patrick.net

Do not take mortgage interest deduction as given. There is a real possibility that deduction limit may be lowered from 1M. Make sure that you can still afford the PITI comfortably even without deduction.

Don't buy. Here is my observation.

The worst-priced homes for buyers are something around 800K-1.2M, because that represents the utmost that a double-income family (~200K) can buy using the innovative mortgage buying. There are plenty of shacks (50 years old, in a decent school district) selling for this much. Beyond 1.2M, you have hit a resistance level that a family dependent on salaries cannot afford. Therefore, the homes above the ~1.2M threshold are priced much more reasonably.

However, when you go above 1.5M, you actually see plenty of good stuff! Do this, go to those suburbs that you always want to get into, like Los Altos Hills, Portola Valley, etc. and look at the properties around 1.6M-2M, they typically have an acre, a fully updated home of ~3000 sft with amazing view, 100 times better than your typical 6000sft-lot-1600-sft-60-year-old-million-dollar starter home.

So before anybody even thinks about jumping in, do a search of properties in truely prestigious neighborhood at 1.6-2M price level and compare that to a million-dollar average home, and ask yourself why the 1.8M dollar home actually looks like a million-dollar home and a 1M-dollar home looks like shit?

Gary, you meant 1.85M?

I think Gary isn't from SiValley.. : )

Re: the above calculations, you left out maintenance costs and hazard insurance on the property. This may have been intentional -- depending on your situation, they might be negligible (or huge).

The distilled advice is always: if you can afford it comfortably, you expect to be there for a length of time (six years is short in my book), and it's important enough to you, buy it. If you are depending on the value of the house to increase for any reason, or if you're stretching, don't buy it.

I wouldn't do it, myself. Leverage can move mountains, but that service commitment for a non-income-producing "asset" doesn't feel good to me. I also don't value SiValley living highly enough to feel the pressure of acting now, or ever. Your situation may be different. : )

I read the recent economist about it and it sounded like the proposed $300,000 cap was the amount of interest you can deduct.

I think it is the interest on loan up to 300K. Most homeowners in the country will not be affected. Some can even benefit from it because of the switch from deduction to tax credit.

The typical loser: a marginal homedebtor with a 100% loan on $1M in a blue state with high income tax and high housing cost.

True. I was surprised too and got nervous (well, personally I own only a bit over 200k on my home, so I should be fine..) but .. anyway..

Don't you have investment properties in Vegas? Aren't they under 300K? Do the typical buyers of those homes itemize?

If your answers are Yes-Yes-No, I think the value of those properties may actually go up if the changes become law.

(Not investment advice. Not tax advice.)

Inflation will kill the housing bubble before it eventually saves it.

No way in hell our paychecks will rise as fast as inflation.

Near future inflation numbers won't show the depreciating home values (numbers didn't show housing on their ride up either -- due to FEDs mysterious CPI).

My Theory:
-------------
- We're going to have inflation due to govenment deficits (i.e., the government borrowing because the consumers are too tapped out to expand credit -- but we can always count on Uncle Sam to spend like a drunker sailor). But we'll have deflation in housing until housing meets the historical housing trendline (after an undershoot for a while, due the IO idiots, flippers, and other weak hands).

- Oil is going to crash hard. I expect at max. $40/barrel by this time next year (this is what happened post 1991 bubble and it started the machinery rolling for the last stock market bubble).
I expect low oil prices to help drive the next expansion in the stock market. When Exxon is talking about Peak Oil watch for the head fake. That's like Robert Toll giving you housing advice.

I was earning close to 7% with tbills during the mid to late 90s long before housing caught up to inflation. There's a very good chance we will see those levels again soon (and again housing will at best lag behind) so your opportunity cost might turn out to be much bigger than you now believe.

Hi Jack: Price was determined by their realtor. I tried to buy direct, but I think they were nervous about being able to determine a price themselves.

Truthfully, there are basically ZERO 3Bdr houses under $900k in San Carlos.

