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Ten Reasons It's A Terrible Time To Buy An Expensive House

By Patrick (184/184 = 100% civil)   2015 Jul 11, 12:58pm   ↑ like (17)   ↓ dislike (2)   1547 links   560,161 views   327 comments   watch (32)   share   quote  

  1. Because house prices in expensive areas still dangerously high compared
    to incomes and rents. Banks say a safe mortgage is a maximum of 3 times
    the buyer's annual income with a 20% downpayment. Landlords say a safe price is
    set by the rental market; annual rent should be at least 9% of the purchase
    price, or else the price is just too high. Yet in affluent areas, both
    those safety rules are still being violated. Buyers are still borrowing 6 times
    their income with tiny downpayments, and gross rents are still only 3% of
    purchase price. Renting is a cash business
    that proves what people can really pay based on their salary, not how much they
    can borrow. Salaries and rents prove that affluent neighborhoods are still in a
    huge housing bubble, and that bubble seems to be getting more dangerous by the day.
  2. On the other hand, in some poor neighborhoods, prices are now so low that gross
    rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there
    could still fall yet more if unemployment rises or interest rates go up, but
    those neighborhoods have no bubble anymore.

  3. Because it's usually still much cheaper to rent than to own the same size
    and quality house, in the same school district. In rich neighborhoods, annual rents are
    typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more
    to borrow the money as it does to borrow the house
    . Renters win and
    owners lose! Worse, total owner costs including taxes, maintenance, and
    insurance come to about 8% of purchase price, which is more than twice the cost of
    renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out
    the house and make a profit. Then you'll know it's pretty safe to buy for
    yourself because then rent could cover the mortgage and ownership expenses if
    necessary, eliminating most of your risk. The basic buying safety rule is to
    divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you
    $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a
    6% mortgage, that's $12,000 per year in interest instead, so it works out about
    the same. Owners can pay interest with pre-tax money, but that benefit gets
    wiped out by the eternal debts of repairs and property tax, equalizing things.
    It is foolish to pay $400,000 for that same house, because renting it would
    cost only half as much per year, and renters are completely safe from falling
    housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local
    employment rate (demand) to the current local supply of available homes for
    rent or sale (supply) should help you figure out whether a big fall in rents
    could happen. Checking these factors minimizizes your risk.

  4. Because it's a terrible time to buy when interest rates are low, like now.
    House prices rose as interest rates fell, and house prices will fall if interest rates rise
    without a strong increase in jobs, because a fixed monthly payment covers a
    smaller mortgage at a higher interest rate. Since interest rates have nowhere to
    go but up, prices have nowhere to go but down. When housing falls, you lose your
    equity, but not your debt.

    The way to win the game is to
    have cash on hand to buy outright at a low price when others cannot
    borrow very much because of high interest rates. Then you get a low price, and
    you get capital appreciation caused by future interest rate declines. To buy an
    expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a
    high price with a low interest rate, even if the mortgage payment is the same
    either way.

    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.
    • As interest rates fall, real estate prices generally rise.
    • Your property taxes will be lower with a low purchase price.
    • Paying a high price now may trap you "under water", meaning you'll have a
      mortgage debt larger than the value of the house. Then you will not be able to
      refinance because then you'll have no equity, and will not be able to sell without
      a loss. Even if you get a long-term fixed rate mortgage, when rates
      inevitably go up the value of your property will go down. Paying a low
      price minimizes your damage.
    • You can refinance when you buy at a higher interest rate and rates
      fall, but current buyers will never be able to refinance for a lower interest rate
      in the future. Rates are already as low as they can go.
  5. Because buyers already borrowed too much money and cannot pay it back. They
    spent it on houses that are now worth less than the loans. This means most banks
    are still actually bankrupt. But since the banks have friends in Washington, they get
    special treatment that you do not. The Federal Reserve prints up bales of new
    money to buy worthless mortgages from irresponsible banks, slowing
    down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense.
    Banks get to keep any profits they make, but bank losses just get passed on to
    you as extra cost added on to the price of a house, when the Fed prints up money
    and buys their bad mortgages. If the Fed did not prevent the free market from
    working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP
    bailout cash taken from taxpayers to be loaned directly to the worst-run
    banks, those that already gambled on mortgages and lost. The Fed and Congress
    are letting the banks "extend and pretend" that their mortgage loans will get
    paid back.

