Why I Am Never Going to Own a House Again


By Patrick   Follow   Tue, 4 Dec 2012, 9:10am   7,390 views   88 comments
In Menlo Park CA 94025   Watch (2)   Share   Quote   Permalink   Like (2)   Dislike  

http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to-own-a-home-again/

Many people have said to me in the past month, Im going to buy a home. Or, What do you think of the idea of me buying a home? I like the second batch of people. They are my friends and it seems like they are sincerely asking for my advice. And Im going to give it to them.

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  1. FunTime


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    49   6:11pm Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    But with the ten-year at 1.59%, $1 is only worth $1.17 in 2013, well, maybe $1.12 with taxes on the interest.
    Welcome to ZIRP, where the timevalue of money goes away.

    It does seem at this point there is much against my strategy, but I try not to have thoughts of predicting the economic conditions of the future because it is futile.

  2. Bellingham Bill


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    50   6:12pm Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    http://research.stlouisfed.org/fred2/graph/?g=dwg

    is 1970-now, sigh.

    If gas had only gone up like food has since 1970, it'd be $1.60 or so.

    Food went up 100% in the 1970s, 60% in the 1980s, 30% in the 1990s, and again 30% in the 2000s.

    Gas was super-cheap in 1970, LOL

  3. FunTime


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    51   6:12pm Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Maybe, more carefully,"...has been shown to be futile." People get lucky and then mistake the coincidence of their thoughts with an ability.

  4. New Renter


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    52   7:45am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    NuttBoxer says

    Here's to my only house purchase, on an island in the South Pacific where I will retire...

    I prefer a hollowed out volcano myself...

  5. C Boy


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    53   8:01am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    A house is a hedge against inflation.

    Anyone who thinks higher inflation rates are on the horizon should buy.

    Especialy in CA where property taxes will always lag inflation.

  6. Bellingham Bill


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    54   9:22am Thu 6 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    donjumpsuit says

    Bellingham Bill showed me his numbers on a $500k home purchase, but as I stated, I don't have that $100k down payment.

    For a 3.5% down FHA loan @ 3.125%, I get the following:

    ~$22,000 down payment and points (points are tax deductible)

    Losing that $22,000 is $40/mo in lost interest (@ 2%)

    Interest, PMI, Prop Tax would be $1650/mo (net tax savings)

    Other expenses would be around $400/mo (including $40/mo opportunity cost)

    All that added together comes to a starting cost of ownership of $2050/mo.

    But as you pay the loan down the PMI goes away and interest costs decline. The average monthly cost of ownership over the life of the loan is ~$1350/mo.

    I think that's the best comparison vs. renting.

    If your landlord -- for $22,000 -- offered you a transferable lease option, $2050/mo the first 5 years, $1650/mo years 6-15, $1000/mo years 16-30, and $700/mo thereafter, would you take it?

    Cuz that's basically what buying is.

    30 years ago rents weren't no $1900 in Fremont. Now, I have no idea what's going to happen in the next 30 years, but betting against inflation coming again is a tough bet to make.

    Too easy for the system to try to inflate, rather than institute painful changes that need to be made.

    Or maybe they'll do both.

    But the important thing here is that the "buying is too expensive compared to my rent now" argument would keep you renting forever, even if buying is the better deal, like buying was the right choice in the 80s, 90s, 2000-2003.

    Whether buying is the right choice 2010-now is something I'm agnostic about, LOL. Government bullshit is the main unknown.

  7. Mobi


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    55   10:10am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    yeah, I don't see the transmission mechanism either.
    But if the PTB are serious they'll a) figure out this rather obvious problem exists and b) find something to get money into spenders' hands.
    A good two-birds-one-stone solution is the Fed monetizing the $2.6T SSTF as required from now to 2025 or whenever.

    I would not worry about it before seeing the writing on the wall (have not seen it yet.) I believe we are monetizing in the rate you mention and that's not causing high inflation. If you buy treasury too much to the point that deficit runs out of control, that's a political suicide. MBS purchase might be the better way to inject liquidity but I guess it depends on how many people are able/willing to get a loan.

