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2005 Apr 11, 5:00pm 199,197 views 117,730 comments
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Shiller
2010 Oct 11, 4:11am
Greece. BOOOYAHHH!!!
http://www.globalpropertyguide.com/Europe/Greece/Price-History
Shiller
2010 Oct 11, 4:15am
Again, what drives home prices are JOBS. No jobs, no home price increases. Inflation can't make wages rise when unemployment exceeds 25% like it did during the Great Depression.
On the casino comment - I've dreamed of making that one options play that would make me a 10x return on investment. I've probably had a 20% in-the-money success rate, but overall have come out 2x ahead on investment. Not bad...but it is gambling no doubt.
I am invested in gold, but after reading these comments - am thinking of swapping it for silver. That seems to be the better play.
On the casino comment - I’ve dreamed of making that one options play that would make me a 10x return on investment. I’ve probably had a 20% in-the-money success rate, but overall have come out 2x ahead on investment. Not bad…but it is gambling no doubt.
I am invested in gold, but after reading these comments - am thinking of swapping it for silver. That seems to be the better play.
If you want to make 10x return on your investment, simply get some good junior mining shares. If gold bubbles, these things will explode through the roof.
That's what caught my eye in an article Patrick linked to: http://www.zerohedge.com/article/three-horrifying-facts-about-us-debt-%E2%80%9Csituation%E2%80%9D?source=patrick.net#inner-content
… either that or experience hyperinflation. There is simply no other option. We can NEVER pay off our debts. To do so would require every US family to pay $31,000 a year for 75 years.
RE @ 4.5% is looking good right now. It is an asset that will grow inflation-indexed.
Patrick
2010 Oct 12, 1:20am
I think the "something else nasty" explanation is correct, because salaries are not rising.
Deflation Nation:
The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.
RayAmerica
2010 Oct 12, 3:35am
"something nasty" translates to me as stagflation. Google is planning on releasing another index that is more in line with inflation statistics. That should be interesting being that, IMO, statistics provided by the government are almost always tainted.
Patrick
2010 Oct 12, 3:59am
Yes, that Wikipedia description of "biflation" seems to apply to the current situation.
Wage inflation is inevitable. It won't track price inflation, but it'll be there. Just wait.
Silver has been crushing gold, ratio down to under 58:1 from 66:1 just a few months ago. I'm looking to get out of the silver and into a jr miner or two, any reccomendations?
What's the guy from Western Silver doing these days, thomas patton?
bert
2010 Oct 13, 5:37am
As patrick says, its better to have low principle and high interest to avoid becoming a debt slave.
Well, if you had that choice, that would be true. But in reality your choice is to buy now with low interest rates or wait a long time until those rates are higher. Now figure the cost of paying 2k rent for 5 years = 120k. It's hard to imagine houses being 120k cheaper in 5 years, especially if interest rates are rising suggesting an improving economy. Not to mention the frustration of basing *your* life on macro-economic theory i.e. making your own decisions based on the macro economy sounds like a case of "life is what happens while you make other plans"
It isn't tied to any "recovery." That's nonsense. A clear look at the graphs indicates this most recent meteoric rise began in August/September after the Fed had indicated that a second round of quantitative easing may be required to prop up the impotent "recovery." That moved speculators into hard assets, ag commodities, gold and silver, copper, etc. It's just inflationary positioning - perfectly logical.
Price increases at the gas station and grocery store will just weaken the economy that much further. This is DEFLATIONARY for housing, especially in suburban areas where the cost of oil has a significant impact on family budgets.
Since we've been talking about Argentina lately, let's examine what happened to their real estate market upon devaluation of the peso argentino.
IT COLLAPSED. All bank lending completely seized (nobody is going to loan money that, once paid back in the future, is worth significantly less).
Real estate prices in Argentina (as well as Iceland where another devaluation just happened a couple of years ago during the bust) are still FAR BELOW their pre-devaluation levels.
Not planning for the macro-economy is REALLY working for those people who bought in ‘06
At least they didn’t let that macroeconomic bully tell them what to do though.
Well, I think the point is not to go entirely by macro-economic theory, but to mainly consider your own personal micro-economic situation.
Most of those who bought between 2002-2007 ignored both.