    And of course the banks can simply sell millions of bad loans
    to Fannie and Freddie at full price, putting taxpayers on the hook for
    the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into
    slavery, for the banks to make a profit. If you pay a low price for a house and
    manage to avoid debt, the banks lose control over you. Unacceptable to them.
    It's all a filthy battle for control over your labor.

    This is why you will
    never hear the president or anyone else in power say that we need lower house
    prices
    . They always talk about "affordability" but what they always mean is
    debt-slavery.

  6. Because buyers used too much leverage. Leverage means using debt to amplify
    gain. Most people forget that debt amplifies losses as well. If a buyer puts 10%
    down and the house goes down 10%, he has lost 100% of his money on paper. If he
    has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the
    real world.

    The simple fact is that the renter - if willing and able to save his money -
    can buy a house outright in half the time that a conventional buyer can
    pay off a mortgage. Interest generally accounts for more than half of the cost
    of a house. The saver/renter not only pays no interest, he also gets interest
    on his savings, even if just a little. Leveraged housing appreciation, usually
    presented as the "secret" to wealth, cannot be counted on, and can just as
    easily work against the buyer. In fact, that leverage is the danger that got
    current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there
    is no more fake paper equity from the sale of a previously overvalued property
    and because the market for securitized jumbo loans is dead. Without that fake
    equity, most people don't have the money needed for a down payment on an
    expensive house. It takes a very long time indeed to save up for a 20%
    downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause
    big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's
    corruption of US legislators.
    On a $300,000 house, 6% is $18,000 lost even if housing
    prices just stay flat. So a 4% decline in housing prices bankrupts all those
    with 10% equity or less.

  7. Because the housing bubble was not driven by supply and demand. There
    is huge supply because of overbuilding, and there is less demand now that the
    baby boomers are retiring and selling. Prices in the housing market, even now, are
    entirely a function of how much the banks are willing and able to lend. Most
    people will borrow as much as they possibly can, amounts that are completely
    disconnected from their salaries or from the rental value of the property. Banks
    have been willing to accomodate crazy borrowers because banker
    control of the US government
    means that banks do not yet have to acknowledge
    their losses, or can push losses onto taxpayers through government housing
    agencies like the FHA.
  8. Because there is still a massive backlog of latent foreclosures.
    Millions of owners stopped paying their mortgages, and the banks
    are still not forclosing on all of them, letting the owner live in the house for free. If a
    bank forecloses and takes possession of a house, that means the bank is
    responsible for property taxes and maintenance. Banks don't like those costs. If
    a bank then sells the foreclosure at current prices, the bank has to admit a
    loss on the loan. Banks like that cost even less. So there is a tsunami of
    foreclosures on the way that the banks are ignoring, for now. To prevent a
    justified foreclosure is also to prevent a deserving family from buying that
    house at a low price. Right now, those foreclosures will wash over the landscape,
    decimating prices, and benefitting millions of families which will be able to
    buy a house without a suicidal level of debt, and maybe without any debt at
    all!
  9. Because first-time buyers have all been ruthlessly exploited and the
    supply of new victims is very low.
    From The Herald:
    "We were all corrupted by the housing boom, to some extent.
    People talked endlessly about how their houses were earning more than they did,
    never asking where all this free money was coming from. Well the truth is that
    it was being stolen from the next generation. Houses price increases don't
    produce wealth, they merely transfer it from the young to the old - from
    the coming generation of families who have to burden themselves with colossal
    debts if they want to own, to the baby boomers who are about to retire
    and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with
    children. It is foolish for them to buy at current high prices, yet government
    leaders never talk about how lower house prices are good for American
    families, instead preferring to sacrifice the young and poor to benefit the old
    and rich
    , and to make sure bankers have plenty of debt to earn interest on.
    Your debt is their wealth. Every "affordability" program drives prices
    higher by pushing buyers deeper into debt. Increased debt is not affordability,
    it's just pushing the reckoning into the future. To really help Americans,
    Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even
    more important is eliminating the mortgage-interest deduction, which costs the
    government $400 billion per year in tax revenue. The mortgage interest
    deduction directly harms all buyers
    by keeping prices higher than they
    would otherwise be, costing buyers more in extra purchase cost than they save
    on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra
    $39,000
    in purchase price. Subsidies just make the subsidized item more
    expensive. Buyers should be
    rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia
    have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that
    housing is becoming truly affordable via falling prices, they want to stop it?
    Their actions speak louder than their words.

