patrick.net

Just look at the cost of owning vs the cost of renting the same thing

http://patrick.net/housing/calculator.php

Then you'll know what to do.

Some not-so-great neighborhoods are good deals now. But the expensive neighborhoods are still usually a horrible deal compared to renting. Really horrible. Suicidal compared to the money you could save renting the same thing.

Man, with one wife and another wife on the way, you have bigger things to worry about in your future then thinking about moving from your cave to a house....

BTW, Patrick's home ownership calculator is cute, but I respectfully disagree with its assumption that nominal home prices are going to decrease 1% per annum over the long haul. My long term theory in the area is that an entry Palo Alto or Menlo Park home will always cost just about what the combined salaries of two mid-level development engineers can support, give or take 10%. Since I expect those engineers who are competent to nominally get 2%+ raises, I expect prices to go up over the long haul.

OTOH, this site seems to dominated by people that believe that it it simply impossible for us to experience any inflation let alone double digit inflation despite the country's historical large national debt. To each his own, but there are a few people in the world how do think that inflation is in the cards. Witness that the 10 year treasury inflation protected security is sold at auction at a negative yield to inflation -- that's how scared some are....

fizbin says

BTW, Patrick's home ownership calculator is cute, but I respectfully disagree with its assumption that nominal home prices are going to decrease 1% per annum over the long haul.

Couldn't agree more! I think the decrease will be more like 3-4% per annum over the long haul.

Japan's house prices decreased for more than 20 years straight. Don't know the percentage though.

We seem to be heading in a similar direction, judging by our deliberately suppressed interest rates.

If you disagree that prices will fall, you can change that assumption. But I'm proud that my calculator is the only one I have ever seen that start with an assumption that prices will not go up.

RentingForHalfTheCost says

Couldn't agree more! I think the decrease will be more like 3-4% per annum over the long haul.

Ok, Nostradamus... If we have 15 more years of declines in the cards.. (just like Japan). Then home prices will be about 70% less in 2027 as they were in 2007.

BoomAndBustCycle says

Ok, Nostradamus... If we have 15 more years of declines in the cards.. (just like Japan). Then home prices will be about 70% less in 2027 as they were in 2007.

Percentages compound: assuming continuous decline, we'd be taking a percentage of an ever-smaller total, which changes the picture a bit.

At 3% per annum declines, the total 20-year decline would be 1 - (0.97)^20 = 45.6%

At 4% per annum declines, the total 20-year decline would be 1 - (0.96)^20 = 55.8%

These numbers might not be believable to everyone, but they're consistent with 3%-4% year-over-year declines, and they're more believable than a 70% cumulative decline.

Just keep renting and tally up the stories from friends of money they are sinking into repairs for their houses. That's a fun game and it keeps my wife and I renting. We have two kids and a dog.

Man, irony is dead.

HydroCabron says

Percentages compound: assuming continuous decline, we'd be taking a percentage of an ever-smaller total, which changes the picture a bit.

At 3% per annum declines, the total 20-year decline would be 1 - (0.97)^20 = 45.6%

At 4% per annum declines, the total 20-year decline would be 1 - (0.96)^20 = 55.8%

Nice. So you're saying that the price of a prime bay area house will nominally be half its current price in 20 years. And I'm saying that engineers will continue to get 2% nominal raises for 20 years:

At 2% per annum increases, the engineer's salary increase will be 1.02^20 x = 149%.

So, on a relative basis housing will cost that family 33.6% of current prices. Which I am happy to hear because it will mean that when my kids come out of college, they'll hopefully be able to buy an entry level house in Los Altos with their wages from their first job out school.... It's an interesting theory. And I am impressed at the certitude of those who make these prognostications....

HydroCabron says

s a fun game and it keeps my wife and I renting. We have two kids and a dog.

Or just poorly executed.

Japan's house prices decreased for more than 20 years straight.

Population of Japan grew by 3% over the last 20 years. American population grew by 24% in the same period. One would expect American population to continue to grow at similar rate, as such don't expect house prices to stagnate like Japan.

hanera says

Population of Japan grew by 3% over the last 20 years. American population grew by 24% in the same period. One would expect American population to continue to grow at similar rate, as such don't expect house prices to stagnate like Japan.

Much of the US population growth is coming form illegal immigration. That influx of unskilled, uneducated workers isn't exactly a boon for high house prices.

There have actually been a few periods over the last 20 years in Japan when real estate prices have gone up just a little -- but not much.

Here's a graph of the changes in the year-over-year change in Tokyo prices. You want the red line, which is for non-new-construction:

Around 2007, and for pockets of 2010 and 2011, prices went up; the rest of the time they were declining just slightly. Not enough to put you off buying, of course, since paying rent would have cost you much more than you'd have saved by waiting, but they were still on a very gentle downslope.

And here's price plotted against income:

Look at that decline! Even when prices were flat, people were making more money.

BoomAndBustCycle says

RentingForHalfTheCost says

Couldn't agree more! I think the decrease will be more like 3-4% per annum over the long haul.

Ok, Nostradamus... If we have 15 more years of declines in the cards.. (just like Japan). Then home prices will be about 70% less in 2027 as they were in 2007.

