patrick.net

Surfer-X

Sorry I missed you last month when you were in town. I had to travel back east on short notice for a funeral.

You are correct in your analysis. The key is the notion of having alternatives -- specifically reasonably quantifiable ones -- at the time of making the decision.

Part 1: you earn X + (X*10%) in future value dollars.

Part 2: you realize (by selling)
Selling Price - (Purchase Price - X) + amortized principal; or
Selling Price - Loan Balance in future value dollars.

--Now you consider your alternative use of funds, or in this case what you forgo by not taking Option 1, so you subtract that from option 2.

Your real value of Option 2 is:
Selling price - Loan balance - Alternative Savings Return.

So the home buyer has to clear a hurdle, or she's actually losing money even if the home sells for more than her loan balance.

This is her discount rate. And we keep talking about that being the risk-free rate, T-Bill, CD, etc. But for *most* people their discount rate is much higher. Remember the consumer debt figures and number of people who carry a credit card balance. For someone with a credit card balance, they're paying 18%+ nominal, much higher effective. So they get to earn a risk-free return of over 20% simply by paying off their credit card. For them, buying a home is purely financial stupidity. People who buy crap with HELOCs that revolve aren't much smarter; they just get to play more games and have better rate structures. Is revolving home equity credit interest still deductible? That I don't know.

I’m bored with this now. I’m going back to work.

pa renter,

Let me just apologize now for all the other posters here who labeled you a troll a while back. Clearly that's not the case. The "you'll be priced out forever" THREAT is one of the usual realtor (tm) "talking points."

gentle cheetah,

Haven't heard from you in a while! I miss the interesting tangents. Did you ever get your Arc'teryx jacket? Have you had a chance to use it yet? Can you pack your .45 in the pocket???

Record foreclosures

Check out how this asshat uses words:

"It is a problem, a big problem, but it is not the worst it has ever been," said Chris Holbert, president of the Colorado Mortgage Lenders Association.

"If everybody groans this is the worst it has ever been, it scares people out of the home-buying market," Holbert said.

So in other words, lets make pretend all is well! Not that the tightening of credit has anything to do with it or the fact that prices are too damn high!

He said people who bought during the previous foreclosure crisis in the late 1980s, after the decline in energy prices, are the ones who have made the most money on their homes.

Yes, the ones that bought AFTER the bottom of the market, not at the start of the fall! ....If you feel this way, you should buy!, buy!, buy! If you don't buy you should shut the f@ck up! They should really treat these people the way they treat stockbrokers!

"The truth is, it is a better time to buy now in Denver than it was four years ago" before the current crisis began, he said.

Yeah, yeah, yeah, it's always a good time to buy, but it will be a MUCH better time to buy next year!

He also noted that a large percentage of homes that enter foreclosure do not complete the process.

In some of those cases, lenders accept "short sales," or less than the mortgage amount for the home, instead of going through with the foreclosure.

So in other words, we should go for one of these short sales where the price is 20% below the 300% marked up price. What a good idea!! :lol: It's funny how desperate people become when their business is in trouble.

I expect to see "Colorado Mortgage Lenders Association" go under in the comming months ahead. :evil:

2- you salary is not going jump from 263k to 323k, so use a 3% increase (you seems too bitter to have smelled a wall-street-like end of year bonus, do we have another hungry consultant???)

assuming a 40% total return over 3 years and a 9.3% rise in income to $328,000…

theotherside,

Palo Alto's official household income is around $200K. Are you telling me that most of Palo Alto homeowners lie on their tax returns?

So why can't a $263K household afford a median home in Palo Alto?

palo alto renter,

Theotherside has now thoroughly bored each of us with her amazing powers of real-estate-agent-math.

She's full of shit. She said: If you rent for 3 years, your MORTGAGE TERM in 3 years should only be 27 years and not 30 years as you assume in scenario 2!! First, you didn't assume that, but let's see what those huge whopping 3 years of amortization bought you in value:

At 20% down on a $900K home ($774K financed, after closing costs) @6.5% fixed:

Year end 3 you've a loan balance of $745,332.

Assuming you pay down all $347K of reinvestment return, you're financing $607K after closing costs.

Year end 3 you've a loan balance of $584,517.

The differential in outcomes is even more pronounced when present value is applied to those future dollars.

--

By the way, t.o.s. is just FaceReality, MarinaPrime. He gave it away with the Wall-Street bonuses comment.

C'mon MP, you're really still not over not making the IB cut? With math like you've demonstrated here it's no wonder. You're bad even by IB standards. Oh well, back to the grindstone. Got your new headshot on your cards for the "Spring Bounce" yet!

L
M
A
O

theotherside:

Of course PA Renter can afford *a house* in Palo Alto. (is there such a thing as a bad school district there?) He just can't afford a real house that's not about to be torn down.

According to CNN Money, the median household income in PA in 2006 was $133k. Why is it that someone with 2 times the median income can't afford the median house?

