patrick.net

Rentingforhalf...
I don't think you understood my question, but it doesn't matter. Unless you are buying with all cash, mortgage rates should factor into your equation somehow. I never said they were the only thing to look at. However, to completely ignore them for some reason is absurd. And to base a purchase price on 3x your income without factoring them in is either lazy or oversimplifying things.

tiny tina says

Ok, apparently some of you don't want to discuss things in monthly numbers...what do you propose, instead?

I propose that we stop letting interest rates determine the value of a fixed asset. Value is in the land and construction costs. If I was selling you a bicycle and told you, hey based on your income level, you can pay me $10/mth for 30yrs and the bike is your. Would that be enough data for you to decide if the deal made sense? Wouldn't you like to look at how much it actually cost to manufacture the bike? The present value of the 30 years of payments? It all should come down to the exchange of money that happens when the bike leaves my garage. Regardless if it is your money, your parents, or a banks. Interest rates are just a scam to confuse the problem so the average buying doesn't realize what is happening to their future. I know many people that can't even understand exchange rate conversions, but talk about mortgages and interest rates like they have PhDs. That is how screwed up this real estate industry has become.

tiny tina says

Rentingforhalf...

I don't think you understood my question, but it doesn't matter. Unless you are buying with all cash, mortgage rates should factor into your equation somehow. I never said they were the only thing to look at. However, to completely ignore them for some reason is absurd. And to base a purchase price on 3x your income without factoring them in is either lazy or oversimplifying things.

YES, Oversimplify! Please. It is not that hard a problem. I have an asset that others want. What is the value in the asset? X of todays dollars. Simple. Now add in the weight of the government and fed and NAR trying to give away money all over the place to complicate things. The interest rate should match the risk of default all the time. Did you see the latest default numbers? Obviously the setting of the interest rate has nothing to do with risk. In that case I cry out "Manipulation".

RentingForHalfTheCost says

The interest rate should match the risk of default all the time.

Default risk is a part of mortgage rates, but a very small part actually. It can be seen more in the spread between prime and subprime.

Renting...
I agree that in a world without mortgages, your way is the right way. When it comes to cars, I agree, they try to get you to focus on monthly payment, which is why we pay cash.
Unfortunately, in reality, particularly in the BA, it is very hard to pay cash for a house. Plus, you aren't talking about a product that toyota can just ship another 10,000 of next month. In the good parts of the BA, you have a few hundred houses for sale at a time. Yet, you have several thousands of people looking to buy, and they are content with using a mortgage based on current rates. I wish the housing market crashed in 2009 for the whole bay area. But, it didn't. I was waiting with a good pile of cash. Unfortunately, unless you have a boatload of cash, a mortgage is a relevant aspect of purchasing a house in the BA.

Here is a chart of the latest Case-Shiller data, broken down by price tiers, for the Bay Area:

tatupu70 says

RentingForHalfTheCost says

The interest rate should match the risk of default all the time.

Default risk is a part of mortgage rates, but a very small part actually. It can be seen more in the spread between prime and subprime.

If a private company that owed its existence to managing the risk actually set the rates, we wouldn't have this problem today. Like another post where there are 40yr old DINKs buying a 600K house and only putting down 3.5% the private company would say "What?". You have been making money for 20 years and all you have is 3.5% down? Red flag right there. The interest rate they would get offered is not +1 from the best. It would be +15% from the best. Therefore, I say we don't have a free market in housing. It is a highly manipulated market that everyone is comfortable dealing with now. That still doesn't make it right and I still don't have to believe it is right or even mildly fair. I am not one to fall in line just because that is the way it is and has been. When it is broke we need to fix it. What is happening now will eventually lead to a fix I am hoping. Probably not, but I can still hope.

RentingForHalfTheCost says

Obviously the setting of the interest rate has nothing to do with risk. In that case I cry out "Manipulation".

And you would be completely right. There is no doubt that interest rates are manipulated, and that taxpayers pay for the manipulation. I would like nothing more than for this to end.

