It's A Terrible Time To Buy An Expensive House
patrick.net
patrick.net
People used to stay at their jobs for decades or their entire lives. Nowadays, what's the average job tenure? 2 years or less in tech, a touch more outside of it. So how much do you want to constrain your next job search to a commute-radius of your home (hint: research the relationship between commute distance and happiness before you answer)?
People are more mobile nowadays. My rule of thumb with real estate is "If I can't rent it out for more than the mortgage + 1% of purchase price (avg. maintenance), I will not buy a house".
(disclosure: I own two homes with mother-in-law apartments-- both are currently rented and profitable while I travel the world for bit)
Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald: "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."
Important to remember that for every homeowner over-stretching to buy their dream house is another home-seller making a healthy profit.
There's also a very real lifestyle component. If it's a purely fiscal decision, we should all be renting in Dayton, Ohio.
That's why these sorts of articles drive me nuts. He's assuming equal inventory across renting vs. leasing. There are six people in my family, and the local home rental market doesn't support those numbers, at least not in the area where we want to live. In other markets, our only sane options would be renting.
EDIT: I should clarify that I mean owner-occupied housing. You can certainly make money in real estate that you can leverage; properties that you can rent or sale. (Still, as an investor, I have yet to add any real estate.)
If you said that you wanted $500,000 to play the stock market they'd laugh you out of the door. So for the average person in the street it's the only way to get significant leverage.
Edit: I agree with your premise btw, I despise the culture that's been created here in the UK with regards to home-ownership.
People here still don't believe that house prices can drop significantly, and the amount of TV programmes about buying a house, renovating a house, or selling a house for more than you paid for it is ludicrous.
What frustrates me even more is during the run up to the crash I was standing my ground that they were overpriced, and there must be a correction soon. So I continued to rent. And now that I'd like to buy I need close to £100,000 deposit to buy a place similar to the one I rent (20% deposit required for places over £400,000).
The fundamentals just don't stack up.
UK average wage: £26,500 UK average house price: £242,415
So that requires a mortgage 9.14 times the individual's average wage, or 4.57 times a couple's average wage.
It seems to me we have a way to fall yet.
However the UK is short of houses. So who knows!
Real estate can appreciate. It's not guaranteed to do so, but it can, and with significant leverage. That's why it's considered an investment.
If cars were tethered to a plot of land in the same way houses are, the comparison between cars and houses might be more valid. Investing in parking spaces can actually be profitable, in some cases. But whether you buy a house or a car, you're buying a construction that time and weather will ultimately beat into a worthless object. Ordinary homebuyers are too used to thinking of a house as an investment by its very nature and ignoring both the expenses of homeownership and the investment quality of the land the house sits on.
Even land is a depreciating invesment in an area where the population is sharply declining and tourism/business is minimal. Nothing is a good investment by its nature, only by the circumstances in which it exists.
Its investment if you can oil the wheels as a landlord such that you can rent money from a bank cheaper than renting the land from the landlord. That of course is a mathematical impossibility at this time in most areas.
For example, leading up to the real estate market crash, a lot of people made the mistake of thinking that because home prices had gone up for a decade, they would always go up.
But, it's just as big a mistake today to think that because home values have gone down from 10 years ago, home prices will never go up again.
I get that building a pool makes your house worth more, but trying to ride a bubble seems messy
Of course all of this can be trumped over short time periods by nationwide trends like the recent financial crisis. But with strong local fundamentals, such trends create more volatility than permanent depreciation.
Not necessarily. Many folks see a pool as an extra expense and will immediately disregard a potential purchase because the property has a pool. This is especially true for above-ground ones that aren't as durable as in-ground designs.
> Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going.
Aren't there statistics available that show housing inventory levels over time? I can't refute the claim, because I don't know where to find those statistics, but I'm skeptical of claims provided without citation.
The entire thing seems very rational, but I'm reminded of the quote, "The market can remain irrational longer than you can remain solvent." I wish there were more citations to back up the facts. Maybe I'll do some of the footwork myself.
We are in unprecedented territory here, interest rates have never been this low. Is it sustainable? Who knows. Given history I'd be more inclined to believe it's not.
http://www.multpl.com/case-shiller-home-price-index-inflatio...
There's obviously some relationship there, but it's not as clear cut as this article makes it out to be.
Considering that for a period of time it was practically free to borrow money (interest rate < inflation), I don't think it's that unreasonable to describe that as "unsustainable".
So in retrospect, it would have been a terrific idea to buy a house in SF in mid-2009 and then sell it now. But if you followed Patrick's advice, there's no way you would even consider doing so. And bluntly, if you're a hacker, you probably should follow Patrick's advice. SF is the land of perma-renters.
Paying too much rent now and moving when the current bubble pops and/or sticking around long enough for the Ellis Act to make your apartment a bargain both seem like better strategies than speculating to me. Focus on what you're good at to pay the rent in the short term.
It's the people whose brains are wired into local and national real estate markets who stand a decent chance of knowing when to buy or sell, many, not all, of them realtors. Now if you can give people a better finger on the pulse of this market, go for it. Zillow, Trulia, and Redfin need not apply - their attempts at property valuations are wacko.
Sell when people say it is awesome.
This goes for real estate and basically anything else.
