patrick.net

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

SubOink says

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

yes.

ThreeBays says

Good explanation, RentingForHalfTheCost.

Though, rising rents would increase your cost each year, and if you play out that fixed-income pays rent example, over time your bank would be completely gone with no asset left.

In terms of assumptions, how many years would you expect the price to drop 30k y/y? Over 6 years it would have to drop 180k, or 36% from today. Over 10 it would have to be 60% from today. Helicopter Ben is going to make your 500K into toilet paper before that happens. :D

Absolutely agree. My points where just examples showing some of the holes in the original conclusions. If you buy and hold for 7 years ( the average) then you need to analyze the whole picture. If you read this report it goes into all the details and does a great comparison. The final conclusion is that over 8 year periods the last 30 or so years it was actually always better to rent verses buy. There are assumptions in that analysis though. It assumes you would actually invest in the savings you get from renting and not spend it. That is not for everyone, a house is a great forced savings account for many. I have the fortitude to save without a house, so I look at it from that side.

Anyway, here is the article. A great read if you have the time.

http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

As you will quickly see, it is not as simple as looking at the monthly costs of the mortgage verses the rent payment. It is much much deeper than that.

Hysteresis says

SubOink says

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

yes.

+1

SubOink says

Mobi says

You did not include the interest, tax, closing fee, and maintenance among others a house owner needs to throw in

Yes, I also did not include the tax deduction of the interest etc...and rent increase. I am using a simplified version to make a point.

Closing Fee? In this market you make the seller pick that up. We did.

I did not say your "conclusion" is wrong. I'm only saying your oversimplified model does not work for me. Since I'm the only one working in my family, interest tax deductible pretty much has zero benefit for me and the tax is relatively high (no property tax cap here.) Those two adding up are far more than half of my rent. And I just got a rent reduction rather than increment. Therefore, I need less than 3 percent depreciation to beat renting. And, my real concern is once I lose my job, I need to move out of the area. So, flexbility is quite important nowadays.

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In my line of work I meet people from all walks of life and get to hear about their personal living arrangements. I meet people who rent a room in a house for $500 a month, man and wife, sometimes with kids. ONE ROOM! Sometimes they will just rent out the couch in a house (usually illegal immigrants)

Then I met a man who bought a house for cash as-is. Seven million dollars! He is a young man, too.

Amazing. I have never lived in such a place, such a time, where you see such a wide spectrum of poverty and utter ridiculous-lucky wealth.

What is your occupation? I am intrigued.

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states
which are much cheaper and would welcome the addition of new
Bay Area jobs.

Actually, the are not CA employers, since they are incorporated in Delaware. so it goes.

If you don't own a house now, you will be priced out forever.

thomas.wong1986 says

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

which are much cheaper and would welcome the addition of new

Bay Area jobs.

Actually, the are not CA employers, since they are incorporated in Delaware. so it goes.

Why should employers adjust to match the over inflated house prices? If you agree there is a correlation between the house prices and incomes, then you also agree that there is potential for the house values in the BA to continue to fall. I actually think the BA salaries are too high sometimes. I am always amazed when I see the salaries of the public workers around here. 200K for a police officer? 100K+ for Postal workers. The only place on the planet that has amazed me more with salaries is Switzerland. That place makes the bay area look like a back ally. I paid over $80 US for a medium pizza once. It wasn't even a good one. ;) Good thing I was on expense.

xenogear3 says

If you don't own a house now, you will be priced out forever.

That is so not true. Scare tactics worked in 2003, but now people are wise to the realtor cries. Try another angle.

RentingForHalfTheCost says

then you also agree that there is potential for the house values in the BA to continue to fall. I actually think the BA salaries are too high sometimes

Yes. that is fairly clear, home prices, rentals, and salaries will need to fall for CA to keep employers and employees in CA in order to compete globaly and with othe states.

Its a much different economic landscape than 1970-2000.

RentingForHalfTheCost says

That is so not true. Scare tactics worked in 2003, but now people are wise to the realtor cries. Try another angle.

They will continue with this nonsense crap and it wont end..
Next time a realtor say,,, home prices are going up.. tell them "so will my foot... right up your ass."

So Cal is so peppered with RE interest and many were in denial that So Cal prices would ever fall. But they did and so do rents.

http://dqnews.com/Articles/2012/News/California/Southern-CA/RRSCA120215.aspx

Southland Home Sales Flat, Prices Edge Down

Februry 15, 2012

La Jolla, CA---The Southland housing market started 2012 with slightly higher sales and slightly lower prices despite record-low mortgage interest rates. Home sales skewed toward the lower price ranges, which is normal for January, as many traditional buyers retreated and investors snapped up homes at a record level, a real estate information service reported.

