Renting is just throwing money away.
FALSE, renting is now much
cheaper per month than owning. If you don't rent, you either:
- Have a mortgage, in which case you are throwing away money on interest, tax,
insurance, maintenance, costs that increase forever.
- Own outright, in which case you are throwing away the extra income you
could get by converting your house to cash, investing in bonds, and renting a
similar place to live for much less money. This extra income could be 50% to
200% beyond rent costs forever, and for many is enough to retire right now.
Either way, owners lose much more money every month than renters and
that's assuming prices stop falling! Currently, yearly rents in the San
Francisco Bay Area are about 3% of the cost of buying an equivalent house. This
means a house is returning about 3%, and it is a bad investment. Pretty much
any other investment is better. If you don't like risk, put your money in US
Treasuries, where the dollar value is guaranteed not to fall. If you don't mind
some risk, you may want buy the stocks that make up the market indexes.
Landlords are loaning a house to their tenants at a 3% interest rate. This is
a fantastic deal for renters. When it is possible to borrow a million dollar
house for 3% yearly rent at the same time a loan of a million dollars in cash
costs 6.5% interest, plus 1% property tax, plus 1% maintenance, something is
clearly broken. Renters are enjoying an extreme discount.
To add insult to "owners", their property is declining in value. Renters do not
have to worry about the massive losses owners are experiencing. Here's a great
quote from
NPR:
Underwater owner: "We would do it [pay the mortgage] if the equity was there,
but in a case where we're already so behind... Imagine that for five years, say,
we're gonna pay four grand a month and then we're just gonna be back up at what
we bought the house for. We feel like we're throwing away money."
There are great tax advantages to owning.
FALSE. Everyone
automatically gets a $9,500 tax deduction, just for breathing. You have to have
interest expenses greater than $9,500 to get any advantage from the mortgage
interest deduction. And even then, the tax advantage is not significant compared
to the large monthly loss from owning.
Compare the cost of owning to renting.
Many people believe you can just reduce your income tax by the amount you pay
in interest, but they are wrong. Buyers may not deduct interest from income tax;
they deduct interest from taxable income. Interest is paid in real
pre-tax dollars that buyers suffered to earn. That money is really entirely
gone, even if the buyer didn't pay income tax on those dollars before spending
them on mortgage interest. You don't get rich spending a dollar to save 30 cents!
Buyers do not get interest back at tax time. If a buyer gets an income tax
refund, that's just because he overpaid his taxes, giving the government an
interest-free loan. The rest of us are grateful.
If you don't own a house but want to live in one, your choice is to rent a
house or rent money to buy a house. To rent money is to take out a loan.
A mortgage is a money-rental agreement. House renters take no risk at all, but
money-renting owners take on the huge risk of falling house prices, as well as
all the costs of repairs, insurance, property taxes, etc. Since you can rent a
house for 2% of its price, but have to pay 6% to borrow the equivalent amount
of money, it is much cheaper to rent the house than to rent the money.
All real estate is local, so you cannot say anything about the national
market.
FALSE. Lending is global. ALL loans are harder to get. This will
drive prices down everywhere.
A rental house provides good income.
FALSE. Rental houses provide
very poor income
in bubble areas and certainly cannot cover mortgage payments.
Remember that it's pointless to do the work of being a landlord if you can make
more money with no risk, no work, and no state income tax by buying a US
treasury bond. And money in treasury bonds would be liquid and secure.
That said, there are parts of the US where it does make sense to buy because
mortgage payments are less than rents in those areas. They are generally rural
areas away from the coasts, and have not seen the same bubble that the coasts
have.
OK, owning is a loss in monthly cash flow, but appreciation will make up
for it.
FALSE. Appreciation is negative. Prices are going down, which
just adds insult to the monthly injury of crushing mortgage payments.
As soon as prices drop a little, the number of buyers on the sidelines
willing to jump back in increases.
FALSE. There are very few buyers left,
and those who do want to buy will be limited by increasing difficulty of
borrowing now that many subprime lenders have gone bankrupt.
No one has to buy, but there will be more and more people who have no choice
but to sell as their payments rise. That will keep driving prices downward for
a long time.
House prices never fall (in my city).
FALSE. San Francisco house prices dropped 11 percent between 1990 and 1994.