When I used to participate in his online forum, it seemed to me that his main objective was to eliminate the mortgage interest and property tax deduction immediately so it would trigger an immediate crash in the market and allow anyone with cash on the side to clean up. Whatever floats your boat of course, but that seemed a pretty reckless plan to me. That said, reforming said deductions gradually is probably sensible, just not all at apocalyptically once.
For example: $650 student loans,$100 cellphones,$90 car insurance,$300 food,$250 gas,$150 electric (average over 12 months),$80 water/sewage/trash ---- $1620
($1620/$4000) 100 = 40.5% recurring debt to credit ratio
Note: Most lenders do not factor in utilities. You should. They will let you drown.
It is always wise to take your Good Faith Estimate and refactor your d/c ratio.
$1620 recurring,$350 mortgage,$120 home insurance,$150 taxes,$80 mortgage insurance ---- $2320 (2320/4000)*100=58% 42% of your income remains to be spent on fed taxes, benefits at work, non recurring debt, random quirks of life.
I really think 2x Household salary is pushing the limit of what you can afford. Vehicles break, pipes bust, utilities are going to have fees/unexpected jumps, people get sick, etc, etc.
Don't waste your life preparing for the unknown. Just don't dig yourself into a hole that you can't swim out of once the floods come.
But when you have debt, you can't just decide not to pay this month or you really get in trouble.
I was renting a place for $950/month starting in 2011, then for 2012 it went up to $1,050, then for 2013 the landlord wanted $1,350/month to renew. Meanwhile home prices were still low (30% of inventory still short sales in my area) and mortgage interest rates were under 4%. No-brainer. I now pay less in principal and interest than I paid in rent, for a much larger, nicer house compared to the apartment I lived in. And my mortgage payment is never going to go up. (My property tax bill might go up, but that just means my investment is appreciating.)
Funny you say that: I'm strongly considering buying, and my landlord elected to not offer a "heat pump renewal" when the A/C went out. Hello window units, goodbye rental hell. Rental markets are not all alike, and this one's not too healthy.
1) The majority of your net worth is probably in that building so you're badly diversified across asset classes, 3) You are massively leveraged on that one position. 2) You are holding an extremely illiquid investment that could take months or even years to sell. This will probably be worst when when you want to sell the most.
All three of those are marks of a questionable investment.
This matters because the payments on a fixed-rate mortgage do stay flat; they don't adjust with inflation.
I just refinanced to 4.5%. Long-run inflation is 3% so my actual cost to borrow is 1.5%. With the mortgage deduction it is just over 1.1%--nearly free money, in other words.
It's true that I pay property taxes. In my jurisdiction they are just over 1%, so now my actual cost to own is maybe about 2.2%.
Maintenance is a bit of a red herring...most straight maintenance is inexpensive (cleaning, painting) or optional (fancy landscaping).
Most expensive "maintenance" is actually improvements. For example last year I replaced both my A/C unit and furnace. It was a substantial cash outlay, but the new units are far more performant and efficient than the old ones. If I stay in the house another 5 years I will completely recoup that investment in lower monthly energy payments. And if I don't, the modern new appliances will allow me to set a higher asking price in a sale.
LOL the political reported rate is what the .gov is willing to provide in COLA increases. It has nothing to do with actual costs. You're budgeting based on made up numbers provided for someone elses "pay" rate increases.
Look at say... gas prices. Double in a decade. Thats about 7% per year. Or the price of food, or medical insurance, or tuition, or price of cars, etc. Think of what real people actually spend money on.
You can get better numbers from shadowstats. Somewhere toward the low end of 6% to 10% is about right. We'll call it 7% long term average.
The problem with 7% annual inflation rates is very few people can maintain those pay increases, every year, for an entire 30 year mortgage... So eventually you end up house poor.
Lets say J6P gets a 3% pay raise but the cost of everything else increased by 7%, for a generation or so. That means the money left over after food, car, etc aka the rent either directly for land or indirectly for money to buy land, will drop by about 4% per year. For awhile you can mask that by lowering interest rates, but once you reach "basically zero" like now, problems develop.
Finally the mortgage interest deduction doesn't work like that. If you pay more interest to the bank than the standard deduction fraction then you don't have to pay income tax on the fraction above that. Basically you need low income, high interest payments, and then all you save is taxes on the portion above the standard level. You're still out the same money, just not out the income tax on a small sliver of the total interest over a certain limit. I've paid enough of my mortgage off that I no longer get a mortgage interest deduction. Oh, I could file it anyway, but I'd have to pay more in taxes than just taking the std deduction. Eventually you reach AMT range and then things get weird.
Actually you end up inflation poor, not house poor. Your house payment stays mostly fixed. In your scenario of much higher inflation than reported, rents are also likely going up. In such a case the renter will be worse off than the home owner.
Also, s/each money/each month/g
On the other hand, I'm now paying ~3.4% interest on a place that would rent for, again, about 6% of the purchase price per year. Even including other costs, I'm coming out decently ahead.
Of course there are other reasons to own rather than rent (or vice versa) aside from just which costs more, like stability, or freedom to move. But it is not a slam dunk easy decision as to which option costs less, even after accounting for the potential equity you build when owning with a mortgage.
But of course: this time is different, broken clock, and <insert your financial cliché here>, etc etc.
Retrospectively you'll always find people who "predicted" any up or down in the market. That doesn't mean they will get it right the next time. Or it would be too easy, just find the guy who got it right once and you can predict the future!