  10. Because boomers are retiring. There are 70 million Americans born between
    1945-1960. One-third have zero retirement savings. The oldest are 66. The
    only money they have is equity in a house, so they must sell. This will add yet
    another flood of houses to the market, driving prices down even more.
  11. Because there is a huge glut of empty new houses. Builders are being forced
    to drop prices even faster than owners, because builders must sell to keep
    their business going. They need the money now. Builders have huge excess
    inventory that they cannot sell at current prices, and more houses are
    completed each day, making the housing slump worse.

Next Page: Eight groups who lie about the housing market ┬╗




The Housing Trap


You're being set up to spend your life paying off a debt you don't need to take
on, for a house that costs far more than it should. The conspirators are all
around you, smiling to lure you in, carefully choosing their words and watching
your reactions as they push your buttons, anxiously waiting for the moment when
you sign the papers that will trap you and guarantee their payoff. Don't be
just another victim of the housing market. Use this book to defend your freedom
and defeat their schemes. You can win the game, but first you have to learn how
to play it.

115 pages, $12.50

Kindle version available

Discuss the book

#housing

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248   05c4   2016 Dec 4, 3:43am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

Found this blog post; absolutely amazing.

I totally agree to this premise - I reached the same conclusion independently.

We bought our "rather modest" townhouse at $370K. However the rental market here shows that the maximum we can rent it out for is $2200 - realistically, it's $2K. And we won't be guaranteed a 100% occupancy either. Even at my current 30 year mortgage at a low interest rate of 3.6%, my rent barely exceeds (by some $150) my total housing payment including taxes and HOA dues. There isn't enough cushion to do any repair works or even account for low occupancy.

Worse yet, rental income is subject to taxes and since we are in 28% bracket, we are sure to east a lot of them. The only way I can offset them is to start using depreciation from year 1, which gives me maybe a few years of "break even" income, after which I will have to start paying more in taxes. The only hope is that rent increases every year, but unfortunately, my experience in this area shows it's either the same or even decreasing! And this is a prime area, near malls, highways and even a great school district. It's baffling why rents wound't be higher, but a major housing frenzy in a neighboring town perfectly explains it actually.

Yeah...people are buying $700K-$900K newly constructed houses like there's no tomorrow. People even on single income with salaries barely into 6 figures are doing it (they have 2 kids to boot too). We see the resale market in the same town, and houses are being sold at $100K less than their asking prize clearly showing that the bubble is losing air even now. More interestingly, we can rent houses bought at $550K at as little as $2200. These people will bleed money on rentals. But apparently, no one cares. Having a loot-at-me house trumps personal finances.

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours.

