but it's surprisingly bearable because of the transit options available. Distances that would drive me nuts to drive can be tolerated if covered by train or on bicycle. I'm not a fan of buses, but appreciate Caltrain and BART. Looking to the future, I expect that the coming decades will see a return to rising energy costs, and employers increasingly supporting transit by employees, meaning that as long as I can reach a major station nearby, I'll be able to rely on them to get me the rest of the way there.
Of course, work is only a part of what's important to me. Besides a convenient commute, I also want access to the things I enjoy doing. Fortunately for me, the entire Bay Area is rich in opportunities for things like hiking. Access to a public library and a farmers' market would be nice as well. One thing that would be much better than my current location is convenient access to San Francisco. I can easily get to the city for things, but getting home is more of an obstacle, especially late at night. It becomes a lot less convenient to take Caltrain late at night, and trains stop running entirely at midnight. It's frustrating to have to pass on fun-sounding events, speakers, concerts, plays, etc. when I know that I won't be able to make it home afterwards. I also hope to do more in the city when it becomes easier to go there. Even when it works out for me time-wise, on the weekends it takes over 90 minutes just to get into the city by train, and few activities are worth a 3-hour round trip weekend ride.
Going to San Francisco is a blast, but the truth is that I'm an introvert and ultimately a bit of a homebody... I enjoy going out to do specific things, but by default I spend much of my leisure time at home. As such, having a comfortable space is important. Something fairly quiet would be nice - finances dictate that I'll be getting a condo, so I'm not expecting complete silence, but the less noise the better; I don't want to be edged up against Highway 101 or above a Market Street hot spot. I don't need a ton of space, but it'd be nice to have at least as much as I have now, about 650 square feet... that's enough to comfortably store all the stuff I need, and feel like I have enough room to live, breathe, and move around. I do a decent amount of cooking, so a workable kitchen is important. I don't do much entertaining, so I don't really care about designer accents or anything like that.
And, since I'm paying big bucks to live in California, I want to be able to enjoy it. That means having some kind of balcony, porch, or small yard so I can take full, gleeful advantage of those warm and sunny February days.
One of my litmus tests is that I don't want to live anyplace where I need to mow the lawn. While I do like the idea of becoming a homeowner, the domestic tasks that come with being a houseowner - mowing, painting, gardening, and so on - don't do anything for me. I can't say that they never will, but right now I just feel like there are a lot of things I would rather spend my time and attention on than looking after a physical property. Because of this, and because they're (relatively) cheap, I plan to buy a condominium.
So, there you have it, my first take at what I'm looking for. Coming soon: locations currently under consideration.
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