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

By Patrick following x   2015 Jul 11, 12:58pm 810,272 views   326 comments   watch   nsfw   quote     share    

  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.
  3. 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.
  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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!

  9. 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.

  10. 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.

  11. 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, $12.50

Kindle version available

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41   tatupu70   ignore (0)   2015 Aug 13, 5:24am   ↑ like (0)   ↓ dislike (1)   quote   flag        

you never lived in the midwest, did you? at one time, parts of chicago and detroit were also extremely rich, with huge prime houses which are now falling apart because the neighborhoods went to shit when local industry fell apart.


i know this because i lived in both areas.

What part of Chicago was once extremely rich and now fell apart?

42   EBGuy   ignore (0)   2015 Aug 13, 1:47pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Our fearless leader said: you never lived in the midwest, did you? at one time, parts of chicago and detroit were also extremely rich, with huge prime houses which are now falling apart because the neighborhoods went to shit when local industry fell apart.
Set the wayback machine to the 1850s and go further east to where John D. Rockefeller once lived. In the words of Spinal Tap "Hello Cleveland".
Dan Ruminski, a business owner who lives in Chesterland, has created a sideline as a history buff who researches and lectures on Millionaires' Row, circa 1850 to 1910.
"There was a time during that period when half the millionaires who existed in the world lived in Cleveland," he says.
That storied portion of Euclid Avenue, stretching from downtown to about East 55th Street, was known as one of America's "grand avenues." The Euclid Avenue of that era was compared to the Champs-Elysees in Paris and Unter den Linden in Berlin....
Tax rates on the wealth of those patrons were nominal in the 19th century. But that started to change in the 20th century.
That wasn't the only thing that began leading to the Row's demise. Many of the owners of the estates were responsible, directly or indirectly, for the industry and commerce that were dramatically making Cleveland grow. Gradually, pollution from industry and railroads and the choking congestion of automobiles and streetcars made their way toward the mansions. Commercial demand for property on the avenue grew, too.
There was another aspect as well: Some of the owners didn't want to see their palatial homes carved up into apartments that the poor, especially immigrants, would move into. They chose to have them demolished instead. So the grand avenue died.

43   bob2356   ignore (4)   2015 Aug 13, 6:29pm   ↑ like (1)   ↓ dislike (1)   quote   flag        

i know this because i lived in both areas.

My condolences.

44   someone else   ignore (0)   2015 Aug 14, 7:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

tatupu70 says

What part of Chicago was once extremely rich and now fell apart?

Wicker Park, for example. Though now it's trendy.

bob2356 says

My condolences.

Thanks. It's OK now that I live somewhere beautiful without brutal winters or mosquitoes.

45   tatupu70   ignore (0)   2015 Aug 14, 7:59am   ↑ like (0)   ↓ dislike (1)   quote   flag        

Wicker Park, for example. Though now it's trendy.

Yes, I wouldn't say Wicker Park is falling apart.

46   someone else   ignore (0)   2015 Aug 15, 4:25pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Joy Hong Kong says

local people said that Hk property price only go up

lol! that's what realtors told everyone here just before our huge crash in 2008.

47   PickaName   ignore (0)   2015 Aug 20, 4:21am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Can I just pipe in and say that I just noticed that the
usual internet name-calling, etc is missing from this reasoned discussion
between people who fundamentally disagree (on the fundamentals :) )?

I KNEW something was missing...

48   aminata   ignore (0)   2015 Aug 28, 6:49am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Thanks for this posting Patrick.

I was thinking about buying a house in Davis, CA, where the prices are just nutso. I kept doing the math, but it didn't make sense to buy when we could rent a similar house for almost $1000 less. We're good at saving money, so I figure it's better to invest. Emotionally, it makes my husband and I feel bad not to buy because we've been programmed by society to do so. I feel better about our decision to put off buying until we can find a really good deal now that I've read this. I'm going to show this article to my husband to let him know our decision was the right one.

Keep writing. Your ideas are extremely insightful and can't be found anywhere else.

Thanks again!

49   Sophieil   ignore (0)   2015 Aug 31, 11:31am   ↑ like (1)   ↓ dislike (0)   quote   flag        

This was a very insightful thread! I thank you.
Could you wise gentlemen, please give me an advice?

