patrick.net

One doesn't HAVE to do anything...........thats the fallacy people like you always base your arguments on. There are always choices/options and usually more than there would appear to be at first glance.

Of course you have to do things. You have to eat, you have to avoid exposure. That's why it's called Maslow's hierarchy of needs and not Maslow's hierarchy of wants. Buying property before your income stream gets diminished during retirement is practically a need because of inflation.

If you want to deny your income to moneyed interests then it's also good to live in a low-cost area. Renting may be better than buying in the BA but it's not as good as renting or buying elsewhere.

I moved to Austin back in the dot com boom to 'have affordable housing' and Austin is awsome and all that but it aint CA so I aborted it and moved back.

I found that the really cool awsome parts of Austin where a CA transplant would live are the high priced areas. Nice downtown area, or higher end suburbs are not cheap there and prop tax is 2.5 to 3% on a house.

Anyway I decided I dont need a bunch of extra bedrooms to fill with crap I dont need - I'd rather have the good weather and things to do CA has. I didnt see sunlight for 6 weeks in Austin in winter - mind cannot comprehend how that is possible but crappy weather is the norm in the world.

Also the mexican food in TX is crap by CA standards. How in the hell that can that happen with a high hispanic population? Tex-Mex. its crap. They replace the good parts with chili and corn, blah. just a rant. BBQ there is top notch though so it evens out.

I moved here from NYC after 7 years of working as a nurse in Manhattan and living in the boroughs of Queens and Staten Island. In Staten Island I was living in a 3 story cubicle with a view of Brooklyn but that's all about it.

Living in Green Valley area of Fairfield is like heaven on earth in comparison with what we have in Staten Island. Very good weather, big houses, less stress in commuting ( i worked in PM shift to SF ) cheaper foods, fresh vegetables, incomparable outdoor activities. With the house prices right now in this part of Bay Area and having lived in the NJ , NC, the bay area is still a California dreamin'.

The only thing i miss about NYC is the Pizza, Hotdog,Bagels and the " How you Doin "

How you doin' ?

A former neighbor of my relocated from SoCal to San Antonio, Texas. He lasted a year before his wife told him that she wanted to move back to California. He had to take a loss on his one year old new house.

I have traveled and lived throughout the world as a computer consultant. I just try to "fit into" the area that I'm working in. Even here in the San Francisco Bay Area. :-/

I love the Bay Area, in spite of the prices. I know lots of tech people, my wife and kids have friends, and I even like my landlord.

My complaint is not that prices are high in nice neighborhoods -- it's that they are irrationally high. Meaning that the cost of owning is much higher (2x to 3x) than renting the same size place in the same neighborhood in the same condition.

Also, I really don't like the fact that bankers and government (both Dem and Rep) are in a giant conspiracy against the public to get them into as much mortgage debt as possible. That's just wrong. It's a roach motel for the 99%: they go into debt, but they don't come out, and end up spending their entire working lives paying the 1%. Then they die.

Patrick,
It's renters like you who make the rents too (irrationally?) high for the local kids.

That's just wrong. It's a roach motel for the 99%: they go into debt, but they don't come out, and end up spending their entire working lives paying the 1%. Then they die.

yes sir and its the ones who got them the penthouse room in that same roach motel that act all smug with there selves.

B.A.C.A.H. says

Patrick,

It's renters like you who make the rents too (irrationally?) high for the local kids.

Rents at least depend on salaries and savings, not on debt. You can't get a loan to pay the rent.

So if rents are high, that means local salaries and/or savings are high. And that means that local kids also have the good luck that there are a lot of high-paying jobs nearby.

But my rent is well below average anyway, so you can't say I personally am driving up rents. In fact, I'm bringing down the average rent.

B.A.C.A.H. says

Patrick,

It's renters like you who make the rents too (irrationally?) high for the local kids.

Not so true. I never overpay on rent just I refuse to overpay for a wooden box(especially a crappy one)!

I love the Bay Area, in spite of the prices. I know lots of tech people, my wife and kids have friends, and I even like my landlord.

Hmm, he's got a valid point here. Since your a computer programmer, you can telecommute for anywhere in the world. While no one is suggesting you move to Bangladesh for the cheap rents and housing prices, you can move elsewhere in California where housing prices are more reasonable. The point is your not tied to your location, like most of us are tha need to be within commuting distance to our employment.

Wacking Hut says

Of course you have to do things. You have to eat, you have to avoid exposure. That's why it's called Maslow's hierarchy of needs and not Maslow's hierarchy of wants. Buying property before your income stream gets diminished during retirement is practically a need because of inflation.

Ok, it's been a couple of years since I graduated and took my professional licensing tests... I'm a bit rusty on my Maslow, so I figured I must've forgotten the part about "practically a need" and "buying a house:"

http://en.wikipedia.org/wiki/Maslow%27s_hierarchy_of_needs

There was no mention of either. But then again, there was no mention of an ipad and my daughter NEEDS one. So, it should be changed to fit the times:

Physical needs: Beer, a couch or recliner, remote control and cell phone.

Safety: a job where one doesn't have to work very hard but is paid well, an auto with airbags pretty much everywhere, a neighborhood where friends can visit without being mugged, having a spouse that you're not afraid will kill you in your sleep.

Love/belonging: family that accepts you as you are, a spouse/partner or booty call you don't have to work for, a shitload of facebook friends.

Esteem: respect & being respected (unless you have teenagers, in which case respect is not having them wreck your car).

Self Actualization: all the crap about creativity, morality and problem solving, as well as having bought a house you can still afford when your income stream dries up...

Notice I didn't have an ipad there anywhere. Sorry, honey, you'll have to meet that "need" on your own...

B.A.C.A.H. says

Patrick,

It's renters like you who make the rents too (irrationally?) high for the local kids.

Rents at least depend on salaries and savings, not on debt. You can't get a loan to pay the rent.

So if rents are high, that means local salaries and/or savings are high. And that means that local kids also have the good luck that there are a lot of high-paying jobs nearby.

But my rent is well below average anyway, so you can't say I personally am driving up rents. In fact, I'm bringing down the average rent.

Well it all depends on the landlord and demand, the problem with the bay area now is that so many former homeowners are finally getting booted out after wearing out their post bankrupcy squatting, that rents started to spike just over two years after things started to go sour.

Before I moved from San Mateo county I lived in what was regarded the best apartment complex in an entire city, the prices were among the lowest, the management and maintenance good. But the building was still a rickety piece of garbage and I suffered many earthquake scares due to neighbors with a heavy gait or hand.

As sure as our lease was up (1 year) the landlord raised the rent $150 a month. I miss the manager and besides the noise the neighbors were great, but I got out of there fast.

I moved back to my home region of Los Gatos, it is pricey here and to get anything is a many mile drive, but due to family I get my rent very very cheap and I do not have to deal with people stomping on my roof anymore.

It is a fact that apartment landlords are typically greedy would-be slumlords, the problem with the bay area is they can get away with it here. I will never make that mistake again and will only be renting cottages or houses from now on.

My complaint is not that prices are high in nice neighborhoods -- it's that they are irrationally high.

That's caused by supply and demand. there's a limited amount of real estate here to buy, and there's a whole lot of people who want to live here, because it happens to be among the best places on earth to live, for many reasons.

I really don't like the fact that bankers and government (both Dem and Rep) are in a giant conspiracy against the public to get them into as much mortgage debt as possible. That's just wrong. It's a roach motel for the 99%: they go into debt, but they don't come out, and end up spending their entire working lives paying the 1%. Then they die.

People don't do that because of some conspiracy. No one is conspiring to keep anyone "down," as some would put it. The fact is, most people (almost everyone in the 99%) don't understand how money works. How capital works in our economy, how the economy operates, how their own money works, how the banks work, etc. Most people don't understand the mechanics of wealth creation.

They learn poor money habits from other people who have poor money habits, and the cycle of poverty continues.

TechGromit says

you can move elsewhere in California where housing prices are more reasonable.

yeah you could move out to the Mojave desert, rents are real cheap out there... The thing is, the reason rents are so cheap out there is because everyone would prefer to live here, not there. If the things that make living out there undesirable for most, don't bother you at all, it's a great option, but chances are your wife and kids wont be thrilled about moving out there, regardless of what it does for your disposable income.

NurseT says

The only thing i miss about NYC is the Pizza, Hotdog,Bagels and the " How you Doin "

That reminds me of some things I've heard from those on the west and east coast...hopefully this won't open up a can of worms but it's that on the west coast or at least CA there isn't decent pizza. Then again I'm in the northeast and I'd say only a handful of places are decent BBQ. Few here even know how to smoke meats.

I do have a place in town that supposedly makes NYC style bagels..baked on site..it even has lox!

Also, I really don't like the fact that bankers and government (both Dem and Rep) are in a giant conspiracy against the public to get them into as much mortgage debt as possible. That's just wrong. It's a roach motel for the 99%: they go into debt, but they don't come out, and end up spending their entire working lives paying the 1%. Then they die.

