Same thing with us. My wife's family is coming over next month along with her 2 brothers and their kids because out of all her family that lives here, we have the only house with a yard,and the living room big enough to host them. It's a 3 bedroom place with 2 stories, an office, 2 bathrooms, a balcony and deck, front porch, 2 car garage, garden and front and back yards.. all for 1700, which given the fact that 4 of us rent it means we pay $450 each. The real kicker is that 2 of the housemates are always gone, so it's like we rent the whole house to ourselves. People are amazed beyond belief that I tell them I rent a whole freakin' house for less than half of what they rent for in the city( we live in alameda) and less than 1/4 what someone would pay to buy this place. Cheap livin!
But the freedom to change a place more dramatically, say, knocking out a wall, adding a bathroom, etc., is very appealing to many people. I think that “paint” is often code for “whatever change I can think of and execute.”
After paying for the mortgage, not many new homeowners can afford to do dramatic changes any more. :)
Adding a bathroom is not cheap, and you will have to put up with contractors.
I don't think most of us would consider 215K or a $1300/mo FRM a bad deal at all. However, your case is not representative of the no-price-is-too-high easy-money credit orgy and living-way-beyond-your-means mentality that we're trying to analyse here.
The question is, would buying your home *still* be a good deal at TODAY's prices?
All right Randy H: I’m sick of your irrelevant fact distorting ways! I’m taking you up on your offer! I challenge you to a duel! Tequila shots to the death! I demand satisfaction! Just name the bar, pal! Name the bar!
It's a duel! I can't handle Tequila, so I cede that to you. Either whiskey in a proper roadhouse (you can choose either kind of proper malt, Kentucky or Tennessee), or Sushi with proper sake-bombs. I don't like the idea of mixing Ikura and Tequila...
First one to see the ghosts of Lee or Gen. Sherman loses. Anyone figuring out a new momentum arbitrage hedge-play exploiting the residential RE fall automatically wins.
Debt can be used to your advantage, either to finance future expectations
...I’m quite happy to use their cash while mine earns more in CDs. If anything were to go wrong, we’ll just pay it off. I always use other people’s money when it’s cheaper than mine.
This is very true ASSUMING the borrower: (a) understands time value of money and opportunity costs, and (b) understands that in order to come out ahead, your finance costs cannot exceed ROI on money invested elsewhere. Oh yeah, and (c) has the discipline to actually pay it off someday and not go into permanent hock.
For Joe & Jill McDebtor, these are tall assumptions indeed.
BTW, anyone have an opinion on Southern Copper (PCU)?
I'm into this notion of a long term secular bear for stocks coupled with a long term secular bull for commodities. I'm impressed with David Tice's power point over at prudent bear that shows the 15-18 year cycles.
No doubt, the commodities are volatile as heck, but there are a lot of companies paying great yields (12% plus). And what does volatility matter, if the long term trend is up over the next decade? Would a US housing collapse = a global collapse in the price of commodities? Will the growth of newly industrializing economies inevitably place insatiable demands on resources? Will China crash if the US does? Indonesia? Vietnam? Brazil? Russia? India?
If past patterns of industrialization repeat, then newly industrializing economies will require vast hinterlands of raw materials. Look at the chunk of the Congo that the Belgians needed to keep its tiny little country supplied with resources. Look at the British empire: one tiny little island, vast expanses of resource-rich colonies throughout the world. Can billions of people raise themselves to the standards of the OECD over the coming 15 years without causing commodities and related investments to soar? Also, the population in the developing world is the opposite of the OECD: more young people entering prime consuming/producing years versus aging populations that will tax OECD economies for decades to come.
Won't everybody in India/China/Indonesia/Brazil/Russia/Malaysia/Vietnam want houses, cars, and plasma TVs too?
I’m into this notion of a long term secular bear for stocks coupled with a long term secular bull for commodities. I’m impressed with David Tice’s power point over at prudent bear that shows the 15-18 year cycles.
If you are interested in commodities, take a look at DBC.
I'm in the North Bay, Marin, so SF is really my only option for getting home without risk of driving sideways off a bridge afterwards.
I'll look into DSX. I don't follow the transport sector at all, so others can probably offer more useful insights. I did see that there is some price momentum building since December, but that's just an eyeball reaction.