CalculatedRisk changed his opinion as the facts changed (he is data-driven, and one of the best blogs out there).
Patrick.net has essentially been a perma-bear on real estate. While that view was correct at one point in time, he never changed his view significantly when the facts completely changed.
I should have emphasized this point myself. Also, the CR comment board used to be of HN quality, but for economics and housing. (Lately, not so much.) If you follow one econ blog, I'd heartily recommend CR: http://www.calculatedriskblog.com/
I will note though for the topic at hand: CR has commented that there is little correlation between interest rates and house prices[1]. I believe he has neglected that most of the data from which that statement is derived had interest rates (and borrowing standards) out of range compared to where we are now.
[1] http://www.calculatedriskblog.com/2013/06/house-prices-and-m...
I'm moving to Florida. I plan to buy a house that is 30k. Small bungelow. Just me, the wife, the dogs and a cat. At the same time I plan on buying a 55k fixer-upper.
The first I should be able to pay in cash. The second, won't get bought until my current home sells. However, that second house, once improved (by us: we do flooring, plumbing, painting and simple eletrical) should value at 160k.
Once we move to the fixed house, we'll rent the other for 500 a month. Should be doable since my wife is currently in FLA in a 300 sq/ft studio at 500 a month.
I purposely didn't want to go to the Bay for this reason. I avoid California at all cost for this reason. My long term plan is to startup a tech firm, hire college grads, train them and try to keep them with the company for 5+ years. Hard, but doable. The nice thing is they can get 45k a year, and get a pretty nice home/environment that would be hard to beat. So we'll see, but again the Bay really matters in the HN echo chamber.
Isn't it chiefly because most other forms of investment are banned or highly restricted?
SF, in particular, seems to be extremely young (though that could be observational bias on my part), well-monied, in sharp undersupply of housing, with rent matching or in some cases exceeding the cost of a mortgage.
Historically, it's been a boom-and-bust sort of town as far as housing prices are concerned. And there are always places like the East Bay and the Peninsula to capture some of the demand. But it's not as if the Peninsula is cheap these days, so Oakland seems the more likely candidate to take on the burden (which then raises a thorny question of where all the low-income Oaklanders go when the gentrification accelerates).
But it's conceivable that SF basically becomes the Mahattan of the Bay Area, a playground for the rich, while everyone else gets pushed into the outlying boroughs and beyond. In such a scenario, where money is little object to the buyers determined to own in SF, what happens to pricing?
I don't know anyone who owns a home in SF right now who doesn't think the current prices are insane. (Anecdote: one friend just bought a condo in a new building, and three months later, the closing price for a lesser unit in the same building was $200k higher than what he'd paid for his). But are they actually going south anytime soon? Also: while mortgages and interest rates are great indicators for the housing market in general, SF seems to have an unusually large supply of cash buyers.
In conclusion: I'm not disagreeing with the article, nor am I bullish on the local housing market. I don't fully understand why it's behaving the way it is, and that's never a great sign. But superficially, it seems to be the sort of "microclimate" that doesn't track the aggregate US market very closely. How many of these enclaves of wealth does the US have, or will it have, that seem to have a low to zero beta w/r/t the overall market? And if it's a significant amount, when will speaking in aggregate terms start to lose a bit of meaning?
On a related note, I'd love to see a comparison of urban vs. rural vs. suburban areas across the US. I suspect that concentrated urban centers are obeying very different laws of physics, so to speak, than suburbs and semi-rurals with their huge tracts of overbuilt housing inventory. Example: I used to live in LA, and when the press spoke about how hard-hit LA was during the housing crash, they painted with a pretty big and sloppy brush. The surrounding areas (Inland Empire, etc.) got the plague, but housing in LA proper barely registered a slight cough.
I lived in Manhattan and in SF now and I would say, yah, I can see that. Already though, the 'boroughs' are being pushed further out. Buying in SF is an all cash over asking price deal (I've heard over 25%). My wife and I have been looking around the east bay and north bay and while those prices are a little more down to earth, the same thing is going on there as well - cash. Maybe it's not so over the asking price, but those that can't buy here in the city, don't want to ruin their chances buying elsewhere, so cash is still king.
It's pretty crazy; I saw a house by us in the Upper Market around - a 2br 1ba, 900 sqft - go for over $1.2m (I pass this place as I walk to muni every day). That was a month or so ago. Last week walked by it, there was a for rent sign. Looked the place up, $5800/mo rent. Ridic. Yesterday, the rent sign was gone. I was like, wow.. Ok..
I felt like our trade up in our building from a $1500 1br apt to a $2200 2br apt was a little crazy. But I'm sure our place now would rent for $3k easy. Needless to say, we're staying put for a bit, still continuing to save.
I think the big thing on the psychology here is the fact that so many people can swoop in with a lot of cash over ask. You really do realize it's a rich people's city - to own. My wife and I have a small toddler with another kid on the way and couple the current climate with how crappy the public schools are here and it's only a matter of time before we hit the eject button. Add to that the homeless problem that never seems to get any better (I've lived here on and off for 20 years and it seems like its only gotten worse) and you have the makings of a city where families don't live (more dogs than kids here).
We still love the city and we'd never ever thought we'd say we're lookin to the suburbs. But now, we are. Who knows if this will change over the next few years.
Yeah, above certain pricing tiers ($1M+ listings), the city seems to be catering to the young and monied without family concerns.