On the same concept though isn't that what nearly anyone in selling does? You end up buying too much health insurance, too much life insurance, too many tv channels, too much car insurance, paying for way too much packaging (remember cd long boxes and the mcdlt?), too much software, too many classes etc. I've known people that have been car salesman. What really mattered was the price and how much financing. If you bought a Jag and had to finance they'd treat you like a king. If want to buy a Kia and can pay in cash and take your time they'd probably tell you to get on with it and leave.

What's a NYC style bagel? I buy bagels and pizza in NYC all the time and I don't see how they are any different than bagels and pizza in other parts of the country.

Also, I really don't like the fact that bankers and government (both Dem and Rep) are in a giant conspiracy against the public to get them into as much mortgage debt as possible. That's just wrong. It's a roach motel for the 99%: they go into debt, but they don't come out, and end up spending their entire working lives paying the 1%. Then they die.

Nobody is putting a gun to anyones' head and forcing them to go into debt. They go into debt because they want to. They want the big house and the luxury car in the driveway. The drug dealer is not the reason why we have a drug problem in America. We have a drug problem because of the DEMAND for drugs. Eliminate the demand, and the drug dealer disappears.

mdovell says

it's that on the west coast or at least CA there isn't decent pizza.

whoever says that has not eaten at Zacharies

Well said HousingWatcher, that is so true!

HousingWatcher says

Nobody is putting a gun to anyones' head and forcing them to go into debt. They go into debt because they want to.

exactly the market determines the pricing. If renting were really such a better deal than owning then everyone would rent.

toothfairy says

exactly the market determines the pricing

No, that's wrong. Pricing for housing is determined primarily by lending, and that debt is specifically encouraged by many different federal laws and programs.

Your faith in the existence of a rational "market" for housing in America is quaint.

ReasonNotFaith says

That's caused by supply and demand.

Again, charming and wrong. Demand for houses goes UP as prices go up, as we saw so clearly in the housing bubble. Your model does not account for that at all.

In fact, your free market model should predict that the players of the "ultimatum game" would agree to split $10 even if the first player takes $9.99 and the other player gets only 1 cent. But that never happens in the real world.

http://en.wikipedia.org/wiki/Ultimatum_game

Homo economicus is a fiction.

HousingWatcher says

Nobody is putting a gun to anyones' head and forcing them to go into debt.

Not that far removed though. The social pressure to buy the biggest house possible (meaning to take on as much debt as possible) is continuous and intense. Wife, family, employer, peers, neighbors: all of them pressure you to buy.

Also, most people can't do math very well and have a hard time calculating the net present value of debt, to compare to renting. They follow the herd and think they are safe. They don't notice that the herd is being led to slaughter by the NAR, bankers, and Congressmen working for the NAR and bankers.

Demand for houses goes UP as prices go up, as we saw so clearly in the housing bubble.

Regardless of what is causing demand to increase, whether it's rational, or irrational (it's usually irrational) it is the increasing demand for those homes that cause the price to increase. You certainly don't see increasing prices during decreasing demand, do you?

You're speaking in circularities.

You're defining "demand" as the price people will pay, and then saying the price is determined by demand.

No, that's wrong. Pricing for housing is determined primarily by lending, and that debt is specifically encouraged by many different federal laws and programs.

I should say the "premium" people are willing to pay vs. renting is determined by the market. You take away the federal programs the only thing that will change is interest rates going through the roof (we know that's what you want).
You're payments will still be double what it costs to rent the same house.
Possibly more because there isn't a 1-1 correlation between prices and interest rates.

toothfairy says

exactly the market determines the pricing

No, that's wrong. Pricing for housing is determined primarily by lending, and that debt is specifically encouraged by many different federal laws and programs.

Your faith in the existence of a rational "market" for housing in America is quaint.

Ah Patrick, you have hit the nail squarely on the head. The rule of thumb everywhere I've been in the world is the price of houses is whatever the multiple of income the banks will loan. Look at any housing bubble and you will find creative financing. The current leader is Australia where you can get a 6+ times income mortgage for up to 50 years. As soon as the banks get over their heads and tighten up to more realistic lending the market crashes.

The part you missed is when the money gets that fast and loose speculation goes wild and all kinds of houses get built that have no rational reason for existing. Like the inland valley or San Diego/Miami condo's.

bob2356 says

The part you missed is when the money gets that fast and loose speculation goes wild and all kinds of houses get built that have no rational reason for existing. Like the inland valley or San Diego/Miami condo's.

Could be.

But it is different here. Elites in Communist China don't covet inland valley nor Miami condo's for their exit plans. They covet Fortresses on the Left Coast. So it's not just about little guys' mortgage financing.

