patrick.net

JH says

FUCK IT I'm going to continue to rent for less than the mortgage payment

With a new loan, ~2/3 of the mortgage payment is tax deductible, and the part that isn't reduces the principal and is thus a form of savings.

This is the primary analytical mistake in not buying that I made in 2000, along with not understanding the ramifications of this graph:

Granted, the interest rate environment is different now -- the prospect of being able to re-fi down to a lower rate is rather weak, unlike 2000:

you might pay the same for rent or mortgage

the only analysis that makes sense to me is to compare housing costs over the next 30 years, renting vs. buying.

Right now rents for a 1B in Sunnyvale are $2300 (a full $1000 more than what I was paying in 2006, btw). This is for a 12-mo lease, which is almost as big a ball and chain as just buying a place outright, at these rents ($4000+ lease termination cost, that's just fucking great!)

Now, here's the deal. The average 30-year cost-of-ownership of a $1M place breaks down thusly:

Average interest: $1100/mo
Property tax: $700/mo
Other: $500/mo

Which adds up to $2300/mo

What's not counted here is the opportunity cost on the $200,000 down payment and $800,000 in principal repayment, but if history is any guide you're not going to beat the the housing market with investing in stocks.

30 years ago, rents were $600 or so a month, about 1/4 what they are now.

I don't see why they won't be 3-4X what they are now 30 years hence.

This is what The System likes to see.

JH says

Well, that's nice...they will get sucked right back into a bubble

what fucked the economy in 2008 was that 2004-2007 was a total Potemkin Village being powered by the rising valuations in housing.

And these valuations were being driven by outright fraud at all levels, from the liar loans to the appraisal fraud to the mortgage broker gaming the online application process to the finance co dicing the loans into CDOs to the ratings agencies knowingly mis-rating the resulting bonds AAA to Wall Street brokers selling the products to widows and then buying the CDS to win when everything blew up.

With the rising valuations 2003-2006, borrowers were cashing out their winnings and spending that money into the economy, giving every sector a sugar-rush of unsustainable consumer demand.

is what the Credit Bubble looked like.

We're far, far from that now.

Call it Crazy says

Do you really think they've been saving up all their money ($100K+)for a down payment and closing costs for a house that's selling for around the same price as the house they lost?

If they have saved that much, they are probably thrifty enough with their money to NOT make the same mistake again.

Bellingham Bill says

Now, here's the deal. The average 30-year cost-of-ownership of a $1M place breaks down thusly:

Average interest: $1100/mo

Property tax: $700/mo

Other: $500/mo

Which adds up to $2300/mo

I'm not sure your math, but with 20% down, my math gives me:
$4000 p&i
$1000 taxes
Cost of ownership over a 30 year span does not substitute for the cost of payments over a 30 year span. I don't care what kind of equity you get out in 30 years. Hell, you will need every penny of that, in 30 years, because you will not have saved a penny before then. In addition, the upkeep on a $1M will eat into your equity quickly...unless it's a 2/1 shack in San Jose.

Long-term? Probably not a bad idea to buy...but not today...not when a $1M house can be rented for 2300...which I doubt anyway. $1M by me will rent for 3500-4000. Still a better deal to rent until they drop in price.

JH says

13,000 vs. 14,000...pretty damn close..

well, rates are a lot lower now than then and wages are up $2T (30%) from the bubble.

Consolidating this into a chart:

is a closer picture of what the situation is now

Because it means that, long term, housing is no longer a good investment. It's 4 walls and a roof.

4 walls and a roof not owned by someone else.

Where rents go will determine how great housing is an investment today.

Demographically, there's going to be no let up in demand. It's all uphill from here, actually:

JH says

my math gives me:

$4000 p&i

$1000 taxes

Sure, PITI is $5100/mo for a $1M place with 20% down, but $3800 of that is tax deductible starting out.

And after 20 years, interest and taxes will be ~$3300/mo, one's housing cost goes down over time when one buys.

What will rents be in 2034? A lot more than $2300, I can tell you that!

Averaged over 30 years, the interest cost is $1100/mo (after-tax).

And of course interest cost is $0 for years 31 and on.

I don't care what kind of equity you get out in 30 years.

Well, a) you should and b) I wasn't considering that -- inflation -- at all.

the upkeep on a $1M

is not that great, since inflation hasn't hit the sticks and bricks all that much, just land values, which has an upkeep cost of 2%, thanks to Prop 13.

Still a better deal to rent until they drop in price.