I live in Silicon Valley and have to live here for another 15 years at least. I am divorced, single mom of two children and have to stay in close proximity to my ex, who lives in San Jose. So I am tied to this completely insane housing market, that goes on in the valley.
I earn an ok tech salary, but pay 2780$ rent for a one bedroom apartment and there is no rent control in South Bay (yeah.. crazy, I know...)
From the savings division in divorce settlements, I got about 120K which I could put for a downpayment for a tiny condo (550K doesn't buy you much in this area) or invest it and be afraid for the market to crash. Currently, I just keep the money rotting in my bank account, being liquid and not tied to the stock market.

The big question is - and I would highly appreciate any logical answer, is whether I should keep renting and wait for the housing market to go down and then buy something. Or should I bite the bullet and buy something small now? (the 30year fixed mortgage+HOA will be around 3K a month, by my calculations).

My real estate agent says - "buy buy buy as prices will only go up and the supply is much lower than demand" and "this is the tech area and tech will not go down for many more years to come" (Google and Facebook are doing great and their people are earning crazy salaries). I know that nobody actually knows the future, and am fairly intelligent. But still, an advice is highly appreciated.

Thank you!

51   anonymous   ignore (null)   2015 Aug 31, 11:38pm   ↑ like (3)   ↓ dislike (0)   quote   flag        

Sophieil says

I live in Silicon Valley and have to live here for another 15 years at least.

that's usually the key factor - if you need to sell too quickly, then buying can be risky.

compare the rental units with a similar condo/th. for about the same price, you can be paying down a mortgage and building equity over 15 years with protection from rent increases. you also don't have to dump all your cash into the down payment up front, if you don't want to.

the crux of the rent vs. buy comes down to what you pay for a similar unit. rent has gotten so out of control lately that the calculation ought to be reconsidered for certain locations.

on the other hand, the tech industry is as boom-bust as any. SFBA has a dangerous 70% PITI to income ratio (30% to 35% is normal). prolonged economic distress could cause quite an impact on house values.

however, SF is now officially a "luxury city" like paris or manhattan. when the world dreams of living there, it's hard to rationalize a long term decline in pricing.

just my 2 pennies.

52   B.A.C.A.H.   ignore (0)   2015 Sep 1, 11:28am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I'd think long and hard about putting down roots here.
Life here is becoming miserable: traffic, people coming from all over the USA and all over the world bidding up the rents, lots of obnoxious people. Everything busy, crowded, working class employees in service industries stressed out. Stressed out from long commutes, stressed out from high rents, stressed out from overcrowded sharing housing, stressed out from unpaid sick leave and child care hassles.
K-12's becoming bipolar between grade-grubbing families that will do "whatever it takes" to get above 4.0 grade average and all the accolades for acceptance to an elite UC, and warrens of future gangsters.
You really wanna put down roots here for a job?

53   Sophieil   ignore (0)   2015 Sep 1, 1:00pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

BACAH, I hate living here as well. I absolutely agree with you on all the points you've mentioned. Totally. It is like that. I would move from here in a heartbeat. But like I wrote in my original post, I have to live in this area because of the kids and the shared custody situation with their dad who owns a house in San Jose. I have to live in a reasonable radius around his house and the kids' school, while I work in Sunnyvale and San Francisco. So Silicon Valley it is for me... Thats a given. Whether I want it or not.

In the current rental market, what I would pay for rent is approximately what I would pay for the 30 year fixed mortgage. Though of course, the whole thing can go bust, the market could crash and the rent could go down, while I will still be paying the 3K a month for my mortgage+HOA.

Just trying to make a decision what to do now, after looking for houses from February. My money just sits in the bank account, after I liquidified everything. And that feels stupid, while I pay a lot for rent. And no, there is no rent control here, like in SF.

I can keep renting and hope that market will go down, home prices will go down, and then I buy. The thing is that Silicon Valley is not like the rest of the country. The tech is booming and will keep booming. It is going strong for now. People are coming here from all over the world. There is not enough housing and houses are sold within a few days, after multiple offers, and almost always above the asking price. Its pretty insane. Its true that it was similar in 2007, but the crash then was triggered by subprime mortgages. Now its different. Will it crash so much now as well? Nobody knows...

