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About Finally Buying a House

By HeadSet following x   2009 Sep 18, 3:18am 10,605 views   44 comments   watch   nsfw   quote     share    


Now that the housing bubble has popped, many who wisely rented throughout the runup are waiting to buy when conditions match their personal criterea. But what to buy? We have seen some changes in the last decade or so that should concern a new buyer.

For example, should the buyer be concerned about homes built between 2003-2006? During that period, so many homes (and entire neighborhoods) were built sacrificing quality for speed of construction. The sheer number of new units also hampered the building inspector's ability to do a thorough job, some skipping whole homes completely. And we have all heard about the Chinese drywall. Would you even want a house build long ago, but then renovated during the boom years? The same attitude of quickly satisfying demand applied here too, resulting in so many renovated homes being little more than paint and veneer covering wear and rot.

Perhaps one could have a new home built. But the builders tend to want bubble prices for any "custom" home. Building a new home has some choices also. For example, one can have a "poured" home. In this case, the entire house, including all stories, walls and gables, is poured concrete. When completed, the house looks no different than a stick built home, but is tornado proof and has a very high R factor. I saw several of these during a "Parade of Homes" in Omaha. Another choice is the factory built home, which is a far cry from the old prefab. For the factory built home, all walls are built in a large indoor facility. Everything is square. Even the foundation the house is set on must be trued out to a far higher degree than a stick built home. You can buy a factory home from basic ranch to very upscale multi-story.

Another option would be to buy an older home that is in need of rehab, and supervise the rehab yourself, taking all the time needed. You could be sure that all the appropriate materials were actually removed, and not just covered up. You could also put in more modern plumbing electrical, and HVAC. The actual structure of many old homes is actually quite good, as long as you don't mind the smaller rooms, lack of large bedroom closets, or only 1 to 1.5 bath.

I have a question for many on this blog. I have read so many posts where people are offering "$500k" or "$750k" or even more. Just what do you do for a living? I plan to pay up to $650k cash for a new home in about 2 years (in my opinion, people should plan to be mortgage free by age 45, that really helps the freedom). I do not plan on my new $650k home being an old 1200 sqft "drop out abode" either, but something much more luxurious. I would flinch at a $750k price tag, and I am a middle age life long saver with two paid for homes, over $650k in local credit unions, and have had a 6 figure income for the last 10 years. What kind of job do so many of you younger folks have that allows you to buy such expensive houses? And so many of you wealthy youths in the Bay Area that such austere homes on tiny lots would be bid up to the half million mark or more?

#housing

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5   Fireballsocal   ignore (0)   2009 Sep 18, 11:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I am a 32 year old warehouse worker and my target price in the inland empire area of SoCal is $150,000. I don't rate a turn key home and fully expect to buy a tract home in the area of 1400 sq/ft built in the 80's. I am sure it will need alot of work but at my income of $60K a year, I don't want to pay for a turn key house. I also look forward to learning how to care for and fix my new home. No kids, no wife, but a girlfriend who will be over on the weekends.

I have a very active life outside of work and at my target price with a 10% down, I will have a payment of about $1,000 a month with tax, PMI, and ins. included. Its a safe amount I think. I am set to buy now if so inclined but am happily renting till the beginning of next year most likely. I hope the $8K tax credit goes away and interest rates go up so that prices drop even more than what they have. With all of the houses being held back from foreclosure by the banks, I have no doubt prices will continue to slide.

6   homeowner_for ever_san jose   ignore (0)   2009 Sep 18, 3:43pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Software engineers with masters start out at 70K (out of college) and reach around 110K in 6-7 years in bay area ( all numbers are averages). the curve becomes flat with time..
check out median income in many areas and you will be suprised how much people make ( example zipcode: 95135 has median household income of more than 200K)

7   thomas.wong87   ignore (0)   2009 Sep 18, 4:37pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Stupendous says

So I would think someone in CA would be making a lot more because of the cost of living increase.

The CPI index (Inflation) has a component of rent equivalent which hasn't gone up that much.
Home appreciation are not factored into inflation numbers, nor is it factored into salary increases.

