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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   939,428 views  470 comments

by Patrick   ➕follow (61)   💰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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211   Philistine   2016 Jul 1, 7:45am  

JasonM says

Also, as someone who is a veteran of bear blogs, the biggest attribute you can have IMO is self awareness. I too was in denial, as we all were. We were all so wrapped up

Jason, to be fair, not all of us were bears, either. 10 years ago I was 3 years into my first real job out of college. Try saving 20% for a (then) $700k apartment in Brooklyn in your first adult years out of school. And there were none of those famous FHA freebie loans for that kind of purchase. The all-cash (in the city, anyway) environment of 2009-2013 in LA eradicated any purchasing power of a 20% DP. That was the point we realized $250k was a lot of cash to have saved and we could just move to Bumblefuck, Mississippi and retire with that kind of money.

What I realized is that my need to live and work in big cities was the biggest impediment to my home ownership. I don't regret it; my career would have gone nowhere if I hadn't left the sticks and started (with nothing) in New York. With maturity, I now see the big city as a place I don't need anymore. But I have a few years left in me before we can go off into the sunset for early semi-retirement.

As the great Jody Chunder once said on this very site (I'm paraphrasing and forget his exact, elegant wording), I lived and worked in the city and all it ever got me was chair-ass, a bruised liver, and a broken heart. Amen, brother.

David9, always good to see you check in.

212   anonymous   2016 Jul 5, 2:23pm  

Whatever happened to ol Uncle Jody of Victorville fame?

Is it true he retired to Pahrump?

213   Bellingham Bill   2016 Jul 16, 7:29pm  

Our grandparents did not compete with Chinese money or the massive population we now have, nor did they prize metro-city real estate the way we do today

Heh, I'm reading some good, old histories of the original settling of Central California.

Ca. 1890 Somebody named E.B. Perrin owned land around Fresno by the square mile:

https://www.raremaps.com/gallery/enlarge/24804

His 9+ sections in the NE of that map are worth up to $5M an acre now . . .

And that's around 6,000 acres, LOL.

Somebody named Bullard bought 72,000 acres at around 25c an acre back then, around $500,000 in total in 2015 dollars.

Now 2 nice acres of it will set you back $1M . . .

https://www.redfin.com/CA/Fresno/6475-N-Sequoia-Ave-93711/home/58375844

But this was utterly useless land back then, when the town had more land (~8,000 sections within a 50 mile radius) than the people (all 3,000 of them) could use.

214   Bellingham Bill   2016 Jul 16, 7:56pm  

Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with a 20% downpayment.

20% is in the past like balloon and assumable mortgages are now.

Now it's 5% and pay some more points to avoid PMI.

3X factor was based on the 8% mortgage rates. Now they're well under half that.

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.

Two things; 10 year rates have collapsed:

So what was 9% gold-standard cap rate is now a 2% cap rate.

Plus CPI is still the landlord's best friend:

Rents never, ever go down, not since 1930 at least. You want to own your customers by the balls, buy RE.

215   Sharingmyintelligencewiththedumbasses   2016 Jul 16, 8:10pm  

I just bought a home for $195,000.00 (closing next friday hopefully) Tax is $1200 a year, insurance $500. non owner occupied loan 25% down, 4.375%.

My payment is less than $900 a month.

I showed it to potential renters at $1950 a month, and have several interested, may have an app and deposit tomorrow. Have about $5000 in rehab to do, and promised to convert the carport to a garage, which is easy since it only needs one wall and the frame around the door on the front.

Yeah real estate is a terrible buy.

216   Patrick   2016 Jul 16, 8:12pm  

that's a cheap house with excellent cashflow.

did i ever say you should not buy such a house?

217   Strategist   2016 Jul 16, 8:15pm  

Sharingmyintelligencewiththedumbasses says

I just bought a home for $195,000.00 (closing next friday hopefully) Tax is $1200 a year, insurance $500. non owner occupied loan 25% down, 4.375%.

My payment is less than $900 a month.

I showed it to potential renters at $1950 a month, and have several interested, may have an app and deposit tomorrow. Have about $5000 in rehab to do, and promised to convert the carport to a garage, which is easy since it only needs one wall and the frame around the door on the front.

Yeah real estate is a terrible buy.

Price of 8 x gross income for a house is one hell of a return. Is it an old home?

