patrick.net

Considering that the sellers are only now starting to reduce prices and starting to panic a bit, I think all buyers should wait as long as possible.

If 2007 continues the way 2006 has been, it could trigger country-wide panic amongst sellers and restore prices closer to where they should be.

Now, it’s not a completely wrong argument. But when it was made to be, I calmly pointed out that 5 to 10% of a typical BA home (800K to 1M range) is anywhere from 40K to 100K. This amount is nothing to sneeze at.

Though arguably if you assume just 1% annual appreciation, a 10% drop will be made back in ~11 years. 8% in ~9 years.

Five to ten percent matters if you put no money down and plan to flip the property...

The URL below says:

"based on what we could find on Amazon, more Flipper books have been published over the one year period ending March 2007 than we could find over the previous 20 years -- combined."

http://tinyurl.com/yxea4n

FAB,

Priceless link, thanks! Old Robert Cote had made a comment that was.... well, in character shall we say?

Stuck in BA,

Excellent thread. Given the evaporation of sales volume I'D have to say a 5-10% correction (even for the BA) is just so much wishful thinking. Most of the feedback we got towards year end was that frustrated sellers FS's (TM) will be attempting to "get the jump" on other FS's by re-listing as early as the 2nd week of JAN! More normally this wouldn't occur until what, March? Maybe even April?

Oh and just a quick thought from the previous thread? Mutual Fund loads aren't a "perfect" analogy b/c they A) decrease in time, B) are *not* added to the cost for the next buyer and C) eventually go away altogether. IMHO.

Any predictions for so cal? Wouldn't it be a larger percentage than BA? Who will hit bottom first northern or southern cal? Bring out your crystal balls...

The conversation between these math-challenged Bay Aryans is a prime example of mental accounting and the power of denial in action.

Here's a good example of the economics of why renting would've been better than buying this Mountain View condo:

http://www.burbed.com/2007/01/02/12-price-drop-in-1br1ba-condo-in-mountain-view/

Of course, how long this will remain true is unknown.

Oh and just a quick thought from the previous thread? Mutual Fund loads aren’t a “perfect” analogy b/c they A) decrease in time, B) are *not* added to the cost for the next buyer and C) eventually go away altogether. IMHO.

What makes loads decrease?

Do people even buy into funds that have loads? I thought that was rule #1.

eburbed:

That condo building is on my block. The one bedroom places leaves a lot to be desired. Though a number of units have ok-sized patios.

Re: the 5-10% comment. Maybe it's coming from a sense of easy-come, easy-go? It's not like they were financial geniuses that worked hard to earn that equity in the first place.

patrickm Says:

So can Patrick or someone tell us when is a good time to buy. Since I just don’t get the mathematics or the economics of perpetual renters making out better than a purchaser of property.

Giving you a benefit of doubt. No one knows what is the right time to buy for someone else. The decision is based on both tangibles and non-tangibles.

Go to Randy's site http://capitalism2.org/ and use the bubblizer to put in your numbers. This will help you solve the tangibles part of the equation.

How much utility / pleasure you derive from owning a particular house is only you can decide. How much ownership premium is best for you ? Only you know.

[i]What makes loads decrease?

Do people even buy into funds that have loads? I thought that was rule #1. [/i]

The backend loads decrease after you hold onto it for a while. Typically, I think it decreases by 1% for each additional year you hold it. So for a 5% deferred load, it's 5% in the first year, 4% the second year, so on. But some shops don't have the graduated scale and make you hold it for a set number of years before removing the load entirely.

NIA

So I see what you mean over the short term, but longterm the purchaser will eventually own the property

That's why interest only loans are so popular right now - so that the purchaser never actually owns the property.

Oops, forgot how to use the italics tag properly.... Oh well.

troll threshold has been reached

What do you guys think of the rivermark condo fire?

A potential insurance fraud since these are freshly finished condos that have little chance of getting unloaded at a price that makes sense to the seller?

I predict more "fire" on soon-to-be-finished condo projects in the Bay Area for 2007, mark my words.

you sound bitter for some reason? What have I done to hurt you? Sometimes it’s just more prudent for someone who wants to put down roots for his family to purchase a home and build equity and leave it for his offspring.

Ding Ding Ding! Troll alert, troll alert!

patrickm's first comment was possibly genuine. The second one about "longterm the purchaser will eventually own the property and the renter would have nothing" is making a false assumption that "renters" here plan never to buy, if you're generous to patrickm. Now the "SP - you sound bitter for some reason" comment seals the deal.