8   SyncMaster   ignore (0)   2009 Sep 19, 2:28am   ↑ like (1)   ↓ dislike (0)   quote   flag        

homeowner_for ever_san jose says

Software engineers with masters start out at 70K (out of college) and reach around 110K in 6-7 years in bay area ( all numbers are averages). the curve becomes flat with time..
check out median income in many areas and you will be suprised how much people make ( example zipcode: 95135 has median household income of more than 200K)

I'm not sure where you're cooking up those numbers from. In 2007, zip code area 95135 had median household income of $105,270. That hasn't gone up that much since then (in fact, it probably has gone down now). Ref: http://www.city-data.com/zips/95135.html

The myth, that people in the Bay Area are rich, has been debunked many times on this site. In fact, majority of the people in the Bay Area in recent years are poorer than many other part of the country after the const of living adjustment.

BTW, there are literally very few zip code areas in the entire country that has more than 200K median household income.

Few other tid bits of info for the zip code 95135:

2008 cost of living index in zip code 95135: 168.4 (very high, U.S. average is 100). That is 68% more expensive than the US average. That is roughly equivalent of average household income of 62.5K in the rest of the US. Not exactly high.

Estimated median house/condo value in 2007: $847,643. Currently it is still more than 550K. Which is still very high compared to the median income of that area.

Bottom line is, houses in the most areas are still grossly overpriced. People need to wait at least few more years before even thinking about buying anything.

9   elliemae   ignore (0)   2009 Sep 19, 2:41am   ↑ like (0)   ↓ dislike (0)   quote   flag        

What era/type house to buy?

Some of the homes thrown up in the bubble are complete pieces of shit, depending upon the builder, quality of materials, etc. Also whether the builder & subs drug-tested their employees. I don't care about pot or drinking, unless it was done on the job. But I know of many (many, many, many) construction workers who were meth users and claimed it helped them to work fast. I personally would stay away from homes built during the bubble unless you could be reasonably assured that the home is of good quality (altho there are no guarantees).

Rehabbing an existing home is time consuming and often requires moving out in order for the work to be done. Buying a new home may mean a waiting period.

It's a crap shoot - but it always has been.

10   justme   ignore (0)   2009 Sep 19, 3:29am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I think the reason that older houses sometimes have better reputations is that major defects and flaws have already been detected and corrected.

11   Lectrician   ignore (0)   2009 Sep 19, 4:30am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I'm sure we will have another housing bubble in time ... trying to guess how long the market will remain flat is a crap shoot. When one takes in consideration the anemic job market and the global effects of this meltdown, I agree with 'angrist' that there will be many kids returning home and many not even leaving anytime soon. We very well could be witnessing a demographic sea change that will affect a whole generation the same way the Depression affected our parents.
As a 63 yr old retired commercial electrician / carpenter, I know that my $92K out here on the fringe of the Bay Area (Knightsen) doesn't go very far, so I'm looking for that 5 - 10 acre parcel with a '70's ranch style home with a good well & septic where I can't see or hear my neighbors (animals excluded). Gonna have to head for the foothills or southern Oregon to get what I want. Previous posters are correct - homes have been 'thrown together' in the last few years and I wouldn't even consider a recently built tract home. My advice - buy a 30-40 yr old home and remodel it yourself (w/help if needed) and get what you want while enjoying the experience ... you'll learn a lot in the process if you have the patience.

12   anghrist   ignore (0)   2009 Sep 19, 6:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I hear ya' Lectrician. I don't trust the newly built houses either.

I inadvertently hijacked the topic of this discussion. The original question was, "What to buy?" If one is in dire need of a home immediately, I would say buy the least expensive option. If a person can afford to wait and save for a bit longer, they will have much better options in the not so distant future.

The real problem is the constant meddling with the market by those with seemingly good intentions. I will admit that people losing their homes may seem tragic; however, it is far from the end of the world. Those who find themselves in the foreclosure/eviction process should take stock of what they still have and what is truly important, family, friends and health.

