If the bubble returns to the BA, what will you do?
invite response
2012 Apr 2, 1:35am 98,244 views 255 comments
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bubblesitter
2012 Apr 2, 6:55am
i suspect, although i haven't looked too deeply, my rent is cheap relative to a lot of the rent prices in the bay area even though i'm in a nice neighborhood. i've had one rent increase in the 6 or 7 years i've been living here.
Your situation is the exception to the rule. You must have a very generous landlord.
1 more. My rent has not increased in 4 years - not the only exception.
Your situation is the exception to the rule. You must have a very generous landlord.
I don't think it's all that uncommon for landlords to hold the rents steady for good, long term tenants. I have several paid for single family rental homes in coastal CA and I haven't raised the rents on long term tenants in four years and have no inclination to do it in the near future even though they are rented for under fair market. My lowest priced rental is $2100 a month and the others are are several hundred a month more. The one that rents for $2100 and another one has long term tenants. For whatever reason (renters become buyers in some cases, job changes, etc.) the other homes seem to turn over every few years. I have several friends that are landlords as well and they also have long term tenants that they don't raise the rates every year even though they could.
My properties are paid for and I don't need to squeeze every dollar out of them because I have been very fortunate to have done well over the years. I would rather keep the rent steady for several years for a good, long term tenant that pays on time and doesn't cause me or the management companies any trouble. It cost money to turn over rental homes; advertising, management fees for new tenant, etc.
i suspect, although i haven't looked too deeply, my rent is cheap relative to a lot of the rent prices in the bay area even though i'm in a nice neighborhood. i've had one rent increase in the 6 or 7 years i've been living here.
Your situation is the exception to the rule. You must have a very generous landlord.
1 more. My rent has not increased in 4 years - not the only exception.
Another. My rent was $1395/month in 1997 and is $1495/month now (month to month, midsize apt. complex in MtV). Spiked up about 15% higher during the .com bubble but came back down afterwards when I complained and has been at this level since 2006.
The downside is that I'd really like to live somewhere with a more intelligent and responsive manager, and less noisy neighbors, but moving to even the same class of apt. around here would cost quite a bit more at this point :-( On the bright side I have her boss' email and can go through him instead for most things.
RentingForHalfTheCost
2012 Apr 2, 11:25am
i suspect, although i haven't looked too deeply, my rent is cheap relative to a lot of the rent prices in the bay area even though i'm in a nice neighborhood. i've had one rent increase in the 6 or 7 years i've been living here.
Your situation is the exception to the rule. You must have a very generous landlord.
1 more. My rent has not increased in 4 years - not the only exception.
and another. I've had one rent increase in 14 years and when that one happened I just moved. The place sat idle for about 4 months after I moved. That'll teach em.
The downside is that I'd really like to live somewhere with a more intelligent and responsive manager, and less noisy neighbors, but moving to even the same class of apt. around here would cost quite a bit more at this point :-(
And you say homeowners are immobile... All the "exceptions" here appear to be less mobile than they appear, if moving ultimately means a significant rent hike.
RentingForHalfTheCost, if you had bought 14 years ago.. there is no way you'd be underwater.. You'd be halfway done paying off your mortgage.. or 1 year from paying off your mortgage with a 15 year loan.
So RentingForHalfTheCost appears to be bragging that he's paying a "low rent" when if he'd bought 14 years ago with 15 year fixed mortgage.. he'd be a year away from only paying property taxes and maintenance.
And you say homeowners are immobile... All the "exceptions" here appear to be less mobile than they appear, if moving ultimately means a significant rent hike.
Shrug. I don't know what the "rule" is and neither do you, but I expect in general good tenants who've been there for a while will do better rentwise than the Google employee who just has to live 5 minutes from work.
RentingForHalfTheCost, if you had bought 14 years ago.. there is no way you'd be underwater.. You'd be halfway done paying off your mortgage.. or 1 year from paying off your mortgage with a 15 year loan.