Are you a realtor (TM)? Or maybe you're planning to sell this spring? Getting worried about the upcoming year?

@eburbed,

You made the same conclusion, only more concisely...

cypook,

Interesting, interesting. For everyone else, here's the merc story about the fire:

http://www.mercurynews.com/mld/mercurynews/16368645.htm

The timing IS a bit fishy, isn't it...

patrickm Says:
So I see what you mean over the short term, but longterm the purchaser will eventually own the property and the renter would have nothing.

Hmmm. I think I agree with eburbed and skibum.

But you are right patrickm. When renters are thrown out on the street by their landlords they burn the saved $ bills to protect their poor children from cold. So eventually, they end up having nothing.

in the last 50 years which period of time would you have purchased in?

Ahhh... the sweet, putrid smell of Troll. The year-round gift that keeps on giving!

Ok, ummm "patrickm" (CuriousCat, MP, LittleWorried, whatever), assuming I had a time machine and a wad full of Fed bubblebucks, I would go back as far as possible as buy as much prime coastal property as I could get my mitts on. Too bad I've never gotten my time machine to go in reverse, though. Your point?

Let’s do my question retrospectively, in the last 50 years which period of time would you have purchased in?

That's actually a pretty good question. If I knew that Prop 13 was going to pass, I would've bought right before then.

But being that I wasn't born yet, that would've been difficult.

I initially thought about arson for that too, but aren’t apartment buildings in the Bay Area usually rented? The rental market is still pretty strong in Santa Clara I heard (I don’t keep up with it though, so if someone knows otherwise, please let me know.)

Apartment Building doesn't necessarily mean rentals - it could have been a condoplex.

The only way to know for sure would be find out more about that site. I'm not familiar with that part of San Jose, other than I drove through once and wondered "This is the famous Rivermark that they keep boasting about in newspapers? There's one dinky strip mall and that's it!"

Patrickm, out of the $2200 what portion is principal and how much is interest? The interest doesn't buy you the property, only the principal does. The interest is what you pay ON TOP OF what you owe for the property you wish to purchase.

If you separate out the interest and the principal and consider the former to be "not buying me anything" and if you assume that prices are not gonna go up much beyond inflation (best case I think), then you will realize how your mortgage payment is a bad idea.

I wonder what $2200 a month can buy nowadays with 20% down.

patrickm Says:

Random lets’s assume, I’m saving $1200/month on a mortgage of $2200/month by paying rent of $945.00/mth. I invest the 1200 at a return of about 8% annually. The 945 is still getting me nothing. The $2200 is getting me ownership of property ...

How much of that $2200 is giving you ownership (principal) and how much of it (interest) gets you nothing ? How much is the monthly property tax, HOA, insurance that the owner has to pay ?

The biggest mistake I have ACTUALLY seen people make is comparing mortgage payment to rent, and ignoring property tax. At 800K-1M range the property tax alone comes close to a frightening 1K per month. I am talking about people who used their stock option gains to buy expensive houses and now are getting crushed under property tax. Yes, they made a cool 1M in stock options, spent all of that in buying the house - BUT property taxes is not one time thing. They continue their onslaught every year, quite mercilessly.

The second biggest mistake I have again seen people make is NOT factor in HOA - especially if the are buying a condo/TH. Like taxes, they bleed you every month. Non stop. I have seen HOAs in the 300+ per month. The only thing certain about them is over time HOA will GO UP.

I'm not sure where you find a 30 year fixed at 5% without paying points. patrickm do you know something I don't?

Yes, patrickm, even with a 30 yr fixed at 5%, if you buy at the peak and the value of the house goes down after you bought it, you have not only overpaid for the house but also overpaid interest to buy something that is less valuable than when you bought it.

You are right when you say "at the end I will have something" but if you have paid more than what it is worth, it is a loss no matter how you slice it.

I wonder what $2200 a month can buy nowadays with 20% down.

http://www.dinkytown.com/java/MortgageFixedvsNegAm.html

Option "Suicide" ARM: $768,750 - a very small house in Sunnyvale

ARM Interest Only: $662,500 - a fixer upper in Sunnyvale

30 Year ARM: $512,500 - a nice 2br/2ba condo in Sunnyvale

30 Year Fixed: $447,500 - a 2br/2ba condo in Sunnyvale

The biggest mistake I have ACTUALLY seen people make is comparing mortgage payment to rent, and ignoring property tax.

