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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   939,184 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 445 - 470 of 470        Search these comments

445   NDrLoR   2023 Apr 12, 8:57am  

GNL says

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

Bitcoiner says

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


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

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

GNL says

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

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

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

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

ad says

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

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

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

There's no reason outside of laziness to not be making $120k+ if you're married. No one wants to work right now. Wish kids could start younger because my kids could have jobs they'd be making $15-20/HR at 13.
450   WookieMan   2024 Dec 6, 11:37am  

All those fees are baked into the rent regardless even with no gains for the landlord. You pay it as a renter. I'm making $200k off my current house, tax free. 95% of people make less than $100k salary and pay taxes. I did that living in a house I'd need anyway sitting on my ass and it was 30% below rent.

On a tax basis it was probably a $300-400k gain and massive savings. You CA guys live in a different world. Not a knock, you love where you live, but CA is not the reality in most the country.
451   Patrick   2024 Dec 6, 12:58pm  

True, California is fucked up. In most places rent has to cover the landlord's cost of owning, but landlords here don't seem to care that rent is not enough to justify the purchase price.

I think they are mostly speculating on future increases in house prices, which is no longer a sure bet given California's declining population.
452   WookieMan   2024 Dec 6, 1:19pm  

Patrick says

I think they are mostly speculating on future increases in house prices, which is no longer a sure bet given California's declining population.

You guys are in phase 3-4 out of 10 of exodus. I've lived it in IL. It takes decades. Hell you're out there Patrick as someone that's lived in IL. It takes time. It's not a fast process.

I go out to Montana 2-3 times a year to visit my good buddies and former bandmates. Get airline points or be willing to drive to TX, ID, MT, AZ, NV or FL as examples of where people will move. Some drivable, but that would suck. IL hit level 10 and we're in recovery mode and it's not awful to be honest.

A lot of owners are going to eat shit on housing prices in CA. There's already been major celebrity flight. The state will lose House seats for sure on the 2030 census. So less dominant. The aforementioned states will have gains. IL is 10-15 years ahead of CA. Stay if you want, I don't want 15ºF, but I'm staying. Toughens you up. Really outside off surfing and climate, there are other places as good or better than CA and I like CA.
453   Patrick   2024 Dec 6, 1:30pm  

I'm hoping that there will be a Reconquista of California by the forces of sanity at some point. A lot of rich and powerful Californians are getting fucked by wokeness and taxes, and I can feel the mood shifting a bit already, even if we have a ways to go before hitting bottom.
454   WookieMan   2024 Dec 6, 1:46pm  

Patrick says

I'm hoping that there will be a Reconquista of California by the forces of sanity at some point. A lot of rich and powerful Californians are getting fucked by wokeness and taxes, and I can feel the mood shifting a bit already, even if we have a ways to go before hitting bottom.

I legit wish you luck. You don't have winter so it's harder to leave. But your political structure is as bad or worse than IL. I stayed. Maybe the good for change will stay in CA?
455   socal2   2024 Dec 6, 1:56pm  

California had some of the biggest shifts to the Right in this past election then anywhere in the country. We got rid of some of the crazy Soros DA's in big cities, booted the San Francisco mayor and some of the other extremists in City Councils.

We are still hopelessly blue and gerrymandered, but some people legitimately appear to be getting a clue.

This place is far to beautiful to abandon it to the Commies and weirdos!


https://abc7.com/post/higher-percentage-la-county-voters-favored-donald-trump-2024-election-2020-data-shows/15541547/
456   WookieMan   2024 Dec 6, 2:14pm  

socal2 says

This place is far to beautiful to abandon it to the Commies and weirdos!

I agree, but that's not the trend. Your username and I believe you've said where you live is more palatable than the central part of CA that controls the state. People are moving out of LA and SF.

Not telling you to move, but getting out would easily save you $20-50k/yr on an above average income. I spent about 3 months researching states I want to move to. About 5. CA, CO, FL, MT, ID. None of them made sense for me and our income. They were all more expensive than IL. And yes, no income taxes in FL, the cost of goods is double than IL though. CO and CA were the worst on paper.
457   mell   2024 Dec 6, 3:18pm  

CA could turn red in the future, the trend is there: https://www.foxnews.com/politics/more-than-40-californians-voted-trump-state-not-liberal-newsom-thinks-says-expert

Over 40% voted Trump. It's a poor state for business, a minimum "franchise tax" of $800 slapped on yearly on an LLC, even on foreign ones if you live here or do business with CA. What for? Pure extortion. These grifters need to go and we're getting closer to reaching this goal.
458   DOGEWontAmountToShit   2024 Dec 6, 9:35pm  

mell says

minimum "franchise tax" of $800 slapped on yearly on an LLC, even on foreign ones if you live here or do business with CA. What for? Pure extortion.