249   bob2356 (34/34 = 100% civil)   2016 Dec 4, 5:49am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

05c4 says

We bought our "rather modest" townhouse at $370K. However the rental market here shows that the maximum we can rent it out for is $2200 -

Rule of thumb 100 months rent is the price of the house. Over that doesn't pay off unless you are gambling on appreciation. Fast and easy way to tell if it's a renters market or an owners market. Having 2200 in rent on 370k is a big renters market. http://affordanything.com/2016/04/28/one-percent-rule-gross-rent-multiplier/

05c4 says

The only way I can offset them is to start using depreciation from year 1, which gives me maybe a few years of "break even" income,

You don't have any choice in depreciation. The IRS requires it. Then they claw it back when you sell the house.

05c4 says

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours

Yep good call. Downside is in a renters market rentals are frequently much harder to come by because no one is making much or any money renting. You wind up renting from people looking to sell the house but won't tell you that. You are paying for the privilege of being a caretaker without knowing it.

I ended up buying when I came back to the states even though the market where I live favored renting. Where I am the taxes are so high and renter protection laws are so onerous, 6 months to evict is common, that people would rather put houses on the market and wait however long it takes for a sale rather than rent them out. Carrying a deadbeat $1500 a month tenant (who might trash the house moving out) for 6 months at with 600 a month taxes and 200 a month water/sewer on top of a mortgage is a real loser.

250   Tim Aurora (22/22 = 100% civil)   2016 Dec 4, 7:11am  ↑ like (3)   ↓ dislike   quote   top   bottom   home   share  

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

251   Strategist (30/30 = 100% civil)   2016 Dec 4, 7:16am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

05c4 says

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours.

You will be sorry.

252   Strategist (30/30 = 100% civil)   2016 Dec 4, 7:16am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Bob makes his own rules.

253   bob2356 (34/34 = 100% civil)   2016 Dec 4, 8:52pm  ↑ like (2)   ↓ dislike   quote   top   bottom   home   share  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.
https://www.thebalance.com/rental-property-investing-for-beginners-453821
http://affordanything.com/2012/01/25/income-property/
http://samsrealestateclub.com/the-1-rule/
http://www.doughroller.net/real-estate-investing/the-1-solution-to-real-estate-investing/
There a a couple hundred more articles describing the 1% rule. Google them.

Whatever dude, I own enough rental units myself. I always get 1% or I don't buy a rental property. I'm starting to buy in a market now where it's more like 1.7-1.8%. That's crazy out of balance. There aren't many of those markets out there.

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

254   kmail   2016 Dec 4, 9:42pm  ↑ like (2)   ↓ dislike   quote   top   bottom   home   share  

yup 1% rule is a quick calc.. those who want higher profit margin/ROI will do well at getting a property at 90% expense rate.. but can be harder to come by thru conventional means (listings) in a seller's market (good luck).

anyone who's gonna spend their money and time on re will really want to put in their dd to ensure their rough/quick calcs check out tho!

but ya, Bob isn't pulling numbers outta his hat ;)

255   RealEstateIsBetterThanStocks (23/23 = 100% civil)   2016 Dec 5, 2:28am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

i see some good points, some outdated (written during the bubble era). but 3. seems incorrect. historically there has been no relationship between mortgage rates and home prices.

do you have data backing up your "high-rates -> low prices" rule?

256   05c4   2016 Dec 5, 4:36am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

Thanks for the comments everyone - agreeing or disagreeing likewise.

This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed.

30 years. It's. A. Long. Long. Time. No one is going to live in that house for 30 years. It's a super expensive over-leveraged rental that's got no wiggle room for renegotiation of the terms of contract. I would trust this logical economic fact over the primal fear that "I might be sorry for not buying today".

As for us, the moment we made the decision, I felt almost liberated. I haven't felt so good in quite a few years. I am almost thankful that the size of our mistake was a mere $370K and not $800K. Thankfully, our income has shot up to the point, where I can pay off my current house in just under 3 years if I want to. The mere thought that we could rent and would not have to buy a huge mansion has suddenly opened up a lot of possibilities in our lives. It's a whole subject of discussion altogether.

Maybe it's not the right decision, and maybe all the people who bought mansions today will be millionaires. But, maybe not.