But as a prospective house buyer, is it reasonable to wait until if/when it does? Do you refuse to go by BART because it is subsidized?

Since I am paying for the manipulation as a tax payer, isn't it rather reasonable to get some of my money back through a manipulated-low interest mortgage?

Sure there are risks. If the manipulation ended tomorrow house prices would drop quite a bit as well. But sitting with a hoard of cash and renting isn't exactly risk free either. What if all the manipulation leads to inflation/currency debasement? Then one would do pretty well with a hard asset like a house and a mortgage with a locked-in low rate.

tiny tina says

Hysteresis says

i could buy a $600k house with cash - i wouldn't because that would be stupid for various reasons. i currently pay $1150/month rent.

What are these various reasons?

here's one: tying up $600k cash in a non-performing and most likely depreciating asset (over the short term, and probably flat over the long term after adjusting for inflation) is stupid. it would be better allocated elsewhere whether it's savings, bonds, stocks or more likely some combination.

drtor says

And you would be completely right. There is no doubt that interest rates are manipulated, and that taxpayers pay for the manipulation. I would like nothing more than for this to end.

But as a prospective house buyer, is it reasonable to wait until if/when it does? Do you refuse to go by BART because it is subsidized?

Since I am paying for the manipulation as a tax payer, isn't it rather reasonable to get some of my money back through a manipulated-low interest mortgage?

Sure there are risks. If the manipulation ended tomorrow house prices would drop quite a bit as well. But sitting with a hoard of cash and renting isn't exactly risk free either. What if all the manipulation leads to inflation/currency debasement? Then one would do pretty well with a hard asset like a house and a mortgage with a locked-in low rate.

Now there is a real bona fide argument for buying that realtors should be using! drtor tells it like it is, and has posted one of the only reasons I agree with as to why buy now. This is much more refreshing the "lowest interest rates in history", "Houses only go up", "great schools". There is some micro and macro economics in the argument, rather than just straight up fear. Realtors, please learn and stop with the fear mongering.

In fairness to the argument that housing will be a better place to manage inflation, history has shown the exact opposite. Housing has just barely kept up with inflation over the long run. Real value increase of 0.4% since 1890. Yikes. Stocks on the other hand have increase 7% over that same period.

http://efinancedirectory.com/articles/Why_Investing_in_Stocks_Instead_of_a_House_Will_Make_You_Richer.html

Winner=Stocks

Hysteresis says

here's one: typing up $600k cash in a non-performing and most likely depreciating asset (over the short term, and probably flat over the long term after adjusting for inflation) is stupid. it would be better allocated elsewhere whether it's savings, bonds, stocks or more likely some combination.

Ok, so you're back to using a mortgage which can be analyzed in monthly terms.

I think we need to back up the train for a second. The initial post was:

"Is Bay Area Crash Over?"

Short answer is yes. Crash means prices crash, which they did fairly dramatically a few years ago. What's left is a very sluggish, slow, and as of last check a very slowly depreciating market. Its not appreciating and its not depreciating enough to make people really snap to attention. But simplifying the answer even further, the bottom is never reached until a pattern of appreciation appears at which point the "bottom" can truly be seen in hindsite. So if the question is are we out of a depreciating cycle and into an appreciating one? Nope.

illustrateth says

I agree with edvard2. We are in almost the exact same situation, and it stinks not having a yard, but we just can't bring ourselves to overpay for a house when we feel it's accepted value is over it's intrinsic worth.

Well, just because you rent doesn't mean you don't have a yard. We rent a 4 Bedroom house with a fairly nice back yard and a garage. Our rent works out to be $1,200 a month for our part of the rent with a house mate who is seldom home.

tiny tina says

Let's stick with the $600k house example. How are you going to purchase it?

edvard2 says

Short answer is yes. Crash means prices crash, which they did fairly dramatically a few years ago. What's left is a very sluggish, slow, and as of last check a very slowly depreciating market.

