HOUSING: Buying in a falling market

New homeowners say they do not worry about declining prices.

By ZACH FOX - Staff Writer | Monday, July 28, 2008 12:19 PM PDT ∞

Steve and Shelby Nowak, pictured with their dog, Riley, recently purchased this three-bedroom home in San Marcos for $447,000. (Photo by Waldo Nilo - staff photographer)
Steve and Shelby Nowak, pictured with their dog, Riley, stand in the dining room of their three-bedroom home in San Marcos. (Photo by Waldo Nilo - Staff Photographer)

House prices are falling at the steepest rate on record, but for some buyers, the attraction of a home is overcoming the anxiety of buying a depreciating asset.

From October through April, North County homes lost about 3 percent in equity ---- per month. Right in the middle of that slide, which some analysts expect to continue through the year, Steve and Shelby Nowak pooled their savings and made the biggest purchase of their lives, a $447,000 house.

The Nowaks are among a growing group of people buying houses who say they believe they not only got a good deal but also believe their dwelling ultimately will grow in value.

The newlyweds bought their three-bedroom, 2,250-square foot house in an east San Marcos gated community four months ago.

Real estate listing sites show two similar homes in the same neighborhood, one listed for $400,000, or 10 percent less and another for $496,000, or 10 percent more, though list prices can vary greatly from the eventual purchase price.

But for home buyers such as the Nowaks, potentially losing thousands of dollars of equity in their new home is not causing any sleepless nights.

"We didn't buy the house to get rich in," said Steve Nowak, 28. "We got it to live in. It was just an ideal situation for us. The house was the right price and interest rates were low."

The couple plan to have children in the near future and see the house as their home for at least five years ---- they already have painted the walls and replaced gray carpeting with chocolate wood flooring.

Of prices through April, the latest month available, San Diego County home values have tumbled 28 percent from a peak in November 2005, according to Standard & Poor's Case-Shiller Home Price Index, considered by many housing analysts the most accurate measure of home prices.

But the price declines have lured buyers, and sales have jumped over the last few months. Home sales are now practically flat with activity a year ago, compared to 30 percent drops from January through March, according to a monthly housing report issued by the North San Diego County Association of Realtors.

An influx of buyers appear to be driven by investors looking to turn houses into rentals in hard-hit areas such as north Oceanside as well as first-time home buyers, such as the Nowaks, who can afford a house because of the drop in prices.

"I never thought we'd get a house two or three years ago," said Steve Nowak, an engineer with Encinitas. Shelby Nowak works as a teacher in San Marcos.

Real estate agents have long relayed the mantra that if a family stays in a house for five years, they not only will ride out any market bumps, but will see their house appreciate in value.

Other analysts, such as Christopher Thornberg, an economist with Beacon Economics, says many homes will continue to depreciate.

Five months ago, Thonberg's advice to buyers was to "wait, wait, wait." However, North County's dramatic price declines over the last year lead Thornberg to believe there might be deals in real estate.

But he still is advising buyers to wait a bit longer.

"If you're really hot for some sort of bargain, I think it's worth keeping your eye out. They may be out there," he said. "But market averages are still very, very high compared to relative income. They have to come down 40 percent to come back to historic norms. They're not there yet."

The Nowaks bought their home at 20 percent below the previous sale price in 2005.

While Oceanside and Escondido have seen older, subprime-plagued neighborhoods lose up to 50 percent of value, newer neighborhoods such as Nowak's, where most homes were built after 2003, have not lost much value, based on county records and real estate Web sites.

Another cause for concern among home buyers is a growing number of foreclosures. Throughout North County, notices of default ---- a forward-looking indicator of foreclosures ---- have doubled from last year.

"I don't think (they) have a lot to be worried about in losing value," said Nathan Moeder, a principal with The London Group, a San Diego real estate consultant firm. "I think in the long run, meaning five years or more, their values should be retained at least."