218   Sharingmyintelligencewiththedumbasses   2016 Jul 16, 8:21pm  

Strategist says

Price of 8 x gross income for a house is one hell of a return. Is it an old home?

of course it is old! 1960's. the pipes are in fine shape, roof needs about $2500. Landscape has some problems and it is overgrown, original owner or heir selling it, so it needs serious updating, but that's what I do. Agent/seller screwed up selling it. I could clean it up, get it to pass a home inspector and make $20K+ instantly.

219   05c4   2016 Dec 4, 3:43am  

Found this blog post; absolutely amazing.

I totally agree to this premise - I reached the same conclusion independently.

We bought our "rather modest" townhouse at $370K. However the rental market here shows that the maximum we can rent it out for is $2200 - realistically, it's $2K. And we won't be guaranteed a 100% occupancy either. Even at my current 30 year mortgage at a low interest rate of 3.6%, my rent barely exceeds (by some $150) my total housing payment including taxes and HOA dues. There isn't enough cushion to do any repair works or even account for low occupancy.

Worse yet, rental income is subject to taxes and since we are in 28% bracket, we are sure to east a lot of them. The only way I can offset them is to start using depreciation from year 1, which gives me maybe a few years of "break even" income, after which I will have to start paying more in taxes. The only hope is that rent increases every year, but unfortunately, my experience in this area shows it's either the same or even decreasing! And this is a prime area, near malls, highways and even a great school district. It's baffling why rents wound't be higher, but a major housing frenzy in a neighboring town perfectly explains it actually.

Yeah...people are buying $700K-$900K newly constructed houses like there's no tomorrow. People even on single income with salaries barely into 6 figures are doing it (they have 2 kids to boot too). We see the resale market in the same town, and houses are being sold at $100K less than their asking prize clearly showing that the bubble is losing air even now. More interestingly, we can rent houses bought at $550K at as little as $2200. These people will bleed money on rentals. But apparently, no one cares. Having a loot-at-me house trumps personal finances.

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours.

220   bob2356   2016 Dec 4, 5:49am  

05c4 says

We bought our "rather modest" townhouse at $370K. However the rental market here shows that the maximum we can rent it out for is $2200 -

Rule of thumb 100 months rent is the price of the house. Over that doesn't pay off unless you are gambling on appreciation. Fast and easy way to tell if it's a renters market or an owners market. Having 2200 in rent on 370k is a big renters market. http://affordanything.com/2016/04/28/one-percent-rule-gross-rent-multiplier/

05c4 says

The only way I can offset them is to start using depreciation from year 1, which gives me maybe a few years of "break even" income,

You don't have any choice in depreciation. The IRS requires it. Then they claw it back when you sell the house.

05c4 says

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours

Yep good call. Downside is in a renters market rentals are frequently much harder to come by because no one is making much or any money renting. You wind up renting from people looking to sell the house but won't tell you that. You are paying for the privilege of being a caretaker without knowing it.

I ended up buying when I came back to the states even though the market where I live favored renting. Where I am the taxes are so high and renter protection laws are so onerous, 6 months to evict is common, that people would rather put houses on the market and wait however long it takes for a sale rather than rent them out. Carrying a deadbeat $1500 a month tenant (who might trash the house moving out) for 6 months at with 600 a month taxes and 200 a month water/sewer on top of a mortgage is a real loser.

221   Strategist   2016 Dec 4, 7:16am  

05c4 says

We have decided to be rational in an irrational market. This town has a lot of our irrational friends, so we will rent one of their houses when we sell ours.

You will be sorry.

222   Strategist   2016 Dec 4, 7:16am  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Bob makes his own rules.

223   bob2356   2016 Dec 4, 8:52pm  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.
https://www.thebalance.com/rental-property-investing-for-beginners-453821
http://affordanything.com/2012/01/25/income-property/
http://samsrealestateclub.com/the-1-rule/
http://www.doughroller.net/real-estate-investing/the-1-solution-to-real-estate-investing/
There a a couple hundred more articles describing the 1% rule. Google them.

Whatever dude, I own enough rental units myself. I always get 1% or I don't buy a rental property. I'm starting to buy in a market now where it's more like 1.7-1.8%. That's crazy out of balance. There aren't many of those markets out there.

