patrick.net

FunTime says

tiny tina says

How do you figure 2-3x without factoring in the interest rate?

Think past a month.

When the analysis throughout the thread has been about monthly payments, why should I switch? Affordability can be compared pretty easily using monthly numbers.

FunTime says

Yeah, I have too. Every six months, or so, since that NYTimes calculator published. It's great! And I agree that there are some reasonable numbers at this point that make even a higher price seem to make sense. (my wife reminds me of this often now, since we went through the exercise together a few months back)
I'm not comfortable, though, with the numbers for appreciation that make it work even over periods of ten years or more, even when those appreciation numbers make sense in the historical context.

Yes appreciation assumption is a key point, isn't it. Historically, long term rents and houses go up with inflation so I simply assume 2-3%, same for both. I think that is pretty "fair and balanced".

Of course animal spirits could take us higher or lower but I like to focus on long term fundamentals...

sheltielover1 says

Well your "Man" in the WH has blown out the debt so much none of us will have any money! Just love you Libs - All TAX & SPEND!

This says a lot about the validity of your assessment--if you don't know how we got here, how we will get out, how the debt grew, etc without resorting to blind Faux news rhetoric, you'll likely not be right about this purchase either.

tiny tina says

Comments like this make me wonder if you really have crunched the numbers. How do you figure 2-3x without factoring in the interest rate? Really, you can afford 3x with interest rates at 4% just the same as if they spike to 8%? So the fact that your P+I is $1900 @ 4% and $2900 @ 8% doesn't matter at all?

heh. Well, my husband works in finance, so yes, we have, pretty carefully actually.

sheltielover1 says

Well your "Man" in the WH has blown out the debt so much none of us will have any money! Just love you Libs - All TAX & SPEND!

As opposed to the prior administration's policy of lowering taxes while overspending?

illustrateth says

heh. Well, my husband works in finance, so yes, we have, pretty carefully actually.

That's great. Then can you explain how $1k/mo difference is completely ignored in your analysis?

ttt says

For giggles I also pass by 'mid tier' open houses in the $800K-1.2M range. There is very little traffic to say the least. Realtors are usually really happy to see me :-) I wonder what type of people buy these places in the end. From what I can gather from talking to the realtors these places are much harder to finance. Usually they start out like this: "If you can't put down 10%, that is really no problem. We can figure out a creative solution for your situation."

Haha yes wife and I went by a $1.6MM house (out of our range, we didn't realize price until we were inside and then we decided to play the part). Two other parties there, one Chinese and one Japanese. Realtor seemed genuinely happy to see us and asked (almost with a tone of desperation) if we were seriously interested. This segment is still quite overpriced IMO, it does not compare well with rentals at all.



Curious to hear about the 10% comment. I thought banks were pretty strict with non-conforming loans these days. Anybody knows what kinds of $1MM mortgages get approved (and not) these days?

drtor says

Curious to hear about the 10% comment. I thought banks were pretty strict with non-conforming loans these days. Anybody knows what kinds of $1MM mortgages get approved (and not) these days?

Good question. I placed a bid on a foreclosed property back in January and the bank wanted a pre-approval letter from their own mortgage department. This sounded unusual, but I sucked it up and got the hard inquiry on my credit. To my surprise I was told I would qualify for a jumbo loan (I gather something in the $850K-900K range) but insisted that the pre-approval letter be conforming only. %4.05 with 20% down, 15 years fixed. Probably not a good deal. Not sure what the interest rate would have been on that jumbo or how much downpayment it would have required.

I assume the realtor with the 10% comment was full of it and simply tried to lure me in. That's not how you make me a customer.

FunTime says

tiny tina says

I'm not saying people should go nuts and overspend, but using 3x without factoring other things such as 4% interest rates is just plain wrong.

I agree. If we were using reason, we'd definitely not borrow anything at all to buy a house. Like buying a candy bar, or a loaf of bread.

I wish everyone looked at real estate this way. Save until you can buy, or at least have a reasonable downpayment (>30%). Live way below your means in a crappy rental until you can move to your own place.

sheltielover1 says

Stupid, stupid, stupid... I think I am done with you libs.. Too much stress for reading your idiot posts...

Make sure to thank "the libs" for your FHA loan ...

"FHA insured loans are a type of federal assistance"

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

tiny tina says

illustrateth says

heh. Well, my husband works in finance, so yes, we have, pretty carefully actually.

That's great. Then can you explain how $1k/mo difference is completely ignored in your analysis?

