patrick.net

uni6jon2 says

Unfortunately, buying a home with debt(mortgage) means that you’ll be, instead, paying that interest over time to someone else.
By saving your own money, there can be a time in your future where you’re the one loaning money to other people.

Sure--mortgagees pay interest to the bank. Just as renters pay rent to the homeowner.

Saving money is good whether you rent or own. Not sure where you are going with this--unless you are assuming that it is much cheaper to rent than own. If that is the case, then I agree, one should rent. I would never argue otherwise.

leoj707 says

I can buy into what you are saying if your monthly outlay for buying and renting was the same, but if you are paying 2, or 3 times more (not unusual at the current house prices) for housing each month renting is a much better option.

Yep--no argument from me. I rented during the bubble years for that exact reason.

leoj707 says

Correct me if I am wrong, but I think the rule of thumb is planning on an average of 1% a year to maintain a house.
You could get several years of nothing then *boom* $20K for a new roof.

That sounds a little high--but as others say, it depends on the value of your home. I just put on a new roof with 50 yr architectural shingles for $5K.. Maybe if you include insurance then it's closer to 1%.

Patrick, I'm wondering if you've had a chance to re calculate those ratios, say from Jan 1st, 2012 to March 31st, 2012?

It would be very interesting to put the two time columns next to eachother to see how things have changed in the past two years.

BayArea

pkowen says

Oh for God sake. That 30 year timeline again. It just sounds desperate, really. I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Well most of the bears on this site claim we are in a bubble since early 90s.. or before. The most conservative bears say 1997 was the start of the bubble in SF/LA areas.

In that case, tatu, makes a VERY valid statement in comparing 30 year fixed mortgage to lifetime rent payments. If someone bought a house in 1997 they are 15 years into paying off their mortgage. They could have EASILY refinanced into a 15 year fixed or less at 3% interest rate by now also.

Anyone that bought between 1997-2002 is doing JUST FINE.. Their mortgage is halfway paid off or BETTER.. and they are set! Real estate was a fine investment for them...

Ask any of them if they wished they would have rented back in 1997-2002? They would all say no.. Sure, some probably wish they would have sold in 2005-2006 I'm sure!

In another 15 years... I think 2012-2017 could easily resemble the 1997-2002 years... (definitely not as DRAMATIC of a boom.. but i don't think either buyer will be regretting their purchase in the long run).

You realize your post reinforces the fact that the BA is still in a bubble right?

No, you probably don't.

Oh and 12-17 resemble 97-02? lol. This failing economy isn't going to support that in the slightest.

ugh, the same tired arguments.

FunTime says

Rent can go up, but almost never has during the time I've rented apartments and houses in Portland, OR and San Francisco.

That's crazy talk. I've lived in SF for 25 years, rented the whole time, and lived in 6 different places.

My rent has gone up, significantly, every time I've moved.

pkowen says

I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Some of us have been renting this long and we are getting old. And still renting. And kind of bitter about it, actually.

orbitron says

You're right, housing is going to zero...

Yes that's exactly what I was saying.

Just stop posting.

It should probably be noted that the assumptions that Patrick has baked in to the rent vs buy calculator are subject to considerable debate.

For instance, the default assumption is that house prices will decline 1% per year over the long term future. Note that this is not an inflation adjusted decline but rather an assumption that if you wait another year, you will be able to buy the same house for a price 1% less. Wait 10 years, and it will be 10% less.

Personally, I don't think that is realistic. Overall, I don't see any reason to believe that house prices should not mostly track an inflation index such as the CPI or PPI, which would mean that one might expect prices to go up (along with your salary) at 2-3% per year.

And I would argue that the same should be anticipated for rent inflation.

If you recalculate with these (reasonable, imho) assumptions then you end up with wildly different results.

fizbin says

It should probably be noted that the assumptions that Patrick has baked in to the rent vs buy calculator are subject to considerable debate.

For instance, the default assumption is that house prices will decline 1% per year over the long term future. Note that this is not an inflation adjusted decline but rather an assumption that if you wait another year, you will be able to buy the same house for a price 1% less. Wait 10 years, and it will be 10% less.

Personally, I don't think that is realistic.

I think he is too conservative. I put in at least 2% depreciation each year. That would be a change from the 4-6% we have been experiencing. My rent cost right now is less than in 1997, so I don't see the rent inflation. If anything, my landlord is afraid I will be buying soon. The last thing he wants is try is increase my rent.

You can get different results with different assumptions, but you would then be fooling yourself. House prices in California have a downward momentum. There needs to be reasons for it to stay flat or start going upwards and there is not even one. Then there are many reasons to see it continue down.

orbitron says

You're right, housing is going to zero...