13   thomas.wong87   ignore (0)   2009 Sep 19, 6:56am   ↑ like (0)   ↓ dislike (0)   quote   flag        

elliemae says

What era/type house to buy?

For space, style and my usage, I am looking at homes made back in the 80s.
The homes that were currently made are far too narrow and lack space.

14   elliemae   ignore (0)   2009 Sep 19, 9:38am   ↑ like (0)   ↓ dislike (0)   quote   flag        

anghrist says

Those who find themselves in the foreclosure/eviction process should take stock of what they still have and what is truly important, family, friends and health.

The problem with that is that many people who have lost their homes didn't seem to use the time they got to live in them rent-free to save any money, and are still nearly homeless.

I have a friend who tried to sell pre-bubble, house appraised $235k & he couldn't sell for that or DIL & bank wouldn't short sell (nor would he consider roommates in the huge huge home) So he walked, lived a year & 1/2 free rent and saved not one dime. He could easily afford to save at least $1,500 per month but didn't. But a year after he waltzed away the place sold for in the $700k range. Served his ass right.

15   davidphan_7   ignore (0)   2009 Sep 19, 10:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"would flinch at a $750k price tag, and I am a middle age life long saver with two paid for homes, over $650k in local credit unions, and have had a 6 figure income for the last 10 years. What kind of job do so many of you younger folks have that allows you to buy such expensive houses? And so many of you wealthy youths in the Bay Area that such austere homes on tiny lots would be bid up to the half million mark or more?"

I have two friends who work in the bay area, they are married with one child. Both were employed at Yahoo, but one was recently laid off which I think was the bread winner.

I would say their combined salary was 110 + 90 = 200.
That is a good salary but not enough to afford 750K, btw they did buy at the peak for an OLD OLD home at 650K.
I don't know how they are surviving, but hopefully they have old money in the savings somewhere.

16   Eliza   ignore (0)   2009 Sep 19, 11:12am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The "younger folks" I know end up buying in one of several ways:
1) Gift or long-term loan from family, or possibly an inheritance. I tend to see this more often with Bay Area natives. Their families want their kids to be able to buy in the town/are where they grew up. This is not an unreasonable wish. But there are definitely other folks out there who live simply buy have a good deal of family money set aside should they need it.
2) Sweetheart deals on loans. Teachers, firefighters, people who within certain income bounds, all qualify for a lower interest rate than others might. Some may qualify for additional perks.
3) They bet the farm. Every penny of retirement savings. Everything.
4) Novel loans. ARMS, etc. They worry about the monthly rate for the next five years, at which point they hope to be able to solve the problem. And maybe they will. Maybe the wife goes back to work. Maybe the father-in-law moves in. Maybe a parent helps out.
5) Give up other stuff, and make that move somewhat public. Buy a place with decent public schools, and you get out of paying for private school. Maybe nothing goes into retirement savings or the kids' college fund. Never buy anything new. For those with a good network, this can work well. If your family and friends know that you are stretching to make it, well, they know where to send their old bike when they get a new one, outgrown kid clothing, etc. Maybe grandma will put aside a little money for the kids' college.
6) A couple really can make that much money, together. Heaven help them if something should change.

17   chrisborden   ignore (0)   2009 Sep 19, 11:14am   ↑ like (0)   ↓ dislike (0)   quote   flag        

However they do it, keeping up with the Joneses is a path to financial ruin. Period.

18   HeadSet   ignore (1)   2009 Sep 19, 11:23am   ↑ like (0)   ↓ dislike (0)   quote   flag        

davidphan_7 says

I would say their combined salary was 110 + 90 = 200.

Incredible. They could have lived on one salary and banked the other. Then they would have been set after just 5 years. Even in the bay area, I'm sure a family of three could life confortably on a mere $110k.

19   HeadSet   ignore (1)   2009 Sep 19, 11:32am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Eliza says

Teachers, firefighters, people who within certain income bounds, all qualify for a lower interest rate than others might. Some may qualify for additional perks.

Now that is a scary thought. With our current government pushing low rates, it is conceivable that money may be made available for teachers, firefighters, etc at zero interest. A $500k loan at 0% over 30 years would be less than $1400/month. Too much of that and home prices will be propped up permanently.