I haven't found the time to get more information, but when I read the Case-Shiller report this morning I remember that San Francisco had the tied-for-5th worst performance non-seasonally adjusted and similar performance seasonally adjusted. I agree with some of the posts here that the BA didn't go that negative and I find that worrisome and, possibly, hopeful. Maybe the situation has brought to light the fallacy of spending your entire life's earnings on a house.

RentingForHalfTheCost says

The monthly means nothing to the people not working paycheck to paycheck. You are paying to either rent money or rent a house.

Ding Ding Ding We have a winner.

You are paying to either rent money or rent a house.

tiny tina says

Let's stick with the $600k house example. How are you going to purchase it?

Just calling it a "$600k" house seems deceptive to me. Let's call it a "$600k house at 4% interest" or, even better, a "$988,095.33 house." I used some of the numbers from this thread. 10% down, 4% interest, 30 year loan. Patrick made a great calculator for this which you can see here;

http://realestate.patrick.net/housing/mortgage_calculator.php?price=600%2C000&pc_down=10&years=30&pc_interest=4

tiny tina says

Unfortunately, in reality, particularly in the BA, it is very hard to pay cash for a house.

Some of us are challenging that idea with math and hedging that maybe as we calculate we'll enjoy a nice rental while our determination is either met with lower prices or a longer wait to buy, with the possibility that never buying is also acceptable given a steadily increasing net worth.

tiny tina says

Affordability can be compared pretty easily using monthly numbers.

Yeah, "affordability" is tricky though because of the human relationship with numbers(a subject of which I know almost nothing). I'm thinking of how $19.99 sounds affordable, but $20 does not. So you can get a positive affordability reaction from people by presenting numbers in different ways.

I really fell sorry for those in NoCal. Makes SoCal prices look reasonable. We sat on the sidelines a good 5 years renting at the beach in San Diego, checking this blog everyday and finally bought a house last December for $583K in a great neighborhood in La Costa (South Carlsbad). We got a 5 bedroom house with peak ocean view, huge yard, and a great school district. Rents are going for $2,500-$3,000/month. We put 20% down and got 4.13% 30-year fixed. Even without the mortgage deduction, I am paying about the same amount as renting including taxes, utilities and maintenance (so far).

I think prices will drop a bit more, but we just couldn't stay in our tiny beach cottage any longer with 2 kids under 5 years old.

I have stable employment and hope to be in this house for at least the next 15-20 years to raise our kids. Glad we waited, but with interest rates so low and prices down, we did not want to spend another year miserable in our tiny rental hoping to find a house slightly cheaper to save a couple hundred bucks/month. We love our new house and community and haven't regretted a thing yet.

FunTime says

Some of us are challenging that idea with math and hedging that maybe as we calculate we'll enjoy a nice rental while our determination is either met with lower prices or a longer wait to buy, with the possibility that never buying is also acceptable given a steadily increasing net worth.

The general assumption here in favor of buying is that prices will go up by then and if you rent, it could go up 3% YOY,but then it could go completely other way if we are in for a Japan like lost decades. I bet for the later.

drtor says

Since I am paying for the manipulation as a tax payer, isn't it rather reasonable to get some of my money back through a manipulated-low interest mortgage?

I have thoughts like these, which turn to other thoughts I categorize as "Can I, through saving/investing, become a member of the manipulative group?" Unfortunately, given my family background and financial starting point, I'd need a couple hundred years and I'm not sure I'd qualify then. What would it take? Hundreds of millions of dollars at least, right? I'm not sure they'd have me. Maybe if Kurzweil's singularity occurs?

So maybe given that futility, becoming part of the game is the best move. It's not in my nature. It doesn't seem consistent with the U.S. Constitution. I find the idea of Cannibal Apocalypse actually more bearable.

FunTime says

I find the idea of Cannibal Apocalypse actually more bearable.