Wow, great counter argument. So, you are saying BUY NOW because house prices cannot go to zero. Haven't heard that one before. It is great to see the Realtards senseless chants become obvious to all now. Most people used to believe them before.

I figured out when I was old enough to think that smoking was a bad idea for your health. It took a while for the smokers to believe it, but they finally did. I never believed the realtards stories and it is great to finally see the rest of the population recognize the wolf in sheep's clothing. Realtards are not good for your health.

orbitron says

they are not building anymore SF homes

They are also not making anymore good paying jobs and the current ones are disappearing. There is actually less money out there than you think. And the people that have the money, the last thing they are doing is putting it into overpriced houses. Down we go. If you already have a house and are trying to pump it up, good for you. However, keep that job of yours cause things are going to get a lot worse in SF before they get better IMHO.

1sfrenter says

pkowen says

I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Some of us have been renting this long and we are getting old. And still renting. And kind of bitter about it, actually.

Just like the support beams in the house you could have bought a long time ago. Consider yourself lucky you don't have to rebuild the place you are renting. I love it when I move around renting and go into a newer home. Instant upgrade. I drive by some of my previous rentals and can see the deterioration over time. Roofs, siding, property shifting, etc. They felt fine when I was there, but time does do a number on crappy building materials and practices.

orbitron says

It is VERY hard to buy now because the banks have really clamped down. They check everything and question every movement of money. This means that the current prices are supported by only the most qualified borrowers (and investors/cash buyers). When things loosen up again (and they will, they always do) there will be more demand.

Things loosen up? So, you are recommending that we start the next wave of people getting houses that can't really afford them. Credit is not hard right now. What is hard is finding qualified people. You have it backwards. In my mind if you don't have 20% down already then you are not qualified. If you play anywhere away from that line then you are creating the demand, it doesn't already exist. We are paying the price now in terms of our economy. There is no loosening up, unless you want to continue to go further in the abyss. Pretty soon even China will not buy US notes and then what is your plan? Make all the banks become national landlords? That'll be nice. Here is the service fee structure

- $2 charge each time you open your front door
- $10 charge if you forget your wallet and have to return to the house
- $50 charge if you host a party but realize you are short on food
- $15 charge for parking your car inside the garage

etc. etc.

Screw the no more houses can be build argument. We already have more houses than we need. 22% of the people living in the existing houses have negative equity. They really don't even own them, they own the debt. If anything, we need to tear down some of these horrible houses. We either do it now, or the next quake will do it for us. Just like the housing correction, we let it right itself or if we drag it on with nonsense then it will right itself anyway and the suffering will be much worse. Yah, accountability and math sucks.

Also, historic p/e of 24 is in normal times when people behave normally. We have created an abnormal situation and kept pumping, pumping, pumping. Nothing is normal here. People making 250k/yr are foreclosing on their homes. Crazy stuff...

1sfrenter says

That's crazy talk. I've lived in SF for 25 years, rented the whole time, and lived in 6 different places.
My rent has gone up, significantly, every time I've moved.

I didn't write clearly. What I was trying to write was that it's been unusual for a landlord to raise my rent. Tiny amounts a couple fo times and thankfully I was living so far below my means and getting big raises to the extent I barely noticed.

I've also had significant rent increases when I move, but I've also had signficant space/amenity increases. For less than twice the cost of what my one-bedroom rented for at market rate after I moved, I'm now renting a three bedroom/1.5ba house with a yard, incredible neighbors, and in a neighborhood I love.

RentingForHalfTheCost says

There needs to be reasons for it to stay flat or start going upwards and there is not even one.

RentingForHalfTheCost says

We have created an abnormal situation and kept pumping, pumping, pumping.

This is also your one reason why the housing market could go up or stay flat. Markets are faith-based, so susceptible to all means of influence outside reason. A lot of lessons have been learned the last ten years, though, and it wil take time for people to forget them.

FunTime says

RentingForHalfTheCost says

There needs to be reasons for it to stay flat or start going upwards and there is not even one.

RentingForHalfTheCost says

We have created an abnormal situation and kept pumping, pumping, pumping.

This is also your one reason why the housing market could go up or stay flat. Markets are faith-based, so susceptible to all means of influence outside reason. A lot of lessons have been learned the last ten years, though, and it wil take time for people to forget them.

To me that explains why we haven't sunk to 1996 pricing yet. The pumping has done nothing but slow down the decent. Just imagine what would have happened if the tax payers hadn't graciously thrown trillions at the unfortunate greedy victims. Just imagine. Oh, wait, we would have been saved by the Asian and Indian buyers. Right, forgot about that.