I think this area has become 'gentrified' (from middle to upper class) with all the money that has flowed in. We have some of the only decent schools on the peninsula.

Then again, no matter how good the schools are, we're going to use private ones. But it's kind of like buying a car with options - it's easier to sell later.

.I can’t even fathom $1 million for a 3br house….do you people have acid reflux???

I know. It's crazy.

_shrug_

We'll see if it lasts.

Cheers,
prat

I fear that soon I will find myself in the "Heaven or Hell" scenario but my wife and I have found the resolve to move if needed. We made a reasonable offer on the place we now lease and the owner, (at the time I feel bubble intoxicated) flat turned down our offer. The condo he owns below us has been vacant for about a month and people have been telling me that would give us more leverage. The tuff part will be presenting our new offer which will be lower than what we initially offered and less than what we know he paid. I understand that the thrust of your question addresses affordablity/advisory issues, and I'm certainly not oblivious to that. In a way the larger question may be, do bubblesitters have the audacity to totally dismiss what someone else paid and establish a whole new "baseline" as a starting point for negotiation?

Home inspection: had one done, paid for it myself. Asside from some floor deterioration under the toilets and galvanized, rusty pipes all it came out basically clean. Haven't done pest yet, but the home inspector said he saw nothing obvious. Still, I'd write that in as a contingency with the contract.

Windows are leaky, though - I figure that's $50k for new ones.

The bathrooms and kitchen are dated but functional.

The really hard thing is, as you see house after house sell for high prices, you really wonder how prices could drop, say, $200k. This is a mecca for high earners - weather, schools, scenery. It seems to build on itself - the more money that moves in, the more money that wants to move in. Also, whereas the late 90s was all in the today-still-depressed tech, more of the people around here today are in biotech. Just playing angel's advocat here.

On pipes: they are rusty enough that if you're out of town for a week, coffee comes out of the faucet. Needless to say, we always use a water filter.

On windows: they leak air, not water. But mild weather and a new heater make this a somewhat milder issue.

On schools: people would send their kids to other states but the bus route probably won't reach out to here. Remember, especially given the post-modern relativistic nature of the BA, everything here is relative. Everyone (but us) has dual incomes and need them to survive. Careers are high stakes. Private school costs $. So, they move to the towns that have *relatively* good schools.

On acid reflux: yes I have it, but it's heriditary and the purple pill makes it not bother me. Seriously, again, it's all relative. Yes, $900k seems like a lot of money. But we're really talking $3k a month more than a midwesterner might be paying. That's $36k a year, and I doubt I could make what I make in Illinois (even Chicago) without taking at least that much in a pay cut. Yes, I harp on CA, but I have to admit that I have made more money here than I EVER did in IL.

newsfreak: Good thinking on the pipe coffee water.

H.Z.: Yeah, my tax-free muni fund (ACTX) does 6% tax free, but can certainly lose money.

"I am planning to buy a 700k house with a 35k (5%) down payment in the next few weeks due to the kids’ situation that I have.
What is your advice

-JB "

I sure hope your not serious!

I would not buy period, I would say rent a house for a couple of years, you will be glad you did.....just my advice.

"Find a buyer’s agent you like, make appointments with two and chose one."

If your going to use a buyers agent, make sure they have a fixed commision. If they get a percentage like most of them do, there is no incentive for them to get you the best price.....why should they, the more YOU pay the more THEY make. Don't believe what people or other agents tell you about buyers agents.

Or, put another way, if the house does not go up in value, it will cost me around $260,000. If it dropped a mere 20%, it would cost me around $420,000.

This sentence pretty much settled the issue for me.

"It is a house with coffee water, but these things can be fixed. The question is whether he really wants it at this price or should sit for something else."

He will get a whole lot more if he waits....just my opinion

"See what interest rates do today?"

Forget about what they do today, tomorrow or yesterday......they will always fluctuate and it is very difficult to see the trend if you examine too closely. The trend in the coming months is clearly up.

"How much will a quarter point do to his payments?"

