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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   939,147 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

« First        Comments 260 - 299 of 470       Last »     Search these comments

260   missing   2016 Dec 5, 12:51pm  

Inflation can be caused by factors other than increased economic activity which leads to wage growth. The causality relation is wage growth => inflation. Not the other way around.

261   joeyjojojunior   2016 Dec 5, 1:09pm  

"The causality relation is wage growth => inflation. Not the other way around."

OK--that's what I've asked you several times. What would cause inflation without wage growth AND cause rates to rise? Inflation without wage growth would have to be caused by goods with very inelastic demand curves such as oil and food. But a spike in oil prices would likely bring wage growth at this point with all the oil and natural gas potential in the US. And even if all oil were imported, a spike in prices would push then push the US into recession causing rates to fall, not rise.

I just don't see how you can have inflation with no wage growth. Where is this extra demand coming from if there is no wage growth?

262   missing   2016 Dec 5, 1:30pm  

joeyjojojunior says

"The causality relation is wage growth => inflation. Not the other way around."

OK--that's what I've asked you several times. What would cause inflation without wage growth AND cause rates to rise?

Once you acknowledge that my original statement:

"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."

is accurate and your historical reference does not disprove it, we can move on to discuss the relationship between wages, inflation, and rates.

263   joeyjojojunior   2016 Dec 5, 1:37pm  

"Once you acknowledge that my original statement:

"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."
is accurate and your historical reference does not disprove it, we can move on to discuss the relationship between wages, inflation, and rates."

OK--I'm not going to play games with you. If you actually want to have a discussion, I'm willing.

Unfortunately, you seem unwilling to do so.

You might as well say--if aliens land on Earth, and destroy all single family housing stock, it will put upside pressure on housing prices.

264   missing   2016 Dec 5, 2:06pm  

Ignoratio elenchi

265   joeyjojojunior   2016 Dec 5, 4:04pm  

My comment is actually spot on point. Let's review the discussion. Patrick writes that house prices will fall when interest rates rise, and Mark (and I) replied that historically there is almost no correlation between interest rates and house prices, and the little correlation that does exist is slightly positive (prices rise when rates rise, housing falls when rates fall). You replied with a hypothetical which I then said was basically impossible, and therefore shouldn't be considered when evaluating the future of the housing market.

266   missing   2016 Dec 5, 4:09pm  

joeyjojojunior says

You replied with a hypothetical which I then said was basically impossible,

No, this is not what you said initially. Only later you tried to change the subject.

267   missing   2016 Dec 5, 4:13pm  

My comment was on topic, because it is important to understand that there are several factors that influence house prices. You cannot take just one (in this case interest rates) and consider it in isolation.

268   joeyjojojunior   2016 Dec 5, 4:17pm  

My comment was on topic, because it is important to understand that there are several factors that influence house prices. You cannot take just one (in this case interest rates) and consider it in isolation

Well, we agree on something then!

269   joeyjojojunior   2016 Dec 5, 4:18pm  

"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."

This was my initial comment. Point being that it hasn't happened in 100 years, it's obviously not a very likely scenario.

270   missing   2016 Dec 5, 4:21pm  

When you admit that my original statement is correct (whether you believe that the hypothetical is possible or not is irrelevant), I'll explain to you how rates can rise faster than wages.

271   joeyjojojunior   2016 Dec 5, 4:28pm  

OK--like I said, I'm not playing games with you.

272   missing   2016 Dec 5, 4:37pm  

joeyjojojunior says

Well, we agree on something then!

But you are doing exactly the opposite with your historical reference!

273   missing   2016 Dec 5, 4:44pm  

joeyjojojunior says

OK--like I said, I'm not playing games with you.

Not playing games. It's just that we need to go slowly with you, one step at a time.

First we define the problem, clearly and precisely. Then we address it.

274   joeyjojojunior   2016 Dec 5, 7:10pm  

"But you are doing exactly the opposite with your historical reference!"

Actually what I said was the effect of interest rates are outweighed by the effect of rising incomes. That the reason prices don't fall as rates rise is because rates don't rise in isolation. So, no, I posted pretty much the same ting

275   joeyjojojunior   2016 Dec 5, 7:17pm  

"First we define the problem, clearly and precisely. Then we address it."

What problem? There's a problem?

276   RealEstateIsBetterThanStocks   2016 Dec 5, 8:54pm  

here are a couple of charts with a different opinion. i don't really see a relationship between the two. i agree with joeyjunior, interest rate is only a small factor. income, inflation, housing policy and foreign investments combined is a bigger force.

http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/#6c75eef77a97
http://www.bankrate.com/finance/mortgages/rising-rates-lower-house-prices.aspx

277   missing   2016 Dec 6, 7:42am  

joeyjojojunior says

"First we define the problem, clearly and precisely. Then we address it."

What problem? There's a problem?

I know it's confusing for you. That's why, as I said, we'll go slowly. For now focus on my first statement - is it correct, yes or no?
Then we move on to step 2.

278   joeyjojojunior   2016 Dec 6, 7:48am  

"I know it's confusing for you. That's why, as I said, we'll go slowly. For now focus on my first statement - is it correct, yes or no?
Then we move on to step 2."

The only confusing thing is your behavior. If you have a point, make it. The more you bob and weave, the more ridiculous you look.

I frankly don't care if you ever share your incorrect theories. I've demonstrated my point with data and supported it with the reason why. You've come up with a ridiculous hypothetical that you can't support. So forgive if I'm not waiting with bated breath for step 2.

