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Average Joe's Take

By someone else follow someone else   2007 Feb 21, 11:50pm 18,264 views   283 comments   watch   nsfw   quote   share    

From a reader:

I am a renter and I have been thinking that is time to buy RIGHT NOW. What if the market goes up and sellers stop offering price reductions and paid closing costs to buyers. I understand that a lot of home buying and building in the past few years has been speculative. but that means nothing when you consider the fact that the stock market is purely speculative and stock prices still rise. Is that "funny money" when you have stock market gains? It spends the same, it puts food on the table. What's the problem with financial gain whether or not a market is in a "bubble"? Are you opposed to people making money? So when should I stop renting and start taking advantage of the 50% off housing sale? Why buy ever? If buying is 50% cheaper in the future wouldn't rent be even cheaper as well?

Wow, where to start with this guy? How about this:

  • The stock market is not purely speculative. You can measure the value of a stock by its P/E ratio and dividend, among other things. Houses have no dividend, only rental income, or savings on rent. And by those measures, houses are grossly overpriced.
  • If you win the lottery, great. But it's a lousy investment strategy. That's the problem with the bubble.
  • I'm not opposed to people making money, only to millions putting themselves at risk of bankruptcy and foreclosure, and being smug about it.
  • You should stop renting when it's cheaper to own.
  • If house prices go down, that does not necessarily mean that rents will go down. It may make sense to buy then.



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244   astrid   ignore (0)   2007 Feb 24, 9:34am     ↓ dislike (0)   quote   flag        


Where did FAB throw out either number?

Monthly PITI for a $1M condo w/ 20% down and 30 yr fixed would be $6-7,000. Even $3,000/month net is a lot of money that could be spent pursuing utility elsewhere.

245   FormerAptBroker   ignore (0)   2007 Feb 24, 10:04am     ↓ dislike (0)   quote   flag        

OpinionsPlease Says:

> FAB, one thing.. $1million condos are renting for
> around $3,500 in the city and not $2,000.

I’m sure you can name a $1mm condo that is renting for $3.5K a month (I bet it is a 2 bedroom).

I have a friend paying just over $2K a month for a 1 BR in a Pacific Heights condo building that recently had a 1BR sell for $1.2mm. I have another friend renting a 1 BR (with parking) on Scott in the Marina for $2,100 across the street from a 1 BR that sold last year for just under $1mm. The 1 BR Condos in the Lake Street area that have been selling for close to $1mm will be lucky to get even $2K rent…

246   StuckInBA   ignore (0)   2007 Feb 24, 11:11am     ↓ dislike (0)   quote   flag        


I was just trying to calculate income required under the inflation scenario. Not providing complete analysis.

As others have pointed out rents are far more dependent on supply demand and the owner's needs have insignificant impact. It has also been pointed out that there are no creative financing schemes available for renting. During the dot com boom rents here far outpaced inflation. And after the bust they went down and stayed down.

And if you really want to know who will very quickly pass on the cost, then the mortgage banks will do that faster than the landlords. Think about the ARMs. Think what it would theirs resets do that to the housing prices when CPI is 7. So for once and all, let's say good-bye to the scare tactic of rents going up with inflation.

Remember rents are a factor of CPI, not the other way round.

247   OO   ignore (0)   2007 Feb 24, 12:46pm     ↓ dislike (0)   quote   flag        


excellent rebuttal to thotherside.

248   OO   ignore (0)   2007 Feb 24, 12:47pm     ↓ dislike (0)   quote   flag        


I actually think the interest rate is about to go down when things really start to blow up.

But that will be too late to save the FBs. However it would be a good time to refinance when we go into Japanese fashion of 1.0% interest rate, haha.

249   OO   ignore (0)   2007 Feb 24, 1:14pm     ↓ dislike (0)   quote   flag        


I think I will buy a $2M house now if I won a $5M lotto, because real estate is just a part of the portfolio, and since I got the entire amount free (gift from god), I would rather buy a piece of land to stake my value, even if the price is inflated. In fact I did see a friend who cashed out a big option to buy a home all-cash, because he knew the stock was in a bubble, and swapping a stock bubble for a house bubble is not that bad of a deal, at least he gets to enjoy the house.