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

224   kmail   2016 Dec 4, 9:42pm  

yup 1% rule is a quick calc.. those who want higher profit margin/ROI will do well at getting a property at 90% expense rate.. but can be harder to come by thru conventional means (listings) in a seller's market (good luck).

anyone who's gonna spend their money and time on re will really want to put in their dd to ensure their rough/quick calcs check out tho!

but ya, Bob isn't pulling numbers outta his hat ;)

225   RealEstateIsBetterThanStocks   2016 Dec 5, 2:28am  

i see some good points, some outdated (written during the bubble era). but 3. seems incorrect. historically there has been no relationship between mortgage rates and home prices.

do you have data backing up your "high-rates -> low prices" rule?

226   05c4   2016 Dec 5, 4:36am  

Thanks for the comments everyone - agreeing or disagreeing likewise.

This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed.

30 years. It's. A. Long. Long. Time. No one is going to live in that house for 30 years. It's a super expensive over-leveraged rental that's got no wiggle room for renegotiation of the terms of contract. I would trust this logical economic fact over the primal fear that "I might be sorry for not buying today".

As for us, the moment we made the decision, I felt almost liberated. I haven't felt so good in quite a few years. I am almost thankful that the size of our mistake was a mere $370K and not $800K. Thankfully, our income has shot up to the point, where I can pay off my current house in just under 3 years if I want to. The mere thought that we could rent and would not have to buy a huge mansion has suddenly opened up a lot of possibilities in our lives. It's a whole subject of discussion altogether.

Maybe it's not the right decision, and maybe all the people who bought mansions today will be millionaires. But, maybe not.

227   joeyjojojunior   2016 Dec 5, 5:22am  

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of interest rates. History proves this.

228   05c4   2016 Dec 5, 6:28am  

joeyjojojunior says

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of ...

Did interest rates go as below as 3.5% ever in the history? As a first generation immigrant who has lived in the US for 16 years, I don't have enough context and I haven't really lived through the experiences of various eras.

I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it.

229   missing   2016 Dec 5, 7:15am  

joeyjojojunior says

Housing prices do not move opposite of interest rates. History proves this.

If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough.

230   joeyjojojunior   2016 Dec 5, 7:24am  

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

231   joeyjojojunior   2016 Dec 5, 7:26am  

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

232   Strategist   2016 Dec 5, 7:33am  

bob2356 says

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.
You should know that.

233   Strategist   2016 Dec 5, 7:37am  

bob2356 says

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

234   05c4   2016 Dec 5, 8:18am  

joeyjojojunior says

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

That is totally incorrect. Rates rise because "inflation" rises. True, in a healthy economy, rising inflation would mean people's income rises too. But the US has been printing money for a while now to offset all the junk securities from the 2009 era, and the resulting rising inflation will not necessarily mean rising incomes.

We are due for high inflation and high interest rates, and it remains to be seen if this economy has enough jobs to push people's incomes higher. I hear the minimum wage workers are protesting today on streets for $15/hour...

P.S. 30 year mortgage rates in fact have already jumped by 0.5% - I refinanced at 3.5% just 6 months ago; now that rate is at 4% from the same institution. I will watch closely the summer of 2017 and report the findings on this thread.

235   bob2356   2016 Dec 5, 8:33am  

Strategist says

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.

You should know that.

That's why I said rule of thumb. It's a place to start. Obviously I don't buy properties for investment or make a rentvsbuy call by just looking at the rent vs house prices in the general neighbourhood. But the grm for overall area market lets me have a general idea if I want have a to look or not bother. When I got out of tx (great returns in late 90's then insurance and property taxes went insane) los vegas was a screaming bargain basement. Now I see some other markets that are much better and will start shifting out of vegas.

Strategist says

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

Maybe, maybe not. It depends on whether the books you are looking are truly reflective of actual expenses or cooked up with capital expenditures to puff up numbers for a sale. Almost impossible to verify just going through a P&L. You would have to dig through the actual receipts, even then it can be deceptive.

Cap rates works much better for commercial buildings or apartment complexes than individual houses for rent. I don't do commercial any more. It's not hard to find a rental property manager that's good. It's very hard to find a commercial property manager that's good. I don't know why that should be. Maybe I know a lot more about the right questions to ask rental property managers and how to review their operations.

236   joeyjojojunior   2016 Dec 5, 8:36am  

"That is totally incorrect"

No, it's really not. If money printing were to cause the price of goods to rise, it would be exactly because that printed money reached people's pockets as income. Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

237   missing   2016 Dec 5, 8:50am  

joeyjojojunior says

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising.