To be fair though, the property tax could probably be covered by the tax savings on the interest portion (e.g. 100%) of the monthly mortgage payments.

As for HOA, that's a different story. In SF in one of those fancy SOMA towers, it's over $600 a month.

yes, we live in unusual times!

@ patrickm

real estate always goes up!

To be fair though, the property tax could probably be covered by the tax savings on the interest portion (e.g. 100%) of the monthly mortgage payments.

Yes, if the comparison was made that way, that is comparing the mortgage payment BEFORE tax savings with rent.

In the case I was talking about the comparison was with 3600 per month of mortgage payment (which was actually about 5K using ARM) with a the rent. Since rent is paid with after tax money, it is fair to compare it with mortgage payment AFTER tax savings. But then you also have to consider other taxes and HOA and insurance etc also.

People make all sorts of mental accounting tricks to convince themselves to buy.

My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.

If he bought BRK with $67000 in 1975 his stock would be worth over $190M even after "adjystment".

Not investment advice

My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.

Too bad he used that money to buy a home. If he had waited to 1986 and used that money to buy Microsoft stock, he would've had $20 million today.

:(

patrickm Says:

I think this argument is time limited. My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.

But do you know what would have happened if he had bought it for 60K and invested the 7K difference in SP500 index fund for these 30 years ? Do you get the point ?

Anyway, what's your point ?

If he bought BRK with $67000 in 1975 his stock would be worth over $190M even after “adjystment”.

You know, I was going to post that - but I had the hardest time finding data about BRK in 1975.

You know, I was going to post that - but I had the hardest time finding data about BRK in 1975.

http://www.fool.com/news/foth/2002/foth021106.htm

skibum Says:

> patrickm’s first comment was possibly genuine.
> The second one about “longterm the purchaser
> will eventually own the property and the renter
> would have nothing” is making a false assumption
> that “renters” here plan never to buy
> Are you a Realtor ™? Or maybe you’re planning to
> sell this spring? Getting worried about the upcoming year?

The “it’s just more prudent for someone who wants to put down roots for his family to purchase a home and build equity and leave it for his offspring.” quote made me vote for Realtor ™…

But then patrickm Says:

> I’m a renter. I live in a rent controlled 1br, rent is
> $945.00 in San Francisco

And

> lets’s assume, I’m saving $1200/month on a mortgage
> of $2200/month by paying rent of $945.00/mth.

You can not buy anything in SF for $2,200 a month unless you have a huge down payment since $2,200 a month will cover a loan of about $350K. Condos and TICs like my apartment in Presidio Heights are selling for $1-2mm so I’m saving about $6K a month…

> I invest the 1200 at a return of about 8% annually.
> The 945 is still getting me nothing.

The $945 a month is getting you a place to live in a city where the chance of eviction is close to zero without the expense of property tax, maintenance or any market risk. If I GAVE you a $1.5mm condo in San Francisco you would pay more than $945 a month (taxes, insurance maint, HOA, etc.) to live in SF…

> The $2200 is getting me ownership
> of property

Let us know where you plan to buy in SF for $2,200 a month…

> and when the market normalizes at least a 5%
> annual appreciation. The owner will in the long-term
> eventually win, and the renter lose. Is this not true?

I don’t have time to look up the average stock market returns over the past 100 years but I remember something like 8%. The owner will always win in the “long-term” due to inflation, but when you buy at the top of a bubble you run the risk of dying before the “long-term” is long enough. Cisco is a great company that makes great products, but it was not worth the ~$80 a share it was selling for at the top of the bubble in 2000. In $2001 Cisco was down around $20 and I just looked and it is now up to $27. If it keeps going up in value like it has for the past six years the guys that bought at the top of the bubble will be able to sell for what they paid at the top of the bubble after a 50 year hold period (if you back out the opportunity cost of the initial investment at the risk free rate or inflation they will have to hold a little longer)…

P.S. I want to leave my kids a condo on Nob Hill, a lakeview place on the West Shore and a big family home on the Peninsula, not a crappy condo or TIC I can buy today for $2,200 a month…

Yes, Peter and eburbed and raise his 3 kids in a studio, makes perfect sense

Do people even have 3 children any more?

What a hassle that must be given that everything's designed for 4 or even numbers. How do you take your kids on 2 seat rides at Disney/Universal? Or how do you get a cab since they're only supposed to take 4 pax.