You're defining "demand" as the price people will pay, and then saying the price is determined by demand.

That's not what I said. I'm defining demand as people being willing to buy at whatever the price is today. The more demand, the less supply, the higher the price. Elementary economics.

toothfairy says

You're payments will still be double what it costs to rent the same house.

I don't think you can ever say it's cheaper to rent than it is to buy the same house, provided we're using the same date of sale of the house for considering the amount of rent vs the purchase price + continuing cost of owning.

If you were going to consider buying the house today, vs renting the same house from a different person who bought it today, it's always cheaper to own.

The only time it's cheaper to rent than to own is when you can find a place to rent that was purchased at a time when the home could be purchased much cheaper than it could be purchased for today.

"Willing to buy" is hard to measure. What units is that in?

Let's define demand as number of houses sold. That should express "willing to buy" pretty well.

Now look at number of houses sold as prices rose during the bubble. They both went up together, big time!

Then in the crash, the prices fell, and at the same time, the number of houses sold fell.

Elementary economics would predict exactly the opposite. It would predict that people would buy fewer when the price goes up, and more when the price goes down.

Elementary economics is horribly wrong. It does not actually predict or explain what obviously happened in the real world in the last ten years.

ReasonNotFaith says

I don't think you can ever say it's cheaper to rent than it is to buy the same house, provided we're using the same date of sale of the house for considering the amount of rent vs the purchase price + continuing cost of owning.

If you were going to consider buying the house today, vs renting the same house from a different person who bought it today, it's always cheaper to own.

Wow, that is SO very wrong!

Just do a little bit of math. Pretty much every single house in San Francisco and down the peninsula is definitely much cheaper to rent than to own.

OK, I'll do the math for you. You now have a free three-day trial of the Patrick.net "Should I buy that house?" service. See the top of any page for the link. Enter a real house for sale. The service will automatically find the median rent in the area for that number of bedrooms and calculate the loss from renting and compare it to the loss from owning. Change the rent if you know better what it would actually be.

Note that the only variable that could make anything around here cheaper to own is high appreciation. But that was the essence of the housing bubble, and cannot be counted on. In fact, it looks like prices will keep falling.

bob2356 says

The rule of thumb everywhere I've been in the world is the price of houses is whatever the multiple of income the banks will loan.

That's a very clear way to put it. Thanks!

Patrick,

The house I bought sold in 2003 for just a hair more than what we paid in 2011.

The house used to be a rental and in 2003 it rented for $1700. Now, the house 2 doors from me, which is a lot smaller, less backyard and no pool just was listed for lease and rented right away for $2800.- . The house on the other side of us also rents for 2800.-, same deal. Our house would probably rent for 3000-3200. (our guesthouse alone was rented for $1200/m)

So in a nutshell...the house sales price is unchanged from 2003...but the rent from 2003 has almost doubled .

Rents are off the charts!!

If I use only the interest "throw away" portion (so to speak my rent) that I pay $1200-1400 less a month than what it would cost to rent.

No Brainer! I am not even figuring in that I have a tax write-off - if they got rid of mortgage deduction (which they won't), would make no difference to me...it would still be a whole lot cheaper to buy, even without tax deduction.

Tax deduction is a bonus - we put that in our kids college savings fund.

San Fran must be one crazy place if its that different from LA. In your case, I'd move here.

Yes SF is absolutely a crazy place. I rent a 1.3m home for 3000/month. Try to get a mortgage payment covering 1.3m for close to that. Also, by paying 3K/month I sleep well knowing that I am not in debt to someone for 1.3m!

Wow, what a thread. I agree with Patrick's take on economics. The concept of "utiles" just makes me chuckle. Too much of economic theory is just post hoc rationalization of anti-social behavior by rich people.

If Patrick is willing to pay the price to live in sunny Menlo Park that's his bed and he'll sleep in it. The housing purist would move away from the land of fruity, nutty, and flaky jumbo loans. Not that being a housing purist is admirable. Life is for living and not investing after all.

RentingForHalfTheCost says

Yes SF is absolutely a crazy place. I rent a 1.3m home for 3000/month. Try to get a mortgage payment covering 1.3m for close to that. Also, by paying 3K/month I sleep well knowing that I am not in debt to someone for 1.3m!

I don't buy that. Either your paying well under market value for rent or your house is not worth anywhere near $1.3 million.

HousingWatcher says

RentingForHalfTheCost says

Yes SF is absolutely a crazy place. I rent a 1.3m home for 3000/month. Try to get a mortgage payment covering 1.3m for close to that. Also, by paying 3K/month I sleep well knowing that I am not in debt to someone for 1.3m!