20   HeadSet   ignore (1)   2009 Sep 19, 11:53am   ↑ like (0)   ↓ dislike (0)   quote   flag        

justme says

I think the reason that older houses sometimes have better reputations is that major defects and flaws have already been detected and corrected.

True, plus most minor issues and any settlement problems. But at least they are corrected.

I have a friend who works for a construction firm that now has as the major portion of it's business fixing moisture rot in bubble built homes. I am talking about very upscale places. The 3500 sqft and up mini mansions bought by all the New York and Connecticut "equity locusts" who came down to purchase retirement places in the Williamsburg, VA area. Plus the tony areas where the local execs and assorted minor millionaires live.

The big problem is rotted exterior door frames and porch railings. Despite the upscale nature of the homes, the sloppy builders neglected quality flashing work or even proper priming. My friend has had steady work for some time now doing extensive repair work on homes that are only a few years old. All the rotted windows frames, door frames, and railings he works on are in the expensive neighborhoods. He does not work cheap. His firm is paid directly by the homeowner, it is up to the homeowner to get any money back from the original builder.

21   HeadSet   ignore (1)   2009 Sep 19, 11:58am   ↑ like (0)   ↓ dislike (0)   quote   flag        

chrisborden says

keeping up with the Joneses is a path to financial ruin. Period.

Well, after so many people's recent experience, perhaps "staying back with the Browns" will be the new chic.

22   thenuttyneutron   ignore (0)   2009 Sep 19, 4:24pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I just signed a Construction Loan mortgage last Monday to build one of these “Poured” homes AKA Insulated Concrete Forms (ICF). I paid 20% down and will soon have a 2100 ft^2 home that is energy efficient. I am pleased so far but will withhold my full opinion until it is built. The one thing I do like so far is the fact that the bedrock is 7 feet below the soil. The home will have a basement and this means the structure will be anchored in Bedrock. If this home is built right, it will be about the best way to build a home with current technologies.

I don’t know where these Engineers are that make 100k per year, but I know many of my engineering buddies from college are either out of a job or making 55k. I think many of the kids my age (30 years old) will have to adjust our expectations. Society is going to look with indifference on everyone and simply ask “what skills do you have?” If you have nothing to offer, can you push a broom or work a shovel?

It has taken me about 5 years to save what I needed to get this home going and I am glad I finally went for it. I am scared by the actions of the FED. They have pumped so much Monopoly money in the system that I am scared about the future of the dollar. Zimbabwe tried adding zeros to their currency and you see what it got them. The Treasury selling Bonds to the FED is even scarier. It is a greater fool game. The music is about to stop and there are only a few chairs in a room full of screwed people.

I remember playing Monopoly with my little brother and the stuff we did. When one of us got in trouble (Usually Board Walk with a few homes) we would rob the bank and split the cash. This worked only once but it kept the game going for a few more rounds around the board. I am pretty sure that the FED and US government are on their last dice roll. We are on water works and we are just about to roll a snake eyes!

23   justme   ignore (0)   2009 Sep 19, 5:34pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Neutron,

Can you give us an idea about the construction cost?

I'm not sure ICF would ever become a mainstream option in California, though. Seems like concrete nor basements has never been popular here for residential construction. Part of he reason may be earthquake considerations, but I'm not sure.

And congratulations are in order ...

24   Austinhousingbubble   ignore (1)   2009 Sep 19, 6:28pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Poured concrete is the way to go!

25   KashKitty   ignore (0)   2009 Sep 19, 9:46pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

wish i was lucky says

When I sold my house I was prepared to do a full disclosure - but my realtor informed me that it’s up to the home inspector to discover the flaws.

Actually your realtor was incorrect. In the California Residential Purchase Agreement (CAR Form RPA-CA), Section 7B states verbatim (including capitalized words):

"SELLER shall, within the time specified in paragraph 14A, DISCLOSE KNOWN MATERIAL FACTS AND DEFECTS affecting the Property, including known insurance claims within the past five years, AND MAKE OTHER DISCLOSURES REQUIRED BY LAW (CAR FROM SSD)

It is always in the best interest of the buyer to request the seller's disclosure statement prior to entering into any agreement. Unless the buyer waives this, sellers are required by law to disclose all known problems.