But I won't take out a loan on top the lotto winning. That's like putting in my own hard-earned money for the house, nah, I will pass.

250   StuckInBA   ignore (0)   2007 Feb 24, 2:59pm     ↓ dislike (0)   quote   flag        

OO :

The CPI is not offering any excuse to the Fed to reduce rates. I was surprised to see CPI being higher than expected because every Fed governor is talking about inflation ebbing.

Nevertheless, I think Fed will try to reduce rates. No disagreement there. BUT I do not think mortgage rate will follow suite. It's possible that MBS buyers continue to remain complete nut cases as they have been till yesterday. I just don't think it's likely. We will see widening of risk premiums.

251   sfbubblebuyer   ignore (1)   2007 Feb 24, 3:07pm     ↓ dislike (0)   quote   flag        

OMG... I'd like to club anyone in the head who says it's fine to run up a 1.2 million dollar debt and walk away from it. The only way you can walk away from that is if you have nothing worth the legal hassle of taking, and you don't mind being a financial pariah for the next 7 years. If you have nothing to lose, you have nothing to lose. And it used to be nobody would loan 1.2 million to people like that. The house price run was the only reason why it would make any sense to load a boatload of cash to somebody who was going to default. You take the 6% commission hit on a 15% appreciation and you still make money.

Anybody who thinks borrowing money they can't have a reasonable expectation of affording to repay has no consequences is delusional.

252   Different Sean   ignore (0)   2007 Feb 24, 3:12pm     ↓ dislike (0)   quote   flag        

The Reserve Bank in Oz is talking about another interest rate increase sometime this year, rather than a cut. It is also a major Federal election year. While the new Guv'nor of the RBA has bravely and matter of factly indicated at the same time he is independent of the political process and will change interest rates without fear or favour as needed, there will arguably be a local economic feedback circuit of: higher interest -> FBs are even more F'ed; recent investors with big mortgages are also F'ed -> chance of higher rents due to F'ed landlords -> higher CPI -> upwards wage pressure = inflation! the very thing the interest rate rise was meant to head off. However, you keep interest rates low instead = inflation!

It's like you turn the spigot on, and water comes out. You then turn it off, and water continues to come out.

Once you have had long periods of low interest and a speculative RE market, it seems to pathologise the whole economy, something like taking antibiotics for too long which kills favourable microorganisms as well and leaves you with a pathological physiology...

253   Different Sean   ignore (0)   2007 Feb 24, 3:17pm     ↓ dislike (0)   quote   flag        

OO Says:
excellent rebuttal to thotherside.

FAB is running like a well oiled machine today ;) he's in the zone...

254   ozajh   ignore (0)   2007 Feb 24, 4:00pm     ↓ dislike (0)   quote   flag        


The 'byproduct brine' I was referring to is the seawater itself after it has passed through either evaporator. The actual level of concentration will depend on water and air temperatures and flow rates, but it will always be saltier than the input seawater. Perhaps much saltier.

On any fairly small scale, this is irrelevant as the brine quickly diffuses back into the ambient seawater, but if applied on a really large scale you could concievably make the local marine environment saltier enough to have impact. I am thinking of places like the Red Sea and the Arabian/Persian Gulf, which are already significantly saltier than the open oceans.

Mind you, the more I look at the website the more I think that a couple of local agribusiness investment companies have missed out on a real opportunity. There would have been a lot less political opposition to their schemes if they had based some of them (E.g. large scale greenhouse tomato growing) around this sort of technology in semi-desert land close to the sea. (Australia has enormous areas of such land, the entire Eyre Peninsula springs to mind, not to mention the Nullarbor. Only lunatic fringe Greenies would object to technology-driven sustainable agriculture in those places.)

255   ozajh   ignore (0)   2007 Feb 24, 4:09pm     ↓ dislike (0)   quote   flag        


Sam Zell was very careful in his remarks to distinguish between the apartment rental market (which he said looked good) and the SFH market (which he said he thought was OK as long as unemployment stayed low).

He did say there has been a lot of crazy lending, and that many people were going to finish up renting again after losing their homes.