It's not the increase in the short term rates..........The markets already know that a quarter point is baked in. Inflation is growing and interest rates will continue to rise as a result.

"I was just trying to get the guy to have someone on his side find more info."

We are all on his side, that is why we offer our advice.

The fact that so much work needs to be done leads me to believe whoever is selling it is in a rush to get rid of it........seems the seller doesn't have too much faith in the market............Yes....Sellers usually do know more about the market.

On pipes: they are rusty enough that if you’re out of town for a week, coffee comes out of the faucet. Needless to say, we always use a water filter

My mom had this a few years back. Hers were a combination of calcification and rust, read to fail in parts. Apparently steel pipes were in code for a period of time. She replaced with copper for around $10K.

Also, does the home have a slab floor? I've heard of some homes having plumbing in the slab. That would be a scary scenario to replace, imo.

"I have to go. I am still curious why he has to buy because of the kids?"

I know.....I never understand this....I have a kid, and I'd love to own a house, but there is way too much to lose if I were to buy now. I think the fact that someone has kids is more the reason to wait, kids are going to be hurt the most when you are in deep financial trouble, especially when theres a chance of losing the house. I remember when I was a child and my Father was in between jobs and we had to cut back on alot of things... I remember the heat had to be lowered and we all had to wear heavy clothing...and while my Mother tried to tell us what was going on and that we could lose the house, we were too young to understand...If you can't do it for yourself, at least do it for the kids!

"Since you plan to send your kids to private school anyway, wouldn’t it make more sense to look for properties in a transition neighborhood?"

I had this thought too. I would not pay the "good public school" premium for certain neighborhoods if I didn't intend to use the public schools. That's like paying for schools twice. I'd go someplace where you're paying for prime location or more house, rather than paying for schools you're not going to use anyway. I know you're considering it because of its effect on future resale value, but for a purchase this big, I really think the issue should be solely how the purchase suits *your* family for the long-term (but I don't think I'd call 6 years "long-term").

And with school funding propositions (like prop 76) up for vote, who knows how that will effect schools 6 years or more down the road. Maybe they will be better, or maybe all the public schools will be screwed up beyond recognition. It's hard to foretell how changes will affect things in the long-term. Sometimes there are unintended consequences.

The answer would be Yes-Yes-Yes; at least I itemize. I would think that anyone itemizes. I expect slow increases in value of 5% annually. I do not understand right away whether itemizing plays a role. Can you explain if it is not too off-topic?

If the tax deduction is changed into a 15% tax credit on interest of loan up to 300K, even those who do not itemize can benefit.

I know you itemize (of course). However do the typical buyers of 300K homes in Las Vegas (non-investors) itemize? If they do not itemize and then get a 15% tax credit from tax reform, your 300K properties may suddenly look 10-15% "underpriced" because the after tax cost for the same price will be lowered.

I am planning to buy a 700k house with a 35k (5%) down payment in the next few weeks due to the kids’ situation that I have.
What is your advice

We cannot give investment advice.

Personally, I think buying a primary residence is always feasible if the PITI for a 30-YR FRM does not exceed 30% of your household gross income. This is already a stretch, so be cautious. A safer way is to determine affordability using 15-YR FRM but get a 30-YR instead. Buffer is good.

Do not overlook property tax and HOA/insurance.

Also, do not assume that you can trade up in 3-5 years. Buy if you can comfortably afford a house that is adequate for the next 15 years.

It is funny. I talked with some friends from Czech and they think a 30-YR FRM is strange because it takes a good portion of your life to repay. They think 15-YR is more reasonable.

Okay... let's not talk about NAAVLPs.

I talked with some friends from Czech and they think a 30-YR FRM is strange because it takes a good portion of your life to repay.

right--a lot of Europeans hate massive, lingering debt.

right–a lot of Europeans hate massive, lingering debt.

I did not tell them about the Hell-lock financed "car (Hummer) loans" that are effectively 30 year long. :)

The housing market cannot go down because it is Hell-locked. :)

... if you still remember the *-locked jokes...

