Warp,
Hold onto your pocketbook, amigo.
"I could see Bay Area property continue to devalue by 20% from here. One the other hand, interest rates are very favorable - 6.25% for a 30-yr fixed (1 pt)."
As "affordable" as you find these formerly exorbitant townhomes now, you may very well find them much more so in a little while. The incredibly low interest rates are serving to buoy up the real estate prices all over the country but especially in the Bay Area where the bubble hit first, hardest and longest. But I don't think low interest rates, which may be here for quite some time, can support these inflated house prices for very long. I believe that high end housing prices will continue to fall no matter what the interest rates are, it's just going to be a question of velocity.
In order to make a savvy judgment, you need to take a big, back of the envelope judgment on what you're looking at from a supply/demand point of view. First of all, townhouses, to me, already means big supply. $400K for a house may seem reasonable if the newspapers had the same thing for $450K or even $500K a while back, but that won't stop it from being valued at $300K or lower within a year or so. In most markets, townhomes and apartments have less upside than free standing, fee interest real estate (traditional single family homes on single lots). I've gone through various hypothetical examples here before, but you want to now focus on how many potential buyers are still out there and will still be out there 3 - 5 - 7 years from now. How many people will be able to afford the payments, taxes, lifestyle charges, real and implied costs of living of living in Alameda? With an increased supply of housing, and a shrinking demand (that is supply of high end purchasers) where can the direction of this investment be but south?
The now empty dot.com office space in downtown SF, tech layoffs, venture capital funds drying up--this all says that there are a ton of white collar / I used to be rich / drive a new German car types who have been permanently taken off the demand side of the Alameda townhome buyers crowd.
Now add in the major city discount (which may be temporary) arising from 9/11.
Of course, you may get your lowball offer accepted, but there's still a lot of hope out there in the stock market and real estate market which tells me the bottom isn't in in the stock market, and isn't even close in real estate yet.
In times of falling asset values, rent, short term if possible. In times of rising asset values, buy, with as much leverage as possible.
Which of the above do you believe we're in?
Kb |