I don't buy that. Either your paying well under market value for rent or your house is not worth anywhere near $1.3 million.

I don't buy it either - SF can't be that different than LA.

For 1.3mill - I can buy a house with ocean views in malibu. I doubt that its that different in SF.

Show me a house that sold within the last few months for 1.3mill that rents for $3000.-

here is one I found, in Berkeley - sold for $450k in 2009 and is for rent at 2500.-
http://www.zillow.com/homedetails/1947-Virginia-St-Berkeley-CA-94709/24839120_zpid/

just to clarify - a mortgage on a 450k house with current rates (20%down, fixed 30 year) = $1650 + Prop tax $470 = $2120 ...lets not even put in the tax break because then its even less. In other words - somebody in Berkley could be paying $2120 / month to own OR rent for $2500.-

I knew it can't be that different from LA...

basically everyone in the rest of this country either hates Californians or will come to hate them later in life. i am a sixth generation native and so this hurts me to say it but I can not blame them

Wow, that is SO very wrong!

Just do a little bit of math. Pretty much every single house in San Francisco and down the peninsula is definitely much cheaper to rent than to own.

OK, I'll do the math for you. You now have a free three-day trial of the Patrick.net "Should I buy that house?" service. See the top of any page for the link. Enter a real house for sale. The service will automatically find the median rent in the area for that number of bedrooms and calculate the loss from renting and compare it to the loss from owning. Change the rent if you know better what it would actually be.

Note that the only variable that could make anything around here cheaper to own is high appreciation. But that was the essence of the housing bubble, and cannot be counted on. In fact, it looks like prices will keep falling.

It's important to understand the components and structure of the calculator to get a feel of what's going on. Here's my observation.

The calculator already slap a 10% -11% transaction cost. Absent appreciation, it is impossible to overcome quickly based on rent/buy delta alone. But if you don't plan to sell your home, there's no 10% transaction cost ever. The other factors such as rent appreciation, appreciation is impossible to predict long term anyway so the calculator is just a guess based on the inputs and extrapolated with formula anyway. You can come to whatever conclusion you want.

Soft factors is missing, If pricing is perfect, everything S&P stock will have have equity to value ratio of 75% and PE of 15, but it doesn't. Amazon.com is horribly expensive, but one of the best bet in the next generation, Best Buys is cheap but in my opinion one of the worst bet next generation. There's reasons why the ratios are different. Understand them. Any calculator that tells you to buy in the slums of Oakland but not buy in Palo Alto is not consistent with reality - People voting with their money. Housing has a huge amount of soft factors to account for. The calculator ignores everything.

Hate the median data without context. The median rental in the SFBA is a village type apartment. Your median home for sale, not so much. Understand what "median" means. Makes the calulator useless as well.

housing choice is a social science more so than any other science. scrap the calculator and talk to real people with real social reasons and choice.

Sorry P, just being honest

I understand peoples' love for the Bay Area because I lived there between '79 and '85, but although San Francisco is an amazingly beautiful city, and the topography, bays, inlets, and islands of the Bay Area makes it unbelievably gorgeous, even thrilling, it isn't the only place in the world where one can find happiness.

There is no paradise, even the Bay Area, if you're unemployed and worried about the prices of food and housing spiralling out of control, and who cares if you're making 60K if it all gets consumed in mortgage payments and rent.

In 2003, motivated by a new relationship, I pulled up roots, sold a home I loved on 7 acres east of San Diego, and started the move to South America.

Although there have been some struggles here, and employment is not that easy for someone my age here (55), the cost of living was so low here I could get by on less that $5,000 a year for the first years, and now am happily employed in an American company in Montevideo. I love my life, and am extremely grateful to be living in this part of the world.

I forego the restaurants with pleasure because I'd rather save 40% to 60% of my salary, and cooking and spending time with friends is much more fun than going to a restaurant, and Montevideo has street markets filled with high-quality, low-cost produce, and even though this is considered an "expensive" city, if you know how to buy and avoid supermarkets (buy everything you need at the auctions and fairs), you can live very well, and who cares about luxury? I hate shopping malls and restaurants anyway.

Also interesting is that the oldest part of this city is a small peninsula surrounded by water on three sides, and most of the city is oriented towards the water, with topography that's not as dramatic as San Francisco, but still quite pleasant. The entire country has less than 4 million people, and the capital has the population of San Diego. Migrants to Argentina, and to a lesser extent Uruguay, are now streaming in from Europe and some from the States. http://www.guardian.co.uk/world/2011/dec/22/young-europeans-emigrate-argentina-jobs