WatchTwo years after signing a lease with a landlord who intended to never sell, he is selling.
I have to choose whether to buy this 3 bdr / 1.5ba, 1450 sq ft house in San Carlos for $888k or rent elsewhere. Here's my analysis...
I would put down $250k, financing $638k. At ~6.125%, my P&I comes out to $3,877. Property tax is around $928 for a total of $4805.
But I can deduct the mortgage interest of $3256. CA + Federal tax is 42%...so I save $1368 (and I already itemize, so it's not as if I lose the standard deduction). That brings me down to $3437.
Then comes something I can't calculate properly...I'd like to deduct the property tax, but I think I'm again in AMT hell this year...maybe someone can help. If I could deduct property tax, it would save my another $390 a month, bringing me down to $3047. Let's go with this for now.
Now if I think that the house won't lose value, I can look at it this way...of the P&I, $620 goes to principal. So that means my 'down the toilet' money comes out to $2427 a month. Renting anywhere on the peninsula in a comparable house is this much or maybe a bit more.
And at this point I'd say 'why not?', except for one thing...the opportunity cost on the $250k downpayment. Even with, say 5% after taxes, that's $1000 a month. Or put another way, if I rent for $2500 / mo, I really only pay $1500.
So then, let's assume I keep the house for 6 years and have to pay a 6% realtor commission. If I figure 5% savings rate, comparable rent of $2500 and $1054 opty cost on my $250k downpayment, it tells me that the house will need to sell for $1,076,000 to break even, or go up by roughly 21% (3.5% per year). If I assume no AMT deduction, I'll need to sell for $1,111,000 - required appreciation of 4.1% a year.
For fun, let's say that the proposed tax change limiting CA mortgage deductions to ~$350k comes into play. It actually makes less of a difference than you would think, at least for me. One one hand, my interest deduction goes down from $1368 to $750. But I can then deduct my state tax. Net, break even sales price becomes $1,130,000; appreciation of 27% or 4.5% a year.
Or, put another way, if the house does not go up in value, it will cost me around $260,000. If it dropped a mere 20%, it would cost me around $420,000.
I'm left with one (financial) reason to buy...inflation. Does anyone see an inflation scenario that makes this make sense to do?
Can you guys check my math?
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I’ve never seen that market so inflated, and if someone is buying for those prices, I’m damn sure selling.
Mr. Wrong, I believe, from your posts, that you don't think RE is headed for a very severe downturn; how do you reconcile this sentiment with the statement above?
If RE is "so inflated," what will prevent it from becoming "so deflated?"
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knickers in a twist
Hah! Nice fig-o-speech. I love it!
But it sounds like he has done well...sold a lot of property at (or near) the peak, and held on to lucrative rentals that are almost paid off. Unless I missed something....
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SJ Jim.
Sarcastic yes, sour hardly. I'm just calling Jack what he is - a concerned (for himself) RE bull doing damage control. And don't try to make sense of Mr. Wrong's position, he's exactly the same as Jack if not the same person.
Peace.
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And don’t try to make sense of Mr. Wrong’s position, he’s exactly the same as Jack if not the same person.
Ahhhhh....you mean literally, or...?
How long you been reading this blog?
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Allah's website
I don't think anyone who has their house paid off or close to it and likes the property should cash out and buy in later.....I don't see the point! You should not gamble with the place you live in... I wouldn't buy now because I am a first time buyer so it would make no sense for me to buy into a severely overpriced market that is just starting to turn the corner. If I bought 4 or 5 years ago..... I would certainly sell now.... not that I would be looking to buy back into a bigger place or that I would want to roll around in the cash that I accumulated so easily, I just would want to own more of my house.
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Allah's website
.....besides Jack.....if all you with your paid off houses cashed out and bought back in, you'd drive the prices right back up again...... We need that liquidity to disappear not get cashed out and poured back in. Your house may lose value to those who lose the power to pay the price, but if you're staying there why should you care. Your house is your home and to you it should be priceless.
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Jamie, go check out the rereports.com. They only have numbers dating back to 1997, but you can already see the drop in 2001, very substantial drops for these blue-ribbon suburbs.
For the 90s numbers, I lived through that. You can ask your realty agent to dig up the median price for SFH in these neighborhoods and it shouldn't be a problem to pull.
I was buying a home in early 90s, choosing between Los Gatos and Los Altos, my RE agent kept telling me that Los Altos was a better deal because the neighborhood lost 30% and Los Gatos headed down only 5%-10%, although the properties I was looking at cost around the same figure.