(Not investment advice)

$750k. she and her husband have no kids and are in their early 30s, household income about $120k.

Unless downpayment is significant (250K+), it is quite difficult to finance the mortgage with 120K.

How can people who only make $120k afford a $750k house?

It would represent a price to income ratio of 6.25, which is not unheard of in high-cost places like the SFBA. Many people stretch to get on the real estate boat that is said to be unsinkable.

4300sf is not a small house for 2. Is this a good time to get a dream house?

It really breaks my heart to see people having to work so hard for so little to live in the Bay Area. I'm not selling anything here but I wanted to show you what you can get in some other areas. I grew up in CA and lived there 40 years. I moved a few years ago to the Midwest - culture shock in some ways - yes, a better way of life with awesome schools, no traffic, wonderful people - yes.

It's not for everyone but maybe someone will see how they can have the American dream if they stop believing the hype of the Golden State.. I'm sorry to knock CA - it was my home for a long time and I have a lot of memories and miss some things ( like the weather) but it has gone downhill in my mind. I got to the point where I didn't want to go anywhere because I would be stuck in horrific traffic and the people were like mice in an endless maze.

Yeah, some people will make fun of midwestern states and that is okay - most have never been here - it can be a wonderful place to raise a family.

Tonight is an exciting night for us here - our first NBA game ever in history played tonight - Hornets against the Kings - can't wait!

http://tinyurl.com/dfczn

"for those of you with knowledge about the las vegas market, please chime in…should she buy or wait?"

All I can tell her is the force is not with her! Why would anyone want to buy right now....does your friend have a deathwish?

Perspective on ATM

Did you mean AMT?

yeah, it’s pretty crazy. all i can say is they made this decision after they decided that they would not have any kids. they were horrified when they did some back of the envelop calcs on what it takes to raise a kid and put him/her through college. anyone do a cost analysis on what it takes to raise a kid these days??

So it is fine to overspend on a house but not a kid?

I did a discounted cashflow analysis once and the net present value of having a kid is in the 200K range. I forgot the assumptions used.

" It is extremely unlikely they all get screwed up "

Oh sure, H.Z., get all logical on me, why don't you? ;-) You're right I overstated my case.

My son also just started kindergarten, in one of the poorer counties in the state. Funding sucks, there's not a lot of parent involvement, but I still think he's having a good experience. I think we probably place more importance than necessary on API scores and such. So long as it's a safe learning environment, I'm okay with it for now.

There's a hilarious article in the October (I think) Atlantic Monthly about California parents' obsession with API scores. Also includes some discussion of how this affects real estate prices, so it's not totally off topic. :-)

seattledude et. al...

Thanks a ton, but although I love Illinois but I'm not moving. That's fixed. And I've watched rent here since 1999. I sincerely doubt it's going to collapse - in fact rent will go up when the bubble bursts.

Given that my 'down the toilet' money (payment + taxes - tax savings - principle paid) is about the same as rent, then it seems to me that this isn't as nuts as it seems to some of you.

I mean, I build into my assumptions that I can make 5% after taxes. As someone pointed out, that's not a safe assumption. It's just a different risk.

But really, I guess it really boils down to 2 scenarios:

1) People *on the peninsula* (not SJ) are buying houses they can't really afford and setting themselves up for a big fall. If I wait long enough, there will be opportunity.

or

2) There are plenty of wealthy people that want to buy homes. Prices will continue to climb, albeit slowly. A $500k 3bdr house north of Santa Clara will never become a reality.

A $500k 3bdr house north of Santa Clara will never become a reality.

Portland, Oregon is north of Santa Clara and there are plenty of 3br houses under 500K.

"A $500k 3bdr house north of Santa Clara will never become a reality."

About 6 years ago (or was it 7?), it was a reality though. Good neighborhood with decent schools on the peninsula, you could get a 3 br 2 ba house in the high 400s. If you'd told me back then that that same house would be selling for around a million today, I would have told you you were crazy. In this market, the unbelievable becomes believable, and I think that applies to market correction as well as rising prices.