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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   55,437 views   73 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

« First     « Previous     Comments 34-73 of 73     Last »

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   ignore   Wed, 12 Aug 2015, 9:36pm PDT   Share   Quote   Like (1)   Dislike     Comment 51

SFace says

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.

first you agree with me and say whether it is cheaper to rent depends on future rent and future price, then you say that it's flawed logic?

also, where did you get 10x for palo alto? did you just make the number up? did you consider what would have happened if the renter put his money in an equally lucky investment in the stock market?

David9   befriend   ignore   Wed, 12 Aug 2015, 9:38pm PDT   Share   Quote   Like (1)   Dislike     Comment 52

Ha Ha, I knew this posting would get a backlash.

Yes, I checked the date, 2015.

I suppose it is a matter of taste. I still love being able to travel. One of my latest pictures from Vienna, Austria, lovely city, well dressed polite people, tolerant, and just enough excitement if you want it. :)

Patrick   befriend   ignore   Wed, 12 Aug 2015, 9:38pm PDT   Share   Quote   Like (1)   Dislike     Comment 53

SFace says

It's proven prime homes gets people rich.

you never lived in the midwest, did you? at one time, parts of chicago and detroit were also extremely rich, with huge prime houses which are now falling apart because the neighborhoods went to shit when local industry fell apart.

http://www.huffingtonpost.com/2014/05/13/detroit-1000-mansion-home-auction_n_5310936.html

i know this because i lived in both areas.

Patrick   befriend   ignore   Wed, 12 Aug 2015, 9:39pm PDT   Share   Quote   Like (1)   Dislike     Comment 54

http://vividlyvintage.com/2010/08/18/detroits-abandoned-mansions/

We all know that Detroit is known for auto makers, and industry shapers. When Detroit was in its prime many wealthy business owners and high ranking employees of those business’s carved homes out of the community in nearby neighborhoods. Since the ups and downs of the auto industry, many automakers closed their doors in Detroit which left many families with a decision to make. Either stay in Detroit and find work in other business’s in the surrounding areas, or leave Detroit. Many people made the decision to cut their losses and move on and away from the Muscle car capitol...

Joy Hong Kong   befriend   ignore   Thu, 13 Aug 2015, 4:30am PDT   Share   Quote   Like   Dislike     Comment 55

Hello, I read your article and have seen your great advise for people not buying an expensive house , avoiding being slavery for bank .

I am now living in Hong Kong . The housing price is going up for ten years , from 2004 - 2015 . The price from 2014 to now (just in two years time ) housing price 250% up. Every months price is going up. The interest rate is very low now, only 2.5% and there is not enough supplies flat for buyers at this moment but I heard news from government that they will have more flat sell in the coming 1 -2 years time . However, local people said that Hk property price only go up, even usa going to rise the interest , even supply increase , these factor won't affect to Hk house price, because : 1) Hk people have much money 2) Hk is too crowded place, many people need home , so rental will support the price .

I haven't buy a house yet. I am waiting the price go down, but seems no hope, I just worry if I don't buy it now I won't have chance to get a house , and also I am afraid if I buy an expensive house , it will let me going ti have a big debt .

Could you please give me advise. Many thanks

tatupu70   befriend   ignore   Thu, 13 Aug 2015, 5:24am PDT   Share   Quote   Like   Dislike (1)     Comment 56

Patrick says

you never lived in the midwest, did you? at one time, parts of chicago and detroit were also extremely rich, with huge prime houses which are now falling apart because the neighborhoods went to shit when local industry fell apart.

http://www.huffingtonpost.com/2014/05/13/detroit-1000-mansion-home-auction_n_5310936.html

i know this because i lived in both areas.

What part of Chicago was once extremely rich and now fell apart?

Bellingham Bill   befriend   ignore   Thu, 13 Aug 2015, 7:40am PDT   Share   Quote   Like   Dislike     Comment 57

iwog says

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

Federal debt to GDP was 30% in 1980, and in the 60%s in the 1990s - 2007.

It's been just above 100% since late 2012.

At 100% debt to GDP, each pp rise in the interest rate paid on the debt is essentially a 1% of GDP negative growth applied to the economy, as interest payments mostly vanish from the economy since the debt is held by "savers" not spenders.

We're actually not quite at 100% debt to GDP, since there's $4T of intergovernmental debt, $7T of non-held-by-public debt if we count the Fed, and we should.

So the true picture of federal debt to GDP:

EBGuy   befriend   ignore   Thu, 13 Aug 2015, 1:47pm PDT   Share   Quote   Like   Dislike     Comment 58

Our fearless leader said: you never lived in the midwest, did you? at one time, parts of chicago and detroit were also extremely rich, with huge prime houses which are now falling apart because the neighborhoods went to shit when local industry fell apart.
Set the wayback machine to the 1850s and go further east to where John D. Rockefeller once lived. In the words of Spinal Tap "Hello Cleveland".
Dan Ruminski, a business owner who lives in Chesterland, has created a sideline as a history buff who researches and lectures on Millionaires' Row, circa 1850 to 1910.
"There was a time during that period when half the millionaires who existed in the world lived in Cleveland," he says.
That storied portion of Euclid Avenue, stretching from downtown to about East 55th Street, was known as one of America's "grand avenues." The Euclid Avenue of that era was compared to the Champs-Elysees in Paris and Unter den Linden in Berlin....
Tax rates on the wealth of those patrons were nominal in the 19th century. But that started to change in the 20th century.
That wasn't the only thing that began leading to the Row's demise. Many of the owners of the estates were responsible, directly or indirectly, for the industry and commerce that were dramatically making Cleveland grow. Gradually, pollution from industry and railroads and the choking congestion of automobiles and streetcars made their way toward the mansions. Commercial demand for property on the avenue grew, too.
There was another aspect as well: Some of the owners didn't want to see their palatial homes carved up into apartments that the poor, especially immigrants, would move into. They chose to have them demolished instead. So the grand avenue died.

bob2356   befriend   ignore   Thu, 13 Aug 2015, 6:29pm PDT   Share