patrick.net

Nigel,

If it's never a better investment to buy than rent, then you should never buy.

But the odds of that are pretty slim.

SFBubbleBuyer Says:

> Nigel, If it’s never a better investment to buy
> than rent, then you should never buy.

It is interesting to comparing buying a car to buying a home.

If you had $1 Million in cash you could either leave it in a Money Market or CD making just over $4K a month, pay cash for a home or condo (and pay about $1.3K in insurance and property taxes) or rent a $1mm home or condo for about $2K a month.

If you had $35K in cash you could either leave it in a Money Market or CD making just over $145 a month, pay cash for a new 2007 (and pay about $150 a month for insurance and taxes to the DMV). Unfortunately you can’t “rent” a new BMW for $73 a month, half as much as the risk free return on the money and have someone else pay the taxes and insurance like you can with a home.

Only an idiot would “buy” a new car when they could “rent” a new car for less than half the cost of the risk free return on their money, but Realtors are able to convince people that this is a good idea with homes every day (for some condos in San Francisco the taxes, insurance and HOA fees are more than rent in the same building)…

the otherside says: Would you call a multi-millionaire an idiot because he spends 10x-20x more on “same quality” food than a upper-middle class guy….?

Yes. Unequivocally and absolutely.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Conclusion: Some people are fools. Does that mean we should applaud foolish behavior? I think not.

The remainder of your argument was sensible. Some people do derive great utility and pleasure from owning a house vs. renting the same house. But I would put forth that the Bay Area premium is too far out of balance for most people's tastes... that is, if they had the common sense to consider it rationally. I bet a lot of people moving to the Bay Area purchase homes without ever really considering what rent would be on an equivalent dwelling.

Renting a house is NOT EQUIVALENT to owning the same house,

Becoming a homedebtor is NOT EQUIVALENT to owning a house.

especially if you have kids (school, friends, after school activities) or you hate moving every couple years or you really really like your neighborhood or you hate having a nosy landlord or it does not fit the preferences of your spouse

You can rent and have all this too. Some Landlords don't even live in the state...and how do you know when that great neighbor will leave and some degenerate takes his place? The renter can easily leave.

Conclusion:
Some people get high by seeing their bank statement showing $$$, other get high when they spend their $$$ lavishly

Homedebtors get high when they see their house appreciate in the double digits; they get even higher when they spend their "equity" on their toys, then thay feel pain when their taxes go up and then they feel trauma and panic when the value comes back down to earth. Renters don't experience this. I call this AEDS "Acquired Equity Deficiency Syndrome".

A better way of saying it is:

"Renting is NOT EQUIVALENT to debtorship."

if inflation is higher, rents will surely go higher to compensate for the cost of servicing the loans …

Not always the case, it also has to do with supply and demand.

if you don’t see why, ask yourself what forces will push the price of tomatoes up if inflation is higher but wages fail to catch up….and why are tomatoes different from rents….

If everyone decided not to buy tomatoes because they felt they were too expensive, they would all dry up and be worthless; the owner of them would lose everything.

Rents stabilize very easily when there are more rentals than there are renters. Also, if the rents get too high because of lack of rentals, they could relocate to other areas further away. If the owner can't get enough income to support his loans, he could lose everything!

You're right, tomatoes and rents share similarities.

Nigel Swaby Says:
Wouldn’t you consider the mortgage tax deduction to be some sort of dividend regardless of the appreciation factor?

Yes, sort of, but you're spending a fortune and over-reaching to get a tiny dividend, and one that is not guaranteed not to be removed at some later time by govt. Govts put on and take off these sorts of things regularly, and they are different country by country also. Shareholders in a particular dept store chain here get a 5% discount on their purchases with a shareholders card, but even with the discount, the performance of the shares is so lousy that you would be better off overall just seeking an alternative investment or stock altogether to make more money.

Over the past 35 years, the median price for houses has always gone up in America. That’s not to say it can’t go down, or hasn’t gone down in specific markets. Housing is not on the same level as the lottery, not even close.

It has not 'always gone up' (I assume you mean by greater than CPI?) -- it has boomed and busted at least 4 times. However, the demographics driving housing inflation over the last 35 years include -- much smaller families on average; general inflation and dollar devaluation averaging 3-4% pa; more than one breadwinner per family; various tax breaks; lower cost of other consumer goods, e.g. by imports from China bringing down prices. All those things have now become static -- families can't get much smaller than they are, you can't get any more breadwinners into the family structure short of putting the kids into coalmines, imports from China can't get any cheaper, etc. Further, 'investors' are retreating big-time from property right now due to the incredibly low and pointless ROI. Once the investors go, that's it. It's very much like the lottery now in that over time you will get about 75% of your money back by gambling based on the house odds, which is what will probably happen now if you buy on a sizable mortgage at the top of the current boom which has all the hallmarks of the tech wreck. If you check Patrick's media reports, you will see the trend towards increased foreclosures and a downward spiral of prices worldwide, especially in bubble affected areas.

FormerAptBroker Says:

I don’t think that Sam really thinks that we will see big rent increases in the next year and was probably just saying that to make the people that just made tons in fees spending pension money on his property happy.

Agreed. The planets finally came into alignment...

If rents *do* go up the way some pundits are suggesting, there will be huge flow-on effects into the economy -- reduced 'consumer confidence' (i.e. crap sales figures and retailers going bust), upwards demands on wages, massive inflation as a result, and so on. All these microeconomic promises to landlords about their forthcoming riches translate into macroeconomic chaos. My own employment agreement has CPI built into wage increases, which in turn has rental amounts built into it. Multiply this thousands of times and Presto! -- you have instant currency devaluation lead by housing inflation.

theotherside Says:

and I can assure you that the owners will pass on the increase cost of carry/financing to the renters faster that you can say “Inflation’s up, I am a winner”

*new* landlords might try this, because they will be the ones who are hurting -- someone who bought their rental 30 years ago won't (shouldn't) be in trouble.

further, the ability of landlords to put up prices depends somewhat on supply/demand -- if demand goes down due to a good supply of cheaper, older apartments, or simply inability to pay, they have to suck it up and wear the hurt themselves... You don't see immediate reflexive passing on of new costs to tenants, there is a lag period depending on lease periods, "unreasonable adjustments" g.t. 10% and so on...

theotherside Says:

> Would you call a multi-millionaire an idiot because he
> spends 10x-20x more on “same quality” food than a
> upper-middle class guy….?

Yes, but I have never heard of this happening. Can you tell me where an apple or a steak costs 10 to 20 times more than it costs at a middle class grocery store? (When people eat out they are not just paying for “quality food” they are paying for many other things for example watching the wait staff interact with patrons at a certain restaurant in Yontville is like watching a ballet).

> With your logic, you will recommend to choose a
> husband/wife based on a spreadsheet…

Money will always factor in to a decision and I’m betting that most people will think twice about getting married to someone that had $1 million in credit card debt…

> Your argument is INCORRECT…what’s the point of having
> money after all…have you ever heard of the concept of a
> UTILITY FUNCTION… Renting a house is NOT EQUIVALENT
> to owning the same house,

I would not get any more utility if I owned my place and the people that rent homes from my parents would not be able to much different if they owned and my tenants in the apartment actually have more utility since If I did a condo conversion they would have the nightmare of CC&Rs and a PITA Homeowners Association.

> especially if you have kids (school, friends, after school
> activities) or you hate moving every couple years or you
> really really like your neighborhood or you hate having a
> nosy landlord or it does not fit the preferences of your spouse

Since I grew up in a family that rents homes I’ve been active in real estate and landlord groups my entire life. Very few landlords sell rental homes with good tenants and if you hand carry the rent on the first of the month most have better things to do than “be nosy”. If your landlord…

> Conclusion: Some people get high by seeing their bank
> statement showing $$$, other get high when they spend
> their $$$ lavishly

Since it would cost about $5K a MONTH after taxes MORE than I pay in rent to buy a condo on the block with the exact same UTILITY FUNCTION I have a lot more money to “spend lavishly” and do things like spending $500 on dinner while many of my homedebtor friends are eating frozen food that they buy at club card savings…

theotherside Then says Says:

> your rent COVERS most of the mortgage costs of your
> landlord (which is the case for the majority of renters
> not about to end up on the streets), ie. It may be may be
> INDIRECT but in most cases renting is equivalent to debtorship…

Most landlords have a very small mortgage (or in the case of my parents and many landlords like them no mortgage). You can actually call any title company and find out how much debt a landlord has recorded on the title before you decide to rent.