    Face it, we are just hanging there. If they can manage to suddenly increase the liquidity injection rate, mostly likely, gas price shoots through the roof and the economy tanks again (see 2007-2008.)

  8. TechGromit


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    56   11:57am Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    donjumpsuit says

    I rent a 3/2 in Fremont for $1900.

    If I bought the same house today, I would pay $500k.

    What you really need to look at is how much would the property cost you 30 years ago. This example has sales listed from the 1980's. This house is a pretty good example,

    http://www.redfin.com/CA/Union-City/32456-Jacklynn-Dr-94587/home/1850348

    On Sep 22, 1989, the house sold for $235,000, assuming 20% down, that's 188k financed at say 6%, that would give you a $1,130 a month mortgage payment plus taxes. Current taxes are $6,200 a year, assuming they were that high in 1989 (which is a stretch), that gives you a $1,645 a month payment. So if you purchased the house in 1989, 23 years ago, you would be paying less today that the typical renter, a 4 bedroom house in Fremont runs at the minimum $2,000 a month. Not to mention in 7 years, your just paying taxes, insurance and upkeep costs, so you talking $800 a month Max for these costs. In 7 years your rent is only going to get higher, not lower.

    So the question is who is better off? In the short run, yes the renter is paying less in rent than the poor home buyer is paying in mortgage, taxes, insurance and upkeep costs. But these costs increase at a slower rate then rent increases. At some point, maybe 15 years, there's a break even point after which each year rents cost more than owning a house would. And in another 15 years, home owner cost drop significantly, where the renter always is paying ever higher rents.

    You could say, but I can invest that difference between what it would have cost to buy a house and what i pay in rent. But the fact is statistically homeowners have a significantly greater amount of wealth then renters. So instead of investing the difference in the stock market and making themselves richer than the homeowners, they are most likely pissing the money away on Starbuck's coffee and designer jeans. You could argumentatively say the renter has a better life then the homeowner, since they have more disposable income during the first 15 or so years the homeowner is paying off there mortgage, but in the long run, I think it's the homeowner is the one better off.

    donjumpsuit says

    Buying vs. Renting sounds like a great argument, until you factor in the costs associated with borrowing the money.

    Your really not comparing apples to apples here. You comparing what the cost of buying the today to what your paying in rent today. What you need to consider is how much rent is going to cost in 15, 20 or 30 years when compared to the relatively fix costs of buying a house. This is why the above example is a good measurement. you can see what housing costs were back in 1989 and what rents are today. It's impossible to predict how high rents are going to be in 2027 or 2042, but I wager they will be higher then they are today.

  9. SiO2


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    57   1:04pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    SFace says

    The difference is with a house you have local tax and MID. Those two combined will put you over the standard deduction. At 3.5% interest, its about 20K in the early years.
    Do you work, if so, you surely pay state income tax and state SDI.
    Do you drive, if so, you surely pay personal property tax with the DMV?
    So not only do you get the MID and Property tax, now state income tax, SDI, charity are gravy whereas they were useless.

    Unless you have AMT. Then, no state income tax or dmv tax or property tax deductions. Just MID + charity. Plus those in the AMT range often end up having some deduction phase out.
    Can be a little more complicated.

  10. FunTime


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    58   2:17pm Thu 6 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    TechGromit says

    What you really need to look at is how much would the property cost you 30 years ago.

    That would not be helpful if you happen to be making this consideration at a time when house prices increased significantly for reasons not fundamental to supply and demand dynamics.

  11. FunTime


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    59   2:26pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    But the important thing here is that the "buying is too expensive compared to my rent now" argument would keep you renting forever, even if buying is the better deal, like buying was the right choice in the 80s, 90s, 2000-2003.

