patrick.net

SP - it's nice to know that flipping is going on adn flopping in this area, I was concerned that it's not so prevalent and thus less likely to have any fallout on the housing prices in this area.

-Is the 3% home appreciation rate on top of inflation, or nominal?

-Does this model include the monthly cash differential between $2000 rent and $4576 in PITI that can be invested?

Those are all very good questions that I don't have answers too. I look at the detailed numbers and my eyes get blurry. I provided the data in hopes that someone else would try it and let me know what they think. :)

That said, I do think they look at the investment model. Here's some of its calculations:

Year: 8
PITI: $4,506.03
Payment After Tax Savings: $3,293.55
Rent Payment: $2,631.86
Value of Investment: $316,675
Home Equity: $325,916

Year: 30
PITI: $5,326.40
Payment After Tax Savings: $4,839.16
Rent Payment: $6,237.30 [Wowsers! 4% inflation is bad!]
Value of Investment: $860,927
Home Equity: $1,594,857

Looking back, I guess it's idea of appreciation is that over inflation. If you enter 0, you don't break even - but the delta isn't that bad:

Year: 30
PITI: $4,338.66
Payment After Tax Savings: $4,127.98
Rent Payment: $6,237.30
Value of Investment: $678,879
Home Equity: $657,060

Person :

I hear you. I have not spoken a word against RE in last 3 years. Once I did, 3 years ago, some got angry and most thought I was an idiot. So I gave up.

I also remember arguing about why AMZN (hardly anything more than a bookstore at that time) should not be valued TWICE that of Sears in market cap. People thought I was nuts.

Expressing contrarian feelings to people drunk on kool-aid is often just not worth it.

Person,

But it was admitted that the payment would be a bit tough to make, therefore, if it was my case, I would not be saving it all. Certainly I find in this area that even though I automatically deduct money from our account every month for savings, I invariably have to dip back in for unexpected expenses. However, I have a feeling that eburbed has a higher salary than us, so maybe he could save.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn't be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

eburbed,

If you don't break-even after 30 years assuming zero appreaciation above CPI, then what is this telling you? If apprecation is a negative number (which the Dinkytown calculator can't handle), then how would that change the delta?

Of course, either assumption is wrong for the full 30 years anyway, as we are likely to see several years of flat-to-falling prices, followed by another up-cycle, followed by another down cycle, etc...

Regardless of fuzzy assumptions about future appreciation, a lower entry price-point will *always* save you big in interest, prop. tax & insurance, plus reduce the % of HH net income that must be devoted to housing, providing you a critical safety cushion. Also, it greatly reduces your downside risk and increases your potential upside. By buying close to the bottom of a market-cycle, if you really need to move, you won't have to bring $tens of thousands to the table or beg the lender for a short sale, as many a flopper will.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn’t be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

Claire,

You're probably right (look at the national savings rate - hint, it's the same as the title to a bad 1980's movie starring Robert Downey Jr.).

To be fair though, the same holds true for homedebtors. In fact, it's worse. To buy those things, they take out HELOCs instead of using cash-in-hand. Worse yet, the only way this can factor into eburbed's cited calculator is to eat away at the calculated equity (vs. investment return from cash).

Skibum,

I know, I know, hence today when I heard StreetSigns report that the housing slump is over as home builders will be building 110,000 to 120,000 houses in CA this year, I decided that I probably won't ever buy a house in CA.

Unfortunately the UK are only just starting to introduce dodgy loans and are just now increasing income to loan multiples - so that market is also just about to go crazy for a while and we are priced out there too!

2. Buy a home and rent out most of the space to total strangers = “smart way to afford that starter home!”

Have you ever seen the movie, "Pacific Heights"???

eburbed Says:

> I’ve been futzing with the Rent vs Buy calculator
> on Dinkytown - and I just don’t get it. If you expect
> inflation to be high moving forwards like I do, then
> the breakeven point on renting vs buy isn’t that bad.

I don’t have the numbers in front of me but on average over the past 50 years homes in CA have gone up in value a little faster than inflation.

The question you need to ask yourself before playing with the Dinkytown model is “if homes on CA have gone up 10-20% (many times more than the inflation rate) per year for the past decade will they continue to go up at or “above” the inflation rate or will they drop in value as things revert to the mean.

I’m renting right now since I’m sure that home prices will drop (can you put a negative number in the model) even if the overall “inflation rate” doubles.

And there was the case not so long ago in SF where the renters killed the landlord (I think a famous Jazz musician) and his dog and left them to rot in the basement while they lived rent free (at least for a while) in the rest of the house.

Claire,

StreetSigns? You might as well listen to the NAR's take on the housing market if you're going to believe the cheerleading outfit over at CNBC. Check out the graphs at the link I referred to earlier (755am today) if you want to see where housing starts are likely headed. I don't know which talking head on that show said what you mentioned, but I can't see how they can say that given all the write-downs the HBs are doing as we speak.

skibum,

Total Zero?

skibum,

I normally don't watch it, but happened to switch on when they were touting their story. They must have got their figures from somewhere, I think build, build, build - more over supply for us to pick from and pressure the prices down. As I understand it the builders have to keep building to survive, but maybe someone knows more?

