patrick.net

CaptainShuddup says

You have to live somewhere.

I hate this myth that as long as you have to live somewhere you might as well take on $400K in debt to do so.

It makes no sense, because at the end of the payment period you end up with the house free, and clear, but your return is only based on the rate of inflation over the life of the loan.

In the mean time you could have invested in any number of things that gave you greater returns.

By that reasoning, yes you should buy new construction, but you do have the fact it will depreciate. You could buy used, but it may require additional repairs over the life of the loan.

So, we have no set return on the personal home, just speculation of what could happen. Today that speculation is very clear that it is better to rent.

robertoaribas says

"home prices did no better than the inflation rate"... you say that is if it is a bad thing, or something that will bother me. You are of course 100% wrong.

Argue this with Professor Shiller, not me.
It is, of course, a "good thing", it's just that some people have been led to believe they would get a much, much higher return.

robertoaribas says

As of today, I take in roughly $15,000 a month in rent, and pay roughly $6000 in mortgages,

You have done very well and you are right to be pleased with your success.
One of the reasons that I value your contribution here and seek out your comments is that I have not been able to replicate any formula like yours here in my small town in Northern Cali. I cashed out of Tucson in '05, retreated up here and nothing has made sense to me since.

Good for the cashing out in '05, but why gamble in CA? It is a very unlikely bet. Prices have no basis there. Technology? They will sell out of CA and move to cheaper areas too. Companies relocate for their bottom lines. You have to do the opposite of what the herd generally does. The herd follows the news. The news is past.

Yes you can still buy in some places reasonably, but not SFBA. That is like putting it all on red.

David Losh says

I hate this myth that as long as you have to live somewhere you might as well take on $400K in debt to do so.

That's not what I advocated at all. In fact, I don't think anyone should own a house over $250K, unless they have the funds to actually buy it out right, even if they did financed it though a bank. And as for the other comment about an ARM, I think in the last few years, it is all but illegal to sell a house to your average home owner

( less than $225K), by using traditional financing.

No bank will even touch those loans anymore, they are all serviced through FHA.
The day of people buying a 150K shithole using an ARM loan are over.

I have a bad investment in the form of a rental house I'll rent to you. Your monthly rental check will pay for all my costs for owning the house and then some. Due to your generosity in paying my costs, you will pay all the interest charged by the bank to loan me money on this house over the course of as long as 30 years. Thank you! During that time I'll reduce my taxable income by writing off the depreciation on the house, for 27.5 years anyway. Inflation will cause the "value" of the property to rise of that time, not in a straight line, but definitely up. So my downpayment instead of having a fraction of the purchasing power it would have having been stuck in a bank, will at least be equal in purchasing power to what it was when I bought the house. Finally, once I'm old and you as my loyal renter have paid off my mortgage, paid for upkeep and maintenance along the way as well, I will have a recurring monthly income from your rental check that is now much higher than when we started due to that pesky inflation, so it's also more valuable now then when we started, ie purchasing power parity. So I can sit at the beach showing off my wrinkly old man boobs sipping a pain killer (great cocktail, look it up if you don't know about them) and thinking about this ridiculous website spreading misinformation about personal finance as it relates to housing all these years after the housing crash... Notice I mentioned rental. Owning your own home is not an "investment" it is a home. But Schiller doesn't rent for a reason...my comments on that another time

David Losh says

It makes no sense, because at the end of the payment period you end up with
the house free, and clear, but your return is only based on the rate of
inflation over the life of the loan.

I don't follow you at all here. Are you assuming that you live in the home? Because, if so, your return is much more than just the rate of inflation.

robertoaribas says

Robert Sproul says

I have not been able to replicate any formula like yours here in my small town in Northern Cali. I cashed out of Tucson in '05, retreated up here and nothing has made sense to me since.

I thought some parts of nothern cali weren't so expensive. I particularly like the area around Chico...

Hmmm. I guess this is all relative. I have been looking in the Chico area for some time, and to me anything attractive to live in (both from the point of view of the house or the neighborhood -- often you choose one or the other) is in my view way too expensive. Chico seems to be a skewed market in that local wages absolutely do not support current house prices. House prices here, from what people in the biz say, seem to be 'artificially' inflated because it is an attractive place for people decamping from the bay and other even more inflated areas. Usually these are people whose timing was fortuitous, and they have a pile of equity that they can use to buy something cash. This seems to be the cause of prices here being so far out of whack vis a vis salaries.
Moreover, the market here is ailing, and is very manipulated. I know personally of many houses that have tenants where the bank has simply refused to foreclose for years. Some of these are in the toniest of neighborhoods, too. The lower end doesn't appear to be so false, as it is primarily directed at the sizeable student population...

tatupu70 says

I don't follow you at all here.