A total of 14,523 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 24.5 percent from 19,247 in December, and up 0.4 percent from 14,458 in January 2011, according to DataQuick of San Diego.

Sales have increased year-over-year for five of the last six months. The sharp sales decline from December is normal for the season. Last month’s sales count was 17.8 percent below the 17,671 average for all the months of January since 1988.

Helloeeze says

Then I met a man who bought a house for cash as-is. Seven million dollars! He is a young man, too.

It used to be that kids burned through their inheritances in more interesting and debauched ways than residential real estate. How depressing.

thomas.wong1986 says

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

This has never been more true. If you aren't getting bonus and RSU, you should leave the area. I'm figuring I have to go in a few years.

Helloeeze says

no, actually he got the money from an IPO.

Of course! Who hasn't? Still, what a stale place to sink all that money. Easy come, easy go, I guess.

Mick Russom says

thomas.wong1986 says

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

This has never been more true. If you aren't getting bonus and RSU, you should leave the area. I'm figuring I have to go in a few years.

That is the part of this area that sucks. I think the trick here is to find a way to live in this place without giving away your first born on housing. Not easy around here, but doable if you put in the energy.

RentingForHalfTheCost says

You have your 500K making money for you in a real investment

1) I am not assuming you have 500k in cash. If you rather invest in the stockmarket 500k then buy a house for 500k and be rent free...be my guest. I wouldn't do that.

RentingForHalfTheCost says

So, on top of tying up your 500K you have 10K of annual expenses

10k of expenses? I have not had a single dollar in expenses other than improvements that I wanted to do. Didn't have to do it. What do you mean?
I have lived in this house like a renter...no issues and a home warranty for $600 that covers most common issues if they happen. $10k?? not realistic. I could get a brand new AC for that.

RentingForHalfTheCost says

You were the one that said "sell in 1 year".

What I meant was, what the salesprice would be, not that you actually sell it. Who buys a house and sells after one year? Wouldn't make any sense.

SubOink says

10k of expenses? I have not had a single dollar in expenses other than improvements that I wanted to do. Didn't have to do it. What do you mean?

You don't pay taxes, insurance? You think your housing structure is absolutely no maintenance? Please let us know how you can do that.

SubOink says

home warranty for $600 that covers most common issues if they happen.

That is like saying cars have no maintenance because you get it covered by the dealer for the first 50K. They still have it, you just have less risk when you buy something new. Just wait until you have a 10 to 15 year old home. Maintenance is a real problem with homes. Many people on this site will tell you. I rent a 45 year old home and have to call the landlord at least once every 3 months. I have seen the bills and they are running about 1-2% of the house price per year. Things like new hot water heater, new dishwasher, roof damage, fence damage, etc. etc. Shit happens.

SubOink says

1) I am not assuming you have 500k in cash. If you rather invest in the stockmarket 500k then buy a house for 500k and be rent free...be my guest. I wouldn't do that.

Then the numbers get even more complicated. If you don't have the 500K cash then you have to pay for an appraisal, title insurance, possible PMI, more costly house insurance, etc. And the worse cost of them all the interest on the loot itself. Remember, someone had to provide you with the 500K because you didn't have it in the first place. That doesn't come free, you are paying someone for that privilege. Sure, in todays market that is not bad because you can get loans in the 4% range, but for 500K that is still a lot. ~20K/year. Nothing, and I repeat nothing in life is free. You make it sound like you own that 500K when in fact you don't. You are renting money instead of a house. That is the main difference. I have decided to rent a house even though I don't need to rent anything. I have the cash to buy, but am growing my cash faster than house prices have been growing. And I am a very conservative investor. Very conservative.

If you are going to shoot down my simplified view of the picture trying to show that your over simplified view has holes, then please just start using the rent-vs-buy calculator on this site. I don't have the time to type up all the costs for each side here. Patrick did a great job and makes it easy for everyone. But stop posting your over simplified view of the rent-vs-buy equation. If after understanding the full financial picture people decide to buy then that is their decision. And there are valid reason to buy, even in todays market. They have very little to do with finances though. People should buy because they want a home for themselves and their families to call theirs, to give stability to their lives. If you keep saying it makes financial sense then I will keep saying you are wrong at this point in the BA. You won't be ruined, but you will potentially be hurt more than if you stayed a renter.

SubOink,

If you are seriously interested in understand the rent-vs-buy problem then I posted this in another thread, but can help you if you want. Read both articles and decide for yourself. The first is fear tactics with little data to support in my view. The second is done by a team of over educated people that are running the numbers and letting the data speak for itself. They argue both sides and have good point both ways. There is no one answer for everyone as you will see. There is one answer for me, because I know where I lie in the investor side. I can save without a mortgage.