    As long as you're doing the assessment including a budget with saving and investments, though, you'll still end up with more money as a renter. Unless you're saying that buying can be a better deal if you time the market. You're saying if you bought during those years and still own the house today in 2012? I'm not sure how that helps, but have seen some data that suggests disagreement and that it is the case that since 1974 renting was generally a better option for allowing a budget of less than 26% of income spent on housing, thereby allowing for savings and investments which would significantly outperform the leverage and performance of a house.

  12. FunTime


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    60   2:32pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Budget and income are components these discussions at patrick.net far too infrequently. You can't have a "deal" that is "expensive" and "best." That can only be true if you believe that houses are so beneficial that people are most helped by spending most of their money on one with no regard to other expenditures like emergency funds, savings, retirement and the like. This goes against every type of personal finance management understanding you'll find. I agree, though, that people believe this exactly.

  13. Bellingham Bill


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    61   3:53pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FunTime says

    but have seen some data that suggests disagreement and that it is the case that since 1974 renting was generally a better option for allowing a budget of less than 26% of income spent on housing, thereby allowing for savings and investments which would significantly outperform the leverage and performance of a house.

    It's easy to back-test this, eg. buying a $75,000 house in 1982 vs. renting and investing the difference, until the rents rise above PITI at least.

    I just did this now in Excel, and answer matches my previous attempt from a couple of years ago -- the S&P 500 was very, very good to people 1982-1999.

    Just $10,000 put into the market in 1981 and allowed to accumulate would be $260,000 today, so a $10,000 housing expense in 1981 has to compete against that.

    Going with an $850/mo fixed PITI etc 1981-2010 vs a $500/mo rent smoothly rising to $1250 over 1981-2012 (3% pa raises) results in a $600,000 accumulation in the stock fund alternative (this is investing the savings of the rent-case, which persist 1981-1999).

    So I can say that buying in 1982 vs renting was a mistake, and probably buying in the 1980s and 1990s vs renting was a mistake, unless the house you bought for $75,000 in 1981 is worth around ~$400,000 or more (the Prop 13 protection on 1980s purchases is worth a lot).

    I'll do another comparison of 1992-now and be back in a bit.

  14. Bellingham Bill


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    62   4:19pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    OK, now I'm looking at another example from my life, if I had been able to buy a condo in West LA in 1992 for say $125,000, vs renting a 1B apartment, which was $700/mo.

    Going with a fixed PITI etc of $1100/mo for the condo, vs. investing $15,000 in the market in 1992 and renting for $700/mo (+3% pa rises) I'd currently have $180,000 in my S&P fund in the rent case vs. having $400,000 or so equity in the condo.

    Rent exceeded the $1100/mo condo expense in 2008, or earlier depending on if the LL matched LA's rent-control maximums (which were 5% for a couple of years during this time).

    Still, having $180,000 in an S&P fund and a $1300/mo rent would not have been a disaster -- if we can get 5% returns in the stock market going forward, that would knock my effective housing costs down to $600 or so, while in 2022 when the loan is paid off the condo will cost $200/mo in property taxes, $200 in HOA, and $200 in maintenance set-aside, about the same really.

    The big difference is in the buy case in 2022 I'd have a ~$500,000 condo paid off and not $230,000 or whatever in a stock fund.

    (LA rent control FTW in this case, do this same comparison for living in eg. Sunnyvale and the historically rising rents will RAPE you -- ask me how I know!)

  15. New Renter


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    63   4:56pm Thu 6 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    TechGromit says

    I've argued this point before about buying. Yes it does cost more to buy then rent in the short term, but once the house is paid off your cost of living drops considerably when compared to renting. Your basically locking in the cost to rent over a 30 year period. So in 30 years, renters are paying a LOT more in rent then you are paying on property taxes and property maintenance.

    You are assuming the luxury of remaining in the same house for 30 years. That's a BIG assumption given many households depend on two steady incomes to make their monthly nut and that most people change jobs much more frequently than they used to. One good dry spell for one of the breadwinners and its default time! That also assumes the needs of the family do not change. the house that's cosy for a new married couple gets to be pretty cramped with 2-3 kids and all their accoutrements. Factor in a change of address every 6-7 years (average for most families) and owning starts getting much more expensive.

