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


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2015 Jul 11, 12:58pm   943,195 views  501 comments

by Patrick   ➕follow (59)   💰tip   ignore  



  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.

  2. 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.


  3. 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.






  4. 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.


  5. 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.


  6. 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.


  7. 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!


  8. 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.



  9. 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.


  10. 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, $12.50Kindle version available

« First        Comments 478 - 501 of 501        Search these comments

478   RedStar   2025 Jan 31, 9:05am  

I think too many conservatives and business owners have already left to have a realistic chance of CA turning back to red. Personally as a tech bro I'm jsut waiting for AI to take me out. Once that happens I'm out of CA too, weather be damned.
479   BigSky   2025 Jan 31, 4:03pm  

preed says

I wish I never read this thread and that I'd bought a house when they cost half as much as they do today.

Patrick says

I retired ten years early because I didn't buy a house in California, where it's much cheaper to rent the same thing.


Looks like timing is everything, although I do not see how Patrick came out ahead when home prices and rental costs have shot up as much as they did.
480   Patrick   2025 Jan 31, 4:05pm  

My rent never went up much and one of my stocks did really well. SHOP

But I've repeatedly calculated that I still would have been ahead by a lot even without those advantages. House prices in coastal California are far beyond the equivalent cost of renting the same thing.
481   Ceffer   2025 Jan 31, 4:13pm  

Most people don't factor in maintenance and ongoing costs. They are bedazzled by 'paper wealth' equity.

Patrick's approach is rational and has to be considered over long periods of time, whereas 'home ownership' is irrational and emotional rather than financial. Also, you never really 'own' your real estate anyway, because it can always be seized and auctioned for back taxes, it is always just a 'government rental' at the tax rate.

You could probably go through various Monte Carlo scenarios on real estate over longer periods of time and find that the rental proposition is quite viable over any period of occupancy of less than seven to ten years compared to purchased real estate.

Shit, all the moving and refinancing costs alone in California will cost anywhere from fifty to a hundred thousand, and new properties still require major investments in drapes, window coverings, and landscaping, if not renovation of the purchased property on already used homes. You always start out in the hole to the tune of about ten percent of the purchase price, until the 'appreciation' catches up.
482   GreaterNYCDude   2025 Feb 13, 7:19am  

Patrick says

equivalent cost of renting the same thing.

That is the crux. When I bought my house the $/ft2 was the same as. My rent ... But "upgrading" from a 2 bdrm to a 3 bdrm apt would have been insane since, at the time 3 bdrm rentals were few and far between. Buying got us more space for a similar price point and also maintained family harmony.

Thinking long term, I will probably just rent this place out once I'm ready to dowsize, either as a long term rental or as a short term Air B n B... The house down the street does that and it always seems rented out.
483   AD   2025 Feb 13, 10:47am  

Patrick says


House prices in coastal California are far beyond the equivalent cost of renting the same thing.


Have to examine the state and county as far as if residential real estate developers rule the local government. Bay County Florida is where developers like St Joe company rule (ticker: JOE), whereas the entire state of California is anti affordable residential development (one major reason is the NIMBY culture of the posh white liberal and Asian tiger mom suburbs, etc).

So in general I'd rent forever in states like California since the lack of supply will keep housing prices forever elevated (as far as price to income ratio and other metrics).

.
484   WookieMan   2025 Feb 13, 11:13am  

Ceffer says

Also, you never really 'own' your real estate anyway, because it can always be seized and auctioned for back taxes, it is always just a 'government rental' at the tax rate.

This can happen to landlords and you have zero control over it. If I F up that's on me. But if the landlord does and I have to move that's a massive pain in the ass. It happened to me. Never again.

So we took a risky move, made a cash offer with no cash (had retirement savings) and bought our current house. No money down margin loan of OPM. Interest only for $125/mo for 2 years and taxes. Appealed the taxes and were paying $300/mo for a 3/2 and other houses were selling for $200k. No chance rent beats that.

The only argument I'd have with Patrick and others is you can own AND invest. It's what we did and still do. CA is a market where the average person cannot own. And when I say average I'm talking $150-200k dual income. You can't live there and save. You rent or rely on appreciation if you own.

The DOGE user doesn't understand this which is why I say you guys are living on another planet. That's not the market in the rest of the country. I can own and save at the same time, not hard where I live. So rent to own doesn't factor in. I can also fix anything, so maintenance is no biggie. Also have friends that can do it free because we have a network and community.
485   Patrick   2025 Feb 13, 11:38am  

WookieMan says

you can own AND invest


Around here, given the multi-million dollar prices, it's pretty much one or the other.
486   Patrick   2025 Feb 13, 11:50am  

AD says

lack of supply will keep housing prices forever elevated


I think about 25% of California is now criminal aliens. Seriously, it's that much.

If they get deported in large numbers, that should have a positive effect for US citizens who want to buy a house in CA.
487   AmericanKulak   2025 Feb 13, 11:51am  

Patrick says

I think about 25% of California is now criminal aliens. Seriously, it's that much.