I don't know about his situation, but if I'd bought 15 years ago when I moved out here... I wouldn't have bought, because I was flat broke having just left grad school. If I bought a few years later when I had enough cash for the then-standard hefty downpayment... prices had already escalated beyond a sane level in MtV at that time. And that was *before* the real lender shenanigans began.
The downside is that I'd really like to live somewhere with a more intelligent and responsive manager, and less noisy neighbors, but moving to even the same class of apt. around here would cost quite a bit more at this point :-(
And you say homeowners are immobile... All the "exceptions" here appear to be less mobile than they appear, if moving ultimately means a significant rent hike.
i'm hardly immobile.
it just means i'd be paying a higher rent than i do now (which i could afford). i just checked craigslist and apartments in my city are $500 to $900 more than my current rent. i guess i'm getting a good deal.
funny, at the time i signed a lease they were having problems finding tenants and giving a month free. i guess now there's a strong demand.
dunnross
2012 Apr 2, 12:51pm
If the bubble returns to the BA, what will you do?
What do you mean "returns"? It never left.
rootvg
2012 Apr 2, 1:38pm
rent is cheap
Rent is FAR from cheap... Last I checked rents were at a historic all-time high and increasing.
NOTHING here is cheap...food, rent, or anything else. Flight instruction is needlessly expensive. Renting the aircraft itself is ridiculous. Getting a car worked on is higher than it should be.
There's too much money here!
1sfrenter
2012 Apr 2, 2:55pm
And you say homeowners are immobile... All the "exceptions" here appear to be less mobile than they appear, if moving ultimately means a significant rent hike.
Try renting once you have kids and a couple of pets. There's immobility for you.
RentingForHalfTheCost
2012 Apr 2, 3:11pm
The downside is that I'd really like to live somewhere with a more intelligent and responsive manager, and less noisy neighbors, but moving to even the same class of apt. around here would cost quite a bit more at this point :-(
And you say homeowners are immobile... All the "exceptions" here appear to be less mobile than they appear, if moving ultimately means a significant rent hike.
RentingForHalfTheCost, if you had bought 14 years ago.. there is no way you'd be underwater.. You'd be halfway done paying off your mortgage.. or 1 year from paying off your mortgage with a 15 year loan.
So RentingForHalfTheCost appears to be bragging that he's paying a "low rent" when if he'd bought 14 years ago with 15 year fixed mortgage.. he'd be a year away from only paying property taxes and maintenance.
Not true at all. My life would be different for sure. However, I would have not been able to live in Switzerland, U.K. , Canada, spent 2 months in Brasil, 1 month in Hawaii, and take almost 2 years off from work to do all the above. A house would have kept me from traveling, and from doing what I love. I would have been indebted to the 30 year note.
Now, 14 years later, I am not behind. Back 14 years ago I would have just barely had the 3.5% down for a BA home. Now, I really don't need a note to get a home. 14 years of savings and investment without the debt of a note has given me that privilege. Obviously, we are all different, but betting on the appreciation of a pile of lumber and nails is not my idea of investing. Did the BA do well in appreciating the wood and nails assets. Sure, but I did better in my investing and these last few years I just lapped every home owner on the track. :)
RentingForHalfTheCost
2012 Apr 2, 3:16pm
A 30 year fixed mortgage as laughable as it may seem to you now, is going to be as cheap as it gets.
:)
Fear fear fear. How do you know that the 30 year note couldn't drop another 50% in rate? You don't. Today's 4% could turn into 2% before this free money train turns around. Then home prices could go up for a change. ;)
RentingForHalfTheCost
2012 Apr 2, 3:29pm
RentingForHalfTheCost, if you had bought 14 years ago.. there is no way you'd be underwater.. You'd be halfway done paying off your mortgage.. or 1 year from paying off your mortgage with a 15 year loan.