  16. TechGromit


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    64   5:50pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    New Renter says

    the house that's cosy for a new married couple gets to be pretty cramped with 2-3 kids and all their accoutrements. Factor in a change of address every 6-7 years (average for most families) and owning starts getting much more expensive.

    This example was a 4 bedroom house, so 2 or 3 kids shouldn't present a problem in this case, but I do see your point. Personally I don't move that often, but your right, you really don't start making a dent in the principal until after 7 years anyway. But my position could be modified, if you plan on living at the same place for at least 10 or 15 years.

  17. TechGromit


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    65   6:01pm Thu 6 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    Going with a fixed PITI etc of $1100/mo for the condo, vs. investing $15,000 in the market in 1992 and renting for $700/mo (+3% pa rises) I'd currently have $180,000 in my S&P fund in the rent case vs. having $400,000 or so equity in the condo

    Why stop there, if I picked the right mega million lottery numbers from May 17, 2002 until today, I'd have a trillion dollars by now. We can all analyze what we could have brought in the past, but it's just wishful thinking.

  18. Mobi


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    66   8:15am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    Going with a fixed PITI etc of $1100/mo for the condo, vs. investing $15,000 in the market in 1992 and renting for $700/mo (+3% pa rises) I'd currently have $180,000 in my S&P fund in the rent case vs. having $400,000 or so equity in the condo.

    Your example here is mostly correct but it is very easy to explain this phenomenon. From 1992 to 2007, inflation dominated so all things including housing and stock increased in prices. The difference between your house purchase and stock purchase examples is that one is leveraged (house mortgage) and the other is cash buy (stocks.) Averagely in the last few decades, stocks gain more than housing. However, you easily come out ahead with the leverage on house (esp. in big metropolitans where housing prices tend to bubble more.) So, again, going forward it depends on your crystal ball. If the inflation were to come back again, buying houses is probably not a bad idea. On the other hand, it is not so hard to see why people here disagree with you when they are in the deflation camp (leverage amplifies your loss in deflation.)

  19. C Boy


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    67   8:35am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Inflation is not an "if", but when.

    5 years it will be here. 10 years if the Euro collapses.

  20. bg


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    68   9:45am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    LA rent control FTW in this case, do this same comparison for living in eg. Sunnyvale and the historically rising rents will RAPE you -- ask me how I know!)

    We have lived in the same 2 bedroom apartment in Pacifica for 7 years with rent going from 1200 to 1350.

    About 2 years ago, I spent about 8K making improvements in our apartment. Some of that was for furniture that I could take with me. I did that with the plan of staying at least 3 additional years. So, you could say that my rent is 225 per month higher if you divide those improvements over the three year window I used for planning/justifying those improvements.
    If I include the cost of those improvements, I could say that our rent as been 1575 for the last 18 months.

    For two years before I moved to Pacifica (2003-4004) I shared a large 2 bedroom 2 bath apartment in San Mateo where my share of rent was 700 a month.

    I moved to Pacifica in 2005 at the top of the bubble, so I think I would have had huge losses on anything I bought at or near that time.

    I am less clear that I should continue renting now. At what point it my salary high enough, and are prices low enough to buy?

    I don't know how inflation/deflation impacts that from here. FWIW my job is very secure.

  21. FunTime


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    69   10:37am Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Mobi says

    The difference between your house purchase and stock purchase examples is that one is leveraged (house mortgage) and the other is cash buy (stocks.) Averagely in the last few decades, stocks gain more than housing. However, you easily come out ahead with the leverage on house

    Is this true even if you calculate the down payment of the house as an investment in stocks? That amount of money seems to just appear for some people, so I think it gets lost in some calculators/tions. Also, if you looks at buying a house as spending a few hundred(or several in the Bay Area) thousand dollars, isn't it logical to compare renting and buying by thinking that buying involves spending all that money on the day of contract? Even though you can't get a loan to spend hundreds of thousands of dollars on anything else?