238   David9   2016 Dec 5, 8:52am  

We have too much debt, interest rates won't rise. And house flipping is too large a part of the economy, imo

239   joeyjojojunior   2016 Dec 5, 8:57am  

"What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising"

I think you're missing the point. You are assuming a scenario that doesn't happen.

240   mell   2016 Dec 5, 9:17am  

joeyjojojunior says

Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

The main driver for house prices besides foreign investors was the downward readjustment of the interest rates so the monthly payments stay the same or don't increase too much. Rates have been artificially extraordinarily low for a while, when the unwinding continues unaffordability will weigh on the market. People don't have 'more' money, their monthly payments have been artificially "deflationed" while the house price itself has been artificially "inflationed".

241   joeyjojojunior   2016 Dec 5, 9:26am  

"People don't have 'more' money"

Actually they do.

242   mell   2016 Dec 5, 9:37am  

Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase".

243   joeyjojojunior   2016 Dec 5, 9:49am  

"Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase"."

OK fine. Here are real income gains:

http://qz.com/780475/us-census-bureau-real-median-household-income-saw-the-largest-recorded-increase-in-history-in-2015-rising-5-2-almost-3000/

Sure looks like real income has gone up quite a bit since 2012

244   David9   2016 Dec 5, 9:50am  

Ask any Realtor about 'cash purchases' it's what they look for. Whatever percentage is reported, I personally would question. IMO, the RE market doesn't even care, currently, about the mortgage customer.

245   missing   2016 Dec 5, 9:57am  

joeyjojojunior says

You are assuming a scenario that doesn't happen.

1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door.

2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?

246   missing   2016 Dec 5, 10:00am  

joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation.

247   joeyjojojunior   2016 Dec 5, 10:04am  

"1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door."

I don't know. I'd have to go back through history and check all the data. But my guess would be that has never happened in the past and will never happen in the future. The 100 year argument is showing you that the idea that when rates rise, prices fall is absolutely incorrect. Which is what the discussion was about.

"2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?"

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

248   joeyjojojunior   2016 Dec 5, 10:05am  

"joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation."

That's my point too. They ALWAYS do. Your scenario is nonsensical.

249   mell   2016 Dec 5, 10:09am  

joeyjojojunior says

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

Because rates are first and foremost a reflection of credit risk - or at least they should be. They have been low because the Fed has the banks back, no matter what they do and how much money they will lose in the next crash. The tail risk has been removed, so why not loan out money for less? Still a profit without risk. It remains to be seen if anything changes wrt the Fed under prez Trump, but as long as the credit market believes the central banks have their back rates may stay low. Any sudden risk dislocations or policy changes and watch the rates explode regardless of income.

250   05c4   2016 Dec 5, 10:10am  

Very interesting graphs joeyjojojunior. Yes, I did underestimate quite a bit how good the economy is doing - I do agree that incomes have shot up from 2012 (I have personal anecdotal evidence for that if it matters any).

Having said that, I have a few reservations. It remains to be seen how much the income will really rise. Secondly, I personally have been very aggressively courted by RE agents and builder's snake-oil salesmen, who relentlessly tried to convince me that the house price/gross income factor could be stretched to 6 at these low rates. As this blog post points out (and as far as back I remember ever since I have been in the US), the recommended factor was 3.

Now, assume someone making $100K bought a $600K house. If the interest rates were to suddenly rise up to their historical norms (ignore how that happens), that person better be making $200K. Will it happen over the large population? Maybe. I don't think real income will rise; it will more or less be a function of the inflation itself. In a way, buying a $600K house now is hedging against increasing inflation if you have a fear it will increase.

Historically, US inflation is between 2 to 3%. For prices to double at 3%, about 20 years have to pass. So it will take 20 years for the person's income income to rise to $200K and the price to income ratio be more normal. But that again assumes house price will remain the same, which is unlikely. I am betting house price will more than double by that time.

I think in a world where population is declining, high inflation is unlikely. Maybe the interest rates will never rise and stay the same. I don't see rising inflation making people's incomes to go higher, and the size of their comparative debt that much lower. I feel a majority of economic crises around the world are simply happening because populations are declining in the West.

Anyway, my last comment - don't have anything to add more. Thanks for the discussion.

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