But I take your point. This is what he was saying, but what has he done? ;)

256   ozajh   ignore (0)   2007 Feb 24, 4:41pm     ↓ dislike (0)   quote   flag        


I assume you mean by greater than CPI?

No, he doesn't, he's talking about nominal prices. It's an industry mantra.

The very, very cherished NAR statement is that since they started keeping comprehensive statistics in 1968 . . . the . . . NOMINAL . . . ANNUAL (Calendar Year) . . . NATIONAL . . . MEDIAN . . . EXISTING HOME sales price has always increased.

(I have overemphasised all the qualifiers here, because it is my understanding that a lot of Realtors (tm) ignore them and simply use the shorter statement "prices always go up".)

Now the interesting thing here, IMHO, is that this could turn around and hurt the industry psychologically if the 2007 median is in fact lower than 2006. All of a sudden the MSM are going to focus on that statement and observe that RE prices have fallen for the first time EVER.

257   e   ignore (0)   2007 Feb 24, 5:32pm     ↓ dislike (0)   quote   flag        

I bet a lot of people moving to the Bay Area purchase homes without ever really considering what rent would be on an equivalent dwelling.

Yeah, they're called starry eyed CS degree college students.

258   Allah   ignore (0)   2007 Feb 24, 11:20pm     ↓ dislike (0)   quote   flag        

The only way you can walk away from that is if you have nothing worth the legal hassle of taking, and you don’t mind being a financial pariah for the next 7 years.

Good points but don't forget to mention the lovely 1099C form that you will get.

259   Allah   ignore (0)   2007 Feb 24, 11:21pm     ↓ dislike (0)   quote   flag        

oops, did it again. try this

260   Allah   ignore (0)   2007 Feb 24, 11:49pm     ↓ dislike (0)   quote   flag        

Over the past 35 years, the median price for houses has always gone up in America. That’s not to say it can’t go down, or hasn’t gone down in specific markets. Housing is not on the same level as the lottery, not even close.

Median, Youdian, Shedian, Hedian, Median prices are bogus, why do people still use the median to determine price trends? They don't mean squat!

But risk is something we have to deal with everyday. Not taking calculated risks is the true tragedy.

Taking risks that are calculated to destroy you financially are a TRUE tragedy.

What if it never becomes cheaper to own than rent? Then what?

You can't seriously believe this can you?

261   astrid   ignore (0)   2007 Feb 25, 12:19am     ↓ dislike (0)   quote   flag        

Too bad these FBs buy overpriced sh1tboxes to breed. There's no way to knock that irrationality out of the gene pool.

262   astrid   ignore (0)   2007 Feb 25, 12:25am     ↓ dislike (0)   quote   flag        

A straight PITI to monthly rent payment comparison is inadequate. You have to take into account expectations of future price growth/reduction.

FBs have been expecting 15%+ annual growth for the last couple years, which makes the huge ownership premium over renting seem reasonable.

If we expect the market to drop by 15% for the next couple years, then renting even at 3X the cost of owning seems like a good idea to me.

263   Allah   ignore (0)   2007 Feb 25, 12:26am     ↓ dislike (0)   quote   flag        

Too bad these FBs buy overpriced sh1tboxes to breed. There’s no way to knock that irrationality out of the gene pool.

Don't worry about that, Darwin's laws are alive and well.

264   Allah   ignore (0)   2007 Feb 25, 12:38am     ↓ dislike (0)   quote   flag        

If we expect the market to drop by 15% for the next couple years, then renting even at 3X the cost of owning seems like a good idea to me.

Exactly, it's not just about whether it becomes cheaper to buy or not, but when prices show real signs that the market has stabilized and this cannot happen until inventories decrease to historical norms and the cheap money is completely washed out of the system along with all the FB's that made use of it. I don't see this happening this year.

There really is no telling just how far the prices will drop, but due to the magnitude of the increases, I sure don't want to bet my hard earned dollars against it.

265   Allah   ignore (0)   2007 Feb 25, 1:47am     ↓ dislike (0)   quote   flag        

Just like a typical FB, always trying to find a way to beat the system!

Pearlman said it may not be taxable if a taxpayer is insolvent or bankrupt and that can be documented to the satisfaction of the IRS.

The key word here is "may not" because the FB is "insolvent". If you are insolvent, you already lost so it won't matter. If you have a decent job however, they will get you. One way or another you will be screwed!

It's kind of like fighting off an armed robber when you have an empty wallet; it's just not worth it!

266   FormerAptBroker   ignore (0)   2007 Feb 25, 2:21am     ↓ dislike (0)   quote   flag        

theotherside posts a link to the “respected financial journal” known as the Contra Costa Times that Says:

> When a short sale, deed-in-lieu agreement or foreclosure
> occurs and a residential lender loses money on a loan, the
> lender will most likely file the loss with the Internal
> Revenue Service.

Lenders don’t file a 1099 when they “have a loss” they file a 1099 when they “forgive debt” (converting the debt to income).

If I “give” someone $1,000 it is taxable income, but if I “loan” someone $1,000 it is not taxable income. The day I tell the person they don’t have to pay me back the “loan” (I “forgive the debt”) it becomes “taxable income”

Interesting choice of words with “will most likely file” when “are required by law to file” would have been more accurate choice of words.

267   astrid   ignore (0)   2007 Feb 25, 2:26am     ↓ dislike (0)   quote   flag        


Can you cite an IRS reg where income in the form of cancellation of debt = $250K home sale exemption? Otherwise it's just an argument and not a very compelling one at that (since debt is characterized quite differently from capital gains).

268   lunarpark   ignore (0)   2007 Feb 25, 2:34am     ↓ dislike (0)   quote   flag        

California slipping in rate of growth and in job creation


269   Allah   ignore (0)   2007 Feb 25, 2:40am     ↓ dislike (0)   quote   flag        


First of all, don't believe everything that you read; that is like saying:

"I can steal money from the bank and claim it as an exemption to keep from having to pay taxes on it".

I'm not buying it!

270   astrid   ignore (0)   2007 Feb 25, 2:58am     ↓ dislike (0)   quote   flag        


Can you give a full citation of that MIT paper?

I find your claims absurd on its face. I know that prices have spiraled outside of affordability in NYC, DC, FL, NV, MA, WA, and AZ. That may not be much space geographically speaking, but it's where the good jobs and the mass of population resides.

271   FormerAptBroker   ignore (0)   2007 Feb 25, 4:20am     ↓ dislike (0)   quote   flag        

Suds Says:

> Back in my home country of India, this statement would
> be pretty much reversed — it usually costs more to own
> than rent! This means that the owners DO subsidize the
> renters.

I’m no expert on India, but I find it hard to believe that many owners are subsidizing renters.

> An amateur investor (like some of my friends here in the Bay
> Area, who bought a second home in another state, like Arizona)
> does not mind “subsidizing” a renter. After a lot of thought, I
> think I understand the real logic behind this.
> It is the reasoning that the cost of owning does not continue
> forever. If one pays $3k a month to own a house on a 30 yr
> FRM and rents it out for $2k a month, then at the end of 30
> years, the owner owns the house outright whereas the renter
> (or collection of renters) owns nothing. My friends make the
> exact opposite claim that FAB does — it is the renter who is
> subsidizing the owner.

Suds you need to get your friends some financial help ASAP since if they are renting a home with a $3K mortgage for $2K they are in big trouble…

Let’s do some basic landlord math:

$3K a month is a ~$500K FRM at 6%, if it is a standard 80% loan they put down $125K.

Income $21.6K per year ($2K per month with an average 10% vacancy/collection loss)
Expenses at least $44K per year ($36K mortgage + $5K typical SFH expenses + taxes)

So your friends are paying well over $20K a year a year out of pocket to own the rental and since they are not getting any return on the down payment they are will have about $30K less money every year (before adjusting for the tax loss)…

P.S. Do your friends (the amateur investors) know that AZ home prices are on the way down?

272   empty houses   ignore (0)   2007 Feb 25, 4:47am     ↓ dislike (0)   quote   flag        

"Call the law offices of Geoffrey Burns if your loan officer failed to explain that the interest would be added to your principle every month if you have a negative amortization loan. "

The sharks are swimming in a circle.

Dump the house cause you cant sell it and you'll pay income tax on the amt the bank lost.

That sucking sound you here is the peasant class moving back to mexico.


273   Allah   ignore (0)   2007 Feb 25, 4:58am     ↓ dislike (0)   quote   flag        

In the end, it will all boil down to

1- SUPPLY / DEMAND (how many people have a strong buy bias versus how many people have a strong sell bias in the next few years)

2- MORTGAGE INTEREST RATES (10 year yields and risk premiums)

3- and INFLATION (the higher inflation is the faster real prices come down even with sideways drifting nominal prices)

You left out the most important factor of all and that is the elimination of idiot loans which were the main driver behind the price runups; and don't forget the $1T of ARMs that are going to reset this year.

274   Bruce   ignore (0)   2007 Feb 25, 5:14am     ↓ dislike (0)   quote   flag        


Himmelberg et al assert that the cost per dollar, that is the cost of borrowing, does not constitute an affordability crisis. And that is all, in their abstract, that they propose.

Since the matter of excess liquidity has been throughly examined here for years now, you have simply provided three more names of people who share the views of the majority here.

Thank you for giving us the unexpected blessing of an MIT publication, though I suspect it was not your intention.

275   sfbubblebuyer   ignore (1)   2007 Feb 25, 5:44am     ↓ dislike (0)   quote   flag        


Yes, taking a 50% bath in Real Estate eventually will work out assuming you never have to sell. But I'd rather not wait 45 years to break even.

276   empty houses   ignore (0)   2007 Feb 25, 6:04am     ↓ dislike (0)   quote   flag        

An investment property in the bay area is a bad idea right now.
You'll have negative cash flow for too many years. The risk will be that you wont be able to afford the cash out of pocket every month and lose the property. Your burden would be a minumum of $1000 per month. The maintenance will also eat you alive. There are much better investments available at this point. Money markets are paying a risk free 5%. That's just for starters.

Head for the exits on housing. This bubble has just started to deflate.

277   Paul189   ignore (0)   2007 Feb 25, 7:36am     ↓ dislike (0)   quote   flag        

Idea for a new thread -

Rent in the city and own a house in the country!

278   SFWoman   ignore (0)   2007 Feb 25, 7:49am     ↓ dislike (0)   quote   flag        


Sonoma County real estate dropped almost 10% the past year. Owning a place up there won't be as expensive as it used to be.

If I hadn't bought in the city ages ago I would probably rent a large flat in town and then buy a country place. I'd try to get into a nice building that lets you get long term leases and renovate. One of my friends sold her house and rented a really nice four bedroom apartment on Nob Hill, renovated the bathrooms and kitchen, has a country house on Fisher's Island (the New York one, not the Florida one), and will stay in that rental until she dies.

279   B.A.C.A.H.   ignore (0)   2007 Feb 25, 8:36am     ↓ dislike (0)   quote   flag        

It sounds to me like what SUDs is saying is that a little bit of spare cash or spare income burns a hole in the pockets of working class people. It's not cool, and it's not hip, to save it conservatively.

It is the liquidity trap on a micro-scale.

280   FormerAptBroker   ignore (0)   2007 Feb 25, 8:43am     ↓ dislike (0)   quote   flag        

theotherside Says:

> Suds, Very smart rebuttal….although the bubble believers
> will very shortly start calling a troll or a real estate agent
> or worse a Casey Serin….

I don’t think that Suds is a troll, I really think he is a guy from India that does not know much about Real Estate or Investing, but I do think that theotherside is a Realtor hoping to convince people that buying a home is always a good investment…

281   Peter P   ignore (0)   2007 Feb 25, 8:56am     ↓ dislike (0)   quote   flag        

New thread: Just who are the willing buyers?

282   Bruce   ignore (0)   2007 Feb 25, 5:24pm     ↓ dislike (0)   quote   flag        

I plead laziness (besetting sin) and an unwillingness to consider an MIT publication to have erred in this way. Evidently Himmelberg and friends do in fact conclude there is no affordability crisis.

As with Forbes, I expected better.

283   astrid   ignore (0)   2007 Feb 26, 12:25pm     ↓ dislike (0)   quote   flag        

Academic publications are quite fallible, esp. outside of the natural/hard sciences. Otherwise, how can one explain the prevalence of campus Marxist and those Che T-shirt wearing drones?

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