On the other hand, I can buy something now. I can afford something very small, crappy, in average to bad area, and far from ideal. Basically put all my money in it, leaving me with no savings and no backup. Not to mention that it seems not that wise to buy on the peak, on the upward move. Doesn't sound like a good financial decision as well.

54   B.A.C.A.H.   ignore (0)   2015 Sep 1, 1:46pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

Sophieil, I understand.
BTW I don't hate living here at all, it's my hometown, and nearly all my extended family and in laws live in the region.
We anchored ourselves here for the same reason as you, to be near family.
But I see how icky it is for my adult kids.
It sounds like what you are interested in is your own personal "rent control", owning is the only way to do that, but even in that case some of the costs are not so much in your control.
My spouse and I, and a lot of local kids like me, made renting work with adult roommates. It was the tradeoff we made. When we bought, it was always the backup plan too.
About the frenzy, we've seen this "Sky is the limit" employment situation before.
The Apple Orb is a harbinger of what's to come (Edifice Complex).

55   Sophieil   ignore (0)   2015 Sep 1, 2:24pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Renting with roommates is challenging when you have two young kids.
So judging by your Apple comment, you think that the real estate here won't go down any time soon?

56   B.A.C.A.H.   ignore (0)   2015 Sep 1, 2:36pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I dunno about house prices.
To some extent, that's more a dynamic of the stampede of elites out of Communist China to communities they covet along the Left Coast.
But about the employment situation, of course it's a Bubble. Social networking, etc companies gonna choke on their own selves. Silicon Valley people are not smarter or harder working than elsewhere; as we choke on our growth, the jobs will leave the region. We've seen it all before.

57   Sophieil   ignore (0)   2015 Sep 1, 2:57pm   ↑ like (3)   ↓ dislike (0)   quote   flag        

Amen :)
I want all these people to go somewhere else. Well, not all, but many of them.
All these young, techie, dual-income-no-kids Facebook-Google couples are really annoying... (my personal rant)

58   turtledove   ignore (0)   2015 Sep 1, 3:58pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

We had moved back to So Cal after living in another country. When we came back in 2011, we wanted to wait for everything to shake out before buying something. So, we rented for a few years. With the exception of 2011 - 2012, we found that we were paying more for rent than we would be had we bought. I kept waiting for prices to do something favorable, but with each year I waited, my rent went up right alongside the sales prices. After a couple of years, I realized that it was getting harder and harder to buy a house. My rent was eating more and more of the paycheck and housing prices were not heading down any time soon. So, we finally decided to buy when, after doing the calculation, we learned that we would be paying $1,000 more to rent each month rather than own. Personally, I see it as a way to control costs. At least I know that my monthly payment isn't going up on the whim of the landlord.

59   Strategist   ignore (2)   2015 Sep 1, 7:07pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Sophieil says

The big question is - and I would highly appreciate any logical answer, is whether I should keep renting and wait for the housing market to go down and then buy something. Or should I bite the bullet and buy something small now? (the 30year fixed mortgage+HOA will be around 3K a month, by my calculations).

If you think prices will go down, why in the world are you even asking the question? I think you have already made up your mind.

60   Sophieil   ignore (0)   2015 Sep 1, 9:51pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Strategist, I didn't make up my mind. I am just aware of that as a possibility and have to take it into consideration.
Prices might not fall at all. Or just a little bit. I don't know. Thats why I asked an opinion an advice from people who know better than me. I am just a regular Joe (or Jane, in this case)

61   B.A.C.A.H.   ignore (0)   2015 Sep 2, 10:57am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Guaranteed our investment timing won't be perfect, so I am not guided by that.
Instead always guided by other factors.

Your kids' father could be gone in a New York minute, especially since life around here is so miserable. Then what?

If you like your kids' school AND the middle and high schools they feed into, well, securing a residence safely within the enrollment area probably means a whole lot more than making the most savvy timed investment choice.

62   Livepeace   ignore (0)   2015 Sep 3, 9:39pm   ↑ like (2)   ↓ dislike (0)   quote   flag        

I hear the hard situation you are in. If I were you, these are the steps I would take:
1) explore any small prossibility of moving, even if it seems not an option right now, but see if there is some comprise.
2) save, save, save and save more. I mean save every penny. Every homemade lunch, second hand toys, clothes...
3) wait for the interest rates to go up, to see if the market will slow down and become less a seller's market and give you more footing.
4) get licensed as a realtor. You can take an evening class for fairly cheap, and cut out the middle "buyers agent", see if that will save you money.
5) as a agent you could work extra and sell houses and make some money, and see if you can figure out the houses that are a better deal. Hopefully you will also have a real insiders understanding of the current market in your area.
---- be careful when working for a broker, read all the small print ----
6) once you have more knowledge you will feel confident about your choice

Good luck. I know you will make the right decision.