CNN Linky

Here's how I did my math:

Buy:
- kill myself trying to make the payments on a crappy house that's gonna fall over when the next 4.0 hits
- eat only instant ramen 3 times a day for the next 10 years
- get foreclosed on when my NAAVLP resets in 12 months

Rent:
- eat regular food and even go out for sushi sometimes
- go on a real vacation once in a while
- save some money to boot

Decisions decisions.

Today is my last day off, so you will not ear nearly as often from me for a very long time (do I ear good riddance )!

theotherside,

So, tomorrow you're starting back at the realtor (tm) desk manning the phones for the onslaught of springtime buyers coming in?

theotherside :

You really don't understand options, do you ? Which serious investor will invest in such gambling scheme ? If it drops 19% there is nothing to gain. Such binary pay-off is hardly worth discussing.

If you are so sure, why don't you accept HARM's proposal ? Put your ego on line. Why bother with this fuzzy math stuff which is way out of your league ?

theotherside,

You are so full of shit that even shit is offended.

If you believe all that, go long in CME housing index options and/or futures. A real financial product exists for you to go lose your money, so quit badgering those of us who can do math.

You don't have $600,000 to throw into an illiquid, crappy return escrow anyway. You're not kidding anyone. People with $600,000 cash or more -- and there are more than a few who read and post to this board -- don't jack it off on a bunch of bloggers; they have it working hard for them earning return.

and the notorious complexity of accurately forecasting medium term inflation, I don’t have the tools.

I say inflation is going up and staying up for the medium term -- based on putting my finger into the wind... and fallout from high fuel prices and the economy struggling to recover from the housing boom triggering an inflationary cycle...

GC Says:
Actually, some mental/personality disorders predispose the patients to be extremely sensitive to other people’s emtions and thoughts and to the surrounding environment. I forgot which ones.

Avoidant PD is hyper-vigilant to others intent. Paranoid PD read sinister motives into innocent remarks and others intent. That's about it, and both are a bit off...

I would I love to make you guys a two-way market on the same type of derivatives using REAL PRICES, but with two underlying stochastic processes (nominal prices and inflation) and the notorious complexity of accurately forecasting medium term inflation, I don’t have the tools.

Yea, math is hard. Not to mention statistics.

I'm so dense I still fail to see why you can't just use the CME Housing Futures/Options market. Unless you're offer is baseless to begin with, that is.

Good luck back at work. I heard there's a shortage of those nice, wooden, "For Sale" yard signs due to all the exploding inventory. Enjoy your spring :)

Notice how theotherside has yet to deny being a realtor (TM).

Wow, bold move TOS! Let me get this straight:

Theotherside is accusing us "bubble theory experts" of failing to put our money where our mouth is unless we accept his bet --on his terms, of course. Merely renting, not buying and investing your money elsewhere is not sufficient PROOF to him we're all not pussies. Golly, I feel my manhood is being questioned.

So, to accept his wonderful offer I would need:

--$200K in free liquid cash, an amount greater than most people's net worth (don't have it), and/or be willing to cash in all my retirement funds & other investments (I'm not).
--settle for some unspecified escrow fund (indexed to LIBOR?) that probably pays a lot less than my current index funds, at TOS's brokerage of choice (earning him a commission too?).
--lose everything if nominal, non-inflation adjusted median prices (reported by the ever-honest CAR, btw) fail to hit the -20% mark by January, 2009. -19.999%? Sorry pal, not good enough.

Gee, I guess TOS has called our bluff cuz' I'm not biting.

HARM you pussy. Just buy a house with a 2yr IO Option ARM and do a cash-back closing for the $200K! Then you'd be hedged either way, lol.

Randy H,

That's brilliant!

Inflation and housing prices - are they tied together?

I'm increasingly of belief that we will see dramatic inflation in the near future. The perpetual fall of the dollar. The massive government debts. Continued upwards trend of the price of raw materials.

I'm too young to know - but what happens to housing prices if inflation say... hits something moderate like 5-6%?

Does it tend to match?

I've been futzing a lot with this calculator recently: http://www.dinkytown.com/java/MortgageRentvsBuy.html and I'm perpetually surprised at how close the break even point is... especially when I tweak the inflation knob.

Inflation and housing prices - are they tied together?

I have a feeling they are -- like a bizarre twist to the business cycle and capitalist waves -- in a way that share prices probably are not, due to elastic demand for shares, etc...

ahem, my theory, the theory that is mine, is that...

speculative inflation in housing prices which outstrip general inflation cause mayhem in the economy -- the petit bourgeoisie (shopholders, etc) can put up their asking prices to meet increased mortgage repayments, as can tradesmen, etc. This is the beginning of the inflationary cycle. However, these increases in turn spark increases in wage demands from wage workers, as well as increased asking prices for housing, and wage growth tries to catch up. Next thing you know, you have high inflation. It's currently tracking at about 4% p.a. here, and the Treasury is 'worried'. Increased oil prices and other 'external' price shocks also trigger inflation, of course -- it is hard to disentangle multiple inputs as we are experiencing them now.