And for the Nowaks, they said interest rates shooting up were a greater concern than any depreciation, which they expect to be minor because of the quality of their home.

Also, because they submitted their offer in December, they were able to secure a loan with just 5 percent down, products that are tough to find now that banks have tightened lending standards.

For another young family, Beth and Marlon Taylor, who works in the military, price depreciation played a larger factor. But with a 16-month-old daughter, the young family wanted a home.

Still, they eschewed a bigger home inland for a smaller town house in Encinitas, which they think will better hold value in the unstable real estate market, Beth Taylor said.

The Taylors used to own a home in San Elijo Hills, where prices dropped 20 percent on some homes, before moving about three years ago.

"The dollar signs looked appealing," to return to the neighborhood, Beth Taylor said. "But we did not want to go back to that instability. We got really lucky when we got out and we didn't want to test that luck again."

Moeder said that buying near Interstate 5 is a good bet because the limited real estate close to the ocean ensures better price stability.

Other analysts, such as Thornberg, disagree, saying all home prices need to track incomes better.

For Thornberg, he suggests waiting to buy until the end of 2009. That is when he will start looking to purchase, he said.

"Even if we are at the bottom, I don't care," Thornberg said. "Because they (prices) are not coming up anytime soon."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Fox's "On the Realside" blog on North County real estate is at http://www.nctimes.com/blogs/minding_your_business/?cat=4.

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Pre-Registration Comments[-]Go to Top

Catch a falling knife wrote on Jul 26, 2008 7:26 PM:This is the WRONG time to buy.

Foreclosures are just gaining steam. This will force many, many more homes onto the marker.

People may even start walking away from their homes even if they are not in trouble if prices go down further.

Also, if you think banks are tight now, wait till foreclosures rise and banks crumble.

I think we could lose another 20-40%.

DON'T BUY!!!

esteban wrote on Jul 26, 2008 9:16 PM:I just hope my tax dollars will not be used to bailout these new homebuyers when they cant pay the mortgage in 2 years.

crazy people wrote on Jul 27, 2008 8:54 AM:you'd have to be nuts to buy in this falling market... see how it looks in 2 years.. avg home price in 2010 $140,000.. that's when I'll buy my monster home..

Kids wrote on Jul 27, 2008 9:52 AM:Couples who are about to have kids *are* nuts. It's called "nesting".

The only folks that are buying homes now are doing so because they have other priorities besides declining home values.

Crystal Ball wrote on Jul 27, 2008 10:22 AM:So many predictions, so few crysal balls. Those who bought as 'investors' get no symptathy from me, but those who saved for many years, worked two jobs, lived simply, now can't retire or accept job transfers, much less send their kids to college. Shame on all the brokers, lenders, shyster realtors who lied to line their pockets. Crime escalates, homelessness abounds, medical care is unaffordable. Not all are deadbeats, but many are seeing no way out of what they thought was the American Dream of home ownership.

okie wrote on Jul 27, 2008 11:32 AM:Whats wrong with the Nowaks buying a home now? They have good jobs and plan to live in it. All these 'expert's like Thornberg change their 'analyses' day to day. And as for 'crazy people' you probably couldn't afford a shack in the desert anyway.

Me wrote on Jul 27, 2008 11:38 AM:Congratulations on your new homes!

Affordability index wrote on Jul 27, 2008 12:19 PM:The main indicator we are at or near the bottom (MAYBE another 5 to 10% drop in the next 18 months) is that is now around the affordability index number (income X 3 to afford to own). Also, in our area of Temecula, if you put 10 to 20% down on a home, with current interest rates and your tax writeoff you will be paying the same or better to own vs. renting. Only, as everybody knows there is never appreciation or paying down of principle when you rent and with inflation over the long term, you will pay a lot more for your monthly expenses renting then you would if you do long term home ownership.