63   Jarhead   ignore (0)   2015 Sep 5, 4:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Why is the inventory low? One reason, by changing the rules of the game to enable millions of previously unqualified homeowners to refinance to a lower monthly payment, HARP effectively transferred a massive amount of other people’s money into the hands of current homeowners. The resulting increased incentive for homeowners to stay in place, rather than move somewhere else at higher monthly payment rate, has the effect of sucking inventory and liquidity out of the market. Non-Ownership Society members face higher purchase prices and rents as a result.

64   Jarhead   ignore (0)   2015 Sep 5, 5:02am   ↑ like (2)   ↓ dislike (0)   quote   flag        

Prices will go down. Canada and Australia are going to pop soon, when rates go up that will also soften prices, as well as lending will tighten, making it harder to get a loan and it will cause more houses to sit. When the stock market gets crushed, people often want to get cash out of their homes. So much happening all at once, I sold my home two years ago and am renting. No regrets whatsoever, debtslave no more. I will buy again if I can do a 15 year or less mortgage, and after the next big dumb.

65   MoneySheep   ignore (0)   2015 Sep 5, 6:40am   ↑ like (2)   ↓ dislike (0)   quote   flag        

The average individual will live a happier life if they avoid debt.

Research had shown, if you are not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than 2x your total annual income. Better yet, pay cash for it.

What you probably don't know is that your neighbor in the $550k condo next to yours bought his condo after he became wealthy. I know this guy who lived frugally for 17 years in the cheapest apartment he could find. After he had enough saved, he bought his home with cash.

66   ThreeBays   ignore (0)   2015 Sep 5, 11:41am   ↑ like (1)   ↓ dislike (1)   quote   flag        

MoneySheep says

The average individual will live a happier life if they avoid debt.

Research had shown, if you are not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than 2x your total annual income. Better yet, pay cash for it.

Timing matters.

Here's a (true life) scenario:
Neighbor (A) bought a 3BR SFH in Bay Area Penninsula for $900k in 2012 with 20% down ($180k cash). He has PITI around $3500/mo, with $1400 of that for principal. The home is now worth $1.3M. He now has over $600k equity and $2100 monthly outflow for housing.

Neighbor (B) rented, and now has a rent of $4500 for the same kind of 3BR SFH. His $180k cash grew 30% (post-tax) in three years, now worth $235k.

(A) has over double the wealth, and half the cost for the same house, and the cost is going down over time. (A) will be able to buy a 2nd house faster than (B) will buy his 1st. When (B) does buy he'll be saddled with higher property taxes than (A) for the life of owning the home.

My research has shown, if you are not yet wealthy but want to be someday, you better have good timing when you purchase a home.

67   someone else   ignore (0)   2015 Sep 5, 12:11pm   ↑ like (2)   ↓ dislike (0)   quote   flag        

ThreeBays says

My research has shown, if you are not yet wealthy but want to be someday, you better have good timing when you purchase a home.

Sure, if someone would just tell me when the peaks and valleys are in the stock market, I'd be a billionaire by the end of this year.

So given that you cannot know the timing, you have to go on fundamentals.

68   Jarhead   ignore (0)   2015 Sep 5, 1:38pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

Fundamentals ^^ Yes!

The stock market tripled since 2009. Anyone who upset by it's recent plunge has not done their homework.

The real estate market has experienced an echo bubble.

We are entering a world debt crisis. I don't know the answers, but fundamentals tell me that when prices feel high, when people seem to be acing out of fear (2014-15) or exuberance (early 2000's bubble) you are not smart money. Smart money enters and leaves before fear and exuberance hit the party.

Debt free is key. And ya, now is a good time to sell if you are house poor. Nothing worse than that kind of timing if all of your cash is tied up in your home.

69   ThreeBays   ignore (0)   2015 Sep 5, 9:22pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

Yes, fundamentals. I'm generally a bear on housing, but I see rentals in the area as about on par or more expensive than owning at today's interest rates.