Just for the record, I did buy a house in that 14 year period, just not in the BA. In central valley and for a weekend home. I sold in 2009 and glad I did, cause I can buy it back now for about 25% less than I sold. I paid about what I thought was a reasonable value considering the rent and housing construction costs at the time, and I sold as soon as someone was willing to pay me an unreasonable amount for it. Pretty simple formula.
those that can afford to buy - buy. Those that can't - don't. It's been that way forever.
Ha! (HA!!!) The choice whether to buy anything today has more to do with available credit than it does with individual solvency.
RentingForHalfTheCost
2012 Apr 3, 12:56am
Just for the record, I did buy a house in that 14 year period, just not in the BA. In central valley and for a weekend home. I sold in 2009 and glad I did, cause I can buy it back now for about 25% less than I sold.
This says it all for me. Anyone with a double digit IQ would know what happened to you. Now I know what kind of financial shape you're in, and why you despite high home prices in the Bay Area. ;)
Learn from your victory. Prosper from your failure.
We all should despise high home prices that are only justified by funny named loans like Jumbo, non conventional, arm, FHA ( f&*ing half assed), etc. Remove this bull and then we might just have a reasonable market where wealth is not about how much debt you can step into during your life. :)
Today's 4% could turn into 2% before this free money train turns around. Then home prices could go up for a change. ;)
So what. Then you re-fi at 2% and it gets even cheaper.
SubOink says
those that can afford to buy - buy. Those that can't - don't. It's been that way forever.
Ha! (HA!!!) The choice whether to buy anything today has more to do with available credit than it does with individual solvency.
And in order to get credit you have to qualify. Some do, some don't.
it's happening...
Nothing is new. That's been happening for years. All its done is that it has kept the overall median prices low.
But moving on, I think one of the reasons I still have a problem with the math in buying- at least for us- is that as of now our part of the rent is around $1,300 for a large 2 story 4 bedroom house we share with one other person. It has a large back yard and a 2 car garage as well. We've lived there for nine years.
As mentioned, we have saved up a lot of cash. We earn an income that probably puts us within the upper percentile of the area median income. We are frugal as you could probably get. We have nearly perfect credit and would thus qualify for the lowest interest rate. Thus logically you'd think we were perfect for buying a house.
But when I do the math its still almost nonsense. If we say- bought a $500k house and put down $100,000 with an interest rate of around 4.00-4.50%, the payments would still be over $2,000 a month. That's just for the mortgage and nothing else. On top of that, the 500k home in question would likely be a lot smaller than what we rent, probably need at least a few major repairs or need a total overhaul of the interior, and so on. So for almost double the cost we would basically be downgrading to a smaller home that would probably not be as nice . That makes zero sense to me.
Then again I suppose if we were paying current market rate rent, which for our house is around $2,500, then I suppose it would make more sense. The comparisons would be about the same if not slightly less to rent, but not dramatically less.
Rule of bubbles:
1. Bubbles can't be reflated.
2. You don't see another bubble in same asset class during the same generation.
it's happening...
http://finance.yahoo.com/news/investors-looking-buy-homes-thousands-134405371.html
Investors buy properties to resell at a profit or rent it out. That means these properties are likely to come back to market. Imagine if market does not improve and investors start dumping these houses!
RentingForHalfTheCost
2012 Apr 3, 2:26am
Today's 4% could turn into 2% before this free money train turns around. Then home prices could go up for a change. ;)
So what. Then you re-fi at 2% and it gets even cheaper.
Austinhousingbubble says
So, your choices are
1) buy now at 4% so you can refi at 2% if rates go down - good choice
2) buy now at 4% and kick yourself in the ass when rates go to 6% and your property value sinks by 20%
My solution the above problem is 'don't buy'. If 1 happens then we are still in a world of trouble and the feds are still playing the free money game. If 2 happens then I'll eventually buy on the cheap and not have any debt.
Everyone is different, but you view things through just one angle. Buy and deal with the changes. My view is let the changes play out and take advantage of the situation. I could be wrong, have been before, but my opinion matters to me more than anything. If I went against my instincts and got burned then I have no one to blame but myself. I can live with going with my instincts and being wrong.