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matt_walsh's website
Mr.Wrong Says:
I do believe, however, that we are headed into a multi-year market of low appreciation followed by flat or slightly declining prices...
At the risk of pissing you off, I have to say that I find these projections to be utter bullshit.
A market is a market. They are governed by buyers and sellers. But this statement is not a market projection. This is careful spin. You are carefully walking the line between not looking incompetent in a down market while not stirring up panic among RE buyers. And you hear the exact same line from every published realtor.
Stop and think about that...a ~0% growth rate is an awfully arbritray thing, no? Why does the swing suddenly drop to 0% but then conveniently and lovingly hover above there, protecting even the most recent buyers? Why is there some magic barrier that assumes the market can only swing dramatically up, but not dramatically down?
Think about it another way...if indeed, RE is this safe of an investment you would see Wall Street suck up every house they could in a New York Minute. If you're a money manager, and you can score up to 20% a year, but can't lose, who wouldn't do it?
To me, the only realtors I'll believe are ones that say something like: 'Gee, I can tell you that the market is clearly not as hot this year. Who knows what will happen next year? Historically, it's hard to say because these conditions are unique."
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"Landlord wants to know what to do…time has run out…and I still don’t know."
Matt, I feel for you. It's a tough situation, but if buying were the right choice for you, would it really be such a tough decision? Your tone has struck me as one who's trying to talk yourself into buying the house, but if it were the right choice, shouldn't you feel it in your gut already and not have to endure such indecision?
"If only I didn’t have to move maybe this would be easy."
Well, hey, to put it in perspective, we have to move every two years, and we have two kids. It hasn't killed us yet. ;-) Moving has its pluses, like giving you a chance to check out another neighborhood in depth before you buy, forcing you to clear all the extra stuff out of your house, etc. And you may end up in a nicer rental than the one you're in now.
Good luck!
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"Jamie, go check out the rereports.com."
Thanks, Owneroccupier, I'll check it out.
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matt_walsh's website
Jamie: thx for the encouragement! Reason for hesitation is that this 'new paradigm' somewhat conflicts with my 'old paradigm'.
-matt
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Anything else?
Yes, one more thing: I was really hoping for a reasonable response to a specific, 1/2-way well-thought out point that I raised. And it kind of sucks to be disappointed.
Hey, look, I'm aware that nationwide affordability has been publicized as being at ~1991 levels -- as opposed to all time lows. I understand that this reflects the low interest rates. I'm willing to believe this data...and not attribute it to some conspiratorial manipulation of numbers by some RE industry secret society. But at the same time, it would be really nice if you'd concede that the amount of risky, highly-leveraged financing is more prevalant this time around -- that it is being used by the masses as opposed to an educated, investment-minded minority -- and that this presents the potential for something a little more severe than a leveling off.
But perhaps it's a matter of social circles. You've clearly done pretty well in RE & maybe some other industries. so, perhaps you don't know people, other than investors, who have used such loans. Well, being a rather mid-class-person, I can tell you that it's pretty common! Shit I don't even know that many people, but I know people that have are relying on this kind of financing to barely be able to "afford" their primary residence! So, perhaps that is skewing your perspective just a bit.
That's all :)
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It is called aversion to loss. And greed. Once you see your neighbor sell for 1M, you would not want to settle for 900K. Unless you are forced to. Eventually inflation cures it. Most people only look at nominal returns, not real returns.
On the other hand, there were people who sold their homes in 1994 for much less money than they paid for it in 1990...in a falling interest rate environment. There have and will be times when the reality of survival is harsh enough to shatter even the wildest, most stubborn dreams of greed. When is the next? Who knows!?!
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HARM's website
It’s an amazingly astute vision of future events that will culminate with a mushroom cloud of foreclosures, job losses, and a RE value death spiral the likes of which have never been seen American soil.
Come now, Mr. Wrong, If that isn't a straw-man distortion of the arguments presented here by most bearish bloggers, I don't know what is. "You've criticized me and I don't agree with your projections/assumptions, so therefore, you're an extremist."
I'd come to expect a little more from you by now.
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Allah's website
Jamie,
You might want to read this http://tinyurl.com/ahfyu but don't get angry at me, I didn't write it.....and you may also want to comment to the author Anne Fisher....go ahead, let her have it!
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"That is another reason we need a little bit of positive inflation to release the psychological angst of loss taking."
So to release the angst of taking a loss on an investment you are suggesting we devalue the currency such that any such loss would appear not to exist. Spoken like a true monetarist. lol.
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Allah's website
I guess it’s the bank that holds the mortgage.