Because if you buy a home, the family home, that is paid for with your wages, that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

gonzo says

so it's also more valuable now then when we started,

You don't know that and I would say it probably isn't going to be true.

New construction, and land use has been advancing by leaps, and bounds. At the end of thirty years you may need to consider demolition in favor of new construction on your lot.

David Losh says

Because if you buy a home, the family home, that is paid for with your wages,
that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

It depends on the interest rate of the loan, but that's not what you should be looking at. You need to look at the difference between rent costs and ownership costs.

robertoaribas says

I get a mortgage of $1400 a month.

In Chico.

Come on, let's enter reality here, what's the wage base of Chico? That's $50K a year to afford that debt for thirty years.

robertoaribas says

David Losh says

robertoaribas says

I get a mortgage of $1400 a month.

In Chico.

Come on, let's enter reality here, what's the wage base of Chico? That's $50K a year to afford that debt for thirty years.

yes, but for many people retiring from a career, that is easily affordable, a nice place to live, and they can still drive back to the bay area to see family and friends. I'm generally anti California, but I'd consider moving there...

That is what seems to happen... As you described above it is a pretty decent college town, with lots of beautiful places within a relatively short drive, and the bay area is with luck 3 hours away. So pretty great for people on the downslope of life, but for people starting out it is not so possible. That is why I say prices are out of line with 'local' (emphasized) wages. This seems to be a common and not often talked about factor in many many markets.

See, and I wouldn't under those conditions, and that pricing.

Why would I spend that kind of money? It means all housing is in that price range so the wage earners are now priced out, but not forever.

Economic equilibrium has to be reestablished at some point, and these retirees will lose money. We are all losing money in this economy, even you.

robertoaribas says

first off, that is bullcrap. People who retire with pensions will be able to afford there forever.

second off, a $1400 mortgage on a 1800 square foot home with a 2 car garage is pretty god damn affordable. $400 or so is going to debt paydown anyways. Even a college student could rent out the other 2 rooms and afford that home while waiting tables part time. Hell, I got $500 a room in Tempe, I doubt chico is any cheaper!

sometimes you guys are just ridiculous... what price do you expect homes to be? when the mortgage is $700 a month would that be ok?

I think both are sides are right, actually. It seems that people on pensions will be able to afford that, and I also think that the overall mechanism of people retiring into a place like chico prices out of the market younger people. The end result is that the town becomes something with a very bifurcated populace -- poor students and much better off retirees with little in between.

Also in the longer term, my own limited view of public finance/policy is that the changes that occurred because of prop 13 will need to be substantially revised -- higher property taxes are on the way, which means downward pressure on real estate. Also, I think the debt burden of young people leaving college has yet to be fully understood. From what I have seen, that is an enormous (non-dischargeable, unlike a mortgate!) debt that will make it very very hard for the younger generation to get started. The demographic bulge of baby boomers heading into retirement is also a factor.
The last 50 years were a sweet spot for the u.s. in the global economy, but the brics have put an end to that. Good solid middle class jobs will be harder to come by, and at least in Chico a good solid middle class job does not pay enough to buy a local house.
So, to your last comment of what is the appropriate price of a home, I think the equivalent of 700$ is about right, actually. It would make it possible to save appropriately for retirement, adequately fund all the local services (schools, etc etc.), raise a family, etc. It will take 10, 20+ years to get there, but I think housing is still overpriced. Again, this is a personal view colored by my experiences, which include a frugal upbringing, brief spells of relative affluence, and now a period of relative prosperity. I've seen that things come and go, sometimes very suddenly... This doesn't mean nobody should buy a house, or even that I shouldn't buy a house, I'm just having a hard time swallowing the idea right now.

robertoaribas says

a $1400 mortgage on a 1800 square foot home with a 2 car garage is pretty god damn affordable.

It's affordable if you make $50K per year, but in a college town that may be hard for the majority of people.

Second, you are right, people in a college town double, and triple up. It's transient.

Actually, it makes no difference, yes $700 is about right for a college town rent.