But when I do the math its still almost nonsense. If we say- bought a $500k house and put down $100,000 with an interest rate of around 4.00-4.50%, the payments would still be over $2,000 a month. That's just for the mortgage and nothing else. On top of that, the 500k home in question would likely be a lot smaller than what we rent, probably need at least a few major repairs or need a total overhaul of the interior, and so on. So for almost double the cost we would basically be downgrading to a smaller home that would probably not be as nice . That makes zero sense to me.
If you are going to do the analysis, you have to get the numbers right. A 400k mortgage at 4% is 1900/mo (30 yr). Property taxes would likely be another $500 and insurance another $80. So you are looking at approx $2500 total. But if you really want to be fair, you need to factor in MID and the fact that you are paying principal as well. I think you are overestimating on maintenance. Most things can be done by yourself, and you never know - you might buy a place with a new A/C or roof, so a big expense isn't likely for many years. If you want to keep renting, that's fine, but if you are trying to do analysis about whether to buy, I think you should be more accurate. Plus, you may want to somehow account for your current sweet deal on rent. What if you had to pay the market rate? It seems like something you may want to factor in on your decision.
dunnross
2012 Apr 3, 3:01am
1 more. My rent has not increased in 4 years - not the only exception.
And another. I've only had 1 $50 rent increase in the last 7 years.
1) buy now at 4% so you can refi at 2% if rates go down - good choice
2) buy now at 4% and kick yourself in the ass when rates go to 6% and your property value sinks by 20%
Re: 2) Why do I kick myself in the ass then? - Do I live differently in the house if it would be worth less than when I bought? I pay my low monthly mortgage that is not going to change ever and move on. The only time you worry about papervalue of the house is if you sell it. In my case, I am not worried about that. I don't want to sell this house. If things go well, I'll buy another house and rent this one out. And with such a below rent mortgage, its easy to break even or even make money with that. When you rent, do you care about what the house is worth? So if you pay 2500/month in rent and the house drops in 100k in value...do you think you get a rent deduction? No. You keep paying 2500 regardless what the house is worth.
The other thing is...if interest rates go up does not mean home prices will crater. It also means that things are picking up. How many people paid ridiculous prices at 6%?
CL
2012 Apr 3, 4:15am
Is it possible that the folks who have little to no rent increases are indirectly benefiting from prop 13 and the time that the owner bought the property? meaning, if they have a small mortgage themselves, they really only want to pay the note plus some profit, but don't need to cover a bubble note and taxes?
Just a thought.
1sfrenter
2012 Apr 3, 4:21am
Is it possible that the folks who have little to no rent increases are indirectly benefiting from prop 13 and the time that the owner bought the property?
Our rent is cheap for the neighborhood (3 br SFH) but it is still $2600 month. The landlord paid off the mortgage a long time ago and pays $800 year in taxes.
We have paid over $400K in rent while waiting for this bubble to pop. Renting is cheaper than buying IF rents are cheap, which is not the case in plenty of places.
So for us, 100K down on a 500K house is a no-brainer.
Now, finding a nice place in a good neighborhood for 500K - that's a whole nuther thing.
If you are going to do the analysis, you have to get the numbers right. A 400k mortgage at 4% is 1900/mo (30 yr). Property taxes would likely be another $500 and insurance another $80. So you are looking at approx $2500 total. But if you really want to be fair, you need to factor in MID and the fact that you are paying principal as well. I think you are overestimating on maintenance.
In my post I specified over $2,000 per month, which is also the conclusion you made. Thus your analysis is the same as mine. As far as maintenance, well for starters, where do you live? If its not California then that's a whole different ball of wax. I have numerous friends who have bought houses and it doesn't take much to suddenly need to spend 10's of thousands of dollars- such as if you need a new roof, any sort of major or even minor plumbing/electrical work, or construction work. If the house needs foundation work then you could very easily be looking at 100k or more. So maintenance is extremely variable and something I've never had to worry about as a renter.