Banks aren't dumb enough to hold the mortgage....they sell it to fannie and fannie sells it to (suckers) investors. pass that hot potato will you :twisted:
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"Jamie,
You might want to read this http://tinyurl.com/ahfyu but don’t get angry at me, I didn’t write it….."
Allah, I don't know what I'm supposed to be getting angry about here. It's not like some big secret that mothers suffer discrimination in the workplace--it's such common knowledge that Desperate Housewives has a whole storyline about the issue.
I'd like to drop this subject completely, because clearly I accomplished nothing the first time we debated this issue. Your thinking I'd get pissed off about the article shows that we're on such different pages, we're not even reading the same book.
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Allah's website
Whatever........ I just thought of you when I stumbled across and thought you'd be interested in reading it thats all. As for "desperate housewives", I really didn't know you watched garbage like that.
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"Whatever…….. I just thought of you when I stumbled across and thought you’d be interested in reading it thats all. As for “desperate housewives”, I really didn’t know you watched garbage like that. "
Nice. Very nice. What's the point of insulting my entertainment choices? Did that make you feel all better? I sure hope so. I'll be sure in the future to only mention the most high-brow pop culture references possible. I'll bend over backwards until my head is stuck so far up my ass everyone will confuse me with, um, someone else entirely.
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Oh hey there SQT, we were posting at the same time. Nice to know you've got my back. ;-)
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"I really didn’t know you watched garbage like that. "
And I forgot to say, Desperate Housewives was a reference to how the idea of discrimination against mothers has worked its way into pop culture. Love how you turned it into a way to insult me.
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Allah's website
Wow all that from “I really didn’t know you watched garbage like that. "
Jamie, QT I wasn't insulting either of you, my wife and sister watches that show also. So sensitive....geesh!! I just didn't think someone who writes about serious issues on a blog would watch stuff like that. I know that some people, all they do is watch reality shows on TV and don't know what is going on around them. There is a friend of my sisters who is just like this.... I was conversing with her and she said she is going to look for a house....this was just 3 weeks ago... I asked, "why do you want to buy now, aren't you afraid of the housing bubble"? She said "What's that"? (my 2 yo says that alot probably from boobahh) She didn't even know anything about the housing bubble, or even that real estate was overpriced..... My sister told me she doesn't get out much and that all she does is sit around and watch reality shows. We just laughed about it....
I’m sure allah never watches garbage.
Actually....I gave up watching TV altogether (except for the news)..... I leave it to my wife and child to do all the watching.
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Allah's website
Sacto....noticed you erased your previous comments....why?
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Allah's website
You should apologize to Jamie.
What would I be apologizing about? Because I think "desperate housewives" is garbage? It's my opinion..... and I stand by it...why should she be insulted? Did she produce it? This is "felonious behavior"? If we can't voice our opinions on here then what is the point of being here in the first place.
Actually I would if I really believed I insulted her, but she would probably find a way to turn my apology into another insult like she has before.
...and Sacto.... I wish you didn't DELETE your comments because they justify my previous statement:
Wow all that from “I really didn’t know you watched garbage like that. ”
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matt_walsh's website
I'm the one that deleted the comments. I did so because this is a place to debate real estate, not TV shows and the battle of the sexes. There are plenty of other places to have those kinds of flame wars.
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matt_walsh's website
Thanks, Nostradamus for the encouragement.
I'm with you, but I have to say that rents have crept up a bit since 2 years ago, and any decent house you go to has many, many applicants. Maybe that's further a sign that things are on their way down and fewer people want to buy.
But I'm sort of tired of all this mental masturabation, really. I was so certain prices would go down for all the same reasons 3 years ago, and the opposite happened. I'm not implying prices are invincible...what I've learned is that you just never know.
And one of the great things about owning is that no one can kick you out ever again. Well save the bank...
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Allah's website
It could be fewer people can afford to buy, yet.
Very much so.........It's usually the cutoff in funds that does it before they find out the reason. I wonder how the appraiser does an appraisal in a falling market.
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"So sensitive….geesh!!"
I replied to your post about the article, and then you give me a "Whatever, I'm dismissing you with a silly insult" response. So I reply to that and then get accused of being "so sensitive" and turning your apologies into insults.
I do not think you owe me an apology, by the way. I just think you and I are incapable of communicating with each other effectively in written form.
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:-) :-) :-) :-) :-)
Forgot to add mucho emoticons to that last post to avoid miscommunication of tone.
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"I’m the one that deleted the comments. I did so because this is a place to debate real estate, not TV shows and the battle of the sexes. There are plenty of other places to have those kinds of flame wars."
