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Ten Reasons It's A Terrible Time To Buy An Expensive House


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2015 Jul 11, 12:58pm   938,628 views  448 comments

by Patrick   ➕follow (60)   💰tip   ignore  



  1. Because house prices in expensive areas still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with a 20% downpayment. Landlords say a safe price is set by the rental market; annual rent should be at least 9% of the purchase price, or else the price is just too high. Yet in affluent areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income with tiny downpayments, and gross rents are still only 3% of purchase price. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that affluent neighborhoods are still in a huge housing bubble, and that bubble seems to be getting more dangerous by the day.


    2. On the other hand, in some poor neighborhoods, prices are now so low that gross rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there could still fall yet more if unemployment rises or interest rates go up, but those neighborhoods have no bubble anymore.

  2. Because it's usually still much cheaper to rent than to own the same size and quality house, in the same school district. In rich neighborhoods, annual rents are typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 8% of purchase price, which is more than twice the cost of renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a 6% mortgage, that's $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local employment rate (demand) to the current local supply of available homes for rent or sale (supply) should help you figure out whether a big fall in rents could happen. Checking these factors minimizizes your risk.


  3. Because it's a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. When housing falls, you lose your equity, but not your debt.

    The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. To buy an expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.



    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.


    • As interest rates fall, real estate prices generally rise.


    • Your property taxes will be lower with a low purchase price.


    • Paying a high price now may trap you "under water", meaning you'll have a mortgage debt larger than the value of the house. Then you will not be able to refinance because then you'll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.


    • You can refinance when you buy at a higher interest rate and rates fall, but current buyers will never be able to refinance for a lower interest rate in the future. Rates are already as low as they can go.






  4. Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loans. This means most banks are still actually bankrupt. But since the banks have friends in Washington, they get special treatment that you do not. The Federal Reserve prints up bales of new money to buy worthless mortgages from irresponsible banks, slowing down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense. Banks get to keep any profits they make, but bank losses just get passed on to you as extra cost added on to the price of a house, when the Fed prints up money and buys their bad mortgages. If the Fed did not prevent the free market from working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks "extend and pretend" that their mortgage loans will get

    paid back.

    And of course the banks can simply sell millions of bad loans to Fannie and Freddie at full price, putting taxpayers on the hook for the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into slavery, for the banks to make a profit. If you pay a low price for a house and manage to avoid debt, the banks lose control over you. Unacceptable to them. It's all a filthy battle for control over your labor.

    This is why you will never hear the president or anyone else in power say that we need lower house prices. They always talk about "affordability" but what they always mean is debt-slavery.


  5. Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.

    The simple fact is that the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little. Leveraged housing appreciation, usually presented as the "secret" to wealth, cannot be counted on, and can just as easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there is no more fake paper equity from the sale of a previously overvalued property and because the market for securitized jumbo loans is dead. Without that fake equity, most people don't have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's corruption of US legislators. On a $300,000 house, 6% is $18,000 lost even if housing prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.


  6. Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling. Prices in the housing market, even now, are entirely a function of how much the banks are willing and able to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property. Banks have been willing to accomodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.


  7. Because there is still a massive backlog of latent foreclosures. Millions of owners stopped paying their mortgages, and the banks are still not forclosing on all of them, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don't like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Right now, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!


  8. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low.

    From The Herald:

    "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Your debt is their wealth. Every "affordability" program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it's just pushing the reckoning into the future. To really help Americans, Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even more important is eliminating the mortgage-interest deduction, which costs the government $400 billion per year in tax revenue. The mortgage interest deduction directly harms all buyers by keeping prices higher than they would otherwise be, costing buyers more in extra purchase cost than they save on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra $39,000 in purchase price. Subsidies just make the subsidized item more expensive. Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.



  9. Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 66. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.


  10. Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.




Next Page: Eight groups who lie about the housing market »



The Housing Trap

You're being set up to spend your life paying off a debt you don't need to take on, for a house that costs far more than it should. The conspirators are all around you, smiling to lure you in, carefully choosing their words and watching your reactions as they push your buttons, anxiously waiting for the moment when you sign the papers that will trap you and guarantee their payoff. Don't be just another victim of the housing market. Use this book to defend your freedom and defeat their schemes. You can win the game, but first you have to learn how to play it.

115 pages, $12.50Kindle version available

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441   Eman   2023 Feb 22, 7:59am  

GreaterNYCDude says

My hose sold in 2003 for $460,000.
Foreclosed on as part of the 2008 crisis.

Bought it for $300,000 in 2012.
(Foreclosures take YEARS in NY)

It's FMV today (according to the county) for tax purposes?
$440,000.