I would believe that housing would continue to plunge if the rents plunged as well. However, that did not happen in bay area. The luxury apartment market has surged by 25%-30% in the last 2 years, so there's definitely money here in this area. If the buy/rent ratios become more reasonable, it will be because of landlords jacking up rents as opposed to house valuing collapsing.

RentingForHalfTheCost says

I think he is too conservative. I put in at least 2% depreciation each year. That would be a change from the 4-6% we have been experiencing.

Maybe. I'm just not convinced that if I wait another 10 years that a potential house in my locale (Menlo Park) is going to be 20% cheaper, but it would certainly make me happy to see prices slack off this year. Over the past nine years, I've seen 3% raises in my personal salary (except 2009 which was flat). So if we wait a decade overall under a 2% depreciation scheme, MP will be twice as affordable to me, which would be nice.

But I worry that it will also be twice as affordable to all of the other folks that are out shopping right now. When I was looking in 2009, a huge majority of the closings were at prices that were below their 2006-7 price (for those same home sales). The same was true in 2010. Last year, not so many. Right now comparing same home sales in my price range (900K-1.2M) only 3 houses have sold in the last 6 months for less than their 2008 price and many have sold for over 2008. Overall, if the house last sold in 2004-5, the most common result is that it has resold now for $50K over what it sold then.

Maybe I'm just in the new bubble. OTOH, interest rates have strongly favored me, and I'd love to lock in at current rates for 30 years.

orbitron says

Let me ask you this: What do you expect a 700K house in Santa Clara today to cost 10 years from now? What exactly are you betting on? I'll be making 34% more (or more) in nominal-dollar salary 10 years from now and so will most other people. What do you think that will do to house prices and rents?

Exactly - renters face the most "inflation risk" and that risk cannot be avoided unlike say healthcare and university education where people have options to a certain extent in regards to health management and education financing.

RentingForHalfTheCost says

To me that explains why we haven't sunk to 1996 pricing yet.

Ahh, I see, so that upward pressure is only countering the downward to the point that we're here instead of 1996-like prices. Makes sense. I honestly don't think much about that because what matters to me is affordability, which is only based on my income. I can see it being helpful, though, to be able to say, "This is as low or close to as low as prices can reasonably go."
Although, if prices got in line with income, that would be really bad news for a big number of people. The big number is a smaller percentage of the whole population in SF than other places, since the split of renters/owners is more fifty/fifty according to some census data I looked at yesterday(which I could have horribly misinterpreted because I took very little time to mine through tons of data)

http://www.bayareacensus.ca.gov/bayarea.htm

orbitron says

There is no theoretical limit to how much the Fed/banks can buy.

If you believe that then I can't help. There are limits and we are at one now. The fed has already stepped over many of their limits and they know it. Now it becomes a bluffing game. Hopefully, no one asks American to show their hand.

"Um, I have 10 high, what do you have? I do have 3 suited though and eights are wild right? "

:)

dublin hillz says

orbitron says

Let me ask you this: What do you expect a 700K house in Santa Clara today to cost 10 years from now? What exactly are you betting on? I'll be making 34% more (or more) in nominal-dollar salary 10 years from now and so will most other people. What do you think that will do to house prices and rents?

Exactly - renters face the most "inflation risk" and that risk cannot be avoided unlike say healthcare and university education where people have options to a certain extent in regards to health management and education financing.

The one thing renters have in the case of the big bad inflation risk is they can always downsize. Owners have no recourse against house depreciation except stay put and stop thinking about the equity drain. You pick a side and you takes your chances. Owners have been winning for the last 15 years and now that high pitch sound you hear around here is the owners whining, not winning. Time for you lumps.

orbitron says

Let me ask you this: What do you expect a 700K house in Santa Clara today to cost 10 years from now? What exactly are you betting on? I'll be making 34% more (or more) in nominal-dollar salary 10 years from now and so will most other people. What do you think that will do to house prices and rents?

400-500K would not be surprising. Your a bit overly optimistic in your job security. I've been through a few downturns in high tech, and when they happen forget about job security. I have never been on the cutting side, but have seen some of the smartest engineers I knew struggling. It happens and it will happen again. Today's high tech craze is not permanent. Pretty soon, and I don't think it is that far off, all these gadgets people buy are going to be commodities.

When you get the feeling of instant on, instant response from your computer with life-like graphics, no wait flash transfers, etc. your upgrade cycle will be stretched like never before. Right now the reason to upgrade is already stretching and we are not at the point I described.

Now, bandwidth. Companies pay to upgrade gear because the current gear is not good enough. It shares common pipes, common choke points. What happens when we remove these choke points. When complex networking protocols to guarantee different traffic priority is not needed. It will happen. Then the network is a commodity.