If you've got a solid rent-controlled place, maybe.

But even LA's rent control isn't all that hot. If I had stayed in my LA place, my rent would be $1600/mo now, more than double from the $700 it was in 1992.

Home prices in West LA, yeah, what was $200,000 in ~1992-95 is $700,000+ now, thanks to the lower interest rates.

And yes, interest rates can go higher, but they can also go lower. 2% in Japan is the status quo thanks to their monetary policy.

Interest rates will only go higher to combat out-of-control inflation, which itself is a big win case for buying now.

Ah....The ravage of rent increase due to inflation. Reality is a bitch. Why buy and be tied down to one location? As a renter, you're free to move anywhere you want.

E-man says

Ah....The ravage of rent increase due to inflation. Reality is a bitch. Why buy and be tied down to one location? As a renter, you're free to move anywhere you want.

Those who don't have a house are disadvantaged. Even if your job requires you to relocate often, should buy a house. It makes renting more palatable since you're a landlord too.

Where no housing recovery has gone before...

Bellingham Bill says

Sure, PITI is $5100/mo for a $1M place with 20% down, but $3800 of that is tax deductible starting out.

so knock $1000 off on April 15 each year. It's a nice bonus, but we are still at $4k.

Bellingham Bill says

And after 20 years, interest and taxes will be ~$3300/mo, one's housing cost goes down over time when one buys.

And after 20 years, your interest deduction nearly disappears!

Bellingham Bill says

Home prices in West LA, yeah, what was $200,000 in ~1992-95 is $700,000+ now, thanks to the lower interest rates.

Interest rates will only go higher to combat out-of-control inflation, which itself is a big win case for buying now.

Clearly, inflation is already out of control. Not only in housing, but also in energy and food. Since people on Social Security do not need those necessities, we leave them out. So, RE inflation is out of control, interest rates will have to go up to combat. And logic tells me to BUY NOW OR FOREVER BE PRICED OUT? Nope.

I agree with your arguments about cost/benefit. I will buy exactly for those reasons. Except, you have to agree that it's difficult to balance the long-term benefit of owning with the short-term reality of very high purchase prices and monthly payments. A monthly payment is not exactly averaged out over 30 years in the way you are breaking it down.

Bellingham Bill says

Home prices in West LA, yeah, what was $200,000 in ~1992-95 is $700,000+ now, thanks to the lower interest rates.

And for the record, a house that was $200k in 1995 at 8% with $40k down carried a monthly payment of $1400. Today, with inflation, that monthly payment is $2100, which buys you a $400k home at 4% IF you have $80k down. Well, hot damn, that house will cost you $700k today. (Same trend in north OC.) That is absolutely not due to decreased interest rates. That only accounts for less than half the price inflation.

Buy forever or be priced out now!

HydroCabron says

Buy forever or be priced out now!

I would rather be priced out..........................

Analyzer says

HydroCabron says

Buy forever or be priced out now!

I would rather be priced out..........................

At the current I am priced out forever.

donjumpsuit says

Analyzer says

HydroCabron says

Buy forever or be priced out now!

I would rather be priced out..........................

At the current I am priced out forever.

Oh well, life goes on.

Analyzer says

donjumpsuit says

Analyzer says

HydroCabron says

Buy forever or be priced out now!

I would rather be priced out..........................

At the current I am priced out forever.

Oh well, life goes on.

...and you have less to worry about...

Analyzer says

I would rather be priced out..........................

LOL. I never thought about that.

JH says

And for the record, a house that was $200k in 1995 at 8% with $40k down carried a monthly payment of $1400. Today, with inflation, that monthly payment is $2100

No, today that payment is still $1400. That's the beauty of buying + Prop 13, inflation pushes up your wages w/o pushing up your housing costs.

And actually thanks to the falling interest rates it would have been possible to re-fi into a 3% 15 year @ $1000/mo PITI or whatever.

http://research.stlouisfed.org/fred2/series/MORTGAGE15US

I really missed the boat not buying in LA in the 1990s. Kinda tough to do from Japan tho.

That is absolutely not due to decreased interest rates. That only accounts for less than half the price inflation.

right, the other half is rents having gone from e.g. $700 to $1800, well above inflation.

Housing's a scarce commodity, dude. Not everywhere, but where it is scarce, it outpaces inflation, since it's easier to live without even food than housing!

JH says

so knock $1000 off on April 15 each year. It's a nice bonus, but we are still at $4k.