DBC isn't for me. Not to put myself in the same company as the great one, but Warren Buffet says that diversification is for suckers. (Actually Mr. Buffet, I don't know him well enough to call him Warren). On second thought, I better sleep on that one and get back to you. I'm not that good at investing yet. I do consider the lessons part of the return. I want to get away from additional funds, and move more toward individual picks.
Seriously, my strategy is to hedge dollars with hard currency, precious and base metals, and energy. I much prefer high dividend paying stocks, because I tend to hold them in my IRA. DSX ships commodites, so it is an indirect play. The banter on the board is that it should drop after the dividend date. I may buy it then.
For the record, I own BGEIX, IAU, PWI, FDG, CCJ, MERKX, PCU, HSGFX, WMT (Gonna be big in China, small position). I also own UCBH and an International Equity fund. Mostly I have laddered CDs. I would like to increasingly accumulate resources that cash flow high dividends. If the thesis in my previous post is correct (not that it necessarily is) then the future will bring much greater demand for resources. If commerical/apartment REITS crash 50% to yield north of 10%, I will buy some of those. My bet is that I will get my chance in 2 years.
In fact, I think I have the future figured out, and it involves a slow dollar and general US decline, and a developing world that uses US dollars to move into natual resources across the globe. What else can our creditors do but slowly allow a controlled inflation while quietly(as they can) moving into hard assets. If the only viable reserve currency is fading slowly, then why not move into hard assets that your industrializing economy will need? Energy, copper, other base metals, and gold and silver for its traditional role as honest money. You could add timber, suppliers to commodity producers (CAT?), and shippers of bulk commodities to the trend.
THE ABOVE SCENARIO IS ALSO THE ONLY WAY POLITICALLY TO FIX THE BUDGET DEFICIT / BABY BOOMER CHALLENGE. IT IS A MUTUAL ADVANTAGE TO OUR CREDITORS AND US.
I think that if you overlay David Tice's work on market cycles with the other set of facts about the "flat" world that is emerging, that the scenario that I describe is THE investable mega trend. In 1982 it was buy the DOW and S&P and NASDAQ and hold until 2000. In 1998 it was buy Real Estate and hold until July 2005. Next I think it will be buy hard currency until the dollar drops 20-30% and buy commodities demanded by the decline of US hegemony and rise of the newly developing world. It can be that simple again, right? Maybe this is just the light going on for me. I'd be interested to hear from others that have already gone down this path.
I do not disagree with the logic presented by most people on this blog regarding how renting is much cheaper than buying at these atrocious prices. But what I am trying to understand is how the bubble will deflate, how long, how much etc. Because eventually, I like most, want to own a home.
Hence I started focusing on how the bubble formed, hoping it would help me make informed guesses about the eventual downturn. And this blog (and Ben's blog) helped me tremndously in understanding that.
But I still felt all the explanation did not explain why my friends, and their friends, and their friends's friends bought the houses that were 50+ years old, looked decidedly lower middle class, required lot of changes (roof, kitchen etc), paid lot over the asking price, and then felt tremendous relief when the house was finally their "own".
None of these, AFAIK, chose I/O mortgaes. Most have 5 year ARM. Some smart ones have now converted to 30 year fixed. So cheap credit helped, but was not the only reason. Peer pressure, fear of being priced out forever and strong income also played significant role. They live frugally, and (kind of) know the risk they have taken. They have stretched themselves to a limit, but if their dual income continues, they will be able to weather the storm. If prices drop, they would loose equity, but not more, depending on how bad the drop is. In short these are the last people to go the forclosure route. When they loose their home, it will really be the bottom.
I have admitted before, and do it agin now, this is a narrow sample. The million $ question is, what % of BA homeowners is "such" people ? That will decide the speed and the depth of the bust. I think it's going to be slow and shallow, but would definitely love to be wrong on that ;-) Unless there is loss of jobs, which might happen due to bust in nationwide RE causing significant economic problems. The moment dual income stops, it will be excruciatingly tough on this group.
The next question is, in that case, even my job opprtunities will be in trouble. So even if the median price in Santa Clara county corrects from 700K to 500K (a big drop), I still won't be able to afford a home here. Unless there is lot of inflation, half a million will remain a "big debt" even after couple of years. Maybe it's not a bad thing. Being forced to move to other areas of the country might be a blessing in disguise.