I think about it in terms of a scientific calculator. There was a point where calculators improved. There was a craze when I took my engineering where everyone was buying the latest and greated. HP48SX was the final point. It had everything. It had apps before we even called them apps. I wrote a lot of apps that were shared by many students at the time. Then it all died. No one cared about the next calculator. The craze died, because we had everything we needed.

The mobile, the network, the whole hardware ecosystem will one day be a commodity. Then all that is left is software and service high tech companies. I don't know when this will happen, but it will happen. If you are asking about what Santa Clara will be like in 15 years, then you better worry about what I am saying here. Things will not be like you expect.

RentingForHalfTheCost says

The one thing renters have in the case of the big bad inflation risk is they can always downsize.

I'd keep my 20% DP with me for now. I have a freedom to invest and get as much as my investment strategies pays off. Now,talking about 20% or whatever DP is put on a home purchase is like tying that money making no returns,plus you owe the bank the $ you borrowed - risky strategy,if home values don't go up. Not risky if you are counting on home value to inflate considerably in the next 5-7 years,if not more then that. I'm in for the renters side!

RentingForHalfTheCost says

The one thing renters have in the case of the big bad inflation risk is they can always downsize.

True, you can sell all your furniture and downsize from a 2 bedroom to a studio apartment and save a few hundred bucks a month. But there comes a point where the rental price difference between a studio apartment and a 2 bedroom isn't wide enough to really do you any good financially. If your making $75K a year.. it's probably worth it to upgrade your life a bit and get a 2 bedroom vs. a studio.. even though you might lose out on $300-$500 a month of possible savings.

I know when i rented a small 1 bedroom we saved money, but we also went out to eat more.. left the apartment more often to spend money then we do now that we have a house with a backyard and pool. Sure our costs have gone up in monthly nut, but we do different things with our free time that cost a lot less money now. Like gardening, relaxing in the backyard, grilling out back... less driving on weekends to get away from our small cramped apartment.

thomas.wong1986 says

You may find your employer also moving to Pleasanton. It does happen.

I like Pleasanton but its surprisingly expensive- as in 500-600k houses simply because its apparently got good schools.

edvard2 says

thomas.wong1986 says

You may find your employer also moving to Pleasanton. It does happen.

I like Pleasanton but its surprisingly expensive- as in 500-600k houses simply because its apparently got good schools.

I think what people are forgetting is that sometimes it pays to be the top dog in a medium of the line school. Being pack fodder in a top school really doesn't help the ego.

RentingForHalfTheCost says

edvard2 says

thomas.wong1986 says

You may find your employer also moving to Pleasanton. It does happen.

I like Pleasanton but its surprisingly expensive- as in 500-600k houses simply because its apparently got good schools.

I think what people are forgetting is that sometimes it pays to be the top dog in a medium of the line school. Being pack fodder in a top school really doesn't help the ego.

That was my excuse for going to Purdue

RentingForHalfTheCost says

HP48SX was the final point. It had everything. It had apps before we even called them apps.

Ha, I had that one too, but you're forgetting the 'G!' I got my 'SX" cheap because everyone was buying the G, which had better graphics/graphing. Maybe you're discounting it for a reason I don't know.

orbitron says

I'll be making 34% more (or more) in nominal-dollar salary 10 years from now and so will most other people.

That's the rub though isn't it. This is extremely unlikely to happen.

Are you making 34% more now than you were 10 years ago? Are most people making 34% more now than they were 10 years ago?

yeah, I didn't think so either.

Well, when you're at my income level it becomes difficult to increase it by 50% (though I'm not an executive).

As you stated, nominal increases from the past 10 years was 18%, I'm not seeing how "most people" will get 34% higher nominal wages over the next 10 years. As a matter of fact I don't see it being even close to 18% unless there's another bubble coming along that I don't know about.

Real wages will continue to go down for "most people" as long as commodities continue to go up at their current rate.

FunTime says

RentingForHalfTheCost says

HP48SX was the final point. It had everything. It had apps before we even called them apps.

Ha, I had that one too, but you're forgetting the 'G!' I got my 'SX" cheap because everyone was buying the G, which had better graphics/graphing. Maybe you're discounting it for a reason I don't know.

Right, they came out with the HP49G (2MB upgradable) also. I stopped at the 48SX. That Saturn processor was awesome. Miles ahead of its time. I once finished a 2.5hr exam in 15 minutes. ;) It took me 3 days of programming transmission line theories into my calculator to have that advantage. The prof was all pissed and asked me how I did it. When I showed him the code it took, he gladly gave me the A. I probably worked 5 times harder than anyone, but enjoyed the challenge.