I have to say that back in 2003-2004 when we were shopping I decided not to buy because I did the simple math calculation of income vs 30 year fixed mortgage payment vs rental rates. No one had to know a damn thing about economics or macro-economic theory, people just had to do simple arithmetic!
bert
2010 Oct 13, 6:31am
Not planning for the macro-economy is REALLY working for those people who bought in ‘06
Funny that you say that because on a micro-economic scale it worked out nicely for me ;)
bert
2010 Oct 14, 2:49am
I’m not following you, bert.
So you’re saying that you bought a house, watched it lose 40% of its value, and now you’re jumping for joy?
Or are you saying that your microeconomic perspective worked because you happened to be at a decent place in the macroeconomic cycle when you made the decision?
or what?
We did buy in 2006 (20% down) and have now saved 2k per month in rent payments for almost 5 years while enjoying our digs. We were able to refinance as interest rates went from 6.25% to 3.875%. The interest payment on our new loan is much less than it would cost to rent, and it's tax deductible. In another 5 years time, we will have saved another 120k compared to renting, totalling >200k compared to non-buyers. Our home may have gone down in value, but our home is a keeper and we have no intention of selling anyway and, frankly, the only real affect it's had on us is lower property taxes.
Life is short. Credit helps you get what you want and enjoy it now. The problem with identifying with losers who can't handle credit is that you're a loser too. Think for yourself.
Bert, sounds like you probably did the right thing in your situation. Even during the Bubble Years, there was no hard and fast rule; it always depends on how long you plan to stay and your rent vs. buying, which is always determined by the micro-economic circumstances of your local market.
In LA, if I had bought the same apartment I'm living in right now, I would have had to pay $800,000; with 10% down that's $720,000 @ roughly 6% in 2006=$4,500/mo mortgage. In 2006, I would have rented this apartment for $2,000/mo. So for me, it never made sense to buy vs. renting.
Even if I was able to refi today at 4%, that's still $3,600/mo mortgage--and, yes, I'm still paying $2,000 because rents are not dropping in LA nearly like home values are. I've saved about $75k (and invested it) since 2006 from renting instead of buying. If I had bought that $800k apartment, it would be worth about $700k in today's world (we're talking west LA/Hancock Park/Miracle Mile area). So I would have really lost out on savings, equity, and possibly being underwater on a mortgage since the first 5 years is 99% interest payments. Not to mention the cost of doing that refi to the current rates.
Re: 10% interest rates. I think in the end we pay roughly the same--it's just a matter of paying for an overpriced house with an underpriced loan, or you're paying for an underpriced home with an overpriced loan.
bert
2010 Oct 14, 3:38am
y ... i guess the point i'm trying to make is that i want to encourage Patrick.net readers to look at their own situation and make their own decisions, rather than basing their life choices on the macro economy and/or what they read in this blog. I know people who seem brainwashed in their own actions because they can't seem to disassociate their lives from what's happening in the broader economy. I'm hoping for some good karma by by offering a dissenting opinion that may save people putting their lives on hold just because we all agree the macro economy sucks.
bert
2010 Oct 14, 4:26am
bert: interest on a mortgage is absolutley not tax deductable, period. Rather, if you itemized it can be itemized, and only helps you to the amount that you exceed the standard deductions…
I bought in 2006 - i easily exceed the standard deduction ;)
furthermore, you can’t just act like you ’saved the rent’ when you incurred other costs to live: ie everything except principle reduction which has no doubt been negilgile.
bad math and thinking to rationalize a poorly timed decision, that’s all I’m seeing here.
I imagine i'd be much more unhappy living in a house with good maths ;)
I think of my principle payments as my own money that i get to keep.
As for "principle reduction which has no doubt been negligible", i encourage you to open your mind to possibilities - you just may be wrong in your thinking sometimes.
It did occur to me what really bugged me about this thread and encouraged me to write. It's that basing your actions on the macro economy is what got us in this mess in the first place. Basing your decisions on what is happening in the macro economy sounds like bubble thinking i.e. house prices are going up - let's buy now. For all your deriding of the housing bubble - macro thinkers are sounding to me like people just waiting to time the next bubble. Double standard?
bert
2010 Oct 14, 6:08am
furthermore, you can’t just act like you ’saved the rent’ when you incurred other costs to live: ie everything except principle reduction which has no doubt been negilgile.
bad math and thinking to rationalize a poorly timed decision, that’s all I’m seeing here.I imagine i’d be much more unhappy living in a house with good maths
I think of my principle payments as my own money that i get to keep.
Until they figure out how to factorize happiness, i'll use whatever maths it takes to make me happy ;)
HeadSet
2010 Oct 14, 6:26am
Bert says:
We did buy in 2006 (20% down) and have now saved 2k per month in rent payments for almost 5 years while enjoying our digs.
Your mortgage payments were $2,000 less than your rent? Equivilant house?
bert
2010 Oct 14, 7:35am
Your mortgage payments were $2,000 less than your rent? Equivilant house?
Good point. I guess my calculations assume a goal of home ownership.
If you buy now instead of waiting for 2 years, you didn't have to spend 2k/month for 2 years trying to achieve your goal. But that's like saying it's worth an extra 2k/month (minus principal + tax benefits) to own your house. I guess i can factorize happiness after all.
bert
2010 Oct 14, 7:49am
Good point. I guess my calculations assume a goal of home ownership.
If you buy now instead of waiting for 2 years, you didn’t have to spend 2k/month for 2 years trying to achieve your goal. But that’s like saying it’s worth an extra 2k/month (minus principal + tax benefits) to own your house. I guess i can factorize happiness after all
or rather,
ownership premium (i.e. Price of Happiness) = current mortgage + taxes - 2k (equiv rent) - principal - tax deduction benefit
The good news is that when i plug my numbers in it comes out negative.
bert
2010 Oct 14, 8:21am
ownership premium (i.e. Price of Happiness) = current mortgage + taxes - 2k (equiv rent) - principal - tax deduction benefit
To be fair, this also ignores the lost earning potential of the initial 20% down plus extra principal payments we made. But that money really wasn't contributing to my happiness while it was sitting in the bank and so, in my happiness alegra, it's a wash.
bert
2010 Oct 14, 9:02am
But that money really wasn’t contributing to my happiness while it was sitting in the bank and so, in my happiness alegra, it’s a wash.
Happiness algebra is a little weird. Think about 100k sitting in the bank. You could spend it on things that make you happy i guess, but a responsible person would organize all the things they want on a happiness scale to make sure they get the things that make them the most happy first. There's a really weird relationship between happiness and $. My $189 kindle makes me really happy to the extent that 100k of happiness is too abstract. Stuff i use everyday makes me happy. I don't use money sitting in the bank for anything. We get so much use out of our house everyday that i'd gladly swap that 100k for some of that happiness. Helping other people makes me happy. Gosh, what have i been smokin' today;)
LAO
2010 Oct 14, 9:36am
We did buy in 2006 (20% down) and have now saved 2k per month in rent payments for almost 5 years while enjoying our digs.
I'd imagine you just recently refinanced... Banks don't REFINANCE for free... What do they have to gain out of refinancing you at a lower rate? Other than keeping you from foreclosing.. a bank has little incentive to offer you refinancing. You don't save $2K a month by renting by the way... That's the lie all homeowners spout off.
You only save the difference between your rent payment and your principal payments + tax savings.
The first 5 years of owning a home people are hardly paying any principle. They are paying LOADS of interest though. For instance, a $500K home at a 5.25% interest rate.. the principle payments would be $31K after 5 years with 20% down.
So since you say you bought in 2006... It's safe to say the average 2006 buyer lost their entire 20% down payment in their homes drop in value. So, a $100K loss on a $500K home bought in 2006. Then after 5 years of regular payments they would have paid off about $31K in principle.
So do the math....
Buyer in 2006 aka BERT: Buys $500K with 20% down. Mortage payment + taxes approx. $2700 a month. Pays approximately $100K in interest over the past 5 years.. and $31K in principle. Their house is worth $400K now... They STILL owe $369K.
Renter in 2006: Pays $2K a month for 5 years. For $120K loss. But didn't pay any taxes or interest and still has that $100K in the bank that the Buyer used for a down payment.
So the 2006 Buyer is paid $162K out of pocket for 5 years.. and $100K up front.. and paid off a whopping $31K of a home now valued at $400K.
Meanwhile the renter paid $120K over the same time period.. still has that $100K in the bank.
Whose better off now and made the better decision... The renter by far!
SFace
2010 Oct 14, 10:12am
I wouldn't say a refinance is free, but the fees are pretty much nominal. (around 1K-2K) If you get a rate reduction from 5% to 4. 3/8% the return on investment is maybe 5 months.
At 4.375%, principle amortize a lot faster than if interest rates are 5.25%.
The going zero points loan was 4.25, and the extra 1/8th paid all the closing costs.
Ducky,
I'm guessing your LTV was less than 50%, perhaps? I'm waiting for Chase to make me an offer I can't refuse... those SOBs impound for taxes (otherwise, 1/8th of a percent more). On the positive side, they'll rebate 1%of your scheduled payments (P&I) each year if you have a checking account with them for automatic payment.
I think you’re doing the right thing by looking at houses that are more affordable and that will allow you to do more with your life rather than being house poor. I’ve looked at a bunch of homes over the past year and I’m finally ready to buy a house, I have an accepted offer in by the bank (it’s a foreclosure) and I’m closing next month assuming the appraisal and inspection go fine.
I’m hoping to get some advice as well; maybe some of you could help me out please?
Here’s my situation. I’m 24 years old, ready to graduate in the spring with a bachelor’s degree. I’ve held a job in my field (which I enjoy) since 2007; my salary is in the $50-$60k range. The house I’m about to buy is $92k; it’s in a great area here in Michigan where there’s a lot of waterfront and canal properties. The house (all brick, built 1967) is 1,600 square feet, 2 ½ car attached garage, basement, deck, 1 ½ bath, overall I like it a lot and it’s a home I can see having a family in. My total payment for the mortgage, insurance, pmi , and taxes is about $775. Using Patrick’s method if I could rent the home for $1k a month that’s $12k a year /$92k that’s 13%, so I would believe I’m getting a fairly good deal. God forbid I lost my job and had to rent the place quick at $800 a month that’s still about 10% using his formula.
I’ve looked at what I can rent for $800 around my area and the results are not great, for what I’m looking at I would have to go over $1k a month it seems.
Overall do you guys think I’m making a decent purchase?
My sense is that you've made a good decision. If you're happy that's the first good sign. Even if you end up paying a little more than you would to rent a place, I would look at the difference as what you're paying to afford yourself a certain standard of living. It's only natural to have a twinge of misgiving at the outset of any big commitment, but looking at your numbers, I really wouldn't sweat it.
Riley said: "But I’d imagine the maintenance on a 75 year old house can’t be cheap. I don’t want the headache"
Of course I don't know the particulars of the place you're in, but I wouldn't be so quick to dismiss older homes because you think the maintenance costs could astronomical and don't want the headaches. I realize the one your in takes a beating in the winter and summer since they are exposed to the extreme elements which creates it own problems. I had homes in the mountains, so I am familiar with frozen pipes, heavy snow slowly melting on the roof, etc.
Two of my low maintenance rental holdings here in Southern California, (Pasadena and Glendale) are older homes; one is a 1927 Spanish house with hardwood floors and loads of storage space and the other is a 1939 ranch home with hardwood, etc., and older homes generally come with larger lots, don't look like cookie cutter subdivision homes, and have lots of character and charm. I rarely have any issues with maintenance and I think it's because these particular homes were built better back then. I have more issues with my properties that were built in the 80s than I do the ones that are 83 years old, so they are super performers. Of course with any property you own there is a little preventative maintenance, but that's part of home ownership. I have never allowed deferred maintenance on any home I have ever owned because ultimately it will cost more to repair if left unattended or the job is done in a poor manner.
In fact, this may be a good topic for those landlords that have older homes to see what their experience has been.
Galatica, I think you made good decision. Don't know a thing about Michigan, but what you said sounds alright to me as long as you keep the job. Your cost of living in there would be about 1/3 of your after tax income, so it sounds fairly easily doable without headache.
Bryan, I think your decision is sound too. And, please don't presume anything because the home is old. Take a look and see if the home has good bone, and is maticulary maintained or not.
Mark_LA
2010 Oct 14, 3:25pm
Even a couple where each of you work at McDonald's and makes minimum wage now qualifies (DTI ratios) for a home in Reno that costs $150k. So, that's the reason why homes in that price range are in sketchy areas. You're living next to people who earn minimum wage, and welfare queens who get the equivalent of minimum wage from the government.
Learn a trade or go back to school and make more money is my advice. Any fully employed plumber, carpenter, or painter, or policeman who marries a nurse's assistant can afford a $300k home at 4.x% 30 year fixed rates. All those professions require is a GED plus a couple of months training, and it separates you from the minimum wage earners.
In the L.A. area a $300k home would land you in the desert communities like Lancaster, or in the ghetto like South Central L.A., but in Reno it'll buy you a nice house that isn't a fixer-upper in a relatively nice neighborhood. FHA loans only require 3.5% down, so a measly $10k downpayment will qualify you.
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