Earlier I posted a response to an article in the Sacramento Bee which discussed some frightening market statistics. I’ve dug into what I believe are the sources of some of those statistics, and so I think I can offer some more perspective on the wide boom-and-bust debate.

It appears that some of the market statistics that were quoted in the Bee have been widely quoted on the net, and seem to have their source in a company called PMI Mortgage Insurance. The name is also what they sell, since PMI stands for “Private Mortgage Insurance.” Typically lenders require PMI to be paid whenever the loan-to-value ratio exceeds 80%. (The thinking is that if you have 20% or more of your own money at risk, you’ll be less likely to default — and lenders don’t like defaults).

Needless to say, a company insuring a lender against default is going to be concerned if prices go south, especially if many of the loans their insuring are taken out by over-leveraged investors who were putting up with negative cash flow and banking on appreciation. Non-owner occupied, high loan-to-value ratio — that’s practically a formula for risk as far as lenders are concerned. So PMI (the company) does an analysis of the housing market in order to understand the risk involved.

Well, so far, so good. Trying to figure out the odds is what you’d expect an insurance company to do. So PMI figured out, based on their statistical model, what the Sacramento Bee pointed out: that of all the places studied, Sacramento ranked number twelve from the top of the most likely places for a price decrease over the next two years. So a lot of you may have read that and thought, “Gee, I better not buy a house in the Sacramento area.”

And in some cases, you’re right — you’d better not. In other cases, I say “hogwash”.

Before we get into which case is which, here’s the good news. Even though it’s twelfth from the top, the likelihood that Sacramento’s prices will decline over the next two years is only 41.9%. Or to put it another way, there’s a better than even — 58.1% — chance that prices will stay the same or continue to increase over that time — again according to PMI.

Now, I would argue that whether or not you should or shouldn’t care about price depreciation boils down to a series of simple questions. First of all, are you buying the house to live in or as an investment? If it’s to live in, and if you can buy it with an amortizing loan, and you’re comfortable with the payment and the terms of your loan after you’ve talked it over with a lender and Realtor® — then what the heck are you waiting for? Buy! Waiting for prices to go down is not a good idea, because the best way for that to happen is for interest to go up. Lock in a fixed rate loan, pay with low interest, then if prices go down just hold until they go up again before you sell. On the other hand, if you’re not comfortable with the payment, don’t buy.

If you’re an investor, you have to ask yourself a different set of questions. Most importantly, if you have enough of a down payment to achieve positive cash flow, or if you’re confident you can “fix and flip”, then go for it! If, on the other hand, you have 5 or 10% to put down or need to leverage your own home to invest, but you don’t want to “miss out” on all the great deals your friends are telling you about, I recommend surfing away from this web site now. (You might want to go play Freecell or something.) If you’re not fixing and flipping, an off-the-top-of-my-head estimate for how much money you should have in cash before considering a real estate investment in the Sacramento area is about $60,000. Anything less than that, and you’ll be that overleveraged investor banking on appreciation that PMI is so worried about.

blog comments powered by Disqus