Sub zero?

DinOR and Claire,

http://imdb.com/title/tt0093407/

RE: builders, yes they have to keep building to make money, but at some point (now), they will have made a calculation that based on where prices are headed, costs of land, materials, permits and labor, as well as their portfolio of land, that they will basically "write off" building on the land that has yet to get to the point of sticking a shovel in the dirt and unlikely to net a profit. The rest of their holdings that are ready to build? They will start building furiously (which they are already doing) and selling as fast as possible to capture as much profit as possible as prices decline. This behavior from the HBs has apparently heralded a housing correction every single time since this stuff has been tracked. Hence, they may be building like crazy, but that's merely to work off the stuff already in the pipeline.

"By buying close to the bottom of a market cycle"

HARM,

Don't you see! There's all these bottom feeders on the sidelines just waiting to jump in! Dozens and dozens of them! THEY'LL support the market! Don't you see?

OT, I actually use Qwest for VOIP and it's like $22.95 a month? I have to agree with X b/c overall the calls are just as good as a land line. I also have SKYPE. If it wasn't for these types of providers my bill would be around $1,800 a month. Ouch.

Does anyone have experience with the MCC program offered in some locales?

I don’t have the numbers in front of me but on average over the past 50 years homes in CA have gone up in value a little faster than inflation.

Nationwide, housing prices post WWII have appreciated at inflation + log(population growth) + 1%. If you factor in from the 1800s you lose the "+ 1%" part.

CA has enjoyed about an extra "premium" mostly due to faster population growth as compared to the whole.

And there's another model that claims the population growth is not so important as population demographics (the curve shape of ages). I linked that article last thread or two. This model says that what is gained due to population growth will be shed later unless populations can grow at exponential rates, because eventually the population becomes "elder heavy". Sound familiar?

Look on the bright side: that means it may be bad in CA but it will be worse in FL.

skibum,

Oh yeah! That's right, what'd I say "Total Zero"? No, actually Less Than Zero would be more accurate.

You're right, this is the wind down phase for the builders and as I mentioned a thread or so back, 2007 is the year where realtors will find themselves in "Julian's position"!

Well, in fairness, when I read the CNN article about that, it noted that the savings rate does not count retirement accounts (e.g., 401k’s) as savings.

Person,

How many Americans have underfunded or not funded their 401Ks? I recall the typical retirement plan savings to be anemic. I doubt that helps very much.

(look at the national savings rate - hint, it’s the same as the title to a bad 1980’s movie starring Robert Downey Jr.).

But the book was great! :)

hmmmm maybe the McDebtors will earn income like Mr. Downey did?

Thanks, Mr. X. I definitely am switching to Vonage and am interested in any referral deals. Will email you.

I have some real doubts about Vonage as an ongoing concerns.

My favorite was right before they IPOed, someone (Om?) bashed Vonage. A Vonage-fan posted a comment that basically said this: "Their stock is going to rock. Vonage is a great company - their customers love them. They lower their prices ALL the time to beat their competitors."

Sounds like a great business model to me.

http://finance.yahoo.com/q/ks?s=VG
Profitability
Profit Margin (ttm): -56.58%
Operating Margin (ttm): -56.10%

Management Effectiveness
Return on Assets (ttm): -32.55%
Return on Equity (ttm): -152.43%

OMG.

lunarpark,

I'll bet you like Ellis' latest novel even better! ;)

Btw, 5% investment return (after tax) sounds rather conservative.

Ever since the tech bubble I've become very risk averse. A huge chunk of my money is a 5% interest savings account (taxable).

I'm not sure where to invest my money these days. I keep thinking about putting more money into some index funds, but I keep hearing that the market's about tank any day now.

Ahahaha, actually I didn't care for it as much as his other work. But I just couldn't see myself posting as Patrick Bateman :)

"I keep thinking about putting more money into some index funds, but I keep hearing that the market’s about tank any day now."

Me too. I even went through the trouble of choosing some Vanguard funds, but I haven't pulled the trigger.

But I just couldn’t see myself posting as Patrick Bateman

You could have posted as "American Psycho."

Come to think about it, maybe I'll use that username sometime :)

Claire,

We're not sure whether we want to put down roots here or move back east to be closer to family. The plan is to wait and see what happens after the wife is w/ her graduate school in a couple of years.

If we do decide to buy here, I'd love to get a reasonably priced house enclosed by Shoreline, the train tracks, and Calderon. Unfortunately, we can only afford the worst house in town if it's down by ~40%.

eburbed and lunapark :

Why don't you look at an automatic investment plan ? A fixed amount - I think Vangaurd allows it to be as low as $50 - per month taken from you checking account. Forget about timing, average it out for next 5+ years.