Whatever wrote on Jul 27, 2008 12:33 PM:There are always jerks that say "Prices can only go up" but you also have idiots like crazy people who make dumb quotes like the median prices of homes will be $140K. Get real. Not here in San Diego. I do think that the Nowaks could have waited to get a better price BUT... they're young (28???) and they have pretty stable job in high demand occupations and they bought a house in a good neighborhood.

izzy wrote on Jul 27, 2008 4:22 PM:the job situation determines everything----the housing boom is over because we are fast running out of places to build homes here in san diego....our construction is still going fairly strong---causing people to have a false sense of some sort of future improvement in home values....i am happy more people can afford homes---but bigger pain lies ahead.

Jay Jay wrote on Jul 27, 2008 6:36 PM:Thornburg has been right about 10 times as much as the realtors. I'd listen to that guy.

Its okay the Nowaks bought too early, they're young enough to be able to make up the loss. As for me, I don't have the time to make a mistake, but I also have the wisdom and perspective gained from living through one housing cycle longer than they.

Huh wrote on Jul 27, 2008 8:34 PM:I'm glad this couple found a house. I hope they enjoy it.

Nobody is raining on their parade. Life is more than what money brings.

What is absolutely clear is that this correction is NOT DONE.

I'm betting that in 24 months things will be the same or worse. With that said: DON'T BUY NOW unless you can get a ridiculous deal. Best case scenario is that we see things flat for many quarters.

Affordability wrote on Jul 27, 2008 11:48 PM:I am concerned with Novak's 5% down-payment. If the home price goes down , they might have -ve equity and the tax-payer money might be used to offset the difference. Homes are no where near affordable or comparable to rent in good school districts. In places like Temecula, Escondido homes have went down 30%-40% off the peak. We still have to go a bit more.

I hope that wrote on Jul 28, 2008 12:41 PM:all those that have negative equity get bailed out by the government and that the government spends ALL our tax dollars repairing our economy. I mean, we have been spending billions of money on Iraq, and our oil is higher than its ever been. I don't hear anyone complaining about war spending, but spending on our people is not allowed? All of you that don't want tax money going towards an economy repair are all selfish. We, as a country, need to move on. If you don't agree, then leave :)

Faux Chuckles wrote on Jul 28, 2008 1:01 PM:So the Nowaks bought a large house than they really need and takes high amounts of energy to heat/cool because they plan on breeding, thus adding to the over-population crisis that is causing world commodities to go through the roof and adding copious amounts of carbon dioxide to the atmosphere. We wouldn't have as many economic and environmental problems if people just stopped buying abodes that are larger than needed and pumping out babies like its good for business.

Happy new owner wrote on Jul 28, 2008 1:03 PM:Purchased a few months ago, Took advantage of a bank owned.. Purchased for almost 300k less than last sold. Purchased to live in not FLIP it.
Loan was good and we can easlly afford payments now and in the future.
If you can find a home with what you want "my wife got EVRYTHING she wanted +" and you "can" afford it Grab it. When the so called bubble starts airing up again you will be lucky to find the home "you want" with everything you desire it to have. What will then be left are the beat up trashed homes needs thousands of dollors to make livable. 1 home in our area the people loseing it literly beat the Shi! out of the inside before they left. So buyers find what you want and can afford...
A happy new home owner! Gotta go for a swim....

What will current buyers do wrote on Jul 29, 2008 7:17 AM:...when prices are 20% below their "great deal"? We are in the perfect storm for this to happen.

It is all going to come down to affordability. When people making $75k combined a year can buy a house, the market will turn. Now that stated and no doc loans are a thing of the past, the "funny money" is gone. Ratios and common sense guidelines are back. The govt. will make sure scenario doesn't come back.

Steve wrote on Jul 30, 2008 2:17 PM:The IE was hit the hardest in gas pains and housing 'cos of the L.A. sprawl. So as more jobs come out here and the economy comes back, it'll have plenty of correcting to do,,,, the 'upward' way.

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