70   MoneySheep   ignore (0)   2015 Sep 8, 7:13pm   ↑ like (2)   ↓ dislike (0)   quote   flag        

ThreeBays says

you better have good timing when you purchase a home.

if someone would just tell me when the peaks and valleys are... ...you have to go on fundamentals.

I do not disagree that "timing" play a role when you buy (ie you are lucky buying low). When the market (house or stocks) is going up and will continue to go up for sure, any time is a good time to buy. When prices are detached from fundamentals, speculators are going crazy, it is wise to keep one's sanity.

On buying a home, not only do you have to go on fundamentals, you also buy only when you are ready --have enough cash reserve for emergency, and you are ready to hold for 10 to 12 years in case the market tanks.

71   Jarhead   ignore (0)   2015 Sep 9, 4:02am   ↑ like (2)   ↓ dislike (0)   quote   flag        

People do not factor in the big picture.

Yes, rents are higher in major metro areas, but sometimes, it is worth paying a higher rent. No, maybe not in San Fran.

But picture this scenario. One buys a home for 700k, puts 140 down (or 70 down) and ties up most of their cash in the home, between the down and renovations/updates/upkeep. They don't mind, they figure they will stay.

The stock market crashes, there is a world wide debt crisis, and at first, the US is a safe haven. Then it trickles over here by around 2017 and it affects our economy. People start to get laid off, etc. You suddenly need that money tied up in your "Purchased" home (but really, you are just renting it from the bank, and had to give them your life savings to do so" Maybe you even need to change jobs because of a layoff and you need to leave the area. But houses aren't selling. You are forced to sell for less and lose money you put in the home, plus the cost in moving (realtors fees) and banks are no longer offering HARP so you can't lower your payments.

Real Estate is TIED to the economy and stock market. It is slower to react but ALWAYS does. We have not fully recovered from the last bubble and recession because the feds created another echo bubble by lowering rates, encouraging people to buy again for little down, etc.

I like not being tied up in the housing market right now. I know if I had a mortgage on a similar property (to what I'm renting) I would save some every month, but I am saving by not making repairs. And I haven't tied up my life savings in a depreciating asset.

That doesn't mean I wouldn't buy again, right now it FEELS like a bubble. It feels like the economy could take a beating when all of the EU debt crisis trickles over here. So I am waiting and renting, quite happily I might add.

72   advancingtime   ignore (0)   2015 Sep 12, 11:07am   ↑ like (2)   ↓ dislike (0)   quote   flag        

The future of the housing market is a topic that has been subject to a great deal of debate and can be somewhat confusing. It should be noted that much of the new construction is in apartments and not single family dwellings. In much of the country units are being built using cheap money flowing from the Fed and Wall Street under the idea that if it is built "they will come."

Currently, we have a shortage of "qualified" buyers and renters and it seems that government policies are pushing on a string and calling it demand. The low end of this market is driven by Fannie, Freddie, and the FHA all insuring 3.5% down payments from borrowers that lack substantial collateral. We have a situation where when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. The piece below delves deeper into the housing market debate.


73   SFace   ignore (0)   2015 Sep 14, 1:45pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Jarhead says

But picture this scenario. One buys a home for 700k, puts 140 down (or 70 down) and ties up most of their cash in the home, between the down and renovations/updates/upkeep. They don't mind, they figure they will stay.

Picture this scenario. I just opened a 500K line of credit to take care of my cash needs for 10 years in case TSHTF.

74   snowstar886   ignore (0)   2015 Sep 18, 8:33am   ↑ like (1)   ↓ dislike (0)   quote   flag        

So i did your math equation =(1750*12)/315000 = 6.6%. Looking in neighborhood of redlands, ca. Good school district. Popular college is in area. Lots of businesses and warhouses have been coming up in the local area i have noticed. Would you suggest being ok with 6.6% in an up and coming area? Where do you research the growth potential of a city? Or does the impending baby boom retirement mean we should wait to by everywhere, even in places i think more businesses are coming in?

75   CovfefeButDeadly   ignore (5)   2015 Sep 18, 11:02am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Redlands was an absolute steal from 2009-2013 assuming you did not have to commute to LA or OC for work.

It's still one of the few affordable, low crime, decent public school areas in So Cal.