279   missing   2016 Dec 6, 8:10am  

Mark D says

i don't really see a relationship between the two. i agree with joeyjunior, interest rate is only a small factor.

you understand that your second statement above does not follow from the first (observation), right?Mark D says

income, inflation, housing policy and foreign investments combined is a bigger force.

1. Why would income be a bigger force?? It has exactly the same, direct, effect on affordability as interest rates have.

2. What housing policy exactly do you have in mind, apart from rates?

3. After rates and incomes are already considered, the way inflation matters is to see how much of the income is diverted to other necessities like food, medical care, transportation to work, repayment of student loans.

280   AdamCarollaFan   2017 Jan 8, 11:51pm  

every time I get on Zillow or redfin and "think" about the possibility about buying a house I read this excellent article. thanks Patrick

281   Waitup   2017 Jan 8, 11:58pm  

AdamCarollaFan says

every time I get on Zillow or redfin and "think" about the possibility about buying a house I read this excellent article. thanks Patrick

hope you didn't read and obey during the 2010-2013 frenzy

282   AdamCarollaFan   2017 Jan 11, 9:17pm  

Waitup says

hope you didn't read and obey during the 2010-2013 frenzy

thank gawd, no!

remember when Obama was offering that $8,000 tax credit in 2008 and 2009(?)? Well, I got mad because I "missed" the boat and missed out on a cool, free $8K.

Well, lo and behold, within six months of that credit expiring, the median house price in my area went down more than $8K. Dodged a bullet there!

283   joeyjojojunior   2017 Jan 12, 5:49am  

"Well, lo and behold, within six months of that credit expiring, the median house price in my area went down more than $8K. Dodged a bullet there!"

What's the median price today?

284   AdamCarollaFan   2017 Jan 12, 11:26am  

The median home value in Sacramento is $283,800. Sacramento home values have gone up 11.8% over the past year and Zillow predicts they will rise 5.4% within the next year. The median list price per square foot in Sacramento is $193, which is lower than the Sacramento Metro average of $213. The median price of homes currently listed in Sacramento is $269,900. The median rent price in Sacramento is $1,340, which is lower than the Sacramento Metro median of $1,575.

www.zillow.com

285   joeyjojojunior   2017 Jan 12, 12:22pm  

So how did you dodge a bullet exactly?

286   AdamCarollaFan   2017 Jan 12, 12:31pm  

because house prices decreased more than $8,000, which would have wiped out the $8,000 credit.

that $8,000 credit was just another way the government tried to prop up and "save" the housing market. they basically artificially inflated the market, so to speak. they should have just stayed out of it, as markets, all markets, go up and down and eventually correct themselves.

287   joeyjojojunior   2017 Jan 12, 1:13pm  

"because house prices decreased more than $8,000, which would have wiped out the $8,000 credit."

So, you would have come out even and that's dodging a bullet?

288   Strategist   2017 Jan 12, 1:24pm  

AdamCarollaFan says

because house prices decreased more than $8,000, which would have wiped out the $8,000 credit.

that $8,000 credit was just another way the government tried to prop up and "save" the housing market. they basically artificially inflated the market, so to speak. they should have just stayed out of it, as markets, all markets, go up and down and eventually correct themselves.

What about the subsequent years? Seems to me you did not dodge the bullet.

289   AdamCarollaFan   2017 Jan 12, 1:37pm  

the median housing price (specifically, the area i was looking at) decreased further than 8K, though. at the time, housing was on the downward slope, and the government was trying to help. people were buying into it, though, which is their decision. i'm just glad i didn't, especially since life has changed since that time. i'm hoping to buy on the upward slope, but that will be difficult. i've already missed it (2011). it'll eventually go down again - just not sure when.

290   RealEstateIsBetterThanStocks   2017 Jan 12, 10:00pm  

lol @patrick's "feel good" thread still getting visitors

291   Patrick   2017 Jan 12, 10:18pm  

Yes, amazing. Feels like it made a tiny difference in the world, like people were thirsty for the info that the realtors will never tell them and now they can get at least some of it.

292   BayArea   2017 Jan 13, 7:23am  

rando says

Yes, amazing. Feels like it made a tiny difference in the world, like people were thirsty for the info that the realtors will never tell them and now they can get at least some of it.

it really is the only book of its kind I am aware of

293   Y   2017 Jan 13, 7:29am  

in the kingdom of LibbyDom, where everybody gets a trophy for generating a new cell on a nanosecond basis, "coming out even" is considered the nirvana of results...

joeyjojojunior says

"because house prices decreased more than $8,000, which would have wiped out the $8,000 credit."

So, you would have come out even and that's dodging a bullet?

294   joeyjojojunior   2017 Jan 13, 7:35am  

"in the kingdom of LibbyDom, where everybody gets a trophy for generating a new cell on a nanosecond basis, "coming out even" is considered the nirvana of results..."

You're not even a good troll anymore. Why don't you stick to correcting people's grammar?

295   Y   2017 Jan 13, 7:48am  

Two triggered libbies inside the half hour...excellent start to the day!

297   Patrick   2017 Mar 24, 3:21pm  

Going to clean up and improve the original articles that made this site famous.

298   Strategist   2017 Mar 24, 3:32pm  

jazz music says

No such thing as a good troll when there are worthwhile things to think about and discuss.

Like the slavery that exists in your mind.

299   RC2006   2017 Mar 24, 3:53pm  

Was looking at upgrading but property taxes kill it for me.

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