I saw a 1BR / 1 BA in mid-Market listed at $1.39M a few months ago. I thought to myself, how much higher could that ever really go? It's a freaking 1 bedroom. Sure enough, it sold at over-asking, all cash, to what a realtor friend of mine assured me was a twentysomething buyer. Probably Facebook money.
On a semi-related note, these days it seems as if developers are making a serious attempt to gentrify the Tenderloin. Lots of new luxury boutique buildings going up or being converted there. There's a $5M+ penthouse in the heart of the 'Loin for sale right now. And I guess it makes sense, in a way. Provided gentrification can push all the homeless out of the area, it's really centrally located and convenient for people who work in the financial district or general Market / Union Square area.
To your point, though: where do all the homeless people go? They seem to be getting pushed further and further south, especially now that SOMA (South Beach in particular) is the most expensive neighborhood in the city. And if the 'Loin turns posh, what the f- happens to all of them there?
I was amazed when I learned that Orange County busses its homeless to SF. I often wonder how many other affluent areas sweep their troubled people under their neighbor's rug?
http://www.mercurynews.com/ci_23087181/san-francisco-probes-...
http://www.nbclosangeles.com/news/local/SF-City-Attorney-Loo...
Granted, I knew I'd be working more and more at home, but for the first year I road a 1 hour commuter bus (with wifi!) that picked me up a block from my house and dropped me a block from my Soma office. East Bay has BART, but don't discount the other public transportation options that do just as well.
Petaluma has that nice old-world vibe because it sits on a slab of granite. During the big earthquakes of the past century the neighboring cities' buildings collapsed but that slab of granite provided a buffer for Petaluma, keeping its turn of the century downtown. It also ended up being the default relief center during those disasters :) Way to go, slab.
I'm not sure what it's like over the hills, but in north oakland and berkeley you'll still have to pay over asking and compete against 5-10 other bids.
This is tempered by the fact that the medium HHI of our zip-code is in the high 30k's and we've got the amenities to match, but we're in a suburban area outside of small city/large town (200k or so during the week?) and with me being a developer my income isn't necessarily tied to a specific geographic area.
For what it's worth, paying above asking is a pretty bizarre concept to me as well, and I lived most of my life in LA (LA LA, not an outlying area) before moving up to SF. Having owned and sold a home in LA, I would have been smoking crack to believe I'd get my asking price, let alone exceed the asking. And there was no shortage of crazy money floating around that town.
But here in SF, asking is basically the floor, not the ceiling. This is probably because of supply & demand. SF has much more constrained inventory and less liquidity in that inventory -- so you get things like bidding wars, and multiple offers on listings are the rule and not the exception.
I have seen people get carried away with their pricing here, and the market usually punishes those people until they lower their asking prices. But for condos or houses priced "appropriately" relative to their comps, asking is almost assured, and above-asking is far from uncommon.
First, it's a bit of a cliché from realtors in every area of the US to say: "It's different here". Sometimes it might be, but when interest rates and cheap money are available nation-wide, it pays to think about what that implies about prices.
If buyers were using only their own cash, then you don't have to worry about what interest rates are doing. But if people of varying levels of financial sophistication are competing to purchase, and some of those people are using borrowed funds, then it implies something about how the least sophisticated buyers are going to bid.
Isn't this already basically true?
It will happen again. Pushing out the middle class yuppies who pushed out the poorish people before them, who pushed out the immigrants before them, who pushed out...
I was just coming to say the same thing. Solid advice, but housing has such metro-geographical differences, 40% of this doesn't line up with my area (Atlanta).
Edit: Had 60% went back and modified to 40% after reading again.
Source: Barrow County resident who would have preferred Gwinnett.
I think there are a lot of generalizations in the article that people have been preaching for a few years now. If you sit on the sidelines and worry about of the potential problems, you're never going to purchase.
Oakland, like most cities, suffers from antiquated and restrictive zoning model (among other things). Already a crowded city in most parts (Lake Merrit), it is largely inefficient. Although they are on different scales (3M vs 300K), Chicago is a good model of how to develop a downtown--the one area where Oakland could add 100k--and help the crime issue. You could argue Detroit has a better downtown.
I don't know about a bust, but things can only go so high before people with money and ambition start looking elsewhere.
This... is not as true as you think it is, even here in Silicon valley.
If I could get $50/month/resident out of any of the reasonable-sized condos around here, I could easily give everyone gigabit Ethernet.
Problem is? even here in the heart of silicon valley, most people don't give a shit. Faster than wi-fi doesn't matter.
Hell, even you and me... I talk about bandwidth being important, but surewest has had fiber to the home in Sacramento for some time now... fast and very cheap. Do you see me moving to Sacramento? No, screw that.
I mean, it's a cool project, and I wish google luck, but the fiber itself isn't going to move real-estate markets.
Obviously, we're not talking about datacenter-levels of oversubscription. You'd be talking consumer-levels of oversubscription. Yes, this would be an oversubscribed gigabit link, really a whole lot like DSL, except that instead of 10Mbps max, you get 1000Mbps max, and because the physical plant is so much cleaner, you could do much better QoS.
I mean, a shitty datacenter-level gige link delivered to a data center where the provider has a POP (if you are only buying a single gigabit; this stuff gets way cheaper as you buy in bulk) is about $750/month. Less if you know people, more if you sound like you have money when you call the sales rep; maybe 3x to 5x that if you want a big name. ($750 is what the he.net guys will quote you straight off.)