No one needs that house unless they are going to stay there, and there is no reason for any one to stay there. There is no economic upside.

Retirees are getting slammed, unless you haven't noticed, we are at the tail end of those great yesteryear pension plans. Social Security is on the ropes, Health care is in question, so no retirees aren't going to be plunking down a pile of dough on housing without a return.

You're in a complete state of denial about the economy, because your sector, as a land lord is having a day in the sun. That's also coming to an end.

The price for housing will decline as rental income or home prices. There's no choice. This example of Chico is a classic, $200K? for Chico? and that's the low end? Come on.

Roberto: I think you are mostly correct on you comments. Whether it is expensive or not is where people disagree... If you are cheap, or poor, or are looking for something not readily available, it is expense. Purely a personal matter and I certainly don't fault Chico for it. I do wonder how we'll all adjust to the next decade or so, though.

Let's see what happens when the fed stops devaluing the dollar and interest rates go up. I for one as a saver, am tired of getting 1% interest on my savings. I would like the prime to go up to 8% again. Also, let's require 20% down payments on house sales.

robertoaribas says

I'll pick this apart piece by piece:

You didn't pick anything apart.

Retirees aren't going to be buying in Chico, or anywhere else. That doesn't make any sense what so ever.

What motivation would a retiree have to buy into a housing unit that wasn't managed, and maintained?

You think retirees are going to be living the high life like they did from the 1980s dot com, high return 401(k) days? They aren't.

Read the threads here where people are begging for an 8% return. My Mutual Funds used to pay more than that, but not any more.

I understand you buy houses to rent out, that is much different than plunking down a few hundred thousand dollars to be stuck with a non performing liability.

The only thing that makes your houses assets is the rental income. To anyone else it's just a hole to dump money in. It's better to let you do that. It's better to rent.

David Losh says

tatupu70 says

I don't follow you at all here.

Because if you buy a home, the family home, that is paid for with your wages, that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

You can prepay the mortgage if you can afford to and prioritize that activity and siginifantly save on the total interest over life of the loan.

robertoaribas says

Better tell that to my friends parents,

OK, there's one.

robertoaribas says

If you think 200 to 300K is too much for anyone to pay, when rates are sub 4%, you are out of your freaking mind.

That is way too much, and a 4% loan doesn't mean anything to a retiree, they are at the end of financial viability.

Why would they buy a liability to the portfolio they have built, and added to from the sale of the family home?

The family home isn't paying any returns. It's a blob, a place to put your crap, and much more expensive than renting because it is a debt.

I'm very happy to have my money out of Real Estate because it makes no sense, any more.

You're not making any sense.

You have your formula where your rents cover the mortgages. Those properties produce income. The retirees aren't getting any income, they are paying a debt. They might as well rent.

Very honestly retirees better start looking at some other investment strategies, because those pensions, that Social Security, those Mutual Funds, and stock portfolios are as questionable as Real Estate is right now.

It's Chico California, houses should top out at $225K, not start there.

David Losh says

The family home isn't paying any returns. It's a blob, a place to put your crap, and much more expensive than renting because it is a debt.

That statement is completely idiotic.

There has been nothing in today's Real Estate market place that inspires confidence in me. All of the numbers I look at look cooked to the gills.

There was a period between 1998 to 2008 that made absolutely no sense, but I was happy to ride the wave.

This time however there is no compelling reason to take a lot of risk for the very small margins that I calculate.

I get it if you have millions, or billions to speculate with, package the income into REITs and sell shares. I get it, but mom, dad, and the kids , or retirees are guppies in a sea of sharks.

tatupu70 says

That statement is completely idiotic.

Make a point, prove me wrong, or is it the "everybody has to live some place" so they might as well pay a mortgage on hundreds of thousands of dollars in debt.

robertoaribas says

you are out of your mind. My friends parents built a freaking mansion, up on the hills backing to a golf club which they get automatic membership in. Not my cup o tea, I don't need that big of a home, nor a silly waste of space golf course, I want easy access to restaurants and coffee shops without driving, and to be able to mountain bike without having to carry my bike in the car. Kayaking near by would be nice too... but to say that prices should top out at something is ridiculous, there will always be some wealthy retires who want something ostentatious.