257   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 5:22am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of interest rates. History proves this.

258   05c4   2016 Dec 5, 6:28am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of ...

Did interest rates go as below as 3.5% ever in the history? As a first generation immigrant who has lived in the US for 16 years, I don't have enough context and I haven't really lived through the experiences of various eras.

I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it.

259   FP (15/15 = 100% civil)   2016 Dec 5, 7:15am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

Housing prices do not move opposite of interest rates. History proves this.

If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough.

260   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 7:24am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

261   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 7:26am  ↑ like (2)   ↓ dislike   quote   top   bottom   home   share  

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

262   Strategist (30/30 = 100% civil)   2016 Dec 5, 7:33am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

bob2356 says

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.
You should know that.

263   Strategist (30/30 = 100% civil)   2016 Dec 5, 7:37am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

bob2356 says

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

264   05c4   2016 Dec 5, 8:18am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

That is totally incorrect. Rates rise because "inflation" rises. True, in a healthy economy, rising inflation would mean people's income rises too. But the US has been printing money for a while now to offset all the junk securities from the 2009 era, and the resulting rising inflation will not necessarily mean rising incomes.

We are due for high inflation and high interest rates, and it remains to be seen if this economy has enough jobs to push people's incomes higher. I hear the minimum wage workers are protesting today on streets for $15/hour...

P.S. 30 year mortgage rates in fact have already jumped by 0.5% - I refinanced at 3.5% just 6 months ago; now that rate is at 4% from the same institution. I will watch closely the summer of 2017 and report the findings on this thread.

265   bob2356 (34/34 = 100% civil)   2016 Dec 5, 8:33am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

Strategist says

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.

You should know that.

That's why I said rule of thumb. It's a place to start. Obviously I don't buy properties for investment or make a rentvsbuy call by just looking at the rent vs house prices in the general neighbourhood. But the grm for overall area market lets me have a general idea if I want have a to look or not bother. When I got out of tx (great returns in late 90's then insurance and property taxes went insane) los vegas was a screaming bargain basement. Now I see some other markets that are much better and will start shifting out of vegas.

Strategist says

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

Maybe, maybe not. It depends on whether the books you are looking are truly reflective of actual expenses or cooked up with capital expenditures to puff up numbers for a sale. Almost impossible to verify just going through a P&L. You would have to dig through the actual receipts, even then it can be deceptive.

Cap rates works much better for commercial buildings or apartment complexes than individual houses for rent. I don't do commercial any more. It's not hard to find a rental property manager that's good. It's very hard to find a commercial property manager that's good. I don't know why that should be. Maybe I know a lot more about the right questions to ask rental property managers and how to review their operations.

266   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 8:36am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"That is totally incorrect"

No, it's really not. If money printing were to cause the price of goods to rise, it would be exactly because that printed money reached people's pockets as income. Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

267   FP (15/15 = 100% civil)   2016 Dec 5, 8:50am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising.

268   David9   2016 Dec 5, 8:52am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

We have too much debt, interest rates won't rise. And house flipping is too large a part of the economy, imo

269   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 8:57am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising"

I think you're missing the point. You are assuming a scenario that doesn't happen.

270   mell (15/15 = 100% civil)   2016 Dec 5, 9:17am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

The main driver for house prices besides foreign investors was the downward readjustment of the interest rates so the monthly payments stay the same or don't increase too much. Rates have been artificially extraordinarily low for a while, when the unwinding continues unaffordability will weigh on the market. People don't have 'more' money, their monthly payments have been artificially "deflationed" while the house price itself has been artificially "inflationed".

271   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 9:26am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"People don't have 'more' money"

Actually they do.

272   mell (15/15 = 100% civil)   2016 Dec 5, 9:37am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase".

273   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 9:49am  ↑ like   ↓ dislike (1)   quote   top   bottom   home   share  

"Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase"."