You would, of course, put 50 or 100 folks on that gigE link. Would this mean that everyone would get 1-2Mbps? not unless everyone was running the link full-throttle all the time.
This is... not dissimilar to the over-subscription ratios on DSL. And it mostly works okay, because it's hard to run a gigE link full-throttle all the time. And like I said, having clean physical plant (where you know the actual maximum throughput of a line, rather than the DSL bullshit, where it's loss depends on the phase of the moon and last time it rained) makes doing QoS way easier.
In many ways, this would be a lot like DSL, in that you'd have a 'star' topology within the building, each customer having a full-duplex connection to your pop within the building, then 'oversubscribe' according to cost concerns at the network edge.
Well that's just provably false:) Before flight people knew why flight would be useful. And before broadband people already knew that it would be important. I remember my mom in 1995 saying how useful she thought the internet would be once it was fast enough to transfer videos and pictures of her grand kids.
I certainly agree that gigabit internet will be more valuable in the future than it is now.
But, will that make property way more valuable? maybe. thing of it is, compared to silicon valley property values, getting fiber in to multi-family dwellings isn't all that expensive.
You are gonna need like 50 neighbors to make the ongoing cost reasonable, so that's harder with single-family homes, but not impossible. Install costs are high, but not that high; generally $5-$15K one-time to trench from the street into a property and splice in, so if you can talk all your neighbors into blowing 10K+ each on the install, plus your $50 each ongoing, well, you could totally do it. The whole project is way more appealing than, say, moving your ass to Sacramento or Kansas or somewhere else you probably don't want to live.
My point is that if something changes the SV market situation, like an exodus of investors to Texas or another Google Fiber location, housing prices are going to fall fast as the money leaves.
You misunderstand. I'm not saying that gigE isn't great. Certainly within the next decade, (and hopefully sooner) nearly all of us are going to demand gigE to the home.
My point is just that the economics of the situation are such that the presence of gigE lines isn't going to move the price of real-estate all that much. In expensive areas, the cost of real-estate utterly dominates the cost of getting gigabit network connections, if all your neighbors want the same speed.
The main reason gigabit to the home is unaffordable right now is due to low density of demand, and as you point out, that is going to change.
Napster, then other file-sharing services (Morpheus, Kazaa), Bittorrent, etc. This was ~25% of internet traffic in the mid-00s
My point still stands:
> No one knew what to do with broadband before VoD and digital delivery (Steam, GoG, app stores, etc.) came along, and we're only a few years into widespread adoption of those technologies
Rent has doubled for most of the area over the last 5 years. In my dismay a few months ago, I did some research into buying a place but quickly came to the same conclusion as the author.
I just did a quick look around my area over on Zillow. A condo comparable to my apartment (townhome style, 2-car garage, similar sq ft / bedrooms, location, etc) is still listed for 23 times my current annual rent, even though rent went up 15% last year. I'm renting for 4.3% the price of an (old!) condo. Anyone who thinks this is sustainable is going to be in for a surprise.
[edit: rent calculations annual...]
If your monthly rent is 0.4% of current value, then over 12 months you'd pay a total of 4.8% of current value.
So more than half (3 / 4.8) ie most of your rent paid would be going to pay the property taxes alone.
In that world, I think you can simplify things quite a bit. First, buying a house is more of a hedge against inflation than an investment. The market goes up? You've got more equity to move somewhere else. The market goes down? Well, you lose money, but everything else is cheaper too.
For the average person, I think the real lesson here is to make sure you can afford the house, put 20% down and it is within x2-3 your annual income. If you live in low-supply/high-demand markets like Seattle, SF, then you might end up paying more, and it is just a trade off you need to make.
When I buy a house shortly, the duplex will start making $500/mo + ever increasing equity amount. Until I decide to cash out.
Property/land is one of the most available avenues to wealth. But, it's no silver bullet. If you are an idiot and/or and/or make poor choices you will probably loose. No different than any other business, endeavor or purchase.
Property is so varied geographically, price bracket, types of property, condition of property, even seasonally, that blanket statements "Don't buy expensive house" lack any relevancy.
The "maintenance" issue is often misunderstood and the costs are different depending on if you live in the home or are renting it out to someone else. Case in point, my furnace started failing a few years ago. I could have fixed it on a Saturday afternoon for a hundred or so (it was made in 1986 -- they were not particularly sophisticated devices back then). If I wasn't living in the house, I would have gone this route. Instead, due to the $250/month heating bill to keep my house at a cool 65 in the winter coupled with the availability of generous tax credits, I upgraded the A/C and furnace. I now keep my home at 75 degrees and pay $80 in the coldest months of the winter.
Most of the problems I've run into have a similar theme. I could have gotten another few years out of my roof with patch work ($~100), but I replaced it because I wanted a better looking (and functioning) roof ($3000). I had a water tank problem that, I discovered, wasn't even failing -- the temp was just set too high. ($0) Due to tax credits and a desire to run more than one device that consumes hot water, I replaced it. ($800) People who are afraid of the unpredictability of these costs can purchase insurance (read the fine print and no, it's usually not a good deal). And a lot of the really expensive repairs that you hear about have more to do with people failing to inspect their home regularly, themselves (get in the attic, watch the way the water drains when it rains, etc). It's a lot cheaper to fix a downspout/gutter that's imperfect than it is to solve a foundation issue that creeps up as a result of water affecting the stability of the ground around a basement.
The article doesn't really apply to where I live. If you're renting out here, it's at a set of suburban-ish apartment complexes (900sq. ft. 2br, 1ba $800) or extremely low-end houses usually in undesirable neighborhoods vs a dearth of single family homes around 1400 sq. ft, 3br, 1.1 or 2 ba with basement space not included in the square footage. While there are homes in the million plus range, they're huge or have something that's highly unique about them (like a million dollar light house[1], supposedly the only one in Michigan that can be privately owned -- and even that's been sitting on the block for two years with the offering price dropped from 1.5 million).
[1] http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-por...
This x 1000.
In fact, I think that's one of the big lessons learned in my first property purchase. If I could do-over, I'd have hired a completely independent inspector (rated highly on yelp/servicemagic/angieslist) and maybe have two separate inspections. At the very least we could have negotiated some compensation from the sellers.
The bill is coming soon for a lot of school districts (especially those with strong unions) with the rapid costs of health care for retirees.
This is going to be our next crisis as we can see it playing out in Detroit.
The older the district, the worse the financial conditions, roughly. If you rent and move to an exurb that didn't exist in 2005, they can't by definition have employees retiring from the local school in 2015 with 30 years experience and 30 years of benefits to pay out. Also roughly speaking the older the community the more corrupt it is in general, which is expensive. This is before we get into infrastructure expenses.
And it's not like the employees aren't playing into the system the same way that private sector employees pay into Social Security. Many/most state employees are excluded from participating in Social Security--the States in their infinite wisdom decided long ago that they would rather roll their own rather than submit to the tyranny of federal control.
In California, due to Proposition 13, many many landlords pay 1970's level property taxes. It makes sense to rent these properties and split the savings with the landlord.
Between the ages of 6 and 12, maybe. Below that age they don't really notice or care, above that age the coverage area for middle and high schools is so immense that if you move out of the coverage area it was intentionally. There are eleven thousand household units in my kids high school. Seriously claiming I wouldn't be able to rent a single one?
The worst case scenario would be kids around 10 and you live in an elementary district that has precisely one apartment building or perhaps only one (perhaps illegal?) private house rental.
The long term effects of financial devastation to the family are probably worse than having to go to a different school "Well, you can't go to college because we don't have the money anymore to help because we stayed in our upside down house back when you were in 3rd grade; but on the bright side we didn't have to move to the apartment complex on the other side of the elementary school district"
The argument is identical to if you rent an apartment while going to university, in theory you might have to drop out of that university and transfer to another if you need to move and no one will rent to you. Very few people indeed report this tragedy..
If you have a high downpayment, and in the extreme case buy your house in cash, you don't have to pay any interest. You can take into account the revenue you could have got from your capital, but nowadays you can't get much without taking pretty big risks.
Then there's the long term. If you end up staying 30 years in the same house, buying is cheaper. Depending on your local market, the number of years you need to stay in house to make up for the purchasing fees (interests, taxes, etc.) is different. It's this number you need to find out. Of course when the real estate price was going up fast, the increase in value made it up pretty quickly so buying was an easy choice. That's no longer the case, you need to do the math.
So it's not whether it's universally better to buy or rent. It all depends on your local market, your downpayment, and how long you're willing to stay in your new house.
The notion of paying every month, pretty much for life, is deeply ingrained in society to the point of not renting/mortgaging seems downright weird. (It's kinda like the recurring threads where living on $1/meal is met with outrage by most, despite many doing so with great satisfaction.) Few start out with a primary goal being owning home & property outright ASAP. This normalizes the dependency factor, reinforcing a social dynamic where people can't take long vacations or high risks, and live in fear of financial devastation from sudden unemployment or disability, precisely because that massive monthly payment ever looms.
The normalization of rent/mortgage also means social expectation of costlier dwellings. Where our culture(s) were satisfied by much humbler abodes a few decades ago, we've now grown to expect vast variants on the McMansion theme as a minimum - shocked at any suggestion that buying a brick shoebox (which our [grand]parents were content with) outright might be financially sensible. I expect downvotes based on "you can't expect anyone to live in that! cash purchase of real estate is absurd unless you're rich!" Well yeah, if you insist on buying multi-thousand-square-foot floorspace in quasi-urban settings with lots of options, sure it's gonna cost ... but you can choose to live somewhere less expensive, in a smaller space, and own outright much sooner - giving you the freedom to take a sabbatical, or risk investments, or not worry about layoffs.
In retrospect, and stuck with a large mortgage (bought at the peak), I strongly suggest anyone entering the housing market focus on hoarding cash until they can buy something, anything, outright. The freedom full ownership bestows is remarkable. Pity society sneers at it.
Edit: And, at least for me, moving far away where its cheaper is not an option. My children will know their grandparents, and not because they make a 4 hour drive each way once a month or some such.
EDIT: Also, don't forget to change the "marginal tax rate" option under "Advanced Settings...Other..." Mortgage interest deductibility is (rightly or, as I think, wrongly) a substantial ownership subsidy, particularly for high-earners.
#6 seems somewhat tinfoil-hatty.
Does anyone have some data to back up #7?
> Buyers should be rioting in the streets, demanding an end to all mortgage subsidies.
...and we went off the deep end.
#9 is incredibly specious. Why would retired people sell? Where are they going to live?
#10 is very true, however it's so difficult to trust a new home builder. Even if you know what bad construction looks like, it takes an immense amount of effort to ensure that everything is done properly and you'll probably be adding 20% onto your cost just to babysit the construction.
If a person is physically able, then a smart option is to move to a small apartment in a location close to services and shops. Downsizing reduces unnecessary energy costs, taxes, maintenance, yard work, etc. Based on my city, the equity in a median suburban home could easily pay 15 years of rent without investment, maybe 25 - 30 with really good investment.
If there's physical support required, then an apartment in the massively booming "Retirement Living" industry might be a good choice. Here's an example that costs ~$4,500/month, meaning you could probably pay 10 - 15 years after good money management from the sale of a median suburban house in these markets: http://www.retirement.org/financial-info/home-cost-calculato...
The other option is to sell the house now to investors and use the equity to support living and healthcare costs. Then you simply move out at a more convenient later date (i.e. when you die): http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_...
http://trends.truliablog.com/2013/06/mortgage-rates-rent-vs-...
Moreover he claims you can get as nice of house in the same good neighborhood cheaper by renting. That's only true if you assume home prices will fall. Even if you just assume they will stay constant, backing out the principal you pay from your payment, the remainder most certainly does not buy a home of the same quality in area's I have a first hand knowledge of. Often homes that make it to the rental market are less desirable IME even if just because they are not cared for to the same standards.
LOL a better assumption over a large non-tech area and long term is the median wages are permanently dropping, not holding steady or rising.
That has a certain effect on the dollars that will be available for monthly housing payment even if interest rates are dropping. Look at, say, Detroit.
If you want to clear a market, supply and demand insists that the median income dude will live in the median quality house. All the interest rate controls is given the median dude's fixed (dropping) monthly housing budget, how much of a reward does the previous owner get from the check the bank cuts for the new owners mortgage?
http://research.stlouisfed.org/fred2/graph/?g=mth
The last real period of rising mortgage rates was in the 70s. You can pretty clearly see that home prices were rising in spite of rising financing costs.
On the other hand, the price of everything more than doubled in the 70s due to stagflation.
If low interest rates would make housing overpriced and high rates would make housing underpriced, it would mean housing was cheap pre-2008 and expensive in 2008-2012. Was it so?
Edit: I mean post tax. It's a cultural thing, in Italy we don't ever consider the gross salaries.
Mortgage is 36% of our combined post-tax wages (there's no tax relief on mortgage interest in the UK). Childcare is another 21%.
(Mortgage and childcare combined would be 100% of my post-tax wage!)
Seems harsh now but it's worth it, and when the childcare costs drop (next September) there will be more money for holidays, more fun and also paying off the mortgage early.
Mortgage payments, for fixed rate mortgages anyway, aren't affected by inflation unlike rent payments. In 10 years time my mortgage payment should be smaller than it is now (as I hope to overpay) but my salary should rise; we have the bonus that we'd be happy to stay in this house for at least 20 years if need be (it was one of our criteria when looking for somewhere to buy).
The above may not seem sane, but the figures are quite normal for the UK tech sector.
This is only possible because I live in Florida (in a non-metropolitain area), but am a shareholder in my own company with revenues that support incomes that is much higher than is typical for my market.
Broadly speaking, I consider numbers up to ~20% sane. Much beyond that starts to seem ill-advised (but personal preferences are important here, too).
I can now save double quick for my longer term house.
It's a short term pain living in a small flat with a long commute, but the strategy will hopefully pay off in the long run with all of the rent and mortgage interest avoided.
Also, I don't like to include bonuses unless they're actually guaranteed.
Do you in Italy have more fix or moving interest rate ?
EDIT: That's 11% of my pre-tax wage
Plus: there is the externality of outside money. I've heard of buyers from PRC paying cash down, sight unseen, for properties in desirable neighborhoods [2] [3]. A lot of the analysis such as the one in this article assumes a somewhat closed market; but outside money flowing in can change the dynamics significantly.
[1] http://sf.curbed.com/archives/2013/07/25/the_40_most_notable... [2] http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-... [3] http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-b...
I was in Vegas during the start of the housing bubble and all I saw were investors buying houses to flip immediately for big profit selling to other investors who thought the same. Anyone who actually wanted to buy a house to live in was required to get caught up in a risky mortgage option that left many of them in serious problems when their house was suddenly worth less than half of what they owed on it.
We looked at a house at the start of the decline and offered $50,000 less than asking. They laughed at us and we stopped bothering to look. Less than a year later the same house was for sale for more than $100,000 less than our offer. The realtor who showed us houses later moved out-of-state so she could earn a living.
Someone I knew told me about his friend that bought a house, did bare updates to it, and sold it within a month for nearly a $100,000 profit. He was gleeful at the idea you could do such a thing. I told him that was good for his friend but incredibly bad for everyone else in the city. About a year or so later I was shown to be correct beyond my worst doomsday predictions.
I'm seeing the same things I saw in Vegas starting again.
Easier said than done!
"the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage"
I don't think this is taking into account the rent that a renter pays. If a renter can just afford to pay a mortgage, then using the figures given (3% pa to rent, 8% pa to own) - that's 5% of the house value they're gaining p/a. At that, they can buy outright in 20 years. Is a typical mortgage 40 years?