Yeah, the numbers of illegals in the US is at least 30M. At least.
488   ForcedTQ   2025 Feb 13, 1:01pm  

Patrick says

AD says


lack of supply will keep housing prices forever elevated


I think about 25% of California is now criminal aliens. Seriously, it's that much.

If they get deported in large numbers, that should have a positive effect for US citizens who want to buy a house in CA.

Agreed. For anyone who already owns a house and wants to stay put, it will be potentially beneficial as well. If you recently purchased and your property assessment is higher than market value, you can request a reassessment. Get that property tax down.
489   AD   2025 Feb 13, 4:46pm  

Patrick says

I think about 25% of California is now criminal aliens. Seriously, it's that much.


They'll deport illegal or criminal aliens but I don't think they'll deport as many to cause a significant supply increase in housing. But it may help some as far as opening up or adding some housing inventory.

At least they are tightening the border to reverse Birdbrain Biden's open border policies.

But how many criminal aliens live in single family homes (not trailers) with no more than 2 people in each bedroom in states like California ? They mostly likely live in squalor or 3rd world conditions, or at least close to it.

.
490   Patrick   2025 Feb 13, 4:53pm  

AD says


But how many criminal aliens live in single family homes (not trailers) with no more than 2 people in each bedroom in states like California ?


I think the majority of them are in single-family houses, but have way more than 2 people in each bedroom. That's how they afford the house.
491   Blue   2025 Feb 13, 5:05pm  

San Jose Mercury news used to mention a dozen plus people live in places like east part of the Redwood City which is close to industrial area in a typical SFH. Not sure if this situation has changed.
492   Patrick   2025 Feb 13, 5:31pm  

I think it's gotten more packed in all of those houses because of the absolute flood of new criminal aliens coming in during the Biden regime.
493   FortwayeAsFuckJoeBiden   2025 Feb 13, 5:43pm  

Patrick says

I think it's gotten more packed in all of those houses because of the absolute flood of new criminal aliens coming in during the Biden regime.


government imported a lot of illegals to “solve” labor shortage they created when they paid people to not work.

out here in Idaho there’s nothing but new construction, houses here do not go up. totally opposite of CA where it’s a battle with offers.
494   Patrick   2025 Feb 13, 5:47pm  

I get the impression that the housing market in CA is pretty weak at the moment.
495   AD   2025 Feb 13, 5:48pm  

Patrick says

I get the impression that the housing market in CA is pretty weak at the moment.


but still not affordable or reasonably priced for working class :-/

.
496   Glock-n-Load   2025 Feb 13, 5:50pm  

government imported a lot of illegals to “solve” labor shortage they created when they paid people to not work.

I don’t believe this for a minute. Only one reason…to destroy America.
497   Patrick   2025 Feb 13, 5:50pm  

AD says

Patrick says


I get the impression that the housing market in CA is pretty weak at the moment.


but still not affordable or reasonably priced for working class :-/

.


True, not even close.
498   Patrick   2025 Feb 13, 5:52pm  

FortwayeAsFuckJoeBiden says

government imported a lot of illegals to “solve” labor shortage they created when they paid people to not work.


The real reason for the flood of illegals was because they will work for so much less than US citizens.

This makes owners richer and US citizens who work for a living poorer.
499   Glock-n-Load   2025 Feb 13, 5:54pm  

Patrick says

FortwayeAsFuckJoeBiden says


government imported a lot of illegals to “solve” labor shortage they created when they paid people to not work.


The real reason for the flood of illegals was because they will work for so much less than US citizens.

This makes owners richer and US citizens who work for a living poorer.

But ultimately destroys America because, no matter what, either we slide into 3rd world status or the debt explodes. No way the government would allow mass homelessness. IMO
500   Misc   2025 Feb 13, 9:18pm  

Glock-n-Load says

But ultimately destroys America because, no matter what, either we slide into 3rd world status or the debt explodes. No way the government would allow mass homelessness. IMO


Depends on how much they get paid to enlarge the homelessness.
501   AD   2025 Feb 13, 9:39pm  

Patrick says

FortwayeAsFuckJoeBiden says


government imported a lot of illegals to “solve” labor shortage they created when they paid people to not work.


The real reason for the flood of illegals was because they will work for so much less than US citizens.

This makes owners richer and US citizens who work for a living poorer.


Yes, as they easily work for cash in Panama City Beach such as cleaning vacation rental units and in various manual labor jobs. E Verify also does not apply to employers with less than 25 workers.

Also there has been a great increase of work visas in Panama City Beach for year round work, which explains on Employ Bay County's page on Facebook there are a lot of posts of people looking for work from November to February.

The staffing companies like Royal American Hospitality in Panama City Beach are bringing in countless immigrants on work visas.

But you would think that would make costs less on the beach, but it is not the case. Its expensive to live on the beach.

As far as what Patrick said, the employers privatize the profits from exploiting an immigrant workforce and then socialize the costs onto the local taxpayers.

.

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