Oh and it might help to understand that I'm a life-long vegetarian trying to be vegan.

socal2 says

I really fell sorry for those in NoCal. Makes SoCal prices look reasonable. We sat on the sidelines a good 5 years renting at the beach in San Diego, checking this blog everyday and finally bought a house last December for $583K in a great neighborhood in La Costa (South Carlsbad). We got a 5 bedroom house with peak ocean view, huge yard, and a great school district.

If you're from anywhere else reading this blog then its probably misleading because the Lion's share of the posts complaining about prices are from those who are unhappy they can't afford in the absolutely most expensive, most desirable, select cities in the Bay Area. Places like San Francisco proper, a lot of the cities dotting the Peninsula, and so on. The Bay Area isn't cheap- much like San Diego isn't cheap either. But there are cheap(er) areas and many of these are just as nice in my opinion but perhaps not as close to the job centers. For example lately there has been a number of homes that sold in the East Bay neighborhood we live in for under 400k. Those same houses would probably be 600k+ in the above "desirable" cities.

On the other hand I'm sort of glad that so many people are trying to live in those expensive places. It keeps places like the east bay more affordable.

edvard2 says

But there are cheap(er) areas and many of these are just as nice in my opinion but perhaps not as close to the job centers.

Walking to work is really awesome. I highly recommend it for anyone struggling to manage stress. I don't even do it most days, but the days I do are really valuable. Can we devise a walk vs. drive calculator?

FunTime says

edvard2 says

But there are cheap(er) areas and many of these are just as nice in my opinion but perhaps not as close to the job centers.

Walking to work is really awesome. I highly recommend it for anyone struggling to manage stress. I don't even do it most days, but the days I do are really valuable. Can we devise a walk vs. drive calculator?

Tell me about it. I rent about 1.5 miles from my office and my car is taken to work once every 2 months or so (if I know I need to run an errand or something). I usually walk or ride my bike. Sometimes I jog or ride my old longboard skateboard. Now, the asking prices for shit shacks in Mountain View are totally beyond reason, and when I buy in the next couple of years, it won't be in this place. For now though, renting costs me less than 50% of what it would take to buy a less-nice place than the one I am in, so I'll take my higher-than-surrounding-areas rent and my 20 minute walk to work!

@edvard2. I hear you. I'm from the Midwest originally and have lived in California for the past 18 years (including San Jose during the mid 1990's) - and it took quite a while for the shock of house prices to settle with me.

I am willing to pay nearly $600K for the big house I just got to be so close the beach, great schools and my work. I could never spend that much on a smaller home in SF or the Bay Area.

I lived waaay too long in tiny stucco boxes built in the 1950's just to be in a "cool" neighborhood. Now I am just digging the little things I used to take for granted in a modern home like a full size dishwasher, central heat, 3 full baths.....

FunTime says

Walking to work is really awesome. I highly recommend it for anyone struggling to manage stress. I don't even do it most days, but the days I do are really valuable. Can we devise a walk vs. drive calculator?

Well, paying cheap rent, having a garage to work on stuff and having a yard with a garden is also awesome. Obviously some people have different opinions which is fine. I'll just say that my commute is around 30 minutes each way. In other words- not horrible.

edvard2 says

Ok, so let's break down the math. Let's say that someone somehow has absolutely stellar, perfect credit. They buy a 600k house and get the current rate, which is around 4.65%. Your payments would still be over $3,000 a month, which of course doesn't include taxes, insurance, repairs and maintenance, whatever HOA fees might be required, inspections, and so on. Assuming you're one of those well-paid professional couples making 200k a year, they would be taxed approx. 15% federal and 9% State, thus 200k minus 25% = $50,000 in taxes, thus they have $150,000 to spend on everything else.

Huh? What am I not understanding here? Fed tax at 15%? Is this couple making its 200K/year on investments and thus taxed at capital gains rate in this hypothetical? Surely you cannot be talking fed income taxes for a couple making 200K? I must be missing somehting bc no one else has commented on this. Please advise

bayarearenter says

Huh? What am I not understanding here? Fed tax at 15%? Is this couple making its 200K/year on investments and thus taxed at capital gains rate in this hypothetical?