I know the area, and actually one of people I referenced earlier was renting one of the simpler houses in that development. The owner of the house had stopped paying 3-4 years ago, and the bank only foreclosed in November '12. The house was built (according to the link here at zillow: http://www.zillow.com/homedetails/3555-Shadowtree-Ln-Chico-CA-95928/66116689_zpid/) in 2004, sold in '07 for 614K, and is now on the market for something like 375K. Ok house, nothing special. Adequately (only) built.
Most of the houses around there are monstrous, tasteless messes. Driving by they seem to be inhabited by a dentist and his wife. You cannot help but think 'this is not sustainable, in any shape or form' when you drive through...

David Losh says

Make a point, prove me wrong, or is it the "everybody has to live some place" so they might as well pay a mortgage on hundreds of thousands of dollars in debt.

You claim buying is more expensive because it's debt? What does that mean? Either it's more expensive or it isn't. The total amount of debt is really not that important. What's the difference whether you're paying a landlord or whether you're paying the bank? If it's cheaper to own over your time frame, then you should buy.

Yes you pay a lot of interest to the bank on your loan. But how is that different than paying a lot of rent to your landlord?

kt says

There are quality-of-life issues that are hard to put a financial value to.

It is probably worth trying if quality of life is what you're after.

robertoaribas says

not if the rent is more than the mortgage

tatupu70 says

The total amount of debt is really not that important.

Financial viability of a retiree who can take a 15 year loan to amortize, but even at that it more likely the debt will need to be retired by the heirs.

Now let's talk about economic viability of a place like Chico California. There are hundreds of golf course around Seattle with million dollar McMansions people are walking away from, and others are buying for $600K to $800K.

It makes no sense because as you say there is no economic viability to those areas. They have the golf course, and a long drive to the grocery store. If you want a meal you have the Club House, or Mels Diner out by the highway.

Come on, use some common sense.

Mortgage debt goes into your liability column to be off set by equity, no equity, no ability to sell, means complete liability. You might as well rent.

beentheredonethat says

Ok house, nothing special.

I would agree. Low ceilings. Sloped lot. Cheap finishes (12" floor tiles used as bathroom counter tops; berber carpeting). Exterior is only finished on the facade. Nothing really bad about this house, but it is very, very, just okay.

robertoaribas says

the granite on the counter is only tiles... not a slab how gouache

That's not granite, it's ceramic floor tile. Berber is not an upgrade.

robertoaribas says

buy this one instead.

It's in Chico California, and after you are done fixing up this gem I might be temted to pay as much as $93K.

These are outrageously expensive homes. Where would there ever be an upside to buying either one of these?

tatupu70 says

Yes you pay a lot of interest to

A lot. That's cute! More like a motherfucking fuck ton.

But how is that different than paying a lot of rent to your landlord?

If you are buying a residence to live in because you like it and the area, and the numbers pencil out, I don't see a problem. Look at it as an investment in your standard of living. Financially speaking, I think if, after your 10% down payment, lender/realtor fees, inaugural repairs (not of a decorative nature) and other liabilities, balloon payments, etc., it's breakeven with renting over, say, a ten year window, then there's no really good argument for renting.

Unless you're renting from me.

But of course...

David Losh says

Financial viability of a retiree who can take a 15 year loan to amortize, but
even at that it more likely the debt will need to be retired by the heirs.

David Losh says

Mortgage debt goes into your liability column to be off set by equity, no
equity, no ability to sell, means complete liability. You might as well
rent.

So, you think housing prices will go down. That's the crux of your argument? Geez--just say that then. That's at least a logical premise as oppposed to all your statements about the evils of debt. Debt is neither good nor evil, it is a financial tool.

Obviously terms and rates are important factors in any discussion involving consumer debt; but I can think of many obvious reasons why debt is something evil that most middle class Americans should try to avoid. Chief among them is that consumer debt can hamper a person's freedom and mobility -- priceless assets in and of themselves. You're also paying more -- often times, grossly disproportionately so -- to enjoy the luxury of borrowing from future earnings to satisfy a desire in the present. In fact, it seems impossible to deny that certain goods and services have that debt priced in. For example, the ease by which almost anyone can obtain a sizable student loan seems to guarantee onerous tuition costs. Meanwhile, there's a robust market for the SLABS created from this non-dischargeable debt, which also seems fucked.

tatupu70 says

David Losh says

Financial viability of a retiree who can take a 15 year loan to amortize, but

even at that it more likely the debt will need to be retired by the heirs.