OK fine. Here are real income gains:

http://qz.com/780475/us-census-bureau-real-median-household-income-saw-the-largest-recorded-increase-in-history-in-2015-rising-5-2-almost-3000/

Sure looks like real income has gone up quite a bit since 2012

274   David9   2016 Dec 5, 9:50am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

Ask any Realtor about 'cash purchases' it's what they look for. Whatever percentage is reported, I personally would question. IMO, the RE market doesn't even care, currently, about the mortgage customer.

275   FP (15/15 = 100% civil)   2016 Dec 5, 9:57am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

You are assuming a scenario that doesn't happen.

1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door.

2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?

276   FP (15/15 = 100% civil)   2016 Dec 5, 10:00am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation.

277   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 10:04am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door."

I don't know. I'd have to go back through history and check all the data. But my guess would be that has never happened in the past and will never happen in the future. The 100 year argument is showing you that the idea that when rates rise, prices fall is absolutely incorrect. Which is what the discussion was about.

"2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?"

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

278   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 10:05am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation."

That's my point too. They ALWAYS do. Your scenario is nonsensical.

279   mell (15/15 = 100% civil)   2016 Dec 5, 10:09am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

Because rates are first and foremost a reflection of credit risk - or at least they should be. They have been low because the Fed has the banks back, no matter what they do and how much money they will lose in the next crash. The tail risk has been removed, so why not loan out money for less? Still a profit without risk. It remains to be seen if anything changes wrt the Fed under prez Trump, but as long as the credit market believes the central banks have their back rates may stay low. Any sudden risk dislocations or policy changes and watch the rates explode regardless of income.

280   05c4   2016 Dec 5, 10:10am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

Very interesting graphs joeyjojojunior. Yes, I did underestimate quite a bit how good the economy is doing - I do agree that incomes have shot up from 2012 (I have personal anecdotal evidence for that if it matters any).

Having said that, I have a few reservations. It remains to be seen how much the income will really rise. Secondly, I personally have been very aggressively courted by RE agents and builder's snake-oil salesmen, who relentlessly tried to convince me that the house price/gross income factor could be stretched to 6 at these low rates. As this blog post points out (and as far as back I remember ever since I have been in the US), the recommended factor was 3.

Now, assume someone making $100K bought a $600K house. If the interest rates were to suddenly rise up to their historical norms (ignore how that happens), that person better be making $200K. Will it happen over the large population? Maybe. I don't think real income will rise; it will more or less be a function of the inflation itself. In a way, buying a $600K house now is hedging against increasing inflation if you have a fear it will increase.

Historically, US inflation is between 2 to 3%. For prices to double at 3%, about 20 years have to pass. So it will take 20 years for the person's income income to rise to $200K and the price to income ratio be more normal. But that again assumes house price will remain the same, which is unlikely. I am betting house price will more than double by that time.

I think in a world where population is declining, high inflation is unlikely. Maybe the interest rates will never rise and stay the same. I don't see rising inflation making people's incomes to go higher, and the size of their comparative debt that much lower. I feel a majority of economic crises around the world are simply happening because populations are declining in the West.

Anyway, my last comment - don't have anything to add more. Thanks for the discussion.

281   Ironworker   2016 Dec 5, 10:13am  ↑ like (1)   ↓ dislike   quote   top   bottom   home   share  

I agree with the statement that interest rates are going to stay very low for very long time.

So if you want to buy a home, be very patient! Don't jump in. Your oportunity will come - 5 years from now.

In the meantime rent cheaply if possibly and forget housing. When the headline of bad economy makes WJ, start tuning in hopefully with lots of saved up cash.

282   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 10:14am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"Having said that, I have a few reservations. It remains to be seen how much the income will really rise. Secondly, I personally have been very aggressively courted by RE agents and builder's snake-oil salesmen, who relentlessly tried to convince me that the house price/gross income factor could be stretched to 6 at these low rates. As this blog post points out (and as far as back I remember ever since I have been in the US), the recommended factor was 3."