------

Here is an opposing view from a SVP at NAR. I went right to the belly of the beast.

http://economistsoutlook.blogs.realtor.org/2011/06/08/rent-or-buy/

If you read carefully you will see the same arguments that many realtors use repeatedly. Compare this to the team of unbiased people who did some real analysis on the subject bringing in years of data and looking at all the parameters.

http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

You decide for yourself the integrity and biasing of each report.

drtor says

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

Where do you live (in general terms).

I personally do not see incomes rising to the extent that would support any increase in rents. I do see things like property taxes increasing and I'm guessing that landlords would be at least trying to pass those along to the consumer.

zzyzzx says

drtor says

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

Where do you live (in general terms).

If the homeowner isn't insulted by your offer...you didn't bid low enough!!!

So, I just sat on a plane that took me across the country. I paid $275 for that privilege because I was early to book and got a great deal. If I had asked around the plane during the flight what others paid, I bet some people paid double and more for the exact same service (not first class). That doesn't mean that the cost to fly is on the rise. Same situation applies here. Just because you have some local demand going on in your apt complex doesn't mean it is everywhere. It could be, but just saying you can't really say that with the data you are showing.

We all know that rent-vs-buy varies by location. There are many places where renting is still a better value proposition (especially in hip & cool coastal CA cities) and there are places (even within coastal CA) where buying makes more fiscal sense due to rising rents.

Mountain View saw 30%-40% jumps in rent in summer 2011, and things have fallen a little, leaving things at about +25% across the board. RE here is still way overpriced, and renting is still cheaper, but it won't be for long if this keeps up. Chances are that most renters will just to choose to live 15 minutes down the road, which may put downward pressure on things. Still, google employees certainly can afford to rent or buy here, so MV may continue to make less and less sense to live in.

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In my line of work I meet people from all walks of life and get to hear about their personal living arrangements. I meet people who rent a room in a house for $500 a month, man and wife, sometimes with kids. ONE ROOM! Sometimes they will just rent out the couch in a house (usually illegal immigrants)

Then I met a man who bought a house for cash as-is. Seven million dollars! He is a young man, too.

Amazing. I have never lived in such a place, such a time, where you see such a wide spectrum of poverty and utter ridiculous-lucky wealth.

You've nailed it right there.

And, that's part of what I think drives the economic and political culture here: good weather, great food and wine, economic and cultural opportunity, highly uneven income distribution and then academics and progressives holding the levers of power.

It's called France.

RentingForHalfTheCost says

20K/year

You always have your numbers extremely high when you try to make a point about the advantage of renting.

You forget that the interest, 20k is a 100% tax deduction.

And the point I was trying to make is that when rents and housing prices are around the same number +/- some...its no longer worth waiting to rent unless the reasons I gave above.

If houses don't drop from here significantly, you're loosing more money by renting than you are gaining by home prices drifting lower.

I told you before, when we bought I didn't even factor in that interest rates would go a whole point lower. After the refy, I am now paying less than when we used to rent. So every month more money gets saved then when we rented. I would have been ok to pay a little more than renting, I live in a much bigger and nicer house than our rental houses used to be. - paying less, comes like a big bonus. Thank you Bernanke :)

It's local obviously. I would just check it out.

I am not a big fan of the calculator because it all depends on factors you can't know. You could buy a house and $0 in repair over 10 years. Or you could buy one where the roof caves in after a storm, or the A/C goes out...etc - you don't know that stuff. Just like you don't know how much your rent could go up - there are all assumptions. What if a big earthquake hits and destroys your entire house? What if aliens come and take us hostage? did you factor that in?

So a more simplified bigger picture is all I needed.

SubOink says

You forget that the interest, 20k is a 100% tax deduction.

Not for everyone. I get absolutely no break on taxes for interest. None. I am not alone here. YMMV obviously.

SubOink says

If houses don't drop from here significantly, you're loosing more money by renting than you are gaining by home prices drifting lower.

This is simple NOT true. The numbers do not say this. Please take the time to read the study I referenced. Over the last 30 years you needed to have a 3.62% appreciation in your house to make it match renting the same place. Currently, for San Francisco you need to have 7.4% appreciation. Here is the report again. If you don't want to take the time then I can't help you understand. We can disagree on predictions for the future, and we can be different types of people with respect for savings, but you cannot disagree with facts.

http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

Now, if you want to start a debate about the type of analysis the above writers did, then I am all game. I've spent over 20 years running these types of numbers and getting paid for it. I breath it for a living. ;)

page 19 shows you the 3.62% appreciation conclusion nationally, and page 34 shows you the 7.4% requirement for SF currently.

RentingForHalfTheCost says

The only place on the planet that has amazed me more with salaries is Switzerland. That place makes the bay area look like a back ally. I paid over $80 US for a medium pizza once. It wasn't even a good one. ;) Good thing I was on expense.