If you like mountains and don't mind the summer heat and smog, and don't need to use public transport for a 90 minute each way daily commute, it's a relative bargain for So Cal.

76   LadyK   ignore (0)   2015 Sep 18, 12:46pm   ↑ like (3)   ↓ dislike (0)   quote   flag        

I love this and will be sharing with many members of my family. We're going into our second year of the 2 year lease we locked in at $1500/month. The rents in our area are now $2000 to $2500, so we thank God for the fore site. NYC is very expensive, but we're frugal people. My husband and I recently bought a house out of state next to a metropolis for only 160k, a 2000 sq foot 4 bedroom with 2.5 bathrooms that came with 6 acres and an in ground pool. We could have never paid that in NYC. Nothing cost less then 400k for a semi decent area. The sick thing though is we had people CONSTANTLY (and two EX-byer agents) trying to push us to higher priced homes based on our income bracket. I don't know who said " Buy the most expensive house you can afford", but I would love to kick them in the shin.

Who want's to pay for their house for the rest of there lives when you already have those darn property taxes for the remainder of it?? We're renting it out at $200 more then the mortgage because we didn't really want to leave the house empty when we found out we couldn't go leave right away.

We have no debt other then this house and no kids yet. But I have no idea how these mortgage pre-approvals do their calculations. My cousin was recently approved for a 400k+ loan and she only makes 40k, with two kids and an ex-husband who contributes NOTHING. I told her she was insane for even looking at houses in that range and that perhaps she too she look out of state, she works in the medical field, I'm sure she can transfer to just about anywhere. Needless to say, she felt I wasn't supporting her. This whole process is like swimming with sharks and people want to bite the hand that's trying to give them a life line out. Perhaps this site can help open hers and many others eyes.

77   Dean G   ignore (0)   2015 Sep 20, 10:27am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Re: OP

Thank you very much for very helpful information, OP.

I have recently relocated to Houston,TX in Semiconductor industry. As we know, price per barrel hasn't stabilized and recent Central bank decision to keep the rates at bay has me on the fence.

I have contract on a house to buy

78   Gina H   ignore (0)   2015 Sep 20, 10:42am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Re: OP

Thank you very much for very helpful information, OP.

I have recently relocated to Houston,TX in Semiconductor industry. As we know, price per barrel hasn't stabilized and recent Central bank decision to keep the rates at bay has me on the fence.

I have contract on a house to buy $300K. It is located just outside of Houston. It has good schools, and homes are built within last ten years. The good family environment, combined with few good yrs of oil production, has attracted a lot of buyers from all over the States and rest of the World.

For Houston suburb housing, the prices are up like I have seen in 2004-2006 California. I was victim of that era on a $600K home. I short sold it at $400K in 2009.

Although the Houston house is $300K, however, the shut down of oil rigs in Texas has me worried. The big lay offs in oil and gas industry has not yet shown the impact on these Houston homes. Is it because these house prices are still low? Despite the 3+% annual property tax, should I move forward with my current contract to buy, or wait six more months (more like couple years) and see? Renting is too high in Houston due to no State tax passed to home owners.

Your insight on this matter would be greatly appreciated.

79   Jarhead   ignore (0)   2015 Sep 24, 5:22am   ↑ like (1)   ↓ dislike (0)   quote   flag        

SFace says

Picture this scenario. I just opened a 500K line of credit to take care of my cash needs for 10 years in case TSHTF.

I understand, but remember, banks can close lines of credit if shtf. Unless you actually draw on the money, having the credit is just having the credit for now. Banks are going to get crunched hard, lending will tighten. Having access to real money is key.

80   SFace   ignore (0)   2015 Sep 24, 10:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Jarhead says

Picture this scenario. I just opened a 500K line of credit to take care of my cash needs for 10 years in case TSHTF.

I understand, but remember, banks can close lines of credit if shtf. Unless you actually draw on the money, having the credit is just having the credit for now. Banks are going to get crunched hard, lending will tighten. Having access to real money is key.

It takes me one click and 10 seconds to move the money as I know the circumstance specifically (equity and economy). The bank will drag their feet for 6 months. When SHTF where they have to take away the LOC, the money is long gone in my account somewhere. Like I don't know what the bank does.

The great thing is WTSHTF, interest rates will be all time low again.

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