David Losh says

Mortgage debt goes into your liability column to be off set by equity, no

equity, no ability to sell, means complete liability. You might as well

rent.

So, you think housing prices will go down. That's the crux of your argument? Geez--just say that then. That's at least a logical premise as oppposed to all your statements about the evils of debt. Debt is neither good nor evil, it is a financial tool.

Good point. I'm not often right about these things, but it appears to me that historically low interest rates are likely to rise, VERY high levels of debt (student debt) among the generation we are expecting to enter the housing market, stressed public finances and crumbling infrastructure, an imbalanced tax structure (prop 13 style) in many important markets, and structural changes in the global economy (brics, etc.) all point towards the u.s. not returning to the conditions of the past 50 years. Nor to they seem to suggest a rebound of house prices -- seems to me the pressure will be downward. Just a hunch. But hey, I've not often been right about much of anything, so there is no reason to think it's any different now...

robertoaribas says

beentheredonethat says

Ok house, nothing special. Adequately (only) built.

not sure what the hell kind of home you live in, but that thing is 2700 square feet in a very pretty area. that is a lot of home, and priced close to build cost + lot and development.

I'd want something smaller and cheaper, but that home hardly disproves my point. If 2700 square foot homes with a bunch of upgrades inside are selling under 400k, then I can surely find something around 1900 square feet, NOT in an exclusive area affordably priced.

We don't have high expectations regarding size, but we are pretty picky when it comes to the look and feel, and the quality of light and view. This is entirely personal and is our 'problem' so to speak, so I don't expect anyone else to value these things in the same way we do. We got around it by building our own place up in the mountains, with exactly the kind of light, view, layout etc. that we wanted. Great little place 1100 sf. BUT entirely suited to us, and most others wouldn't go for it.
This link I sent has nice light and an ok view, but is WAY too big for us (this is actually a deal killer). From what I see of houses built these days, builders try to enclose an ever larger amount of sf while trying to keep the price within certain points, and the end result is the quality of construction suffers, as well as the finishes. Unavoidable, really. The houses around here I like are the older, smaller ones, but those tend to be very dark. We got around this by designing and building our own, but circumstances changed and we had to move down into town. Again, this is nobody's problem but our own.

robertoaribas says

piss off, my family was on food stamps when I went to college!

Fortunately, being marginalized by poverty didn't blight you like it does so many otherwise bright youths. I was pretty well skint when I sent my first one off, too. The second one was a hellraiser. He sobered up and enlisted, so that saved me!

Don't get me wrong: Depending on the situation, rate, terms, etc., I think leverage can be beneficial. (Time is an asset, too--and not one you can "pay down.") But the inducements to over-rely on it, and the temptation to abuse it are very powerful for a lot of Americans, especially in the economic climate that comes packaged alongside aggressive de-industrialization.

Taking out a loan to go to school is a noble thing on the face of it -- certainly more so than a jet ski or a Harley; I just think that the rising cost of tuition has that EZ access to debt baked into it. I also dislike the terms of student loans. I think they amount to quasi-usury.

Speaking of which -- since there is a more than tacit understanding that without at least a four year degree, your chances in the job market are proportionally diminished, (obviously a generalization), I hold that public school should be K - 16, with maybe specialized certifications and graduate degrees being the sole responsibility of the student.

beentheredonethat says

his is entirely personal and is our 'problem' so to speak, so I don't expect anyone else to value these things in the same way we do.

You are not alone. I have a son who is a big time nut for 1920's bungalows. He won't live in anything else, even though his girlfriend doesn't really like them and wants NEW NEW NEW. It's pretty funny.

I would have bought a 1900's-1920's Craftsman house, if that architecture had been popular in South Florida during that time. But instead our old houses are Spanish missionary or art deco and key west wood frame and shake were the dominant themes. The first two had flat roofs, you don't want a house with a hundred year old flat roof.

CaptainShuddup says

But instead our old houses are Spanish missionary or art deco and key west wood frame and shake were the dominant themes. The first two had flat roofs, you don't want a house with a hundred year old flat roof.

Yeah, you really don't want a flat roof on your place, period. I've had a few, and I never didn't have a problem with leaks.

I've got a soft spot for the Spanish and Mediterranean styles you guys have in abundance in Florida.

You've got some really beautiful digs down there thanks to the 20's bubble. which took place during one of strongest architectural movements there ever was, IMO. That stuff was also built disgustingly well.

BTW - is Lester's still a going concern?