  22. TechGromit


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    70   1:09pm Fri 7 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    bg says

    I am less clear that I should continue renting now. At what point it my salary high enough, and are prices low enough to buy?

    I've written about this before too. You were very wise to wait on buying during the market bubble, but most of the price decline is over. So your spending $16,200 on rent. And lets assume your looking at a 300k house to buy. If the house price declines another 5% this year, you would have saving 15k waiting but spent $16,200 in rent. I feel that waiting will return increasing diminished return (pricing will decline less and less in the future) when compared to the cost of renting waiting for the market to fall further.

  23. ELC


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    71   1:19pm Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Also that calculator is assuming there will be either no appreciation at worst or positive appreciation and doesn't take Realtor fees into account.

  24. ELC


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    72   1:47pm Fri 7 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    this one's sweet:
    http://www.zillow.com/homedetails/6242-N-Woodson-Ave-Fresno-CA-93711/18696522_zpid/

    Looks like the photographer was a monkey. No offense to monkies.

  25. jvolstad


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    73   3:09am Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    My San Antonio rental. Fantastic area and very upscale. Will I ever buy again? Only if prices drop a lot more then they have.

  26. bob2356


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    74   3:30am Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    TechGromit says

    What you really need to look at is how much would the property cost you 30 years ago

    What percentage of people live in the same house 30 years? Not many these days.

  27. CDon


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    75   8:26am Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    TechGromit says

    I've argued this point before about buying. Yes it does cost more to buy then rent in the short term, but once the house is paid off your cost of living drops considerably when compared to renting. Your basically locking in the cost to rent over a 30 year period. So in 30 years, renters are paying a LOT more in rent then you are paying on property taxes and property maintenance.

    As far as I can tell, in certain areas, it takes 5-10 years before renting cost = buying costs, and the purchase price always seems to front runs the renting cost by that 5-10 year spread.

    Back when I was young & dumb & was looking to buy, I ran one of those online calculators and it said dont buy because renting was approx 20% cheaper. I ignored it, and still bought in 1999.

    3-4 years in, once I had the place, exactly as I wanted it, I suddenly realized I may be here for a long long long time. The online calculators were still saying "dont buy b/c 2003 rent is about 30% cheaper than 2003 prices". However, for me with my 1999 buy in price, the rent/own gap was narrowing.

    7-8 years in, as the bubble was screaming, the online calclators still said "dont buy b/c 2006 rent is about 50% cheaper than 2006 prices". Yet for me, my 1999 buy in price was suddenly = to 2006 rental costs. Suddenly, I had reached "rental parity".

    Now in late 2012, even after the bubble has burst, the online calculators are still saying "dont buy b/c 2012 rent is about 30% chaper than 2012 prices" Yet for me, my 1999 buy in price was now about 20% cheaper than 2012 rent.

    Also nice, at 13 years in, my principal is absolutely melting away every month (im paying it off on a slightly accelerated 25 year schedule). Early on it seemed like it would take "forever" to pay it all off. Yet the 13 years went by in the blink of an eye. Suddenly, I am looking forward to the day I no longer send a payment to the bank.

    Its funny to think, had I been educated about rent/vs buy in 1999, I very well could have not bought. Moreover, for the past 13 years, there has never been a single moment in time where the calculators would have said "buy". Yet I thank god all the time that I ignored the calculators and bought.

    Dont get me wrong. I remain convinced that buying, especially buying in one of the so called fortress areas is not the best use of your money. Im sure, I can find multiple stocks or other investments which, had I happen to stumble upon them, it would have been a better use of my money while I lived the flexible life of a renter.

    Moreover, if you dont mind it, I absolutely think long term to even permanent renting is a great way to live in a good area at a discount, so long as you have the discipline to continuously put that extra $ into whatever best investment there is at the time. Still, for those who just want to one day "buy and quit obsessing over property" you might just have to one day decide to bite the bullett and pay the premium that buying in your area supports.