Now let's compare if you were to purchase stock/ETFs with that equity investment instead of investing in your house.
Let's do a housing-optimistic comparison. Let's say you get a 2% dividend (nothing special) on the stock and the stock price declines at 0.5% per year. For the house, let's say you gain 3% equity per year and the home price stays flat. Rent costs are 20% higher than your expenses for the house, so you can only gain equity in the stock at 80% the rate you do in the house.
Over the same time period that you would pay off your mortgage and get 100% equity in a $100,000 house, thanks to compounding interest, your stock is now worth $107,000. That means that you have 7% MORE value in stock--even though you paid 20% more rent for the entire period of investment AND the stock price tended to decline (slowly) over time.
If we adjust to something more balanced (3% equity per year, 3.5% dividend, stock price stays flat, rent costs are 15% higher) the result is even more dramatic: 53% more value in the stock option.
Of course, all these numbers would be better if backed up with real-world statistics, but it's something to think about.
If you rent, and put the difference into a savings account, then using the assumptions from the article, you'll be able to buy a house outright in 20 years.
I think you're pretty much agreeing with that..?
I am of course assuming that interest rates (or other return on investment), house prices, inflation and salary increases are all sensible, going in the same direction at the same rate, or near enough.
If you put your money in a pure tracker (e.g. tracking the Dow Jones, FTSE 100, or similar index), then you'll probably be better off in the long term, perhaps able to buy outright in a little less time.
Ultimately you have to ask yourself whether you see debt as a form of slavery, or as a financial tool that you can use to your advantage. If it's the former, you probably should not buy a house. If it's the latter, it might make good sense to buy a house (even an expensive one) depending on the conditions.
I agree with the first half of your sentence and disagree strongly with the second half. In many ways, a house works like a bond. The price moves inversely with the interest rate.
This is because, for most people, what determines affordability is the monthly payment. There are two factors involved in monthly payment:
1. Amount borrowed
2. Interest rate
Consider someone that can afford a monthly payment of $2,000 per month. That means that they can afford:
$541,097 borrowed @ 2.00%
$474,328 borrowed @ 3.00%
$418,922 borrowed @ 4.00%
$372,563 borrowed @ 5.00%
$333,583 borrowed @ 6.00%
$300,615 borrowed @ 7.00%
$272,566 borrowed @ 8.00%
You can see how the price of the house someone can afford is pushed down as interest rates go up. And here's the thing - the affordability population is a bell curve. Once you get above a certain payment per month, there aren't enough people above to replace the people disappearing below. That is, there are fewer people that can afford a $3,000 per month payment than can afford a $2,000 per month payment.
The bottom line? The article is spot on. You don't buy a house when interest rates are low and expected to go up.
You likely won't get high interest rates like 8% unless you have higher inflation rates
This is completely wrong. The only thing preserving low interest rates is the Fed purchasing mortgage backed securities (see http://www.newyorkfed.org/markets/mbs_faq.html). When that stops, interest rates will go up dramatically. You could argue that the Fed will only stop doing that once inflation kicks in but that is not true. The Fed is on extremely thin ice as it is now. They're only supposed to purchase and sell Treasuries for their open market operations (http://www.federalreserve.gov/monetarypolicy/openmarket.htm) and manipulating the mortgage market is significantly outside of their charter.
So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased.
There are literally millions of possibilities that could happen that don't fit your theory. Never heard of stagflation?
My goal is not to write a dissertation in an HN comment so that's enough for me.
So while the basic rule of not buying when rates are expected to go up is true it's possible that larger context may override that rule.
What I've found is that the reward is always proportional to the risk--otherwise people invest in it until it isn't proportional anymore.
Please investigate this for yourself, but personally, I take a two-way split-risk strategy to grow my investments:
- Very high risk, very high reward investments that I thoroughly research and believe extremely strongly in, using money I can afford to entirely lose.
- Very conservative investments in indexing ETFs that have rock-bottom annual fees and decent dividends.
Here's an article you might find interesting:
http://www.npr.org/2013/06/05/188306471/resisting-the-tempta...
- Online savings @ 0.80% (Risk is loss of purchase power)
- I-Bonds @ 1.18% (Risk is loss of purchase power)
- CDs @ 2% (Risk is early withdrawal penalty + lock-in)
- Bonds @ 3% (Risk is drop in value)
- Stocks @ 4%+ (Risk is drop in value)
The realtors' lock on transactions and the lack of transparency in the marketplace is one issue.
The antiquated and closed-source zoning standards are another.
And the building industry in general, hindered by trade unions, et al, is yet another.
Just like disrupting Hollywood would (might) get us better movies, disrupting the RE industry will (might) eliminate overbuilding (and under-building, where applicable) and stabilize prices.
Just one example of the article's outdatedness-- the jumbo mortgage market is doing great now:
http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-t...
Article is very useful, but it's one of those that gives 'here are x reasons'. Yes, but come up with determining how to make a decision instead
Even more indicting is the description of the nationwide market as a singular, when there are enormously different realities across the nation.
So they're just going to let the house sit empty? Buying/selling a house is a long term proposition because of transaction costs. Partially covering a mortgage payment temporarily is better than not recovering it at all.
If the rent payments can't cover the mortgage, they're probably going to take a hefty loss on sale, if they can sell the house at all.
If you don't have enough equity to cover your loss on a sale, it absolutely can make sense to take a small hit on recurring mortgage payments.