Buyers in San Francisco in 1990 did not break even in dollar amounts until about
1998. So those buyers effectively loaned their money to the sellers for 8 years
at no interest, losing all the while to inflation. With inflation, 1990 buyers
truly broke even only about the year 2000, ten years after buying.
Los Angeles' average house plummeted 21 percent from 1991 to 1995, and of course
there have been many similar crashes all around the US. The worst may have been
after the oil bust in the 1980's, when Colorado condos lost 90% of the value
they had at their peak.
Your city may be special, but it was just as special when it was half as
expensive ten years ago, so being special does not account for the run up in
prices, and will not protect it from falling back to what it was.
House prices don't fall to zero like stock prices, so it's safer to invest
in real estate.
FALSE. It's true that house prices do not fall to zero (except in Detroit),
but your equity in a house can easily fall to zero, and then way past
zero into the red. Even a fall of only 4% completely wipes out everyone who has
only 10% equity in their house because realtors will take 6%. This means that
house price crashes are actually worse than stock crashes. Most people have most
of their money in their house, and that money is highly leveraged.
We know it will be a soft landing, since it says so in the
papers.
FALSE. Prices are falling off a cliff. No one knows exactly what
will happen, but it looks like prices will continue to fall for several years.
As Yale professor Robert Shiller has pointed out, this housing bubble is the
biggest bubble in history, ever. Predictions of a "soft landing" are just more
manipulation of buyer emotions, to get them to buy even while prices are
falling.
Most newspaper articles on housing are not news at all. They are advertisements
that are disguised to look like news. They quote heavily from people like
realtors, whose income depends on separating you from your money. Their purpose
is not to inform, but rather to get you to buy. When you see an statistic that
says everything is fine, look at the source. Is it from someone who needs you to
believe in the housing market so that they can take your money?
The bubble prices were driven by supply and demand.
FALSE.
Prices were driven by low interest rates and risky loans. Supply is up, and the
average family income fell 2.3% from 2001 to 2004, so prices are violating the
most basic assumptions about supply and demand.
The www.census.gov site has data for Santa Clara County for the years 2000-2003
which shows that the number of housing units went up at the same time that the
population decreased:
year units people
- 2000 580868 / 1686474 = 0.344 housing units per person
- 2001 587013 / 1692299 = 0.346
- 2002 592494 / 1677426 = 0.353
- 2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those
years. There is an oversupply compared to a few years ago, when prices
were lower.
At a national level, there is a similar story in the years 2000 to 2005:
- 2000 115.9M / 281M = 0.412 housing units per person
- 2005 124.6M / 295M = 0.422
At a national level, there is 2.4% more housing per person now than in
2000. So national prices should have fallen as well.
The truth is that prices can rise or fall without any change in supply or
demand. The bubble was a mania of cheap and easy credit. Now the mania is over.
They aren't making any more land.
TRUE, but sales volume has fallen 40%
in the last year alone. It seems they aren't making any more buyers, either.
Japan has a severe land shortage, but that hasn't stopped prices from falling
for 14 years straight. Prices in Japan are now at the same level they were 23
years ago. If we really had a housing shortage, there would not be so many
vacant rentals.
If you don't own, you'll live in a dump in a bad neighborhood.
FALSE.
For the any given monthly payment, you can rent a much better house than you can
buy. Renters live better, not worse. There are downsides to renting, such as
being told to move at the end of your lease, or having your rent raised, but
since there are thousands of vacant rentals, you can take your pick and be quite
happy renting during the crash. There are similar but worse problems for owners
anyway, such as being fired and losing your house, or having your interest rate
and property taxes adjust upward. Remember, property taxes are forever.
Some people want the mobility that renting affords. Renters can usually get out
of a lease and move anywhere they want within one month, with no real estate
commission.
It is much easier and cheaper to rent a house in a good school district than to
buy a house in the same place.
A fun trick to rent a good house cheap: go to an open house, take the real
estate agent aside, and ask if the owner is interested in renting the place out.
Often, desperate sellers will be happy to get a little rental cash coming in and
give you a great deal.
The biggest upside is hardly ever mentioned: renters can choose a short
commute by living very close to work or to the train line. An extra two hours
every day of free time not wasted commuting is the best bonus you can ever get.
Owners can change their houses to suit their tastes.
FALSE. Even single family detached housing is often restricted by CC&Rs and
House Owner's Associations (HOAs). Imagine having to get the approval of some
picky neighbor on the "Architectural Review Board" every time you want to
change the color of your trim. Yet that's how most houses are sold these days.