  28. ELC


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    76   1:26pm Sat 8 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    SFace says

    So not only do you get the MID and Property tax, now state income tax, SDI, charity are gravy whereas they were useless.

    Also that calculator is assuming there will be either no appreciation at worst or positive appreciation and doesn't take Realtor fees into account.

  29. bg


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    77   11:25pm Sun 9 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    TechGromit says

    I feel that waiting will return increasing diminished return (pricing will decline less and less in the future) when compared to the cost of renting waiting for the market to fall further.

    Mostly I agree with you. Waiting is getting me diminishing returns. I do live near SF. I am not sure that there isn't more air to come out of prices here. My city has dropped a little. Maybe 20%. Crappy houses for sale at 500+K. I think that if we are going to drop again in SF bay, it will be in the next 18 months. I think there will be small bubbles up like the current mini-bubble near SF, but I think it is destined to go back down. The question is how far down or how long to be flat. I don't think there is a huge rush to buy.

  30. Mobi


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    78   8:42am Mon 10 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    C Boy says

    Inflation is not an "if", but when.


    5 years it will be here. 10 years if the Euro collapses.

    Yes, inflation will come back. But the last time Europe collapsed (not Euro, I know), it generated a long period time of deflation, not inflation. If I were to buy something, I would buy it cheap after the collapse. So, the question is not whether inflation will happen. The question is whether there will be (strong) deflation down the road.

  31. dublin hillz


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    79   9:41am Mon 10 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    I think as a society we need to place greater value no paying off mortgages. I don't think that people really connect the dots that a 30 year mortgage is basically an agreement to pay back the debt in 30 years if you make minimum payments. Many responsible people would not make "minimum payments" to pay back the credit card debt yet they are fully OK with doing this for their home loans. Why? The whole point of the game is not to make minimum payments on the mortgage and it is not to avoid debt by being a lifelong renter. The objective should be to pay back the debt as soon as possible and live rent free and mortgage free. There is a huge discount when all one has to pay is property tax + HOA vs paying rent or mortgage. Yet, this is not emphasized. It's funny, parents place so much emphasis on trying to enroll their kids into a good school disctrict so that they can get into a prestigious university. They view it as an accomplishment. Then, they try to micromanage their choice of major so that they end up with marketable skills. Yet, I don't see any concerted effort to highlight the importance of paying off the mortage debt as soon as possible. Considering how few people achieve significan prepayment it seems to me that that is indeed the true accomplishment in this society. I will never understand why some people don't even try to actualize this.

  32. dublin hillz


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    80   10:17am Mon 10 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    SFace says

    Interest rate. One is around 2.5% net of tax deduction and one is anywhere from 12% - 25%.

    Yes, the interest rate on credit cards is much higher and it is not tax deductible. However, the principal balance of most home loans dwarfs the amount of average credit card debt. This translates to much greater interest charges that a homeowner who makes minumum payments will incur compared to a credit card debtor. Emphasizing mortgage prepayments can easily save a homeowner hundreds of thousands of dollar in bay area. Trying to match those savings via "earnings" in the market is anything but guaranteed and in any event will not be a difference maker in the lifestyle of the stock investor given the timelines involved.

  33. TechGromit


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    81   10:53am Mon 10 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    SFace says

    In addition, if an earthquake happens and flatten your paid off home, it is your problem. If an earthquake happens and flatten the bank owned home, it is is the banks problem.

    It is? That's kind like saying I got into a car accident and totaled my car, so I don't have to pay my car loan anymore, since I don't have a car.

    Your still responsible for your mortgage weather you still have a house or not... Wait let me rephrase that. In most normal states (ie not California) your still responsible for your mortgage weather you still have a house or not.

    Which brings up a interesting point. There have been a number of people who lost there homes in Hurricane Sandy, but since they were paid off, they didn't bother to have flood insurance on them. There will be more than a few sales of properties on the New Jersey shore where a family house, in the family for generations will be sold at rock bottom prices because the they can not afford to rebuild. Houses with mortgages on them however are Required to have flood insurance by the banks.