26   knewbetter   ignore (0)   2009 Sep 19, 9:51pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Buy the builder's house. He's got the good stuff.

Houses today are much better built than houses even 10-20 years ago. What you don't get is the land, because unless you tear down and rebuild there's probably a good reason no one has put a house there in the past 200 years. Personally, I'd buy the MINIMUM square footage, because its going to get very expensive to heat/cool/light those giant areas of a home. Does everyone remember when you couldn't get rid of a giant Victorian 10br home, so they just festered on that busy Main St?

Of course it could go the other way, and larger houses could become the norm again, if kids can't get jobs to start their own lives.

27   thenuttyneutron   ignore (0)   2009 Sep 19, 11:15pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

ICF costs: I have looked and it is about 10% more than stick built homes. In California I would want only ICF. These homes have steel rebar all over the place. If you can get the home on bedrock, you will have it made. I think ICF would last longer in any earthquake than other homes.

28   thenuttyneutron   ignore (0)   2009 Sep 20, 2:44am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I like the Monolithic Domes. Go to Italy, Texas and see the huge complex that they have. I really wanted to build an Atlas Dome. If my wife had let me do it, I would have gone for the dome home. She could accept the ICF because it is a box.

I live on the Coast of Lake Erie in Ohio. I do not worry about the oceans as much as a guy in Miami. I am worried more about the energy of the future. The ICF will allow me to heat the home with minimal energy input and stay cool in the summer with no energy input. I do not worry so much about the bullets. It is a nice thing to have that bullet proof wall, but I really worry more about wind driven missiles.

http://www.youtube.com/watch?v=ocEmJ_D-uP4

29   StillLooking   ignore (0)   2009 Sep 20, 3:58pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I guess is you plan on walking if the house goes down in price, and you can get away with a one of those 3.5% downpayment FHA loans. It might make some sense to buy.

But if you have to take a heavy loss if your house goes down in price, buying right now is down right terrible investment decision. The government is the only entity with any skin in this housing market game. The government cannot keep this game up that much longer. My guess is the government is going to cry uncle within a year. That will be the time to buy.

30   thenuttyneutron   ignore (0)   2009 Sep 20, 11:44pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I put 20% down. There is no way I am walking. The way things are going now, I think I will just stay put and pay the home off within 10 years. I do not worry about my job because unless electricity goes out of fasion, I will have a job even if we have other serious problems.

31   HeadSet   ignore (1)   2009 Sep 21, 2:58am   ↑ like (0)   ↓ dislike (0)   quote   flag        

thenuttyneutron says

I put 20% down.. .... pay the home off within 10 years

Too bad everyone does not think this way. It would be better for everyone except the banks. All that money not being paid as interest would be instead available for goods, travel, charity, etc, and thus benefit many sectors of the economy.

32   chrisborden   ignore (0)   2009 Sep 21, 3:12am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Most people today don't think when it comes to money, which is why this mess continues. Banks love stupidity; indeed, they profit from it, and there are millions of idiots out there.

33   bubblesitter   ignore (0)   2009 Sep 21, 5:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Do your math. $650K cash down means loosing significant loss in earned interest on that money. In theory if we are into a Japan like bust your $650K are stuck with same value for 1 to 2 decade. Instead if you have it in hand your can easily make more out of it in many ways.

34   cashmonger   ignore (0)   2009 Sep 21, 5:41am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Wish I was lucky,

Great read - lots of good info.

$200k on a half acre in Placer or El Dorado County will put you next to meth users. And you won't have any work opportunities unless you want to commute to Sac or the Bay Area.

35   HeadSet   ignore (1)   2009 Sep 21, 7:29am   ↑ like (0)   ↓ dislike (0)   quote   flag        

dadab says

Do your math. $650K cash down means loosing significant loss in earned interest on that money. In theory if we are into a Japan like bust your $650K are stuck with same value for 1 to 2 decade.