I could get more than that... but 1) where would I go and 2) if I stay in this area a bigger house means more in taxes /maintance / upkeep. Why bother?

Live within your means and the rest will work out. It's a place to live... not an investment.

Good to hear from you ECBB. Real estate is local. Based on the same 20 years time frame, real estate has gone up about 200% for our area while yours seems to be flat. I’m sure there are markets where real estate have even gone down in value. It’s just the way it is. It’s location. Then supply and demand.

The best time to buy real estate for our market was the mid 1990’s. This was the bottom of the Savings & Loans crises followed by the housing bubble, early 2010’s. If anyone could timed these, that person would be well off. The average SFH, bought in the mid 1990’s, has gone up about $1M.
442   GreaterNYCDude   2023 Feb 22, 9:40am  

Real estate is local.

@eman. Agreed. All markets are local. Here it went up after 9/11 as everyone left NYC, went asymtotic during the 1st housing bubble (as did everywhere), bottomed out after the crash, started going up again slowly thereafter, and just picked up speed with the recent trend to remote work. My local market topped rhis past summer. Now that offices want people back, the market has flattened out or dropped a bit.

For new homebuyers that are getting priced out either prices need to drop or wages need to go up. The one thing I did not expect was how much rent had gone up in the past 10 years. If I were 15 years younger I'd probably be priced out of this area.

I have no idea how you all make it work on the West Coast. For as bad as it is here, out there seems even worse when it comes to the cost of putting a roof over your head.
444   GNL   2023 Apr 12, 8:46am  

zzyzzx says





Why do people think the future is always supposed to be bright? Never understanding that life can turn on a dime. They have a years cushion. That's better than 95% of Americans. If you're so worried, sell your place. Downsize your mortgage.
445   NDrLoR   2023 Apr 12, 8:57am  

GNL says

They have a years cushion.
They also have an $8K/month mortgage, that would make anyone quail.
446   AD   2023 Apr 30, 10:54pm  

Bitcoiner says

we all know it won’t spike up in a meaningful way.


How do we do know house supply won't spike in a meaningful way ? There may be some panic selling and fire sales. Look at how the big tech companies have announced new layoff plans which will effect some of the San Fran Bay area .

How many tech workers are returning to San Fran Bay area ? 200,000 ?
.
447   WookieMan   2023 Apr 30, 10:56pm  

GNL says

Why do people think the future is always supposed to be bright? Never understanding that life can turn on a dime. They have a years cushion. That's better than 95% of Americans. If you're so worried, sell your place. Downsize your mortgage.

You don't have to sell or pay it. This was my career from 2006 to 2012. You don't have to pay your mortgage for 24 months roughly before the bank takes it back. The bank will pay the taxes. You cut the $8k/mo out and save it in cash since it's under $10k. Get a nice safe. After about 12 months not paying you try to short sell it and hopefully sell it in the following 12 months. In 4 years that banked cash is a hefty down payment when you can get a loan again. Or borrow privately and refi when eligible.

Always keep receipts for EVERYTHING you buy for your primary home specifically for this case. The amount short is considered income. Also even primary resident people don't keep shit not realizing the married cap gains tax can be written down too. You have a $600k gain, but put $100k into the house, you pay no taxes as a couple. It's not just investment properties. It's not a loophole it's just something most accountants (sad) and owners don't know. Keep everything from the day you buy. Everything.

Same with a short sale or foreclosure. If it goes for $100k less than what you owed that's considered taxable income. If you had $50k in receipts only $50k is taxable depending on your situation. Always have binder is the way we do it. Every receipt goes into it. Be religious about it. So many clients of ours got burned at tax time. We warned them, but we're not accountants and have to tread lightly with advice.
448   WookieMan   2023 May 1, 12:02am  

ad says

How many tech workers are returning to San Fran Bay area ? 200,000 ?

Bay area is a unique situation nationally. They don't NEED to be at the office. They just built multi-million dollar complexes (maybe billion) and have to justify them to shareholders. To pay the taxes and loans they have to lay people off. Many are talented and could move to Austin, Atlanta, Nashville, etc. and get a similar paying job with a lower cost of living.

It's not glorious but the post office is hiring people at $30/hr with potential lifetime pension. Zero skill required outside of not being a criminal. If you don't take much time off you can be making $60k individually. That's basically the median household income. That's a $220k home in fly over country which is easily findable. And not in a ghetto. Have a spouse working and you're hitting $350's if you're into buying a house.

There's no reason outside of laziness to not be making $120k+ if you're married. No one wants to work right now. Wish kids could start younger because my kids could have jobs they'd be making $15-20/HR at 13.

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