No, I had the same thought. Maybe I need a new accountant. I think Fed tax rates for a couple making that much would be over 30%.

edvard2 says

Well, paying cheap rent, having a garage to work on stuff and having a yard with a garden is also awesome.

I agree! "Cheap" is relative to income. I don't have the garage, but I also don't enjoy working on stuff that big. I plan to stop owning cars. They are also a cost-effective good to rent. I'm going to try and grow peanuts this year in preparation for the Cannibal Apocalypse. I'll make good eatin' for somebody. So far, all I've grown in the back yard is the lavender, rosemary, lemons, arbutus "strawberry" fruit, loquats, and mini-plums that came with the place. Oh, and a bunch of flowers my wife planted and the live trees we use as Christmas trees.

I've been lurking on this forum for quite a while and I feel that I should give my 2 cents on this:
I bought a home (SFH) in Santa Clara county a couple of months ago. Paid 350k. The mothly outflow is ~1700 (motgage, taxes, insurance). The place would rent for ~2300. It's not in a "hot"area - most of the peninsula is still outrageously expensive - but it's a decent San Jose neighbourhood. While I admit that the prices can still go down, for me this was a good oportunity, and I'm paying now less than I was paying in rent before (not even considering the tax benefits). Most of you bears on this forum have to admit that when opportunities like that are available, than there is a tiny chance that RE is starting to bottom (in Bay Area). Prices might still go down from here, but for me it was a sound financial decision, and from the inventory numbers I think that others might start thinking the same.

Im not calling bottom but i will say that the bear's ship appears to be sinking

Realtors Are Liars says

The only thing sinking is prices.

Realtors Are Liars

Buddy,
I really feel for you. I was on the same boat, but don't put on the blinders, there might be a chance for you waiting right now :)

I think it depends upon where you are in the Bay Area. Brentwood, Oakley and Antioch are scary from several different points of view. I liked the house we almost bought out there but it would only work if I had a .50 caliber turret on the roof with troops to staff it and then a helicopter pad (or 2000 ft runway) for my daily commute.

Some things just don't change. People say it's gonna drop some more. In San Ramon, Dublin and Pleasanton? Maybe...there's a lot of housing there and we hear more foreclosures are coming. In Saratoga and Los Gatos? I sort of doubt it.

My wife and I are originally from Ohio, where people still actually work for a living. My father had various insurance licenses for forty years and my parents both had real estate licenses until about twenty years ago. I grew up in this business and learned a lot of things that aren't in books from some really smart people who are no longer with us.

Bottom line, the rules haven't changed. If it's a desirable area with good schools that people want to live in, I think it's stabilizing. Danville, Alamo, Lafayette and Orinda never dropped very much. Saratoga hardly dropped at all. I work close to Cupertino and that place hasn't missed a beat. A vendor was here a week ago tonight and took a bunch of us to Alexander's for steaks. The place was packed and not with snotty, stuffy old rich guys either. I've never seen so many unix sysadmins in one place in my life. They're the guys ordering the big steak.

If you've got common sense and know the value of a dollar, you'll be fine. If you don't, well...I'm sorry. Life's tough but it's tougher if you're stupid.

The big problem with folks in the Bay Area is that so much of what goes on here is based on feeling rather than thinking. The people who run this state do so by manipulating emotions to enrich themselves politically and financially. There are too many people here with money they never earned or earned too easily or who grew up in upper middle class circumstances they take for granted. It's reflected in the business culture.

When you see something happen that by all normal measure doesn't make sense, it probably doesn't. If you don't know what to do, don't do anything at all. So many people react viscerally to things here but I don't coming from a different part of the country with different values, cultural foundations and frankly not as much money.

Before you do something stupid, it's "wings level, nose down, flaps up" and then make your decision. It's old school but it works.