So your theory is that if the house does not appreciate, I would be better with the money in the bank?

That would only be true if a mortgage was truly free money (as many realtors and investment gurus seem to imply). Unfortunately, the money lenders want interest.

When you pay cash for a house, you get a better price. You also save on points, funding fees, and any other junk a lender will put out. That is in addition to the fact that savings accounts pay much less interest than what the mortgage will be. The so called "tax deduction" does not even come near to closing that gap, especially since the cash payer still keeps the standard deduction and can still deduct property taxes.

The lenders /realtors also use the "ROI" trick. That is, they will say that if my $650k house appreciates to $715k, the 65k appreciation is only a 10% return on an all cash buy. But if I only put 10% down ($65k), the $65k appreciation is now a 100% return. Again, that would only be true if mortagage money were free.

I prefer the approach that results in more total money for me, regardless of any accounting tricks. For example, if I pay cash for the $650k house and then put what would have been the monthly payment (P&I at 6%) into the bank, I will have my $650k back within 14 years even if the savings bank paid zero interest.

So, assuming the house is still worth $650k, in 14 years after paying cash I would have my $650k back plus a paid for house ($1.3 million net). Going the mortgage route I would have $835k in the bank ($650k plus interest at 2%) but still owe $480k on the house ($355k net).

It works that way because the mortgage interest paid is higher than savings interest earned, plus mortgage interest is front loaded.

36   homeowner_for ever_san jose   ignore (0)   2009 Sep 21, 5:04pm   ↑ like (0)   ↓ dislike (0)   quote   flag        


I prefer the approach that results in more total money for me, regardless of any accounting tricks. For example, if I pay cash for the $650k house and then put what would have been the monthly payment (P&I at 6%) into the bank, I will have my $650k back within 14 years even if the savings bank paid zero interest.

So, assuming the house is still worth $650k, in 14 years after paying cash I would have my $650k back plus a paid for house ($1.3 million net). Going the mortgage route I would have $835k in the bank ($650k plus interest at 2%) but still owe $480k on the house ($355k net).

It works that way because the mortgage interest paid is higher than savings interest earned, plus mortgage interest is front loaded.

What if you put that amount in stocks+bonds (60:40)ratio for 30 years ? assuming it gives 6% annual return versus your mortgate rate of 4.5%

37   thomas.wong87   ignore (0)   2009 Sep 21, 6:45pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

camping says

According to payscale.com, senior sw engineers make $108k. I’m not sure of the definition of “senior”, but I would think by 8-10 yrs, one would be a senior engineer, putting them in their early late 20s or early 30s. I don’t know if those numbers include stock options either.

Im at 70K after 5 years. the ones who are senior are making 110-120K, they are usually 15-20 years in the game.
VPs are at $150K
Most engineering departments I seen or heard about don't have any women.

38   thomas.wong87   ignore (0)   2009 Sep 21, 6:51pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"Now that the housing bubble has popped"

more like still IS popping, and prices continue to decline and will continue to decline for some time.

39   HeadSet   ignore (1)   2009 Sep 22, 4:37am   ↑ like (0)   ↓ dislike (0)   quote   flag        

homeowner_for ever_san jose says

What if you put that amount in stocks+bonds (60:40)ratio for 30 years ? assuming it gives 6% annual return versus your mortgate rate of 4.5%

Because the current mortagage rate is about 5.25% for those with excellent credit, and for a Jumbo loan (which $650k would be in all but a few select areas) it is over 6%

Do you really think you can make 6% in stocks+bonds (60:40) ratio? Especially after fees, loads, and related charges are taken out? I used the 2% figure in my calculation since 2% is actually available risk free in long term credit union CDs.

The average Joe (and so many professional investors) do so poorly with stock/bond investments that is seems silly for anyone to assume that average Joe can beat Wall Street and make 6%. I think Joe is better off using his cash to pay off and avoid credit card debt, car payment debt, and house debt.