February 22nd, 2006 at 3:04 pm
Agree that At the Rise is in fairly decent shape. I might quibble over the amount that he would be able to rent the place out for, but the analysis is fairly sound.
not so fast.
What many people forget about is other costs outside of the normal monthly payment. For example:
1. Monthly Mortgage Payment is $1300
2. Taxes would be 1.25% of PP: $224/month
3. Minimum flood insurance: .15% of replacement (purchase) or $27/month
4. Maintenance and upkeep (usually about 2% per year of purchase price, or $4,300/year): $358/month
Total monthly cash outlay: $1910
After-tax benefit would be generally in the $1600/month range (but itemizing doesn't always pay off, so this is generous)
To think that an 1800 sq foot house would rent out for $2000 in the IE is not just a bit optimistic, it's not at all realistic. Just check CL. When I found my 4 Bd 2000sq ft house in prime Orange County (Laguna Niguel)last year, I looked at brand-new Corona homes that were 2600sq ft renting for $1750.
Here's a link to CL search for 3+BR in Riverside :
Renters have a lot of power in the current market. I live in one of the best areas in Socal with a large yard in a larger 5 year old home with 15 minute commutes to Irvine for $2500; I doubt your rent would come anywhere close to what you currently think it will ... Best case scenario is that you might break even after all is considered; and you accept the risk of natural disasters. I remember a 7.6 out near Barstow late 1999. Double-whammy will be if the economy weakens and houses foreclose around you.
No offense intended, but you need to be your own worst critic when making sound financial decisions.
In the long run, you will probably be fine; but appreciation should not be the reason for buying; it is very possible that your price will look normal or slightly high in a few years.
BTW, Zillow has no clue. It says the house I live in is worth 524K, when a smaller 3BR house nextdoor just sold for 729K. It also says my wife's parents' house in Utah is worth 2.4M when it sold 1.5 years ago for 242K. Zillow is not at all accurate in any sense of the word. Simply put, nothing is right about their valuations. Until they sort out their problems; the only valid valuation is what someone else is willing to pay for it; and there are not that many buyers around anymore.
DinOR, I hadn't heard that one. Still, his charts are pretty convincing. I said this b4, but it bears repeating. I recently re-read Peter Lynch's book, "Beating the Street". He was buying stocks with PEs like 5, 6, 7. We are NOT in a bull market given the tax incentivized baby boomer money chasing the market. How many 401Ks do you know that offer DBC or similar commodity fund? How about gold? The retail investor has definitely moved into resources, but that is necessary for any bull market. I'm just not hearing people like my mom talking about commodities. It hasn't reach anywhere near the level of mania. It has reached stage 2.
In other words, I don't know nothing about no "bad ju-ju", I just think that the world tends to move from one simple to follow investable long term trend to another. I think Tice (and others like John Mauldin) are spot on that we are in a secular bear. So if its not the S&P, if it's not housing post July, then what is it? What's the trend that fits all the data?
I humbly submit that the US and the dollar will decline while several large nations with enormous populations move inevitably towards indsutrialization and perhaps beyond. Brazil and China have a space program, after all.
It would not be unusual historically speaking for a challenger to leap frog us. Regardless, I don't think that the billions of people yearning to have a better life will do so without hydrocarbons, metals, and increasing political clout that their new economic status will bring them.
The European powers in the 19th century scoured the world for resources. We colonized the vast American continent to get the resources needed to become an industrial power. We even comitted genocide against the aborginal peoples and fought a war over it.
I don't think the Chinese or Indians are dummies. They will quietly secure the resources they need while simultaneously ridding themselves of the worthless paper they get for selling us crap.
I think that commodities are the inevitable beneficiary of these megatrends. The old addage about "Not seeing the forest for the trees" seems to be at work in every bull market. People don't get in because they tend to shy away from abstract conversations and "Philosophy". Most people reject vision, and so they miss the trend. Faggedabout history. Yet the world has seen this before.
I am beginning to think that analysts will look back at 2000 and say, "see, all you had to do was buy DBC, and leave it for 15 years. You would have made a fortune. And who couldn't see that one coming, with all that population coming into the flat world and all".
Sorry for the length, but I'm finding my conviction.