Typical realtor scam of trying to focus the subject on the monthly payments. In a realtors world where interests rates are at 0.00001% and you can get a mortgage for a trillion dollars they would still say, "forgot the trillion, you 5000 yr mortgage payment is only 2500/mth". I, and many like me, like to look at the full cost. I would like to eventually pay off the mortgage on my home. At a trillion dollars that is impossible for me to do, it makes no difference how low the monthly payment becomes. Realtors probably are rolling their eyes right now and can't really grasp this thought. People paying down their mortgage, that is just crazy talk.

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

Let's stick with the $600k house example. How are you going to purchase it? Cash? Ok, how much do you have saved up now, and realistically, when will you have $600k cash? How much do you pay in rent?

Realtors Are Liars says

Because some people aren't howmuchamonthers..... to the disappointment of you lying realtors.

Still not a realtor, but thanks for adding nothing to the discussion.

Because some people aren't howmuchamonthers..... to the disappointment of you lying realtors.

When comparing renting vs. buying (and including PITI plus maintenance), how much a month is indeed relevant, esp. if you are buying because you need a place to live, as opposed to buying RE as an investment.

tiny tina says

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

Let's stick with the $600k house example. How are you going to purchase it? Cash? Ok, how much do you have saved up now, and realistically, when will you have $600k cash? How much do you pay in rent?

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

Hysteresis says

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

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

Would many of us like to wait and hope prices will come down another 10-15%? Yes, of course. But if you need a roof over your head and don't already have cheap rent....

tiny tina says

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

Let's stick with the $600k house example. How are you going to purchase it? Cash? Ok, how much do you have saved up now, and realistically, when will you have $600k cash? How much do you pay in rent?

All, if it makes sense to use. However, it doesn't right now because of the free money, so if I bought I would use the minimum to avoid PMI.

20% down, then pull a mortgage for the remainder at the crazy 4% range

Take the remaining 480K I didn't put down on the house and buy dividend companies that pay 4-5% dividends. Sell covered calls 3 times a year on these companies to increase the return to the 10-12% range. (Done this now for the last 4 years and averaging 11% with very little downside risk IMHO). There are more than enough "get rich quick" people that love to use leverage and will eat up your calls. As soon as one set expires sell another. What is the worst thing that can happen? You get your shares called away when they expire but you still made a tidy profit. Actually, worse is that the stock market tanks, but the high dividend does give you downside protection in that regard.

Net effect you save faster than if your loot was tied up in a depreciating asset.

Then when you feel like you are tired of your mortgage or you are semi-retired and not able to use the tax break then pay it off.

The monthly means nothing to the people not working paycheck to paycheck. You are paying to either rent money or rent a house. It makes no difference, you have to crunch the numbers and see for yourself. I see it similar to how they want to talk monthly when you buy a car and never talk about the real cost. Don't overpay for something because the monthly makes sense. Work hard to put yourself in a more powerful position so you can haggle on value. That is my advice.

Hysteresis says

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

What are these various reasons?

Your monthly rent compared with a $600k house doesn't sound like an apples to apples comparison - meaning, it sounds like you rent a 1 or 2 bdrm versus buying a 3 or 4 bedroom house. Either that or you have a very fortunate deal or are renting from your parents.

If you are somehow doing an apples to apples comparison of rent to purchase, then I completely agree that your rent doesn't justify purchasing. If only I had said something like that at the beginning of this thread...

Even within the Bay Area, there are lots of different markets. You numbers junkies will appreciate comparing my post about the $1M-$1.5M East Bay Market with Andrew Jeffery's Peninsula numbers.

http://bayarearealestatetrends.com/2012/02/27/market-velocity-1m-to-1-5m-which-markets-are-hot-and-which-arent/

http://bayarearealestatetrends.com/2012/02/27/the-bay-areas-hottest-housing-market/

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

tiny tina says

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

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

tiny tina says

Rentingforhalf...

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

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

RentingForHalfTheCost says

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

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

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

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

tatupu70 says

RentingForHalfTheCost says

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

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

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

RentingForHalfTheCost says

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

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

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

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

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

tiny tina says

Hysteresis says

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

What are these various reasons?

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

drtor says

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

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

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

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

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

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

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

Winner=Stocks

Hysteresis says

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

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

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

"Is Bay Area Crash Over?"

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

illustrateth says

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

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

tiny tina says

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

edvard2 says

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

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

RentingForHalfTheCost says

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

Ding Ding Ding We have a winner.

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

tiny tina says

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

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

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

tiny tina says

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

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

tiny tina says

Affordability can be compared pretty easily using monthly numbers.

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

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

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

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

FunTime says

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

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

drtor says

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

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

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

FunTime says

I find the idea of Cannibal Apocalypse actually more bearable.

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