We just bought and my landlord listed our rental for the SAME price as our mortgage payment! And it does not even have a garage! Rents are insane in desirable areas!
rent is cheap
Rent is FAR from cheap... Last I checked rents were at a historic all-time high and increasing.
In the BA rents are way under the ownership costs. By a lot! That makes them cheap when comparing against the alternative of buying.
In my post I specified over $2,000 per month, which is also the conclusion you made. Thus your analysis is the same as mine. As far as maintenance, well for starters, where do you live? If its not California then that's a whole different ball of wax. I have numerous friends who have bought houses and it doesn't take much to suddenly need to spend 10's of thousands of dollars- such as if you need a new roof, any sort of major or even minor plumbing/electrical work, or construction work. If the house needs foundation work then you could very easily be looking at 100k or more. So maintenance is extremely variable and something I've never had to worry about as a renter.
You started by saying a $400k mortgage is over $2k - it's just not true. Anyway, I do live in the BA. As I said, you may be able to find a house with a new or relatively new roof and not need to worry about a big expense any time soon. We bought and had our roof repaired - cost $1k. We also had some electrical work done, around $500. These are things that can easily be found out by an inspection before purchasing. As for foundation issues, again, it should either be disclosed by the seller (if known) or determined by an inspection before purchasing. I'm not sure how many houses have foundation issues, but to write off housing as a whole because a small number have foundation issues is as silly as not buying in CA because an earthquake may hit some day. It seems more and more like some people just make up stuff to worry about to justify not purchasing. Nothing in life is certain - no crap. Your chances of getting killed or severely injured in a car accident (with your long commute) are much, much higher than the things some of you guys are worrying about.
I am not buying a house in Bay area. Old dilapidated houses selling for half a million+. Crap. I just bought a brand new house in north Gilroy. Commute is about 10 miles longer than it would be where I was planning to buy earlier but I got excellent price for a five bedroom house, something you would not find in crowded areas in silicon valley..
rooemoore
2012 Apr 3, 6:00am
The days of easy credit for mortgages are gone for at least a generation -- so the chance of another bubble in the BA is zilch.
That is not to say that there will not be bidding wars in the fortresses -- there already are. Difference is that instead of dozens of bidders there will be just a few and instead of going for 10 - 15% over asking, it will be just 1 -5%.
You started by saying a $400k mortgage is over $2k - it's just not true.
A $400,000 mortgage at 4.25% ( which is incredibly low and I would assume I'd get because I have a credit score of over 800) would be $ 1,967.76 . Thus if the argument is over 30-40 bucks, then I "guess" you can claim you won the argument. But that's pretty close to being $2,000 so what's the difference? Additionally, that 400k price didn't include the $100,000 down payment. Divided over 30 years that works out to be an additional $277 per month. Thus if we're gonna' get literal and specific, that means the monthly cost if all dollars were accounted for would be $2,244.00, if the down payment were also included into the mix.
Also- a good foundation and a bad foundation are night and day in terms of how well a house will not only hold up in an earthquake, but hold up in general. I know this because at one time in my life I sold earthquake retrofit hardware and let's just say that if your house is not properly secured then the chances of the house literally falling down in an earthquake are drastically higher. A lot of the houses in the BA are built in the 20's-40's and A LOT of them have crumbling, older, and inadequate foundations. But even for something as routine as needing new new shingles for the roof, you're easily looking at anywhere from $20,000-$40,000. Most asphalt based shingles are good for maybe 15-20 years. They DO wear out and they must be replaced unless you want the roof to rot away. So for the typical owner they can expect to spend money on at least 2 sets of shingles over a lifetime, thus figure a total of $40,000-$80,000 over the life of the house... for a set of shingles. Also- ever bought exterior paint? The decent stuff is around $30-$50 per gallon these days.