1) charter your LLC in some other state.
2) Set up a remote mail service address for ot, preferably in that same state.
3) The only thing you have to do is pay California income taxes on the profit distributions from that LLC.
459   mell   2024 Dec 6, 9:46pm  

DOGEWontAmountToShit says


mell says


minimum "franchise tax" of $800 slapped on yearly on an LLC, even on foreign ones if you live here or do business with CA. What for? Pure extortion.


1) charter your LLC in some other state.
2) Set up a remote mail service address for ot, preferably in that same state.
3) The only thing you have to do is pay California income taxes on the profit distributions from that LLC.


Thanks, I think if they tie you to the LLC and you live in CA they may try and come after you. I'm sure many are trying to get around it. I have some LLC experience, but am considering setting up an LLC taxed as S Corp due to having multiple revenue streams and wanting to move from IC to contractor/freelancer in tech while cutting back on hours and focusing more on my investing, partnering (K-1s) and automated trading avenues. Tax wise it will very much be worth it and I can somewhat "control" my paid out income, but it will incur higher fees and much more paperwork. There are companies focusing on sole llc/s corp entrepreneurship, promising handling everything such as lettuce.co or collective, any take on those (lettuce seems suited better for imo)?
461   komputodo   2024 Dec 12, 12:25pm  

mell says

It's a poor state for business, a minimum "franchise tax" of $800 slapped on yearly on an LLC, even on foreign ones if you live here or do business with CA. What for?

For the beautiful weather
462   komputodo   2024 Dec 12, 12:32pm  

what the hell is 100tc and 5 YOE?
463   SunnyvaleCA   2024 Dec 12, 4:21pm  

Patrick says


landlords here [in California] don't seem to care that rent is not enough to justify the purchase price.

I've noticed that in my area especially. One reasonable strategy that could be a few of the houses is that old people are leaving, renting the place out temporarily until they die, and letting the kids inherit the house tax free. Saving $1MM in taxes could be worth the wasteful renting out for a few years. Who knows; the house could even appreciate some more while they wait for death. That's the situation for the house across the street from me. The final parent died and the kids sold off the place within 6 months for $3MM tax free. Original purchase price of the parents (in the 70s) was something like $50k, so that's a lot of tax savings at 20% federal and 12.3% CA.
464   SunnyvaleCA   2024 Dec 12, 4:25pm  

WookieMan says


The state will lose House seats for sure on the 2030 census.

Unfortunately, house seats are proportional to state population, not state citizen population. Despite Trump's great efforts in 2020, Democrats succeeded in barring asking about citizenship on that census so we can't even easily switch to proportionality by citizen. Now it's a simple thing to pack the state with as many immigrants as possible to push up the numbers in the house.
465   Patrick   2024 Dec 12, 4:45pm  

SunnyvaleCA says

The final parent died and the kids sold off the place within 6 months for $3MM tax free.


Wait, why no tax at all? Because it's an inheritance?
466   stfu   2024 Dec 12, 5:33pm  

Patrick says


Wait, why no tax at all? Because it's an inheritance?

Their (stepped up) basis becomes the value at the time of transfer - so there are no capital gains. Similar for stocks. Probably spent six months in probate before they could unload it.
467   SunnyvaleCA   2024 Dec 12, 5:57pm  

stfu says


Probably spent six months in probate before they could unload it.

Took a few months to let the 1-year lease expire and then a few months to do a major renovation to upgrade from the 1970s.

The owner went to an assisted living. The kids knew the end was pretty near. (She was 85+.). I think that if she created a living trust the house can be transferred very quickly.
468   AmericanKulak   2024 Dec 13, 1:18am  

WookieMan says


It's not glorious but the post office is hiring people at $30/hr

Until DOGE steps in

"Why are you paying over twice as much as Walmart?"
469   AmericanKulak   2024 Dec 13, 1:19am  

Oh man, the next 10 years is gonna be a hoot. Demographics is Desitny.
470   DOGEWontAmountToShit   2024 Dec 13, 7:27am  

WookieMan says

It's not glorious but the post office is hiring people at $30/hr with potential lifetime pension. Zero skill required outside of not being a criminal.


Don't you have to take a rest that involves timed memorization of addresses, etc?

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