FunTime says

bayarearenter says

Huh? What am I not understanding here? Fed tax at 15%? Is this couple making its 200K/year on investments and thus taxed at capital gains rate in this hypothetical?
No, I had the same thought. Maybe I need a new accountant. I think Fed tax rates for a couple making that much would be over 30%.

Ed is talking about the Effective tax paid, not tax bracket. Have you ever filed a tax return?

A couple earning a 200K would have personal exemption, itemized deduction (especially for owners with large mortgage and property tax) and Pre-tax stuff like 401K to take it to taxable income.

A 200K gross income may end up to around 130K taxable income, Which puts federal tax at around 25K and state tax at around 10K for a combined tax of around 35K rate of around 17-18%. Social sercurity, medicare is around 9.3% or 7.3% Temporary.

A 200K two income earner would have an overall tax bill of around 50K.

If 25% goes to tax, 25% goes to PITI (around 600K mortgage or 720K house which includes about 30% in forced savings) and 25% goes to spending (not including mortgage, property tax, insurance) and 25% goes to savings, we are talking 50K a year in savings. Around 10K more in 401K match and another 10K in debt repayment. Not to mention the social security will put you in the higher end of ss max payout, whatever that's worth down the road.

SFace says

FunTime says

bayarearenter says

Huh? What am I not understanding here? Fed tax at 15%? Is this couple making its 200K/year on investments and thus taxed at capital gains rate in this hypothetical?
No, I had the same thought. Maybe I need a new accountant. I think Fed tax rates for a couple making that much would be over 30%.

Ed is talking about the Effective tax paid, not tax bracket. Have you ever filed a tax return?

A couple earning a 200K would have personal exemption, itemized deduction
(especially for owners with large mortgage and property tax) and Pre-tax stuff like 401K to take it to taxable income.

A 200K gross income may end up to around 130K taxable income, Which puts
federal tax at around 25K and state tax at around 10K for a combined tax of around 35K rate of around 17-18%. Social sercurity, medicare is around 9.3% or 7.3% Temporary.

I remember that edvard2 doesn't have a house. For ones to be in that tax bracket, maybe ones two have at least 2 kids and more flexible acct spending. In general, or at least for the people who cross the magic number of 250k, with AMT, 35% or more sounds more like a correct number.

toothfairy says

m not calling bottom but i will say that the bear's ship appears to be sinking

Why aren't banks back in the mortgage lending biz?

JodyChunder says

toothfairy says

m not calling bottom but i will say that the bear's ship appears to be sinking

Why aren't banks back in the mortgage lending biz?

You'll be surprised: They are! I got my mortgage with BofA and it looks like they are keeping it on their books. Or at least they keep servicing it. If you can come up with 20% and show enough income, banks will just love you these days

1sfrenter says

your rent is $1150 then yes it would be stupid to buy a 600K house. But if your rent is 3K month (typical for a 3 br in San Fran) AND you have 20% down - or can get an interest-free silent second, as we are - tAND you plan to stay put for 10 + years, then it's reasonable.

I really think the perception of price and value has been grossly distorted. I guess it's a reverberation from the movement in prices during the bubble. Recency effect.

Anyway, your numbers assume that your incomes now will remain at par throughout the life the mortgage. Maybe they will, but maybe they won't. My guess is that just about every sector of the working class is going receive a haircut in the next decade. Yes, including finance dicks and engineers. A Tutti Fruitti franchise would probably be a better investment. ;-D

If you saved for the next ten years, I bet you would be blown the fuck away at what you could afford, and would shudder at the idea that you almost bit the bullet ten years before. I would literally bet. A lot. Let's set up an escrow...

sheltielover1 says

Life is too short to be chronically angry

Why be angry? Because prices are being pumped? Does spending a bunch of money make you feel less angry? Is that what it boils down to? Retail therapy?

Many questions...

FormerBear says

I got my mortgage with BofA and it looks like they are keeping it on their books. Or at least they keep servicing it.

Was the rate adjustable or fixed?