I think 3 is a much better guide too. I can't imagine buying at 6--that is ridiculous. I'd also recommend the various buy vs. rent calculators to see how your specific area looks.

283   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 10:17am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"They have been low because the Fed has the banks back, no matter what they do and how much money they will lose in the next crash. The tail risk has been removed, so why not loan out money for less? Still a profit without risk"

Nonsense. There was absolutely tail risk as they banks lost HUGE sums of money. Tail risk was there for IndyMac, Countrywide, Bear Stearns, etc. And it is CERTAINLY there now, as I think every bank owner realizes that the current anti-bank/anti Wall St. sentiment would never allow another bailout.

284   mell (15/15 = 100% civil)   2016 Dec 5, 11:15am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior says

Nonsense. There was absolutely tail risk as they banks lost HUGE sums of money. Tail risk was there for IndyMac, Countrywide, Bear Stearns, etc. And it is CERTAINLY there now, as I think every bank owner realizes that the current anti-bank/anti Wall St. sentiment would never allow another bailout.

You can't possibly believe yourself. There was ZERO tail risk since the Feds announcement in 2008/2009 to bail out the banks by whatever means possible, print money, buy up debt/MBS and leave the "emergency discount window" open for years. ZERO tail risk, hence the run-up in bank stocks and everything related. Now some tail risk has returned, but nobody believes yet that wall street has lost control over its puppets. Certainly not with the 3 stooges Boosh, Obummer and the Clinton-twins, and even Trump has to prove himself first. Pretty sure that even simply Mnuchin's nomination made the rates retreat a little again. But dislocations may happen all over 2017 which is likely going to be a volatile year, and when big money believes the Fed has lost or is losing control, then they will dump by whatever means necessary and rates may rise drastically.

285   FP (15/15 = 100% civil)   2016 Dec 5, 11:15am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

joeyjojojunior,

You have shown inability to think logically. I have a rule to not waste time arguing with people who write more than they think. Therefore, sayonara to you.

To those who understood my argument - the conditions in the 70's were different than now. Women were moving into the workforce then, which helped increase the household incomes (even if individual wages were not keeping with inflation). In addition, more workers were unionised, had better benefits, and education and healthcare were cheaper relative to incomes.

286   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 11:26am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"You have shown inability to think logically. I have a rule to not waste time arguing with people who write more than they think. Therefore, sayonara to you.

To those who understood my argument - the conditions in the 70's were different than now. Women were moving into the workforce then, which helped increase the household incomes (even if individual wages were not keeping with inflation). In addition, more workers were unionised, had better benefits, and education and healthcare were cheaper relative to incomes."

OK sayonara. But I don't think I'm not logical--I think maybe my argument is not reaching you?

To those who have any inkling that FP might be correct. Of course things were different in the 70s--that's why interest rates went up! My point is that rates won't go up again until we have similar conditions again, eg, less inequality.

287   joeyjojojunior (33/33 = 100% civil)   2016 Dec 5, 11:27am  ↑ like   ↓ dislike   quote   top   bottom   home   share  

"There was ZERO tail risk since the Feds announcement in 2008/2009 to bail out the banks by whatever means possible, print money, buy up debt/MBS and leave the "emergency discount window" open for years. ZERO tail risk, hence the run-up in bank stocks and everything related. Now some tail risk has returned, but nobody believes yet that wall street has lost control over its puppets. Certainly not with the 3 stooges Boosh, Obummer and the Clinton-twins, and even Trump has to prove himself first. Pretty sure that even simply Mnuchin's nomination made the rates retreat a little again. But dislocations may happen all over 2017 which is likely going to be a volatile year, and when big money believes the Fed has lost or is losing control, then they will dump by whatever means necessary and rates may rise drastically."

So, you believe that if there was another Wall St. caused bubble and bust, that the government would bail out the banks and Wall St. again?

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