It's all those Davos assholes...

thomas.wong1986 says

They will continue with this nonsense crap and it wont end..
Next time a realtor say,,, home prices are going up.. tell them "so will my foot... right up your ass."

Love it!

wthrfrk80 says

thomas.wong1986 says

They will continue with this nonsense crap and it wont end..

Next time a realtor say,,, home prices are going up.. tell them "so will my foot... right up your ass."

Love it!

I don't think they're going up but where we bought they're definitely holding. The house down the street is pending after one week on the market. It's a REO that smells like mold, needs completely gutted to the rafters and the bank wanted in the high sevens for it. I wouldn't want it under any circumstances. It should be torn down.

SubOink says

am not a big fan of the calculator because it all depends on factors you can't know. You could buy a house and $0 in repair over 10 years. Or you could buy one where the roof caves in after a storm, or the A/C goes out...etc - you don't know that stuff. Just like you don't know how much your rent could go up - there are all assumptions. What if a big earthquake hits and destroys your entire house? What if aliens come and take us hostage? did you factor that in?

So a more simplified bigger picture is all I needed.

I don't agree with your thinking here at all. I find it very odd. We don't know the future, but that doesn't mean we close our eyes and hope for the best case to happen. We can estimate, we can look at history, we can look at patterns and get our prediction and estimation better. Will we ever be sure? Nope, that is what makes is a prediction. However, to say that it is all too hard and we should forget about assumption is crazy talk in my opinion.

If you really think like that, then I have a proposition for you. I might be able to give you 20% return on your savings. Hand it over to me now and lets see. I don't like any system or using my intelligence to pick investments because all that stuff we really don't know and don't want to guess at. I'll just throw company names up in the air and which ever ones land last I'll put all your money into. How does that sound to you. You game? Crazy talk I tell yah. :)

As far as your situation, you benefited from the housing mess because you where able to refi. That is no argument for saying buying now is a good time. With your same logic, can you assure me that if I buy I can also refi into a lower payment? Obviously you can't, so stop talking like you can. We are debating whether if right now is a good time to buy or stay renting. Not when you bought, or your situation. A study of 1 is just a study of 1. My prediction is you would have saved more if you continued to rent, but that has a bunch of assumptions about how you save. If you can't save without having the mortgage then you have done the best move to buy. I'm done here.

RentingForHalfTheCost says

That is the part of this area that sucks. I think the trick here is to find a way to live in this place without giving away your first born on housing. Not easy around here, but doable if you put in the energy.

I took a week's vacation to the Bay Area last March. My nightly motel bill was less than it would have cost to actually live there. Plus someone cleans your room for you.

Life's great at Super 8...

wthrfrk80 says

RentingForHalfTheCost says

That is the part of this area that sucks. I think the trick here is to find a way to live in this place without giving away your first born on housing. Not easy around here, but doable if you put in the energy.

I took a week's vacation to the Bay Area last March. My nightly motel bill was less than it would have cost to actually live there. Plus someone cleans your room for you.

Life's great at Super 8...

You can also get free porn from the next room sometimes in the middle of the night. Well, at least the audio.

What's missing again from this argument is that when you buy, you have to fork over a down payment, and in the Bay Area these days that means anywhere from 150,000 to 200,000 bucks. That amount can't simply be ignored. That's MAJOR money all due up front.

Secondly, the average Bay Area resident only stays in a home they buy for 5 years. So what's the point?

As far as rising rents, for now this seems to only be happening in very specific areas- like the city and the Peninsula. In the East Bay and others? Not so much.

As far as the story of a family living in a single $500 room, well until I got married I always rented houses with lots of other people. I never paid more than $450-$500 a month even when I made more money. I like saving money and sharing a house is a good way to do it. Even now we share a 4 BR house with another housemate. It works out well. We still only pay $1150 per month. The same house bought would easily put us on the hook for $3,000-$3,500 a month after all is said and done, not including whatever maintenance it needs.

rootvg says

You've nailed it right there.
And, that's part of what I think drives the economic and political culture here: good weather, great food and wine, economic and cultural opportunity, highly uneven income distribution and then academics and progressives holding the levers of power.
It's called France.

You've hit the Jackpot!

RentingForHalfTheCost says

You can also get free porn from the next room sometimes in the middle of the night. Well, at least the audio.

ROTFLOL!

Patrick, can I "like" +2? Pleaaaasssse?

RentingForHalfTheCost says

If you really think like that, then I have a proposition for you. I might be able to give you 20% return on your savings. Hand it over to me now and lets see.

I would love to but I am not sure because I used Patricks Risk calculator and there is a big risk you could suffer a heartattack and then all my money is gone...so no.

:)