So, you can go on record of saying prices will appreciate just because, but when someone says something you don't agree with then they are Nostradamus. Great logic there bud. I didn't just come up with that number, it is actually less than what has been happening in the last 4 years, so I am being conservative. There is absolutely no positive news on housing that will stop the downward momentum in my opinion. I don't think it will last 20 years, but another 5-8 years would not surprise me. We have 6 years of shadow inventory to work through at the digestion rate of today. These are real numbers, not just someone taking a guess. If anyone is looking to go into debt over the asset of a house, it might be a good idea to take at least a month of crunching through the numbers themselves. They are very scary. I wouldn't be surprised at all if the next few years are way above my 3-4% calculations. In the 8-10% range nationally.

You can have different conclusions, but I am not guessing and have been correct about the events of the bay area since I arrived here in 1997. I sold stock at the peak, bought housing before the runup - sold at close to the peak, and now am accumulating as much stock as possible while renting. If I didn't believe in it, then I wouldn't be doing it. I value my savings too much and don't have a backup plan if I go broke like many people.

fizbin says

buy an entry level house in Los Altos with their wages from their first job out school

Really? Their first job out of high school will give them the ability to buy a 500K house? I guess you are assuming we are still in the 3-4% mortage easy credit market. No, your not? You kid is going to be making 100K+ as a first high school job? Does your kid go to Cupertino schools? Ah, that explains it then, sorry I thought we were talking about a regular high school kid. Those Cupertino schools are amazing and pretty soon we will be working for all of them. So smart, so bright, I don't understand why anyone with a high school kid would not move to Cupertino. They have great scores you know. ;)

Seriously, your conclusion about your high school kid are based on the simple fact that credit will always be easy. Is it easy now? Absolutely. Who in their right mind would loan anyone in this country 600-800K on a depreciating asset and only charge 3-4%. The risk is definitely in the double-digits or above. That is why nearly all the loans these days are not from private, they are gov't backed. Yup, back by you and me. If it was my kid I would kick them in the butt for even considering being a debt slave at that age. Go out and get arrested or something like normal teenagers.

RentingForHalfTheCost says

If it was my kid I would kick them in the butt for even considering being a debt slave at that age. Go out and get arrested or something like normal teenagers.

Classic! +1.

Compared to $500k of debt, smoking weed and street racing are relatively harmless.

Reposting this here on the expectation that RFHTC will delete this in his other thread:

RentingForHalfTheCost says

Funny how to treat someone's opinion as 'fact'

You bring this upon yourself you know. You express your opinion with an incredible air of cocksure certainty - like I would explaining to a high school kid...that the New England Patriots would destroy Central High School's JV squad.

For example when someone questions your estimation of prices dropping 3-4% per year for several years, here is your response:

RentingForHalfTheCost says

I don't think it will last 20 years, but another 5-8 years would not surprise
me. We have 6 years of shadow inventory to work through at the digestion rate of
today. These are real numbers, not just someone taking a guess. If anyone is
looking to go into debt over the asset of a house, it might be a good idea to
take at least a month of crunching through the numbers themselves. They are very
scary. I wouldn't be surprised at all if the next few years are way above my
3-4% calculations. In the 8-10% range nationally.

You can have different conclusions, but I am not guessing and have been
correct about the events of the bay area since I arrived here in 1997.

/?p=1211322

Boldface emphasis is mine, but again, given the absolute certainty with which you were predicting massive price drops, you cant be sore when someone holds you accountable for something which hindsight proves to be incredibly wrong.

I'm guessing this post was very much tongue in cheek. But to play along and maybe even be somewhat serious, here's my 2 cents.

We rented and saved for over a decade. Basically all through the last housing bubble. Additionally we shared a house with another renter and that meant our rent was very cheap.

At the end of the day it comes down to money. It came to a point where at sometime two years ago prices and interest rates had come down to a point that equaled what we paid in rent. So we decided to buy. This has been a good choice for us. We are still saving close to 50% of our incomes every month and even though this wasn't part of our reason for buying, homes in our area have gone up about 30% in the last year and a half. So for us the timing was right.

But everyone's situation is different. My advice is to take it easy. Do what makes you feel comfortable. I'd recommend saving a lot of cash as well. Lastly, if the area you live in proves to be too expensive, consider moving somewhere else. That was in our deck of cards for a few years too.

Oh wow. this is an old thread.

edvard2 says

Oh wow. this is an old thread.

Yeah - I had to bring it forward to preserve my comment on the suspicion RFHTC would delete it in the relevant thread (which he did).

/?p=1235271

Doing it again now, on the assumption that he will again delete this most recent post below:

RFHTC - serious question, whats the point of deleting when you know I will simply repost in another thread where you cannot delete:

http://patrick.net/?p=1211322

Presumably you are embarrassed by how bad your prediction turned out (which I understand). But given that it will be out there either way, why not just suck it up and deal with it versus having it known that you (a) make some incredibly bad predictions and (b) have a regular habit of deleting threads?

HydroCabron says

with one wife and another on the way...

you'll probably want two places, in separate school districts.

delete this account says

My long term theory in the area is that an entry Palo Alto or Menlo Park home will always cost just about what the combined salaries of two mid-level development engineers can support, give or take 10%. Since I expect those engineers who are competent to nominally get 2%+ raises, I expect prices to go up over the long haul.

there are better parts of than just Palo Alto / Menlo Park... Milpitas is great for both East Bay and Peninsula commutes plus closer to BART to city .. far better restaurants.. Where is my Pho !