No, 38% tax bracket means the tax savings is $1300 per month

And after 20 years, your interest deduction nearly disappears!

like I said, as more of the payment goes to principal, PITI becomes a form of savings (thanks to housing being a durable good and also a local monopoly, it is a stable store of wealth, valuation-wise).

Over the life of the loan, the net-tax interest cost on $800,000 loan at 4.15% is $390,000, which averages out to $1100/mo over the 360 months.

I think this average value is a very fair comparison to renting. Might even behoove people to be more aggressive (towards buying), given how much rents have already gone up since 2000, and the baby boom echo, born 1982-2000, is still hitting their 20s, their center of mass is still in college.

inflation is already out of control. Not only in housing, but also in energy and food

Energy? Not so much. We've got so much natural gas we literally don't know what to do with it. So much that our energy companies don't even want to deliver it to us since the supply glut crushes their profits.

Gasoline isn't anyone's dominant life expense unless driving is their job. $4 a gallon sucks but a dollar or two a gallon over $3 isn't that big a deal.

What is a big deal is rents rising 50% since 2000:

More in the crowded parts of CA of course.

I don't know where this ends, but what we have now certainly isn't pretty.

The "malefactors of great wealth" own a lot of real estate (as do our politicians), so don't expect any systemic reforms here any time soon.

Bellingham Bill says

o, today that payment is still $1400. That's the beauty of buying + Prop 13, inflation pushes up your wages w/o pushing up your housing costs.

If a house is worth its monthly payment, as you suggested by your previous statement, the $200k house in 1995 is worth $400k today. If you own it, of course your payment is flat. But that is not what we are talking about. Someone who buys that house today will be paying TWICE what the original buyer paid, after inflation and interest rates are accounted for.

Bellingham Bill says

Might even behoove people to be more aggressive (towards buying)

Now? Now that housing costs twice what it did 20 years ago? You are out of your mind. Best case, as you said earlier, int rates drop to 2%. That adds $100k value to this house in question. So it's a $500k house, NOT a $700k house. and that is IF rates drop....that is a gamble.

As others said earlier, if housing is already out of reach for me, fuck it then. I'll take the mobility of renting. As my family changes size and age, I can change houses. And I'm not in debt prison for 30 years in the meantime. But the more likely scenario is that housing does NOT stay this high, and the patient buy in at a more reasonable time.

Bellingham Bill says

No, 38% tax bracket means the tax savings is $1300 per month

Yes, my fault...I meant per month. But if you are in the 38% bracket and complaining about a $700k house being too expensive, quit your fucking whining!!!!

Bellingham Bill says

What is a big deal is rents rising 50% since 2000:

Chicken vs egg. I see the explosion of housing values as temporary, twice, and the associated rent is more of the same. If housing and rents continue to increase by 100 and 50% respectively per decade, well...sucks to be alive I guess...? I just don't see it. Shit is cheap off the coasts, so there will always be movement. The middle class leaves CA when housing booms, and then they return when it crashes. Cycle of life.

Bellingham Bill says

Gasoline isn't anyone's dominant life expense unless driving is their job. $4 a gallon sucks but a dollar or two a gallon over $3 isn't that big a deal.

It's true, but I think there are hidden costs. Shipping, travel, etc... But the fact we don't include it when we calculate inflation is a little silly you have to admit...

JH says

It's true, but I think there are hidden costs. Shipping, travel, etc... But
the fact we don't include it when we calculate inflation is a little silly you
have to admit...

Of course it's included. The CPI absolutely has energy (and housing) costs in it.

tatupu70 says

The CPI absolutely has energy (and housing) costs in it.

"headline" inflation doesn't count energy or food, since supply difficulties introduce more volatility.

http://economistsview.typepad.com/economistsview/2013/04/why-do-we-use-core-inflation.html

Inflation is actually driven by wages; more money in spenders' hands pushes up the prices.

California is not the be all - end all, there are plenty of affordable cities to live in and work in across this large country.

Bellingham Bill says

volatility

It would be instructive to have numbers reviewed later (longer term) to account for volatility. The calculations used to justify fed action are clearly somewhat removed from reality.

Inflation in increase in cost of goods. If it happens without matching increase in wages people get crabby.

Bellingham Bill says

"headline" inflation doesn't count energy or food, since supply difficulties introduce more volatility.

I'm not sure I agree it's "headline", but core CPI does exclude it. My only point was that every inflation calculator I've seen uses standard CPI (not core) and does include energy.