In California, the HOA can and will foreclose on your house without a judicial
hearing. They can fine you $100/day for leaving your garage door open, and then
take your house away if you refuse to pay. There's a good HOA blog
here.
The house down the street sold for 25% over asking, and that proves the
market is still hot.
FALSE.
Realtors try to create the false impression of a hot market by deliberately
"underpricing" a house. Say a seller's agent knows that house will probably go
for $400,000. He places ads asking $300,000 instead.
(Bait-and-switch is
illegal when selling toasters, but apparently not when selling houses.) The
goal is to first of all prevent buyers from knowing what a realistic price is,
and secondly to get buyers to blindly bid against each other. There are four
players in this game and three of them are against the buyer -- the seller, the
seller's agent, and the buyer's agent. Yes, the buyer's own agent works against
the buyer, because there is no commission if there is no sale. There's a saying
in Las Vegas: "There's a patsy in every game, and if you don't know who the
patsy is, you're it."
If you want to prove your agent is not on your side, ask to see houses "for sale
by owner" or houses listed by discount brokers. If the agent cannot make a
commission, you will not be told about the house.
There is a way around the conflict of interest inherent in being a buyer's
agent: let the seller's agent be your agent too, just for that one house he's
trying to sell. Then the seller's agent has a big motive to lower the price,
because he will get double the comission if you buy it rather than some buyer
with his own agent.
Update: the underpricing game is now over. You are free to bid far lower than
the asking price. You might be pleasantly surprised to find out how desperate
the sellers are. Another good reason to start low: you can always raise your
offer, but you can't lower it. A suggestion from a reader: have all your
friends bid extremely low for the house before you, then your own low bid will
seem more reasonable.
I was lucky that my realtor told me to increase my bid by $50,000.
Otherwise I would have lost, because my realtor knew about a secret bid
$40,000 above mine.
FALSE. Your agent gets paid nothing if you don't buy
the house, and he gets more if you waste more money by bidding too high. Those
are two big motives to invent false bids.
The MLS proves things are great.
FALSE.
The MLS is a used-house sales tool designed to look "official" so you will
believe it and then bid foolishly. It does not include most foreclosures, new
houses by builders, houses for sale by owner, and any other case where the
agent cannot make a commission. The MLS is not at all credible as a list of
what's really out there.
All sorts of funny things happen in the MLS (Multiple Listing Service, a
private database controlled by real estate agents). For example, if a house just
doesn't sell, realtors can remove its record in the MLS so that you cannot
see that it failed to sell. Then the house comes back on the market at a lower
price, and unsuspecting buyers think it's on the market for the first time.
Their realtor can "prove" it's a new listing by showing the MLS record to
the buyer: "See, here's the listing date, just came on the market. Better hurry
and buy it, this one is hot."
There is nobody checking that the MLS shows true transaction prices. The MLS
prices are often just wrong.
Furthermore, the MLS will not list any house for sale by owner or for sale
through a discount broker, or bank-owned property, or extreme discounts from
builders, or many other cases where you could save huge amounts of money. Those
cheaper prices are just not in the system, because if you save money, they lose
money. Even if some cheaper properties are listed, your agent is not likely to
tell you about them if they require more work on his part, or get him a smaller
comission.
Rich Chinese (or Europeans, or Arabs) are driving up housing
prices.
FALSE. The percentage of US houses bought by rich foreigners is
tiny. Furthermore, American housing is clearly a bad investment at this point.
Foreigners can just wait and watch both the dollar and American housing continue
to fall, and then buy for much less in a few years. Rich foreign investors are
not dumb enough to buy into a badly overpriced market, but your broker is hoping
that you are.
There's always someone predicting a real estate crash.
TRUE,
yet irrelevant. There are very real crashes every decade or so. Even a broken
clock is right twice a day.
But housing was high when interest rates were 21%, so higher interest rates
don't matter.
FALSE.
Inflation was much higher then, so fixed debt was easier to pay off with
increasing salaries. Now we have adjustible mortgages and stagnant salaries.
House price increases exactly mirror the increase in mortgage
debt. According to the Washington Times: "Consumers have doubled their mortgage
debt from $3.5 trillion to $7 trillion since 1996, borrowing and spending
profusely on the assumption that house prices will keep rising." So the
increase in house prices is not backed by assets. It's backed by debt. The debt
in turn is backed by the houses. It's just smoke and mirrors.
Local incomes justify the high prices.
FALSE.
Most bankers use a multiple of 3 as a "safe" price to income ratio. We are well
beyond the danger zone, into the twilight zone. The price to income ratio is
currently around 10.
You have to live somewhere.
TRUE, but that doesn't mean you should
waste your life savings on a bad investment. You can live in a better house for
much less money by renting during the crash. A renter could save hundreds of
thousands of dollars, not only by paying less every month, but by avoiding the
devastating loss of his downpayment.
Newspaper articles prove prices are not falling.
FALSE. The numbers in
the papers are not complete and have murky origins. Those prices are "estimated"
from the county transfer tax and making that tax public record is optional. A
buyer who does not want you to see how little he paid has only to ask to put the
transfer tax on the back of the deed and it will not show up on computer
searches of the deed, which show only the front. Others voluntarily pay more tax
than they have to, in order to inflate the apparent price to fool the next
buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo
county, you have to pay only $100 extra tax to make your purchase price look
$100,000 higher.
Even though you can in theory go to your county building and get sale
price information, in reality the county will give it to you in a painfully
slow and inconvenient way. For example, in Redwood City's county building there
are PC's where you can look at data for any particular house, but you cannot
print, you cannot save to a floppy disk, you cannot email data out. All you can
do is write things down manually, one at a time. And that's how real estate
interests like it. Your elected representatives are serving realtors, not you.
Supposedly impartial sources like Dataquick are paid for entirely by people with
a large financial interest in "proving" that prices are not falling, like
realtors. This makes it unwise to take their numbers at face value.
For the obviously biased sources like the National Association of realtors, you
can be sure that their sales price numbers do not include the effective price
reductions from "incentives" like upgrades, vacations, cars, assumed mortgages
and backroom cash rebates to buyers.
If you remember the definition of the median (the number for which half the
prices are above, and half the price are below) you'll see that the elimination
of sales at the low end of the market makes the median rise, even though the
actual price of all houses is falling. And this is what is happening, as
first-time buyers find themselves completely priced out of the market. So a
rise in the median price can mask the fact that the price for every house is
falling.
Here is a good example of a newspaper lying about the crash in prices by using
the median:
San Francisco Chronicle Headline Lies About Housing Prices
Finally, note that housing prices per square foot have been falling much
longer and by a larger amount than "average house price".
My appraisal proves what my house is worth.
FALSE. "An appraisal in its
typical residential real estate form is little more than a comparative analysis
conducted by someone with no skin in the game offering confirmation that other
lemmings are paying too much for their houses as well." -from an article on
morningstar.com
Amazingly, government house price measures do not include houses with mortgages
greater than $417,000. This excludes well over half of all houses in California.
So the government can report a slight price rise, but fail to mention that
prices actually fell for the other 60% of houses in California.
Foreclosures destroy neighborhoods, so we should stop foreclosures.
FALSE.
Empty houses destroy neighborhoods. Houses remain empty only because
the prices are too high. "Anti-foreclosure" programs just keep prices too high,
and keep houses empty. In areas where there are jobs, if prices were allowed to
fall enough so that salaries can easily cover the cost of owning, people would
move in and take care of the houses. In areas without jobs, the first priority
should be jobs.
It's not a house, it's a home.
FALSE. It's a house. Wherever one lives
is home, be it apartment, condo, or house. Calling a house a "home" is a
manipulation of your emotions for profit.
As a realtor said to me, "a house is a wooden box that sits out in the rain and
slowly rots. No one would buy in this market if they really thought
about how much pain it's going to cause them in the long run. That's why we have
to sell them a home, not a house."
If you don't buy now, you'll never get another chance.
FALSE. This
argument was also popular in 1989 in Los Angeles, just before a huge crash.
It's silly. If no one like you ever gets another chance to buy a house, then
you will not be able to sell your house in a few years either, because
there will be no more buyers like you ever again.
Here is a great quote from June Fletcher, a Wall Street Journal reporter, that
says it all: "The real issue isn't whether you will be stuck being a renter all
your life, she says. Its whether you'll get so scared about being shut out
that you'll buy at the market's peak and be stuck in a property you can't afford
or sell."
Property in the Bay Area is a luxury good, and so will be less affected by
economic downturns.
FALSE. 82% of last year's Bay Area mortgages were ARMs,
and ARM loans are not taken out by the rich. People on the border of bankruptcy
take out ARMs because they can't afford fixed rate loans. The rich don't have
loans at all.
Many of these ARM loans have exceptionally deadly repayment terms, and so are
known as "neutron mortgages". Like the neutron bomb, they destroy people, but
leave buildings standing. They are also known as "suicide loans".
Housing will be permanently higher since downpayments are
now obsolete.
FALSE. The current wave of defaults is making downpayments
suddenly seem like a good idea again. Lending standards are already
improving.
House ownership is at a record high, proving things are
affordable.
FALSE. The percentage of their house that most Americans
actually own is at a record low, not a high. We do have a record number of
people who have title to a house because they have dangerous levels of mortgage
debt, but that is no cause to celebrate.
Houses are worth whatever fools will pay for them.
FALSE.
At interest rates of 6%, houses are worth at most 17 times what you can rent them
out for per year. You can get 6% with no work and very little risk in the bond
market, so why accept less than 6% return (called rent) on your capital in the
very risky housing market?
Here is a page explaining how to value a house.
If yearly rents are less than 6% of the price of a house, watch out, because
house prices are likely to fall.
Rents could shoot up, making it a better deal to buy.
FALSE. Rents are
limited by the money people actually earn, not by how much they can borrow. Try
walking into a bank and asking for a million dollar loan to pay rent with.
It would take another 911 terrorist attack or a major earthquake that
wipes out this area in order for the price to fall by 50%.
FALSE. Even with
a 50% decline in prices to $350,000 or so, the median price in the Bay Area will
still be roughly double the median price in most of America, and the median Bay
Area household income of about $70,000 will still not be sufficient to buy a
house. So a 50% decline is well justified by the fundamentals.
You can easily verify for yourself that rents are less than half of long-term
house ownership costs. Just look in the papers at sale prices, multiply by 6%,
and divide by 12 to get the approximate monthly interest payment + property tax +
repairs. Costs are actually about 8% with all that, but the income deduction
brings it down to about 6%. Then look at the rental rates for equivalent
houses. Which loss per month is larger?
You failed to factor in emotion. More houses are sold on emotion than will
ever be sold based on perceived value. They buy all they can afford plus.
FALSE.
Buyer emotion doesn't matter at all to the lenders, not on the way up or on the
way down. Most people will borrow more than they can afford, but only if the
lender goes along. The whole thing was a party of cheap and easy credit. When
the credit machine gets sober again, millions of people are going to be ruined.
Foreclosure rates are already going up exponentially.
It's unpatriotic to talk about mispriced houses. It might drive down prices.
FALSE. Lower prices are better for America, especially for new
families. Aren't lower food and energy prices better for America? Housing prices
are the same: lower is better. Most Americans directly benefit by a decrease in
house prices. Only the banks benefit from increased mortgage debt.
If you own a house, lower prices have very little effect. If you want to sell
and buy another house, higher prices mean you'll just have to pay more for the
next house, while lower prices mean you will get a discount when you buy. If you
want to buy a bigger house, you come out ahead with lower prices.
My wife will divorce me if I don't buy a house.
FALSE. She will
divorce you if you do buy a house and go bankrupt trying to pay the
mortgage. She won't divorce you if you rent a much nicer place than you can
buy, and then take her to Paris for a month each spring, which you can do just
by avoiding that suicidal mortgage.
If she's religious, you could also point out Proverbs 22:7: "The rich rule over
the poor, and the borrower is servant to the lender."
I just want to own my own house.
TRUE, most people do and that's fine.
Buyers will get their chance when housing costs half as much and they have
saved a fortune by renting. House ownership is great - unless you ruin your
life paying for it. If you can save even just 10% on the price of a house, you
can retire several years earlier than you would otherwise. If you can save 50%,
then you can easily take a ten year vacation and still come out ahead.
Cheap housing is good for us all! High housing costs take away from families'
ability to save for retirement, fund their children's education, travel and lead
a quality life.
As reader Sean Olender put it: "Many people have forgotten that the number
one restriction on their future freedom to do what they want, when they want, and
to go where they want isn't the Iraqis, or Iranians, or North Koreans --
it's their mortgage lender."