If you had started that just before the 2000 crash, you would have been in healthy black before 2006 started ! I doubt we are going to see a stock market crash of that magnitude. Personally, I am mildly bullish on stock market for this year - my prediction is a very choppy year, so a AIP is a great way to handle it.

* I AM NOT AN EXPERT

Randy H Says:

> We’re planning to start trying again in February.
> *But* we’re skeptical enough so as to hold onto
> our rights to keep renting here for another year.
> A lot of stuff here in South Marin (in our price
> range at least) seems to have been pulled for
> the winter.

Does anyone know what happened to our friend Marinite from:
http://marinrealestatebubble.blogspot.com/ ?

He has not updated the BLOG in over a month since he posted a South Marin beauty that Randy might able to buy from the bank later this year…

Why don’t you look at an automatic investment plan ? A fixed amount - I think Vangaurd allows it to be as low as $50 - per month taken from you checking account. Forget about timing, average it out for next 5+ years.

Into which of Vanguard's funds might you recommend (NOT INVESTMENT ADVICE)?

I was toying around with buying a few shares of BRK.B - but if Warren dies that'd be really bad :(

after the wife is *done* w/ her graduate school....

MtViewRenter -

We are in similar dilemma, stay here or move to East Coast or move back home to be closer to family.

I do hear the East Coast has better schools - may not be an issue for you, but is for us.

FAB,

LOL! I drive past that POS every day. It has been on the market ever since I moved to Mill Valley. In fairness, it's a mixed-use building, with commercial space on one side (but no parking).

That picture makes it look like a palace compared to the real view. Normally there is a pile of trash, old mattresses, and broken down beach-bum trucks choking that whole area.

No one is going to buy it, even here in Tam Valley. There's a nice little duplex around the corner for sale for the same price, and it has parking...and no one has bought that in over 6 months either.

eburbed :

If you believe in index funds Vangaurd has probably the best offering. Apart from standard SP500, Midcap, Russel2000, International Developed Market etc index, they also offer variety of mixed offerings - look at their lifestyle funds or target retirement funds. These are just combinations of index funds. So you do one step asset allocation as well. (Make sure the allocation is what you want considering you OTHER investments.)

There is an additional benefit. The pure index funds charge a fee of $10 for balances less than $10K (ouch) but these combo funds (a basket of index funds) don't ! (nice)

Claire,

Our first and only kid is only 4 months old. So no, it's not a big issue, yet. We do miss the fact that family can help us take care of the baby, give us a break, etc. He's quite a handful already. Slightly off topic. How did you guys w/ multiple kids resist the urge to strangle them?

I'm not sure you can make the generalization that east coast schools are better overall. I thought it largely depended on which town you're in since the schools there get their funds mostly from the townships. Can't imagine there's that big of a difference between Mountain View High & Palo Alto High. Of course, you probably wouldn't want to send your kid to school in Oakland or Richmond w/o a police escort.

I went to public high school in Boston in the early 90s. It's a good thing it was an exam school where most of the kids actually want to learn. The regular high school next door had metal detectors and fully armed Boston police at all entrances. We didn't have any security personnel. Guess it was still pretty safe since if anything actually happened, one quick call and 20 cops from next door will come right over.

We are in similar dilemma, stay here or move to East Coast or move back home to be closer to family.

I do hear the East Coast has better schools - may not be an issue for you, but is for us.

The East Coast has dramatically better schools. In Long Island, NY - Jericho has one of the best public schools in the nation. Your children won't have to attend a talk by the local PD on the difference between Nortenos and Surrenos (which gangs use which colors) like they do in Mountain View.

Here's a housing comparison:

Cheapest house in Mountain View right now is $689k - 5br/1ba in 800 sqft. (They use the 5th dimension apparently).

http://tinyurl.com/yggsj4

Or, you could a 3br/2ba for $679k on a 7575 sqft lot.

http://tinyurl.com/yf68tp

Now granted there are some draw backs of moving to Jericho, LI
1) They don't have a street that's entirely Thai restaurants.
2) Mexican food there is not very good.
3) I'm ok with winters there, but summers are awful.
4) No tech jobs

Can’t imagine there’s that big of a difference between Mountain View High & Palo Alto High.

Sure there is - I don't think anyone's been stabbed at Palo Alto High.

There's actually a big difference even within Palo Alto ones. There was some controversy earlier about how Palo Alto High and how Gunn High had some ridiculous funding inequity.

Basically Gunn High had a mandatory voluntary (intentional) $2000 cash donation from parents.

Completely not related, Gunn appears dramatically higher in those silly school rankings than Palo Alto High. Or Mountain View. But Jericho (mentioned above) beats them all.

Here's a house from the school district that figure skater Sarah Hughes is from:

http://www.mlsli.com/uniDetails.CFM?MLNum=1811141&typeprop=1&start=1&rpp=20

4br/2ba on a 7695sqft lot. $659,000.

Cheaper than a 800 sqft house in Mountain View. And the schools there were feature in the NY Times for excellence.