  34. tatupu70


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    82   1:45pm Mon 10 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    dublin hillz says

    Yes, the interest rate on credit cards is much higher and it is not tax deductible. However, the principal balance of most home loans dwarfs the amount of average credit card debt. This translates to much greater interest charges that a homeowner who makes minumum payments will incur compared to a credit card debtor. Emphasizing mortgage prepayments can easily save a homeowner hundreds of thousands of dollar in bay area. Trying to match those savings via "earnings" in the market is anything but guaranteed and in any event will not be a difference maker in the lifestyle of the stock investor given the timelines involved.

    It's strictly a financial decision. If you think you can invest and earn more than your after tax interest rate then you shouldn't pay back early. If not, you should.

  35. Mobi


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    83   8:14am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FunTime says

    Is this true even if you calculate the down payment of the house as an investment in stocks? That amount of money seems to just appear for some people, so I think it gets lost in some calculators/tions. Also, if you looks at buying a house as spending a few hundred(or several in the Bay Area) thousand dollars, isn't it logical to compare renting and buying by thinking that buying involves spending all that money on the day of contract? Even though you can't get a loan to spend hundreds of thousands of dollars on anything else?

    I was not saying the methodology of comparison is wrong. What I tried to say is: you easily come out ahead with leveraged purchase when there is price inflation. When there is price deflation, it is opposite that you lose more money (compared to non-leveraged purchases.) So, when one assumes it is always inflation dominant, of course buying houses with leverage is always a good deal.

  36. Mobi


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    84   8:17am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    C Boy says

    A house is a hedge against inflation.


    Anyone who thinks higher inflation rates are on the horizon should buy.


    Especialy in CA where property taxes will always lag inflation.

    A house is a hedge against inflation but almost all other classes of assets (e.g., stocks) are hedges, too, when inflation is strong. The advantage is it is much easier to leverage with house purchases.

  37. pkennedy


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    85   9:35am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    While a mortgage might be larger than a credit card, people understand they need a place to live. Interest if a miniscule amount compared with the purchase.

    The point SFace made is that there are TWO parties entering an agreement to buy the house, each party has their respective duties and obligations. If an earthquake hits, the banks are the ones who understand they will be the ones losing out. They factor this in when lending, what rates to charge, etc. It's part of their due diligence to understand what they are on the hook for. This is a 30 year joint venture with each party putting something into it, and with each taking on risk. Owners in california have FAR less risk than most states, that is all.

  38. FunTime


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    86   3:37pm Thu 13 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    dublin hillz says

    Yet, I don't see any concerted effort to highlight the importance of paying off the mortage debt as soon as possible.

    Don't mortgage contracts discourage early payment or even make it so there's no advantage? Or do they just make it look like you'll pay 30 years of interest no matter how you pay?

  39. dublin hillz


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    87   9:04am Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    FunTime says

    dublin hillz says



    Yet, I don't see any concerted effort to highlight the importance of paying off the mortage debt as soon as possible.


    Don't mortgage contracts discourage early payment or even make it so there's no advantage? Or do they just make it look like you'll pay 30 years of interest no matter how you pay?

    Nope, the interest charge is calculated every month in the following manner: (Principal balance * interest rate)/12. Thus, the faster you pay down the principal, the more you save on the interest. And the earlier that you prepay the principal in the life of the loan, the more you will save (because of higher principal balance early on). In SF Bay Area, you can easily save hundreds of thousands of dollars in interest charges if you seriously prepay your mortgage. Also, in California it is illegal for lenders to charge prepayment penalties.

  40. Bellingham Bill


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    88   9:55am Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    dublin hillz says

    Thus, the faster you pay down the principal, the more you save on the interest

    Yup, if you pay $100 more in year 1, if you are paying 3% effective interest, you've save 29 x 3%, or ~$87 in future interest payments.

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