40   EBGuy   ignore (0)   2009 Sep 22, 6:03am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I think Joe is better off using his cash to pay off and avoid credit card debt, car payment debt, and house debt.
I certainly can't argue with you there. I'm go into shock when I remember a Frontline special on credit cards; a couple thought they were doing the right thing by building up a rainy day fund -- meanwhile they were carrying credit card debt at an exorbitant interest rate. Add to that the fact that most people don't itemize anyway so there is no "tax advantage" on the interest payments. For your case, though, I would argue against buying a home outright. Asset diversification is one reason, as well as reducing your marginal tax rate - YMMV. NIA.

41   HeadSet   ignore (1)   2009 Sep 22, 7:07am   ↑ like (0)   ↓ dislike (0)   quote   flag        

EBGuy says

Asset diversification is one reason

You have tied up your assets in the house when you bought it, whether through lump sum amount or obligated stream of payments. Unless, of course, you include walking away from a non-recourse loan.

as well as reducing your marginal tax rate

It does not really reduce the marginal tax rate, it just deducts the interest from the taxible income. No real advantage to a married couple until the standard deduction of approx $11,400 is reached. I guess you could say that in some cases the marginal rate is reduced, but only for those who were near a bracket cutoff.

Consider for a $650k house:

Married Couple 25% bracket pays cash - pays no interest but gets $11,400*.25 or $2,850 off taxes

Married Couple 25% bracket $650k mortgage at 6% - pays $38,792 interest to get $9,698 off taxes

This calculus gets worse for the mortgager as the years go buy, as the tax deduction goes down while the standard deduction tends (so far) to go up.

42   HeadSet   ignore (1)   2009 Sep 22, 7:21am   ↑ like (0)   ↓ dislike (0)   quote   flag        

EBGuy,

Most of the people in the country are likely looking at a $200k mortgage rather than $650k. At 6%, a mortgage of $200k or less has no tax advantage at all, as the standard deduction (married) will match the itemized deduction. At 5.5% (more likely at the non-jumbo principle amount), the cutoff is about a $240k mortgage.

43   EBGuy   ignore (0)   2009 Sep 22, 8:32am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Headset, In case my post was not clear, I AGREED with all of your "average joe" advice (for the reasons you elucidated in the subsequent post).
However, I still take issue with paying cash for a half million dollar+ home.
It does not really reduce the marginal tax rate, it just deducts the interest from the taxible income.
It does if it puts you in a lower tax bracket. And let's not forget to add in property taxes and another, I believe, 5.75% to the Commonwealth of Virginia. This will definitely put you "over the top" for the standard deduction. At that point, you can also add in any charitable giving to itemized deductions. Admittedly, from what I can gather, an "implied put" in Virginia is not as valuable as in California as the banks can still get a deficiency judgment on non-judicial foreclosures. What I find slightly humorous about your position, is that you are advocating putting all your assets in real estate. As an end game (see FABs parents) this is not necessarily a bad idea (inflationary hedge). Not so sure about middle age, though...

44   HeadSet   ignore (1)   2009 Sep 23, 2:31am   ↑ like (0)   ↓ dislike (0)   quote   flag        

EBGuy says

Headset, In case my post was not clear, I AGREED with all of your “average joe” advice

Actually, I was the one who wasn't clear. I should have mentioned I was adding to your statement most people don’t itemize anyway so there is no “tax advantage” on the interest payments.

What I find slightly humorous about your position, is that you are advocating putting all your assets in real estate.

I will sell my current residence ($300k) before buying the up to $650k home. That way I will still have at least $300k cash, plus IRAs, plus military retirement, and if I don't get caught blogging too much, my job.

You are correct about being "over the top" for the standard deduction, especially when Virginia (interesting that you know VA is a Commonwealth as opposed to State) tax thrown in. But since I only invest in CDs, and never again in Wall Street Churn and Commission, I do not see the tax deductions as being worth paying the mortgage interest. That is, even with the tax benefits considered, the adjusted mortgage rate is still higher than the insured savings rate. Also, lets not forget the typical "Origination Fee" of 1%, or a cool $6,500, and another $6,500 per any point that gets thrown in.

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