I understand your reasoning, which is completely valid. I think the deletions were just a bit of a shock because SQT is a long-time valuable contributor to the blog and generally everyone is given the benefit of the doubt in such instances. We do have a habit of wandering from topic on occasion, but hey, your thread, your discretion.
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"Sure, I’d rather own. But the Bay Area is egregiously overpriced. I’ve seen a number of these cycles here in Calif dating back to the 70s—both in residential and in commercial."
Wise words, Nostradomus.
Matt, it really sounds like you're leaning toward buying now, correct? I think the quote above is something to keep foremost in your mind.
I'm just guessing but I also get a feeling you have friends who own homes and have given you all their arguments about why you should buy now? It just sounds that way from some of your comments. Everyone we know who owns a house in the Bay Area peppers us with those arguments. :-) It's hard to stand strong against them.
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matt_walsh's website
Matt, it really sounds like you’re leaning toward buying now, correct? I think the quote above is something to keep foremost in your mind.
I’m just guessing but I also get a feeling you have friends who own homes and have given you all their arguments about why you should buy now? It just sounds that way from some of your comments. Everyone we know who owns a house in the Bay Area peppers us with those arguments. :-) It’s hard to stand strong against them.
Well, indeed I do have friends that own. 2 are nearly broke *today*. Yes, I hate to admit to renting. But at this point, those arguments really have faded to the reality that
1) I have been booted out of 2 houses in as many years because owners want to sell. The most recent one claimed he would *never* sell, and wanted long term rentals. I believe he was sincere, but the point is, you never know.
2) This all hinges on one thing...RE vs. equity market returns. I I put down $300k and have the same payment as rent (less, if you count principal pay down). So, the big question is, how will RE do vs. the equity markets? Will higher rates push buyers out? Will another dollar crash bring in hoardes of offshore investors (as has happened in Miami)? Is it a wash?
3) Add to all this, we've moved in, settled, love the neighborhood, and there are no rentals in the same price range. I found a great one in Palo Alto yesterday, but there were so many applicants that they had us on a schedule with 15 minute showings.
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"Allah’s insult was left, as was Jamie’s rebuttal...I wasn’t inciting a flame war, this is a conversation that has carried over from another thread and I was simply commenting on allah’s continued sexism. "
Good point. We should probably all be deleted, if one of us was. :-) And this really was an ongoing thing from another thread. SQT meant no harm.
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"1) I have been booted out of 2 houses in as many years because owners want to sell. The most recent one claimed he would *never* sell, and wanted long term rentals. I believe he was sincere, but the point is, you never know."
I can see how tiring this would be. I'm not all that familiar with rental agreements here, but I know in that past we've gotten rental agreements that were to our advantage--allowing us to rent for the exact time we wanted to, two years or whatever. Is that possible for you?
"3) Add to all this, we’ve moved in, settled, love the neighborhood, and there are no rentals in the same price range. I found a great one in Palo Alto yesterday, but there were so many applicants that they had us on a schedule with 15 minute showings. "
Yikes on the Palo Alto place. Is it possible for you to go up the peninsula a bit to one of the neighborhoods with a less prestigious image (but still a solid family neighborhood?).
If you love the house and love the neighbhorhood enough to stay there long-term, and you are willing to accept the possibility that if you have to sell in the next ??? years, you could be selling at a loss (but this is certainly a big if), then buying could be the right choice for you.
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I'm not being much help. I just hate to see you feel pressured into buying unless it really is the house you *want.* Sometimes trying to reduce these decisions completely to numbers doesn't work, because a house is an emotional purchase too.
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"I guess what burns me up is that allah can throw out an insult and I can’t respond to it."
You're right, I don't know why it didn't occur to me before that it was an uneven kind of thing, not deleting all of us. Too early in the morning, I guess. You have just as much right to reply to allah's off-topic comments as I do.
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Also Matt, I just realized, you've left half the information out of this equation. What does your *wife* want to do? :-P
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Premium
I guess what burns me up is that allah can throw out an insult and I can’t respond to it.
Huh? What happened?
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HARM's website
Ok, can we declare a truce in the War of the Sexes here?
Deleting SQT's comment without deleting the others was a tad one-sided, I agree. However, having been on the moderator side of more than one nasty flame war as well as two rounds of voting to expel our Most Persitent troll, I can understand Matt's desire to nip this thing in the bud. Hey, moderating's not easy and everyone has a different threshold of sensitivity I guess.
How about a new thread by and for the ladies? Here's a topic: Why are some bloggers sexist pigs? :lol: