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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   939,738 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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62   Livepeace   2015 Sep 3, 9:39pm  

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

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

63   Jarhead   2015 Sep 5, 4:59am  

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

64   Jarhead   2015 Sep 5, 5:02am  

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

65   MoneySheep   2015 Sep 5, 6:40am  

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

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

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

66   Patrick   2015 Sep 5, 12:11pm  

ThreeBays says

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

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

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

67   Jarhead   2015 Sep 5, 1:38pm  

Fundamentals ^^ Yes!

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

The real estate market has experienced an echo bubble.

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

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

68   MoneySheep   2015 Sep 8, 7:13pm  

ThreeBays says

you better have good timing when you purchase a home.


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

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

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

69   Jarhead   2015 Sep 9, 4:02am  

People do not factor in the big picture.

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

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

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

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

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

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

70   advancingtime   2015 Sep 12, 11:07am  

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

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

http://brucewilds.blogspot.com/2015/08/the-great-housing-debate-housing-20.html

71   SFace   2015 Sep 14, 1:45pm  

Jarhead says

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

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

72   snowstar886   2015 Sep 18, 8:33am  

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

73   FuckTheMainstreamMedia   2015 Sep 18, 11:02am  

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

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

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

74   LadyK   2015 Sep 18, 12:46pm  

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

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

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

75   Dean G   2015 Sep 20, 10:27am  

Re: OP

Thank you very much for very helpful information, OP.

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

I have contract on a house to buy

76   Gina H   2015 Sep 20, 10:42am  

Re: OP

Thank you very much for very helpful information, OP.

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

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

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

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

Your insight on this matter would be greatly appreciated.

77   Jarhead   2015 Sep 24, 5:22am  

SFace says

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

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

78   SFace   2015 Sep 24, 10:25am  

Jarhead says

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

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

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

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

79   REJack   2015 Oct 19, 9:23am  

Sophieil,

Have you considered buying a duplex, triplex or fourplex? The price per unit will be less than your condo purchase and the other rents (take advantage of the high rental market instead of bemoaning it!) may pay for most if not all of your payment. Those rents will help you qualify for the property too. It could be something to hang on to after the 15-years which will retire (or help retire) you! Don't think small...think big!

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83   ddshutlz   2015 Nov 3, 8:39am  

Sophie,
I don't understand how you asked for some advise and people just changed the topic to how terrible it is to live there. If I am not wrong, you probably cannot or do not want to leave the area. So here is my piece of advice:
The fact that you expect to be there for the next 15 years doesn't necessarily mean you will be. Even if you were, it is really no justification to make such a big purchase with the biggest $$ you got in the bank. To my knowledge, it would be a very risky move most likely to fail.

If you can afford $2780 in rent, what makes you want to change that? Do you live ok?
No need to have that money rot. With a little reading and research, you can invest that money over the long term so it is not "rotting". Your bank is making use of that money, so it technically not "rotting". Someone is benefiting from your money. It is just not you :(

If in doubt always stay on the side of safety

84   rjeddagmailcom   2015 Nov 7, 8:47am  

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87   Bernardeb   2015 Dec 5, 1:45pm  

Hello and thanks for a very informative article. I agree with all your points. However, my question is, how will these predictions affect affluent and highly desirable locations such as Los Angeles. We're trying to buy an average 3 bed 2 bath home, around 1600 sqft in Sherman Oaks, Los Angeles for us to live in. The price tag on such houses are 850k+ built in 1950's with over a million dollars for a little more attractive and remodeled homes. We own 2 rental properties in central california at 250k a piece which give us about $500 positive cash flow. A million dollar home or even 800k is way out of our budget. I've always wondered if those houses will drop in price too? or because they're in such demand they will continue to rise and we will never be able to purchase one. Even if the prices drop, there are a great deal of cash investors in Los Angeles or even people like us who are awaiting a crash, that will drive the prices up again. At least that's my assumption. So on one hand, I'm debating whether we should buy cheap income producing properties now and pay off our existing homes and build equity in that sense or buy whatever we can afford in LA and rent it out even if we're not gonna break even monthly. That way we can capture the gains of LA. What is your opinion? We can afford something around 600k. Should we find low income areas and buy cheap rental properties for the cash flow? