patrick.net

SubOink says

RentingForHalfTheCost says

Apparently really hard to some.

Apparently.

Renting is something that will go on infinitely. Paying back a loan has a final finish line where you no longer pay. It's simply different than renting but whatever.

And here is a question for you then...so I don't have the money right now, right? So I, in your words, I can't afford it so...I RENT the money...20 years later, I own the house. The loan is paid off - now in hindsight did I have the money or not? After all, I do own the house now for real? Did I not pay for the house?

How that is even remotely similar to renting...is beyond me. But hey...

During the 20 years you were paying the rent cost (interest) on top of the principle reduction cost. As the principle decreased your cost to rent (interest payment) decreased. I think you get that pretty easy.

Now, as you were adding equity to your house, you were not adding to your investments. That equity has a value, a cost if you will. By tying it up in a house in the form of equity you are not benefiting from the investment growth of stocks or bonds. At the end of the 20 years, you are correct, you have a house. An asset that is now 20 years older than when you started paying for it. Your equity might have made you money if the house appreciated, but most likely now that is a thing of the past (at least for a while until the next generation comes on board).

So, what everyone misses here in their thinking is that money put into a house is money that you could have been making money from. Over 20 years that becomes the same or more than the house value in 20 years. If you assume appreciation of homes then it might be less, flat homes then more, depreciating homes then much much more.

It all comes back to one thing for me. If you view a house as an investment then you should not buy in today's market. If you really have enough wealth set aside to weather any continued downside and don't mind the extra costs of owning in the BA then buying might be for you.

I am actually at a point where I can weather it. I could take a 20% loss and not worry. However, looking at the current market and the distressed home dynamics I have decided to wait it out another year or maybe two. I am perfectly happy renting at a reduced monthly cost verses owning. But am also willing, with time, to pay more monthly to own. It won't make financial sense, I know, but I would eventually like the comfort of a fixed address, a fixed neighborhood, etc. I will do it when I really don't even think of things in the financial sense of which is better n (rent or buy).

After looking at some homes last weekend around the peninsula, I have to say I would much rather take a bulldozer to them and start new. Horrible quality all around. Even one that I saw at 1.5m 2000sqft. You would think that would be something to see. NOT

SubOink says

FortWayne says

When we rented it was a lot cheaper to rent than to have a loan

Same with us. Rent was always half of paying a mortgage for 8 years or so. Made no sense to buy.

But times have changed.

Maybe in the Michigan or Florida, but in the BA nothing has changed. If anything it has gotten worse. I am renting a bigger place now for close to what I rented in 1997 for half the size. And in that time house prices have doubled. One goes down, the other up, makes things worse for buying, not better.

RentingForHalfTheCost says

So, what everyone misses here in their thinking is that money put into a house is money that you could have been making money from.

EXACTLY! most people never get this. I mean,if one always says,but you have to pay rent? right? too much for some brains to do the lost investment opportunity MATH. I mean,it makes sense to buy if 20 years from now value will tripple. Hmmm....good luck with that kinda equity build up - that also if you don't move in 20 years,but the fact is most people move around 7 years,they are forced to move because of job,divorce,kids etc....there are many reasons to move then not to. That is why Realtors are begging you to sell and buy! :)

RentingForHalfTheCost says

So, what everyone misses here in their thinking is that money put into a house is money that you could have been making money from.

Yep. I think economists call that "opportunity cost." That's why Patrick's rent vs. buy calculator has investment return as one of the parameters. Money in stocks and bonds is generally better over the long term than money tied up in a house.

I plan on buying a small inexpensive house purely as a place to live and not as an "investment." My real investments will be in stocks and bonds...things that actually do generate wealth.

You don't have to spend a million bucks to buy a home in the Bay Area.

You don't even have to spend 700K. We didn't.

You can buy stuff in the high sixes to low sevens in nice areas with low crime and good schools. It's out there. We've seen it.

Walnut Creek has affordable areas. San Ramon is turning very Chinese and Indian but for some that's not a problem.

If you've convinced yourself that you have to live on the Peninsula or close in to San Francisco...yeah, you're going to be competing with the Asians. You're gonna pay more than the asking price and deal with their schemes and fog and shades of gray and using their culture to drive themselves like a hammer to gain the advantage. The best way to deal with that is to not deal with that. That's precisely what the realtor in Danville told us. I agree with her.

wthrfrk80 says

Money in stocks and bonds is generally better over the long term than money tied up in a house.

That's like saying, real estate only goes up.

How has the NASDAQ performed over the last 10 years?

dublin hillz says

The mentality that one should only be able to own a home if they can pay off the whole thing on day 1 will result in only 1% being homeowners while the rest of the people will slave away at work for the rest of their lives and not being able to retire in order to serve the land"lord".

Selling foreclosures in bulk to investors is our country's path to serfdom.

rootvg says

You don't have to spend a million bucks to buy a home in the Bay Area.

You don't even have to spend 700K. We didn't.

There are a lot of homes that are under 500k in our area, and its a safe, walkable, nicer neighborhood. In fact, I wouldn't pay anything over 500k.

SubOink says

That's like saying, real estate only goes up.
How has the NASDAQ performed over the last 10 years?

LOL.

1) 10 years is not long term
2) the NASDAQ was in a MASSIVE bubble 10 years ago. Of course you lost money if you bought then and sold now.
3) as long as there are publicly-traded companies making profits, some of those profits will be returned to shareholders in the form of dividends and/or share buybacks. Even if corporate profits stay flat forever from this day forward there will still be dividend payouts and share buybacks that will give you a return on your investment. Businesses generate wealth. Houses don't.

Are you a Realtor(R)?

bubblesitter says

RentingForHalfTheCost says

So, what everyone misses here in their thinking is that money put into a house is money that you could have been making money from.

EXACTLY! most people never get this. I mean,if one always says,but you have to pay rent? right? too much for some brains to do the lost investment opportunity MATH. I mean,it makes sense to buy if 20 years from now value will tripple. Hmmm....good luck with that kinda equity build up - that also if you don't move in 20 years,but the fact is most people move around 7 years,they are forced to move because of job,divorce,kids etc....there are many reasons to move then not to. That is why Realtors are begging you to sell and buy! :)

"Rent and invest the difference" is an extremely risky strategy and there is no evidence that it will work often enough for people to rent their way to prosperity. I am talking in regards to market rate rents and not living with parents or at rent controlled apartments or having an unorthodox renting arrangement with a landlord. Whoever pursues this stragegy will eventually run into a 2008esque scenario that they will seriously regret. Also with "rent and invest the difference" you have to be honest and eventually count the possibility that in x amount of years, it is the buyer who will be able to invest the difference if the rents continue to increase. Speaking of which, many "high end" apartment complexes have jacked up the rent close to 25% here in bay area since early 2011. How would that feel to pay $2000 instead of $1500 for exactly the same thing just because the landlord thinks they can get away with it?

edvard2 says

rootvg says

You don't have to spend a million bucks to buy a home in the Bay Area.

You don't even have to spend 700K. We didn't.

There are a lot of homes that are under 500k in our area, and its a safe, walkable, nicer neighborhood. In fact, I wouldn't pay anything over 500k.

All the houses around us in Danville are mid sevens to low eights. San Ramon has a lot of stuff in the high fives to low sixes.

dublin hillz says

Rent and invest the difference" is an extremely risky strategy and there is no evidence that it will work often enough for people to rent their way to prosperity.

So it's better to have all of your assets tied up in a house rather than in diversified, more liquid investments???

Repeat after me: a house is not an investment. A house is not an investment.

A house does not generate wealth. It's a necessary item that provides shelter for its owner. That's it.

Factories generate wealth. Mines generate wealth. Businesses generate wealth. Houses? They're a consumer good that slowly wears out like any other consumer good. It takes money to maintain it against normal decay.

The land under the house can appreciate, but guess what? It takes property taxes to maintain the infrastructure that gives the land its value. How much is the land worth w/o fire and police, roads, schools, water, and sewage systems?

If a house is an investment, it's an investment that pays negative dividends.

If speculation is your thing, try penny stocks. Or just go to Vegas. You get an all-you-can-eat buffet included.

dublin hillz says

"Rent and invest the difference" is an extremely risky strategy

So,selling a depreciating asset in 7 years is a fantastic strategy? good luck with that. LOL.

rootvg says

All the houses around us in Danville are mid sevens to low eights. San Ramon has a lot of stuff in the high fives to low sixes.

I wouldn't touch anything remotely in the 6,s or 7's. At the 700k range even with a 100k down payment that's still over $3,000 per month just for the mortgage. Eh... a bit much.

bubblesitter says

dublin hillz says

"Rent and invest the difference" is an extremely risky strategy

So,selling a depreciating asset in 7 years is a fantastic strategy? good luck with that. LOL.

Why are you assuming that a house will be sold in 7 years? Buying and selling after 7 years while only making minimum payments is not a good idea. The goal should be to make additional principal payments and pay off the whole thing in 10-15 years instead of 30. Achieving that is a lifestyle difference maker.

bubblesitter says

dublin hillz says

"Rent and invest the difference" is an extremely risky strategy

So,selling a depreciating asset in 7 years is a fantastic strategy?

Of course not.

The only places I know of where people trade real estate like chess pieces on an ongoing basis is here in the Bay Area, the Los Angeles basin, San Diego (occasionally), the Beltway area, New York, Boston, Miami and possibly the better parts of Atlanta although that's a stretch. Dunwoody used to attract the I-have-not-a-lick-of-sense-and-too-much-money crowd but that may have changed. If I were to live there today, I'd go for Alpharetta. Locals call it the Yankee Containment Area. Cary, NC is the same way.

If you buy in one of the stable areas around Columbus where schools are good and demographics are stable, you can't go wrong. Westerville has a decent economic base, good schools and a excellent small college all in one place...plus a nice downtown AND it's affordable although high by Ohio standards. You'd be a fool to rent there unless you knew you weren't going to stay.

Housing is NOT an investment. It was never supposed to be. If I get out of my house what I put into it, I'm doing okay. If I make money because of where I bought and what I bought and how I bought, that's even better.

SubOink says

wthrfrk80 says

Money in stocks and bonds is generally better over the long term than money tied up in a house.

That's like saying, real estate only goes up.

How has the NASDAQ performed over the last 10 years?

If you look at the very long term, houses have been the worst investment available to the general public:

Average Annual Real Returns beyond inflation
Real Estate Stocks Bonds T Bills
5 Years 1.39% 6.97% 2.91% 3.01%
10 Years 1.28% 6.91% 2.75% 2.85%
20 Years 1.25% 6.67% 2.54% 2.65%
30 Years 1.36% 6.59% 2.34% 2.47%
From Yahoo finance

The above was taken from here.

http://patrick.net/housing/prices.html

RentingForHalfTheCost says

If you look at the very long term, houses have been the worst investment available to the general public:

If its such a bad investment, how come everybody that is rich owns property?

I still need a place to live....regardless of investment or not.

SubOink says

I still need a place to live....regardless of investment or not.

Growing up in a house where both parents had real estate licenses, that's what we were always told.

dublin hillz says

"Rent and invest the difference" is an extremely risky strategy and there is no evidence that it will work often enough for people to rent their way to prosperity.

So the fear analysis for both option are:

rent and invest the difference: You grow your wealth and risk getting your rents increased and getting priced out of an appreciating housing market. Do you have any solutions? By George we do.
1. Move to an areas away from the rent problem (the BA has lots of locations)
2. downsize to a smaller location (we really don't need much room to live)
3. Move to a more reasonable place to live/work in this or another country

buy now and use housing as your investment: You stop growing wealth outside of your house. What happens if the price continues to soften? Lets say another 20% drop and you only put down 10%. Throw on a job loss or a pay cut that puts you at risk of default. Do you have options? Lets list them
1. You refi like realtards tell you. Wait, you have no equity now and banks won't give you the time of day. No refi for you. You are forced into foreclosure and now back to renting.
2. You go to a life of crime and start renting empty houses (that you don't own) to families and ask for a big security deposit (don't laugh it is happening, right here in the BA).
3. You ask the parents to bail you out this last time.
4. You call the bank every day and plead with them to forgive the debt you owe.

If you are talking risk, then I don't see that much of the downside in the first option considering this market. Oh wait, we are coming out of the recession right? How do you explain this then? Doesn't sound like we are doing that well here in this country. California is not far behind.

http://money.cnn.com/2012/04/04/news/economy/detroit-state-takeover/index.htm

dublin hillz says

The mentality that one should only be able to own a home if they can pay off the whole thing on day 1 will result in only 1% being homeowners while the rest of the people will slave away at work for the rest of their lives and not being able to retire in order to serve the land"lord".

If you really think about it though, it might start to make us a country of savers instead of consumers. There is a reason why other countries save better than us. It is called our welfare mortgage system. People shouldn't even consider buying a house until they have proven they are responsible. Savings 3.5% of the price of your home is not enough proof. 20% should be the minimum. Wouldn't you agree? Can I buy an asset from you for 3.5% and then make monthly payment to you for the next 30 years? I will provide you will all my credit history, income, tax returns, etc. Would you feel safe carrying the 96.5% for me? Absolutely not, now why does it make sense when the liability is spread across to all the taxpayers? 20% minimum!!! If anyone even talks about buying a house before they save that much, then as a taxpayer I should be able to kick them in the nuts with steel toe boots.

SubOink says

I still need a place to live....regardless of investment or not.

I can rent you a room if you want. You can pay me monthly or just give me a lump sum where I can put in in AEP stock (5% dividend). The lump sum would be sized so the 5% matches the monthly. I know how you hate throwing money away on renting, but with the lump sum you won't be throwing it away. When you decide to move out, I return the lump sum to you. See, free rent for you. Amazing stuff.

RentingForHalfTheCost says

If you look at the very long term, houses have been the worst investment available to the general public:
Average Annual Real Returns beyond inflation
Real Estate Stocks Bonds T Bills
5 Years 1.39% 6.97% 2.91% 3.01%
10 Years 1.28% 6.91% 2.75% 2.85%
20 Years 1.25% 6.67% 2.54% 2.65%
30 Years 1.36% 6.59% 2.34% 2.47%

That only holds true if the home is completely empty and unutilized.

In real life, the landlord collects rent less direct/indirect expense as well. The net amount is the cash/housing dividend. If the landlord is self-occupying the property, the landlord does not have to pay rent, another form of dividend.

Once that is considered, the return on housing is at par with stocks. Owners net worth are around 30-50X higher than renters. The end result clearly indicates owning has been the better result long term.

Well, there it is. You nailed it.

Twenty percent should be the minimum. It isn't...and that's because long ago we decided to make housing a significant part of what our manufacturing base was built on. This shit goes all the way back to the Great Depression and there were people on both sides of the aisle wanting to change it but from what I understand, that's gone by the wayside again just as it has so many times before.

No, it doesn't make sense for all that liability to be thrown on the taxpayer. Guess what? A lot of things don't make sense but aren't going to change. This is one of them.

Yes, we're penalizing the shit out of savers. No, that's not likely to change either. Martin Weiss talks about this all the time.

RentingForHalfTheCost says

20% minimum!!!

I agree with the 20% minimum. That demonstrates that one can save for the downpayment which predicts that they will be able to honor required future payments compared to those who cannot pass the threshold.

bubblesitter says

That is why Realtors are begging you to sell and buy! :)

Yeah, i've been getting a barrage of flyers from realtors left at my house to "short sale" my home..FYI.. we just bought last summer.

They also are offering to take 1-2% commissions now everywhere... So the days of a realtors only accepting 6% commissions is OVER!

One of patrick and the housing bears main arguments against buying is their claimed 6-7% commission costs of selling.

With companies like REDFIN offering sellers 4.5% commissions and cash back at the sale... Individual realtors just can't ask for 5-6% commissions anymore.

if we were forced to sell earlier than we liked.. I have no worries we could find a desperate realtor to take a 1% commission on our home sale.

RentingForHalfTheCost says

There is a reason why other countries save better than us.

I'm sure those countries have there own problems... And just because you have a country that has a lot of savers.. doesn't mean real estate prices in that country will be low. Someone has yet to disprove that US real estate is among the cheapest assets in all of the world.

rootvg says

Housing is NOT an investment. It was never supposed to be. If I get out of my house what I put into it, I'm doing okay. If I make money because of where I bought and what I bought and how I bought, that's even better.

Pretty much the way I feel. My "investments" are all in various things like stocks and other retirement accounts. When we buy a house, it'll be to live in and store our junk.

As far as the "You've gotta' live somewhere", well yeah.... but that doesn't mean you have to buy a house. Around 40% of the US population lives" somewhere" in the form of a rental.

BoomAndBustCycle says

Someone has yet to disprove that US real estate is among the cheapest assets in all of the world.

The fact that at the height of the boom around 70% of the Bay Area's homebuyers were using exotic loans is proof enough. At that point the percentage of folks who could actually afford houses were in the single digits.

edvard2 says

BoomAndBustCycle says

Someone has yet to disprove that US real estate is among the cheapest assets in all of the world.

The fact that at the height of the boom around 70% of the Bay Area's homebuyers were using exotic loans is proof enough. At that point the percentage of folks who could actually afford houses were in the single digits.

Again and again, you're making my point. A lot of people who live in the Bay Area simply don't belong here income wise. That's a snotty thing to say but the longer I live here, the more confident I am with that opinion.

I don't know how we fix this. Maybe we don't.

RentingForHalfTheCost says

20% minimum!!! If anyone even talks about buying a house before they save that much, then as a taxpayer I should be able to kick them in the nuts with steel toe boots.

I agree with you.. But you are living in an alternate universe. Because you haven't needed 20% downpayment for a home for a generation now. You can wish it wasn't a reality all you want, and we probably would be better off as a society if 20% downpayment were required all along.

But, what is your solution?.. If you were president.. Would you suddenly enact a 20% downpayment requirement? How would you deal with the "fall out" from enacting such a law?

I'm sure you'd get called out for re-distributing wealth to poor renters by Republicans. Democrats would call you out for making it impossible for the poor to come up with 20% down payments.

You'd get crucified!

BoomAndBustCycle says

RentingForHalfTheCost says

There is a reason why other countries save better than us.

I'm sure those countries have there own problems... And just because you have a country that has a lot of savers.. doesn't mean real estate prices in that country will be low. Someone has yet to disprove that US real estate is among the cheapest assets in all of the world.

Here is a cool site to compare the trends of US against other countries. Check out South Africa. Yikes.

http://www.economist.com/blogs/freeexchange/2011/03/global_house_prices

dublin hillz says

RentingForHalfTheCost says

20% minimum!!!

I agree with the 20% minimum. That demonstrates that one can save for the downpayment which predicts that they will be able to honor required future payments compared to those who cannot pass the threshold.

If we had that requirement I bet this site would not exist today. Sad but true. People need skin in the game. I know too many people now walking away from their homes in the BA. Good people who make good money. Sad.

BoomAndBustCycle says

But, what is your solution?.. If you were president.. Would you suddenly enact a 20% downpayment requirement? How would you deal with the "fall out" from enacting such a law?

You wouldn't want me as president. Heads would role. A 20% minimum down payment requirement would be a footnote on my agenda. :)

So, because no one is able to do the right thing, we will continue to suffer for a long long time. Like tearing off the band-aid one hair at a time.

As much as I wish this wasn't the case, I do agree with you that we have created a system that forces us to keep it going. There will be some hard resets, like the one we are going through now. Remember, no one saw this coming right? What a joke. Anyone who took a single course in economics saw this coming from the start. No money down, interest only payments for the first 2 years! How could you not see it coming. It is too bad we can't take the time now to fix the problems because we all live in fear of the political fall-outs.

If people really sat down and understood the problem that was created, instead of being called the "Occupy wall street" and the 1%, 99% mantras, it would have been "bring back responsible lending standards". Most of the crowds would have to examine themselves though, which people hardly practice.

dublin hillz says

Why are you assuming that a house will be sold in 7 years? Buying and selling after 7 years while only making minimum payments is not a good idea.

As I quoted before, lots of people are forced to do that.

RentingForHalfTheCost says

because we all live in fear of the political fall-outs.

We would have a lot more problems than political fall out.. It would be an UGLY few years if the government stopped lending money and we were all made to eat our broccoli so to speak. Home sales would simply just STOP... Everyone with "just enough" equity to sell, would become hopelessly underwater as the 2006 buyers. Any 2006 buyers still holding on would get the official memo that their home will never reach their purchase price in their LIFETIME, and even the most moral and credit-worthy among them would walk away or stop paying their mortgage.. pocket the money and buy the house next door with cash in a year or two. :)

We'd have a very weird situation.. Where people could stop paying their mortgage and in a matter of a few years, have enough cash to buy a slightly more modest home outright if they played their cards right.

Attempting to police and foreclose on all the squatters would prove futile and delinquent mortgages would bring the financial system to a grinding halt. Runs on banks would probably occur.

The inevitable depression and morale crushing layoffs that would commence... It would be a hard, chaotic reset button on our financial system.

BoomAndBustCycle says

The inevitable depression and morale crushing layoffs that would commence... It would be a hard, chaotic reset button on our financial system.

Bring it ON! Time for us sinners to pay and pay dearly. We can take it. Who is not up for a good round of suffering. I'd vote for this if there was a vote. And I own multiple houses (just not any in the BA). I'd rather get us back on track to eventually be prosperous again, regardless of how long it took. Even if it took longer than I live. At least we would be passing down something worth inheriting. Right now, we are passing on an economy build on junk bonds in all honesty. 61% of the bonds are being bought by the fed. What a joke.

SubOink says

RentingForHalfTheCost says

If you look at the very long term, houses have been the worst investment available to the general public:

If its such a bad investment, how come everybody that is rich owns property?

If I was rich I would own property. See how the rich comes first?