> Conclusion: Buying a house with a mortgage is really like buying
> a CALL option…downside limited to downpayment (103%
> mortgage anyone )

Buying a home is NOTHING like buying a call option. A 103% loan on a condo in my area would cost at least $75K a year more than my rent…

> In the event that you are foreclosed, if you have a decent lawyer,
> you can still show the middle finger to the IRS even with HELOC/refi … )

If you are a typical moron FB with a negative net worth you can walk away, but if you have worked hard and have a substantial NW there is no way 1. You can get a non recourse 103% loan and 2. That you can just walk away from a 103% loan…

OpinionPlease,

Where did FAB throw out either number?

Monthly PITI for a $1M condo w/ 20% down and 30 yr fixed would be $6-7,000. Even $3,000/month net is a lot of money that could be spent pursuing utility elsewhere.

OpinionsPlease Says:

> FAB, one thing.. $1million condos are renting for
> around $3,500 in the city and not $2,000.

I’m sure you can name a $1mm condo that is renting for $3.5K a month (I bet it is a 2 bedroom).

I have a friend paying just over $2K a month for a 1 BR in a Pacific Heights condo building that recently had a 1BR sell for $1.2mm. I have another friend renting a 1 BR (with parking) on Scott in the Marina for $2,100 across the street from a 1 BR that sold last year for just under $1mm. The 1 BR Condos in the Lake Street area that have been selling for close to $1mm will be lucky to get even $2K rent…

TOS :

I was just trying to calculate income required under the inflation scenario. Not providing complete analysis.

As others have pointed out rents are far more dependent on supply demand and the owner's needs have insignificant impact. It has also been pointed out that there are no creative financing schemes available for renting. During the dot com boom rents here far outpaced inflation. And after the bust they went down and stayed down.

And if you really want to know who will very quickly pass on the cost, then the mortgage banks will do that faster than the landlords. Think about the ARMs. Think what it would theirs resets do that to the housing prices when CPI is 7. So for once and all, let's say good-bye to the scare tactic of rents going up with inflation.

Remember rents are a factor of CPI, not the other way round.

FAB,

excellent rebuttal to thotherside.

StuckinBA,

I actually think the interest rate is about to go down when things really start to blow up.

But that will be too late to save the FBs. However it would be a good time to refinance when we go into Japanese fashion of 1.0% interest rate, haha.

Joe_renter,

I think I will buy a $2M house now if I won a $5M lotto, because real estate is just a part of the portfolio, and since I got the entire amount free (gift from god), I would rather buy a piece of land to stake my value, even if the price is inflated. In fact I did see a friend who cashed out a big option to buy a home all-cash, because he knew the stock was in a bubble, and swapping a stock bubble for a house bubble is not that bad of a deal, at least he gets to enjoy the house.

But I won't take out a loan on top the lotto winning. That's like putting in my own hard-earned money for the house, nah, I will pass.

OO :

The CPI is not offering any excuse to the Fed to reduce rates. I was surprised to see CPI being higher than expected because every Fed governor is talking about inflation ebbing.

Nevertheless, I think Fed will try to reduce rates. No disagreement there. BUT I do not think mortgage rate will follow suite. It's possible that MBS buyers continue to remain complete nut cases as they have been till yesterday. I just don't think it's likely. We will see widening of risk premiums.

OMG... I'd like to club anyone in the head who says it's fine to run up a 1.2 million dollar debt and walk away from it. The only way you can walk away from that is if you have nothing worth the legal hassle of taking, and you don't mind being a financial pariah for the next 7 years. If you have nothing to lose, you have nothing to lose. And it used to be nobody would loan 1.2 million to people like that. The house price run was the only reason why it would make any sense to load a boatload of cash to somebody who was going to default. You take the 6% commission hit on a 15% appreciation and you still make money.

Anybody who thinks borrowing money they can't have a reasonable expectation of affording to repay has no consequences is delusional.

The Reserve Bank in Oz is talking about another interest rate increase sometime this year, rather than a cut. It is also a major Federal election year. While the new Guv'nor of the RBA has bravely and matter of factly indicated at the same time he is independent of the political process and will change interest rates without fear or favour as needed, there will arguably be a local economic feedback circuit of: higher interest -> FBs are even more F'ed; recent investors with big mortgages are also F'ed -> chance of higher rents due to F'ed landlords -> higher CPI -> upwards wage pressure = inflation! the very thing the interest rate rise was meant to head off. However, you keep interest rates low instead = inflation!

It's like you turn the spigot on, and water comes out. You then turn it off, and water continues to come out.

Once you have had long periods of low interest and a speculative RE market, it seems to pathologise the whole economy, something like taking antibiotics for too long which kills favourable microorganisms as well and leaves you with a pathological physiology...

OO Says:
FAB,
excellent rebuttal to thotherside.

FAB is running like a well oiled machine today ;) he's in the zone...

alien,

The 'byproduct brine' I was referring to is the seawater itself after it has passed through either evaporator. The actual level of concentration will depend on water and air temperatures and flow rates, but it will always be saltier than the input seawater. Perhaps much saltier.

On any fairly small scale, this is irrelevant as the brine quickly diffuses back into the ambient seawater, but if applied on a really large scale you could concievably make the local marine environment saltier enough to have impact. I am thinking of places like the Red Sea and the Arabian/Persian Gulf, which are already significantly saltier than the open oceans.

Mind you, the more I look at the website the more I think that a couple of local agribusiness investment companies have missed out on a real opportunity. There would have been a lot less political opposition to their schemes if they had based some of them (E.g. large scale greenhouse tomato growing) around this sort of technology in semi-desert land close to the sea. (Australia has enormous areas of such land, the entire Eyre Peninsula springs to mind, not to mention the Nullarbor. Only lunatic fringe Greenies would object to technology-driven sustainable agriculture in those places.)

FAB,

Sam Zell was very careful in his remarks to distinguish between the apartment rental market (which he said looked good) and the SFH market (which he said he thought was OK as long as unemployment stayed low).

He did say there has been a lot of crazy lending, and that many people were going to finish up renting again after losing their homes.

But I take your point. This is what he was saying, but what has he done? ;)

DS,

I assume you mean by greater than CPI?

No, he doesn't, he's talking about nominal prices. It's an industry mantra.

The very, very cherished NAR statement is that since they started keeping comprehensive statistics in 1968 . . . the . . . NOMINAL . . . ANNUAL (Calendar Year) . . . NATIONAL . . . MEDIAN . . . EXISTING HOME sales price has always increased.

(I have overemphasised all the qualifiers here, because it is my understanding that a lot of Realtors (tm) ignore them and simply use the shorter statement "prices always go up".)

Now the interesting thing here, IMHO, is that this could turn around and hurt the industry psychologically if the 2007 median is in fact lower than 2006. All of a sudden the MSM are going to focus on that statement and observe that RE prices have fallen for the first time EVER.

I bet a lot of people moving to the Bay Area purchase homes without ever really considering what rent would be on an equivalent dwelling.

Yeah, they're called starry eyed CS degree college students.

The only way you can walk away from that is if you have nothing worth the legal hassle of taking, and you don’t mind being a financial pariah for the next 7 years.

Good points but don't forget to mention the lovely 1099C form that you will get.

oops, did it again. try this

Over the past 35 years, the median price for houses has always gone up in America. That’s not to say it can’t go down, or hasn’t gone down in specific markets. Housing is not on the same level as the lottery, not even close.

Median, Youdian, Shedian, Hedian, Median prices are bogus, why do people still use the median to determine price trends? They don't mean squat!

But risk is something we have to deal with everyday. Not taking calculated risks is the true tragedy.

Taking risks that are calculated to destroy you financially are a TRUE tragedy.

What if it never becomes cheaper to own than rent? Then what?

You can't seriously believe this can you?

Too bad these FBs buy overpriced sh1tboxes to breed. There's no way to knock that irrationality out of the gene pool.

A straight PITI to monthly rent payment comparison is inadequate. You have to take into account expectations of future price growth/reduction.

FBs have been expecting 15%+ annual growth for the last couple years, which makes the huge ownership premium over renting seem reasonable.

If we expect the market to drop by 15% for the next couple years, then renting even at 3X the cost of owning seems like a good idea to me.

Too bad these FBs buy overpriced sh1tboxes to breed. There’s no way to knock that irrationality out of the gene pool.

Don't worry about that, Darwin's laws are alive and well.

If we expect the market to drop by 15% for the next couple years, then renting even at 3X the cost of owning seems like a good idea to me.

Exactly, it's not just about whether it becomes cheaper to buy or not, but when prices show real signs that the market has stabilized and this cannot happen until inventories decrease to historical norms and the cheap money is completely washed out of the system along with all the FB's that made use of it. I don't see this happening this year.

There really is no telling just how far the prices will drop, but due to the magnitude of the increases, I sure don't want to bet my hard earned dollars against it.

Just like a typical FB, always trying to find a way to beat the system!

Pearlman said it may not be taxable if a taxpayer is insolvent or bankrupt and that can be documented to the satisfaction of the IRS.

The key word here is "may not" because the FB is "insolvent". If you are insolvent, you already lost so it won't matter. If you have a decent job however, they will get you. One way or another you will be screwed!

It's kind of like fighting off an armed robber when you have an empty wallet; it's just not worth it!

theotherside posts a link to the “respected financial journal” known as the Contra Costa Times that Says:

> When a short sale, deed-in-lieu agreement or foreclosure
> occurs and a residential lender loses money on a loan, the
> lender will most likely file the loss with the Internal
> Revenue Service.

Lenders don’t file a 1099 when they “have a loss” they file a 1099 when they “forgive debt” (converting the debt to income).

If I “give” someone $1,000 it is taxable income, but if I “loan” someone $1,000 it is not taxable income. The day I tell the person they don’t have to pay me back the “loan” (I “forgive the debt”) it becomes “taxable income”

Interesting choice of words with “will most likely file” when “are required by law to file” would have been more accurate choice of words.

theotherside,

Can you cite an IRS reg where income in the form of cancellation of debt = $250K home sale exemption? Otherwise it's just an argument and not a very compelling one at that (since debt is characterized quite differently from capital gains).

California slipping in rate of growth and in job creation

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/25/ING0BO934F1.DTL

TOC,

First of all, don't believe everything that you read; that is like saying:

"I can steal money from the bank and claim it as an exemption to keep from having to pay taxes on it".

I'm not buying it!

TOS,

Can you give a full citation of that MIT paper?

I find your claims absurd on its face. I know that prices have spiraled outside of affordability in NYC, DC, FL, NV, MA, WA, and AZ. That may not be much space geographically speaking, but it's where the good jobs and the mass of population resides.

Suds Says:

> Back in my home country of India, this statement would
> be pretty much reversed — it usually costs more to own
> than rent! This means that the owners DO subsidize the
> renters.

I’m no expert on India, but I find it hard to believe that many owners are subsidizing renters.

> An amateur investor (like some of my friends here in the Bay
> Area, who bought a second home in another state, like Arizona)
> does not mind “subsidizing” a renter. After a lot of thought, I
> think I understand the real logic behind this.
> It is the reasoning that the cost of owning does not continue
> forever. If one pays $3k a month to own a house on a 30 yr
> FRM and rents it out for $2k a month, then at the end of 30
> years, the owner owns the house outright whereas the renter
> (or collection of renters) owns nothing. My friends make the
> exact opposite claim that FAB does — it is the renter who is
> subsidizing the owner.

Suds you need to get your friends some financial help ASAP since if they are renting a home with a $3K mortgage for $2K they are in big trouble…

Let’s do some basic landlord math:

$3K a month is a ~$500K FRM at 6%, if it is a standard 80% loan they put down $125K.

Income $21.6K per year ($2K per month with an average 10% vacancy/collection loss)
Expenses at least $44K per year ($36K mortgage + $5K typical SFH expenses + taxes)

So your friends are paying well over $20K a year a year out of pocket to own the rental and since they are not getting any return on the down payment they are will have about $30K less money every year (before adjusting for the tax loss)…

P.S. Do your friends (the amateur investors) know that AZ home prices are on the way down?

"Call the law offices of Geoffrey Burns if your loan officer failed to explain that the interest would be added to your principle every month if you have a negative amortization loan. "

The sharks are swimming in a circle.

Dump the house cause you cant sell it and you'll pay income tax on the amt the bank lost.

That sucking sound you here is the peasant class moving back to mexico.

adios

In the end, it will all boil down to

3- and INFLATION (the higher inflation is the faster real prices come down even with sideways drifting nominal prices)

You left out the most important factor of all and that is the elimination of idiot loans which were the main driver behind the price runups; and don't forget the $1T of ARMs that are going to reset this year.

TOS,

Himmelberg et al assert that the cost per dollar, that is the cost of borrowing, does not constitute an affordability crisis. And that is all, in their abstract, that they propose.

Since the matter of excess liquidity has been throughly examined here for years now, you have simply provided three more names of people who share the views of the majority here.

Thank you for giving us the unexpected blessing of an MIT publication, though I suspect it was not your intention.