The decision to purchase for us isn't that big a deal. Like I said, we've saved for well over 10 years and if we really wanted to we could simply semi-retire to another state and say the heck with it. I came from another part of the country where 400k is the absolute nicest house on the block. A house with ACRES of land. For 200k I could own a pretty nice house on a decent amount of land and have a ton leftover. So perhaps my idea of "value" is different from others who might have only skipped from one major metropolitan area to another as most in the BA have done. Its just that for me, when I look at our situation, which is about the best scenario you could get- perfect credit, good jobs, lots of savings, retirement, and so on, at the end of the day $400,000-$500,000 for a mediocre house is still pretty ridiculous.
Today's 4% could turn into 2% before this free money train turns around. Then home prices could go up for a change. ;)
So what. Then you re-fi at 2% and it gets even cheaper.
SubOink says
those that can afford to buy - buy. Those that can't - don't. It's been that way forever.
Ha! (HA!!!) The choice whether to buy anything today has more to do with available credit than it does with individual solvency.
And in order to get credit you have to qualify. Some do, some don't.
In US, there are many not qualified for refinance. Too many who can't afford buy houses. Not many aspire to be landlord, most here are probably interested in buying homes for themselves or I could be wrong. If u cn buy a couple of houses for renting, maybe can't put yourself in the same league with others. Can't dictate what others to do based on your financial situations. Most don't buy for various reasons ..... Loan qualification doesnt mean much in affordability. Many might qualify for 1M loan, but how many could claim that they still have same discretionary spending as before after the purchase.
Edvard, all I asked is for you to do the numbers accurately. I'm not sure why you keep running away from this and continue on about how you could semi-retire in another part of the country. I assume next you'll start going on about stocks as great investments. Just do the math with all of the correct variables: MID, money towards principal, etc. You keep doing half-A'd analysis. I think if you did a full analysis, you'd find that purchasing is not nearly as expensive (compared to renting) as you are making it out to be.
Edvard, all I asked is for you to do the numbers accurately.
.... which I already did in the highly detailed response above. No further explanation needed.
Too many who can't afford buy houses.
Have you gone thru the loan app process in the last 2 years? I have. It's changed. Now, its actually pretty tough to get a loan. Just like they gave a loan before to anyone that had a last name, now its equally as hard. So you are wrong in saying that people that can NOT afford a home, buy one. At this point, if you get a loan, you can afford it.
rootvg
2012 Apr 3, 7:18am
Too many who can't afford buy houses.
Have you gone thru the loan app process in the last 2 years? I have. It's changed. Now, its actually pretty tough to get a loan. Just like they gave a loan before to anyone that had a last name, now its equally as hard. So you are wrong in saying that people that can NOT afford a home, buy one. At this point, if you get a loan, you can afford it.
They asked us for credit reports, three months of pay stubs and a verification letter from each of our employers. That was it.
1sfrenter
2012 Apr 3, 7:45am
In the BA rents are way under the ownership costs. By a lot!
Vallejo or Richmond or parts of Oakland, maybe.
The "Bay Area" is too diverse economically to make broad statements like this.
.... which I already did in the highly detailed response above. No further explanation needed.
Are you kidding? You've never once accounted for MID or principal payments in your calculations. You've clearly made up your mind against purchasing, so why let a full analysis get in the way of that.
They asked us for credit reports, three months of pay stubs and a verification letter from each of our employers. That was it.
You didn't have to provide documentation of assets (bank accounts, investment accounts, etc.)?
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This might have been posted before but what the heck. Its worth revisiting. How many of you think the bubble will return? Of those of you out there looking- and not just those looking in the fortress areas- what are you seeing? Much of the same or have things changed?
Secondly, if another bubble rears its ugly head, what would you do?
A: panic and buy a house ( or get priced out foreva'!)
B: Say: "Screw it, I'm moving
C: Stay and continue to rent
D: ( for those that already own) brag about how much your house is worth.
E: None of the above.
#bubbles