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Ten Reasons It's A Terrible Time To Buy An Expensive House


By Patrick   Follow   Sat, 11 Jul 2015, 12:58pm PDT   52,593 views   64 comments   Watch (4)   Share   Quote   Permalink   Like (6)   Dislike (2)  

  1. Because house prices are in expensive areas still dangerously high compared
    to incomes and rents. Banks say a safe mortgage is a maximum of 3 times
    the buyer's annual income with a 20% downpayment. Landlords say a safe price is
    set by the rental market; annual rent should be at least 9% of the purchase
    price, or else the price is just too high. Yet in affluent areas, both
    those safety rules are still being violated. Buyers are still borrowing 6 times
    their income with tiny downpayments, and gross rents are still only 3% of
    purchase price. Renting is a cash business
    that proves what people can really pay based on their salary, not how much they
    can borrow. Salaries and rents prove that affluent neighborhoods are still in a
    huge housing bubble, and that bubble seems to be getting more dangerous by the day.
  2. On the other hand, in some poor neighborhoods, prices are now so low that gross
    rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there
    could still fall yet more if unemployment rises or interest rates go up, but
    those neighborhoods have no bubble anymore.

  3. Because it's usually still much cheaper to rent than to own the same size
    and quality house, in the same school district. In rich neighborhoods, annual rents are
    typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more
    to borrow the money as it does to borrow the house
    . Renters win and
    owners lose! Worse, total owner costs including taxes, maintenance, and
    insurance come to about 8% of purchase price, which is more than twice the cost of
    renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out
    the house and make a profit. Then you'll know it's pretty safe to buy for
    yourself because then rent could cover the mortgage and ownership expenses if
    necessary, eliminating most of your risk. The basic buying safety rule is to
    divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you
    $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a
    6% mortgage, that's $12,000 per year in interest instead, so it works out about
    the same. Owners can pay interest with pre-tax money, but that benefit gets
    wiped out by the eternal debts of repairs and property tax, equalizing things.
    It is foolish to pay $400,000 for that same house, because renting it would
    cost only half as much per year, and renters are completely safe from falling
    housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local
    employment rate (demand) to the current local supply of available homes for
    rent or sale (supply) should help you figure out whether a big fall in rents
    could happen. Checking these factors minimizizes your risk.

  4. Because it's a terrible time to buy when interest rates are low, like now.
    House prices rose as interest rates fell, and house prices will fall if interest rates rise
    without a strong increase in jobs, because a fixed monthly payment covers a
    smaller mortgage at a higher interest rate. Since interest rates have nowhere to
    go but up, prices have nowhere to go but down. When housing falls, you lose your
    equity, but not your debt.

    The way to win the game is to
    have cash on hand to buy outright at a low price when others cannot
    borrow very much because of high interest rates. Then you get a low price, and
    you get capital appreciation caused by future interest rate declines. To buy an
    expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a
    high price with a low interest rate, even if the mortgage payment is the same
    either way.

    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.
    • As interest rates fall, real estate prices generally rise.
    • Your property taxes will be lower with a low purchase price.
    • Paying a high price now may trap you "under water", meaning you'll have a
      mortgage debt larger than the value of the house. Then you will not be able to
      refinance because then you'll have no equity, and will not be able to sell without
      a loss. Even if you get a long-term fixed rate mortgage, when rates
      inevitably go up the value of your property will go down. Paying a low
      price minimizes your damage.
    • You can refinance when you buy at a higher interest rate and rates
      fall, but current buyers will never be able to refinance for a lower interest rate
      in the future. Rates are already as low as they can go.
  5. Because buyers already borrowed too much money and cannot pay it back. They
    spent it on houses that are now worth less than the loans. This means most banks
    are still actually bankrupt. But since the banks have friends in Washington, they get
    special treatment that you do not. The Federal Reserve prints up bales of new
    money to buy worthless mortgages from irresponsible banks, slowing
    down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense.
    Banks get to keep any profits they make, but bank losses just get passed on to
    you as extra cost added on to the price of a house, when the Fed prints up money
    and buys their bad mortgages. If the Fed did not prevent the free market from
    working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP
    bailout cash taken from taxpayers to be loaned directly to the worst-run
    banks, those that already gambled on mortgages and lost. The Fed and Congress
    are letting the banks "extend and pretend" that their mortgage loans will get
    paid back.

    And of course the banks can simply sell millions of bad loans
    to Fannie and Freddie at full price, putting taxpayers on the hook for
    the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into
    slavery, for the banks to make a profit. If you pay a low price for a house and
    manage to avoid debt, the banks lose control over you. Unacceptable to them.
    It's all a filthy battle for control over your labor.

    This is why you will
    never hear the president or anyone else in power say that we need lower house
    prices
    . They always talk about "affordability" but what they always mean is
    debt-slavery.

  6. Because buyers used too much leverage. Leverage means using debt to amplify
    gain. Most people forget that debt amplifies losses as well. If a buyer puts 10%
    down and the house goes down 10%, he has lost 100% of his money on paper. If he
    has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the
    real world.

    The simple fact is that the renter - if willing and able to save his money -
    can buy a house outright in half the time that a conventional buyer can
    pay off a mortgage. Interest generally accounts for more than half of the cost
    of a house. The saver/renter not only pays no interest, he also gets interest
    on his savings, even if just a little. Leveraged housing appreciation, usually
    presented as the "secret" to wealth, cannot be counted on, and can just as
    easily work against the buyer. In fact, that leverage is the danger that got
    current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there
    is no more fake paper equity from the sale of a previously overvalued property
    and because the market for securitized jumbo loans is dead. Without that fake
    equity, most people don't have the money needed for a down payment on an
    expensive house. It takes a very long time indeed to save up for a 20%
    downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause
    big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's
    corruption of US legislators.
    On a $300,000 house, 6% is $18,000 lost even if housing
    prices just stay flat. So a 4% decline in housing prices bankrupts all those
    with 10% equity or less.

  7. Because the housing bubble was not driven by supply and demand. There
    is huge supply because of overbuilding, and there is less demand now that the
    baby boomers are retiring and selling. Prices in the housing market, even now, are
    entirely a function of how much the banks are willing and able to lend. Most
    people will borrow as much as they possibly can, amounts that are completely
    disconnected from their salaries or from the rental value of the property. Banks
    have been willing to accomodate crazy borrowers because banker
    control of the US government
    means that banks do not yet have to acknowledge
    their losses, or can push losses onto taxpayers through government housing
    agencies like the FHA.
  8. Because there is still a massive backlog of latent foreclosures.
    Millions of owners stopped paying their mortgages, and the banks
    are still not forclosing on all of them, letting the owner live in the house for free. If a
    bank forecloses and takes possession of a house, that means the bank is
    responsible for property taxes and maintenance. Banks don't like those costs. If
    a bank then sells the foreclosure at current prices, the bank has to admit a
    loss on the loan. Banks like that cost even less. So there is a tsunami of
    foreclosures on the way that the banks are ignoring, for now. To prevent a
    justified foreclosure is also to prevent a deserving family from buying that
    house at a low price. Right now, those foreclosures will wash over the landscape,
    decimating prices, and benefitting millions of families which will be able to
    buy a house without a suicidal level of debt, and maybe without any debt at
    all!
  9. Because first-time buyers have all been ruthlessly exploited and the
    supply of new victims is very low.
    From The Herald:
    "We were all corrupted by the housing boom, to some extent.
    People talked endlessly about how their houses were earning more than they did,
    never asking where all this free money was coming from. Well the truth is that
    it was being stolen from the next generation. Houses price increases don't
    produce wealth, they merely transfer it from the young to the old - from
    the coming generation of families who have to burden themselves with colossal
    debts if they want to own, to the baby boomers who are about to retire
    and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with
    children. It is foolish for them to buy at current high prices, yet government
    leaders never talk about how lower house prices are good for American
    families, instead preferring to sacrifice the young and poor to benefit the old
    and rich
    , and to make sure bankers have plenty of debt to earn interest on.
    Your debt is their wealth. Every "affordability" program drives prices
    higher by pushing buyers deeper into debt. Increased debt is not affordability,
    it's just pushing the reckoning into the future. To really help Americans,
    Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even
    more important is eliminating the mortgage-interest deduction, which costs the
    government $400 billion per year in tax revenue. The mortgage interest
    deduction directly harms all buyers
    by keeping prices higher than they
    would otherwise be, costing buyers more in extra purchase cost than they save
    on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra
    $39,000
    in purchase price. Subsidies just make the subsidized item more
    expensive. Buyers should be
    rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia
    have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that
    housing is becoming truly affordable via falling prices, they want to stop it?
    Their actions speak louder than their words.

  10. Because boomers are retiring. There are 70 million Americans born between
    1945-1960. One-third have zero retirement savings. The oldest are 66. The
    only money they have is equity in a house, so they must sell. This will add yet
    another flood of houses to the market, driving prices down even more.
  11. Because there is a huge glut of empty new houses. Builders are being forced
    to drop prices even faster than owners, because builders must sell to keep
    their business going. They need the money now. Builders have huge excess
    inventory that they cannot sell at current prices, and more houses are
    completed each day, making the housing slump worse.

Next Page: Eight groups who lie about the housing market ┬╗




The Housing Trap


You're being set up to spend your life paying off a debt you don't need to take
on, for a house that costs far more than it should. The conspirators are all
around you, smiling to lure you in, carefully choosing their words and watching
your reactions as they push your buttons, anxiously waiting for the moment when
you sign the papers that will trap you and guarantee their payoff. Don't be
just another victim of the housing market. Use this book to defend your freedom
and defeat their schemes. You can win the game, but first you have to learn how
to play it.

115 pages, $12.50

Kindle version available

Discuss the book

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iwog   befriend   ignore   Mon, 10 Aug 2015, 3:15pm PDT   Share   Quote   Like (2)   Dislike (2)     Comment 25

That's the true Pat.net spirit!!!

This is the time when all the bears should start to come out of the woodwork, all the home ownership calculations should be paraded around, and all the doomsayers should be having their field day. Maybe a year or two left until we reach the top, but time to start ramping it up!

iwog   befriend   ignore   Mon, 10 Aug 2015, 3:16pm PDT   Share   Quote   Like   Dislike (2)     Comment 26

Vicente says

Maddening as we are looking for a house. We see a nice house, a few days later it's gone.

In Davis? If I was in your position, I'd rent for now and wait until 2019-2020 to buy. Otherwise I'd aim for Dixon or somewhere away from the UC campus.

Bellingham Bill   befriend   ignore   Mon, 10 Aug 2015, 7:53pm PDT   Share   Quote   Like   Dislike (1)     Comment 27

mid-late 70s boom, early 80s crash (Volcker recession)
mid-late 80s boom, early 90s crash (S&L crisis)
late 90s boom, early 00s crash (dotcom / Worldcom / Enron / NASDAQ madness)
mid-late 00s boom, late 00s crash (systematic mortgage fraud bubble bust)

early-mid 10s boom, late 10s crash??

dunno man. You say the fed did nothing 2009-2011, and 2013-2014, but I think it demonstrated that it indeed had a money gun and was willing to use it.

the previous upstrokes had the seeds of their downfalls in them -- I understand the 1990s recession the least but it had to do with WW2 & cold war aerospace leaving LA, the oil patch collapsing due to oil price collapse, and a real estate bubble on the east coast, too

I don't actually see what's all that wrong -- "unsustainable" -- with the current economy.

shows that if this decade is like the 1990s, we've got another 10M jobs to gain.

Demographically, we're totally different compared to 2000.

The baby boom was age 36 to 54 that year, prime work years. 2020, they'll be age 56 to 74, edging off into retirement, opening up jobs for Gen X and promotions.

Plus as they start dying they'll be distributing their estates to Gen Y, and before they die they'll be spending their retirement savings.

Each year of the baby boomer cohort is 4M people! Health care demand alone is going to be colossal. Plus restaurants and hospitality since old people are tired of cooking.

shows the deficit coming down (this graph is adjusted to 2015 dollars) so that's not unsustainable

I don't pretend to understand the macro picture, trade with China or our deepeningly negative NIIP.

iwog   befriend   ignore   Mon, 10 Aug 2015, 9:04pm PDT   Share   Quote   Like   Dislike (1)     Comment 28

Bellingham Bill says

I don't actually see what's all that wrong -- "unsustainable" -- with the current economy.

Bellingham Bill says

shows that if this decade is like the 1990s, we've got another 10M jobs to gain.

Demand side crisis. I think everyone knows average wages are falling although it's hard to measure with the top heavy becoming even more top heavy. The jobs aren't coming and technology is working to make most jobs obsolete. (computers put all paralegals out of business) People are scraping by and now we've got rents mopping up whatever excess is in the system. The idle cash owned by the rich has ensured much more efficiency in the real estate market so, as you so frequently point out, the economy is going to be a lot better at taking the last few dollars away.

All it needs is a trigger and then you've got the layoff/default/falling demand spiral which has no bottom now that the government is broken and the fed has reached 0%.

We're WAY past 1929 thanks to social safety nets, however that's not a good thing because the economy runs on disposable income and almost all of it is based in services unnecessary for human life.

Here's what I see on your graph. Keep in mind that all things being equal, this should be a low logarithmic increase, not an graph that appears to be on the brink of turning permanently negative:

iwog   befriend   ignore   Mon, 10 Aug 2015, 9:06pm PDT   Share   Quote   Like   Dislike (1)     Comment 29

Bellingham Bill says

shows the deficit coming down (this graph is adjusted to 2015 dollars) so that's not unsustainable

I don't think deficits ever matter. Even if they did matter, there are plenty of nations that prove we could easily double or triple our debt without consequence. In fact considering how much our economy has relied on deficit spending, declining deficits are just another nail on the coffin.

Patrick   befriend   ignore   Mon, 10 Aug 2015, 9:19pm PDT   Share   Quote   Like (1)   Dislike     Comment 30

iwog says

I don't think deficits ever matter.

why don't deficits matter? you'd think that borrowing to spend has to catch up with you eventually.

iwog   befriend   ignore   Mon, 10 Aug 2015, 9:43pm PDT   Share   Quote   Like (1)   Dislike (1)     Comment 31

Patrick says

why don't deficits matter? you'd think that borrowing to spend has to catch up with you eventually.

Cept it never catches up. It has been 35 years since the deficit spending "revolution" and as I said, other nations have shown that we could double or triple our debt and still not worry about any economic catastrophe.

It's actually necessary redistribution. The rich rake in billions, loan it to the government, and it returns as wages, benefits, and contracts before the rich scoop it up again. Now if wealth disparity stops increasing, we'd need debt to stop increasing as well to maintain equilibrium, but I don't see that happening soon.

Bellingham Bill   befriend   ignore   Mon, 10 Aug 2015, 10:40pm PDT   Share   Quote   Like (2)   Dislike     Comment 32

Federal interest payments (2015 dollars):

Interest payments as % GDP:

Hello ZIRP trap. How to get risk-free rates back up to 5% is the tricky bit.

Bellingham Bill   befriend   ignore   Tue, 11 Aug 2015, 7:54am PDT   Share   Quote   Like   Dislike     Comment 33

iwog says

Keep in mind that all things being equal, this should be a low logarithmic increase

red is age 16+, purple is core working age population, flat since the boomers started aging out of this segment in 2000

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:41pm PDT   Share   Quote   Like (1)   Dislike     Comment 34

"1.Because house prices are in expensive areas still dangerously high compared
to incomes and rents."

Flawed logic. Homes are expensive because people pay for them and will pay even more for them. It's proven prime homes gets people rich. Buying cheap homes keeps you broke. location, location, location is not going to change, ah maybe location x5.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:43pm PDT   Share   Quote   Like (1)   Dislike (1)     Comment 35

"2.Because it's usually still much cheaper to rent than to own the same size
and quality house, "

flawed logic. whether it is cheaper to own or rent is based on future unknown factors (future rent and future price). The lifetime owner in Palo Alto is at least 10 time richer than the liftetime renter in Palo Alto.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:46pm PDT   Share   Quote   Like (1)   Dislike     Comment 36

"3.Because it's a terrible time to buy when interest rates are low, like now."

While that may true, interest rate have trended down in one direction for 30 years. Good luck waiting for interest to be back to 1980, which is never. Low interest makes carrying assets cheaper. Most homes are now off the market forever because of low interest rates. record low inventory amid record prices proves this

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:48pm PDT   Share   Quote   Like (1)   Dislike     Comment 37

"4.Because buyers already borrowed too much money and cannot pay it back."

That is a 2005 argument, not 2015.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:50pm PDT   Share   Quote   Like (1)   Dislike     Comment 38

"5.Because buyers used too much leverage. Leverage means using debt to amplify
gain"

This is also so 2005. real estate leverage is pretty low.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:51pm PDT   Share   Quote   Like (1)   Dislike     Comment 39

"6.Because the housing bubble was not driven by supply and demand. There
is huge supply because of overbuilding, and there is less demand now that the
baby boomers are retiring and selling."

This is also so 2005 when 2M homes were built for 5 straight years, most in suburbs and exburbs. For the past 8 years, homes are underbuilt, less than 1M, which drives the supply problem now. Boomers are not selling for another 20 years which means the generation x will pay for it.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:54pm PDT   Share   Quote   Like (1)   Dislike     Comment 40

"7.Because there is still a massive backlog of latent foreclosures"

It's 2015 not 2009.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:55pm PDT   Share   Quote   Like (1)   Dislike     Comment 41

"8.Because first-time buyers have all been ruthlessly exploited and the
supply of new victims is very low."

Prices are at record in-spite of record low home ownership rate. Money buys home not first time buyers.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:56pm PDT   Share   Quote   Like (1)   Dislike     Comment 42

"9.Because boomers are retiring. There are 70 million Americans born between
1945-1960. One-third have zero retirement savings. The oldest are 66. The
only money they have is equity in a house, so they must sell."

The boomer will not sell for another 20 years.

SFace   befriend   ignore   Wed, 12 Aug 2015, 5:57pm PDT   Share   Quote   Like (1)   Dislike     Comment 43

"10.Because there is a huge glut of empty new houses. Builders are being forced
to drop prices even faster than owners"

It's 2015 not 2009.

Nobody   befriend   ignore   Wed, 12 Aug 2015, 6:23pm PDT   Share   Quote   Like (1)   Dislike     Comment 44

Sounds like a great time to sell.

Latesummer2009   befriend   ignore   Wed, 12 Aug 2015, 7:09pm PDT   Share   Quote   Like (1)   Dislike     Comment 45

In the words of Warren Buffett "Buy when most are fearful, and sell when people are the greediest" I think I'd listen to him than the other real estate "professionals". Hedge fund giant Jim Paulsen is also liquidating land holdings now. These guys know....

www.westsideremeltdown.blogspot.com

mell   befriend   ignore   Wed, 12 Aug 2015, 7:34pm PDT   Share   Quote   Like (1)   Dislike     Comment 46

Patrick says

iwog says

I don't think deficits ever matter.

why don't deficits matter? you'd think that borrowing to spend has to catch up with you eventually.

They do matter. Inevitably. That's why the Fed is trapped now in ZIRP land.

iwog   befriend   ignore   Wed, 12 Aug 2015, 7:46pm PDT   Share   Quote   Like (1)   Dislike (2)     Comment 47

mell says

They do matter. Inevitably. That's why the Fed is trapped now in ZIRP land.

Why don't you explain how excessive debt caused the fed to need 0% interest rates?

I think you're a bit confused.

mell   befriend   ignore   Wed, 12 Aug 2015, 8:01pm PDT   Share   Quote   Like   Dislike     Comment 48

iwog says

mell says

They do matter. Inevitably. That's why the Fed is trapped now in ZIRP land.

Why don't you explain how excessive debt caused the fed to need 0% interest rates?

I think you're a bit confused.

http://www.valuewalk.com/2015/02/the-fed-low-rates-dollar/

iwog   befriend   ignore   Wed, 12 Aug 2015, 8:12pm PDT   Share   Quote   Like (1)   Dislike (1)     Comment 49

mell says

http://www.valuewalk.com/2015/02/the-fed-low-rates-dollar/

That's what I thought. You don't even understand the question.

Where in that stupid article does it prove that huge deficits make ZIRP necessary? Quote the paragraph.

mell   befriend   ignore   Wed, 12 Aug 2015, 8:32pm PDT   Share   Quote   Like (2)   Dislike (1)     Comment 50

iwog says

mell says

http://www.valuewalk.com/2015/02/the-fed-low-rates-dollar/

That's what I thought. You don't even understand the question.

Where in that stupid article does it prove that huge deficits make ZIRP necessary? Quote the paragraph.

You seem deliberately obtuse for the sake of arguing. When ZIRP ends (controlled or uncontrolled) the government will pay much higher interest on debt service that it likely cannot afford. That's why ZIRP has become a necessity. In turn ZIRP takes away financial prudence (tail risk) and makes growing corporations and government seemingly easier which then exacerbates the withdrawal symptoms when ZIRP ends (controlled or uncontrolled).

Patrick   befriend