This blog emphasizes condos and townhomes, which have their own set of problems such as a mismanaged HOA, special assessments, and general volatility. With that said, I prefer to own a single family home. With a single family home you get your own yard, you usually get to modify it to suit your tastes, and you usually don't have to worry about the HOA monitoring the use of your property.
But despite that, some of the older single family homes in established California areas might be the WORST real estate investment you can make. They were GREAT investments for their long time owners, but for those trying to buy one today, don't be surprised to get a rude awakening in the future.
For one, there is Proposition 13, which limits the annual tax increases at 2%. Scour Redfin.com , focus in on established, older communities such as Beverly Hills, San Gabriel, Burbank, Glendale, Torrance, etc and you will see many homes listed for $700,000 and above that have property tax assessments of less than $1,000. If you were to buy a $700,000 home right now, you will be assessed somewhere in the neighborhood of $8,000 per year. So the current owner with the cheap property tax has a disincentive to sell. The result? A block full of old timer homeowners who are reluctant to sell their under-assessed homes, and end up passing away and bequeathing these old homes to their children. Wealth is passed down the generations. This leads to a lack of supply, which drives up prices for newer buyers looking to buy in those neighborhoods.
To compound the problem, single family homes are usually much older than condos and townhomes. Sure, people balk at paying HOA dues but keep in mind that these old single family homes are usually not particularly well-maintained. While the old owner enjoyed paying the tiny tax bill and the home when it was newer, he ends up selling you a much older home completely with deferred maintenance and a sharply higher tax bill when you take ownership.
And we're not done there. Mortgage rates were around 18% in the early 80's, which meant buyers were not able to afford the large loan balances prevalent today. From the early 80's, mortgage rates gradually fell through the years, going to 8% in the 90's to the sub 4% we have today. And guess what? Home sellers raised their asking prices to account for the lower monthly payments afforded by low mortgage rates. The result is a home price that appreciated much higher than the rate of inflation in the past 30 years.
Combine the lower rates with Proposition 13 and now you have the 800 square foot home in Culver City that commands $700,000. Repairs or warranties not provided. Property needs "TLC".
Realtors will tell you to hurry and buy before rates go up. But what will happen if rates go up? The home price will come down. But isn't the economy improving and thus home prices will appreciate? Perhaps, but an improving economy is synonymous with rising interest rates. And if rates rise, prices will have to fall.