Peter P, steam Uni? Never tried. $anta Barbara uni is the best ahhhh, but the best uni is the uni that is served on Mr. Rights toiliet seat, now that's some good eats, and quite frankly as a maggot rentor I feel better knowing that Mr. Right's well heeled arse was near my Uni.
Chinese space program? From my experience which lead me to believe that the Chinese are just really interested in cheating, so why have a space program when you can just take Neil's picture, cut out his face, and put Pin Pins in place?
you fail to recognize one huge risk for most people up to their neck in debt: loss of job. And I have seen this scenario played out before in much more affluent places like Hong Kong.
I am also a first gen Asian immigrant, with friends who are making 6 figures income. For those who live responsibly (i.e. not leveraged till the edge), they will do fine. For those who do make 250K household income with 1M mortgage, fewer than 50K savings, if one spouse loses his/her job, they are in for a big shock. When it rains, it pours. Bad things tend to happen all at once. If you have a fixed mortgage payment of $4,000 plus property tax of $1,000, no matter how much you save in food, gas, your fixed running cost is $5K, end of story. The key here is the amount of debt.
Especially for those H1Bs who leveraged so much to get into a home, when the job market sours (and yeah, it will, when RE market turns south), they may not roll over their H1Bs and their green card application will be turned down. At that point, they will have to leave the US at whatever price they can get from their homes. I know of such H1Bs who thought it may be a good idea to buy because home values always go up, and in the "worst case scenario" that they can't stay, they can sell for a profit.
1st gen immigrants are the most vulnerable group in a downturn, and I won't count on this group to carry the market forward or hold back the tide. There are 1st gen immigrants that do quite well financially, but they have been here for over 10 years, bought a home long time ago. Those 1st gen who bought homes in the last 2-3 years are more likely to be wiped out, sadly.
perhaps you should take your parents out for a ride. Do it in a RE boom ghost town, show them how many homes have broken ground and stay vacant. Seeing is believing.
Every time I come back from the East Bay seeing tons of inventory new and old in the market, I am convinced some parts of BA will go down 50% easy. If one is not picky about where to buy in BA, I say getting a home at 60% the current price in an OK neighborhood is highly achievable.
I only know 1 friend who owns responsibly (large downpayment, 15 year loan)
I have one friend who responsibly used IOs and ARMs to arbitrage rates. He's 30 fixed now paying on an 11 year schedule. Then again, he used to work on the Street and spent time in the MBS industry before finding honest work. Not the typical IO customer.
HARM said : You have just proven the point that your sample is NOT representative of the typical CA buyer, 82% of whom in 2005 chose I/O or optio-ARMs (it was around 70% last year, if I remember correctly).
You are correct in pointing that out. I overlooked it. Do you know if the % for BA is in the same ballpark ?
I agree with your loss of job scenario. I also mentioned it.
Thanks a lot for the discussion folks. Overall, no matter how the bubble plays out, I will be OK. In spite of the run ups in prices over last 3-4 years, I don't blame myself for "missing out". I was not willing to take on that kind of debt. When people tell me thay have enjoyed the ownership, and it was worth it even if they might have overpayed, I say to myself, good for them. I slept peacefully, without worrying about mortgage. I knew there was real risk, that I may be forever priced out, and I said so be it. If that's how one has to live in BA, then I will move out.
But it was then. Now after reading this blog, I feel so much better. Maybe, I won't have to move out of the BA :-)
A boomer^Tm came over tonight, I didn't invite him, he came with a friend. The boomer brought a dog, the dog was old, one might say he was a boomer dog. A boomer with a boomer dog. The first thing the boomer dog thought appropriate was taking a big 4 coil steamer on the lawn. When offered a treat the boomer dog would take a finger also. Oddly enough my wife's dog doesn't bite the finger and she cleans up the 2 coil steams the boston leaves on the lawn. Go figure. No bad dogs, just bad owners.
Can we figure out what percentage went 100% IO, 100% Neg-am, and how many went 20% IO, 80% fixed, etc.
This is a good question, but short of obtaining data from a big lender or professional mortgage research company (which is usually proprietary & costs $$), I don't know where you'd find that out.
When the bank forcloses, can the homeowner drop the IO portion, and keep the fixed? or does the whole enchalada get liquidated?
I doubt the law allows the homedebtor to pick and choose which creditors to repay in event of foreclosure --in fact, bankruptcy laws explicity prohibit this. Exactly how the liquidation proceeds get distributed is another story. When people do "piggy-back" 80/20, 80/10/10 financing (1 or 2 extra loans to cover the lack of down-payment), the risk gets split somewhat. The primary, conforming mortgage (the first 80%) could possibly --as far as I know-- get repackaged and sold to/by Fannie/Freddie as AAA-tranch MBS paper. The higher-risk/interest non-conforming sub-prime would probably be sold as lower tranch private MBS/CDO paper. Who gets what % of the sale proceeds (after expenses) is beyond my area of expertise.
Any mortgage brokers or foreclosure experts out there who can enlighten us?
I rented a house last summer after I sold my place. One thing I was amazed to learn was how the realtors who do renting are also the 'loser' realtors. I guess there is no money in being a realtor that rents places around here - so you really have to work to try and rent a place. It is like the whole system is set up to discourage renting.
February 22nd, 2006 at 10:33 pm
Chill Pill dude. I never said anywhere I intended to rent out my home. It is my primary residence. Someone asked for numbers, I threw them out there, and couple people concluded my ‘home owner’ situation is not bad. Thats it. I really could care less if the market comes crashing down tonight and I would sleep like my newborn. I got my low rate fixed on a nice home, my wife is extremely happy, who cares. you figures are correct as far as adding taxes,insurance my payment is about 1600 BUT I do have an income to support it, sorry to burst your bubble. So i got the income the fixed and the home. I twas all luck, I barely got in as my name says, at the rise. I totally understand the frustration of being outpriced of the market though.
Hey, man no offense. Perhaps I did not convey they demeanor of my original post; it was not intended to be argumentative, but rather informative to those who had concluded that it was a good buy without looking at the details. I am a former homeowner from the Valencia area. When we relocated to OC, prices were already too high when I sold (late summer '04) to make sense to buy back in; besides, my stock investments from the home proceeds have been much better than I had imagined; I will get rich off of my house after all, but not in the way that Mr. Lereah figures. However, much of that was luck; not skill on my part.
I only show my calculations to show that it's all about after tax costs including maintenance. (I know I spent at least 5K per year on just maintaining my home while I lived in it). I wasn't suggesting you had forgotten these things, but after being a renter again; I realize that many can have a much nicer house in a nicer area for much less than it costs to buy; and not have the danger of earthquakes hanging over them. I remember the Northridge shake-up and it was enough to make anyone think twice about homeownership.
I have no doubt and even hope that you are happy where you live. Having a family (no matter how hard it is) is one of the most rewarding experiences that cannot be equaled by something as unimportant as homeownership; however, that said, I know many here in the OC who have made that trade; a home instead of a family. In the end, material posessions cannot replace satisfaction in the home (regardless of whether that is an apartment or a mansion) with your family. I hope that part of the coming crash returns at least a portion of the people to their senses that material posessions do not bring happiness, and in excess can cause extreme unhappiness.
My greatest hope for you now is that you don't find yourself needing to sell in 3 to 4 years; sinc you could find yourself underwater if there are severe economic distress in your area. Still, the same could be said for any homeowner; having been one I don't wish any ire especially when most of it is actually hard work enough.
Good luck with your newborn; if it's your first, I am sure you are sleep deprived and glad you are in a home where you don't need to move. I am not so lucky.
I think it's great that you were able to buy back in'02 before prices got too far out of whack with incomes/rents (early part of the Bubble). Remember, we're not ANTI-HOUSING here --just ANTI-BUBBLE.
I don't know that I'd recommend over 50% salary or working two jobs for everyone, though. If you're single and don't mind the extra hours, sure, but for married with children...?
It's great that you're able to enjoy the "intangible" benefits of ownership. And I gather you bought a SFR that's not part of a HOA, otherwise you would NOT be able to do the things you just mentioned --smart move. Condo & HOA "owners" really don't have much more in the way of freedom than renters do.
I would also caution against banking on all that "50% equity" being there a few years from now. I'm guessing you're basing that on CURRENT VALUATIONS, not repaid principal (?). Remember that, in an asset bubble's aftermath, newly acquired equity can readily disappear. ;-)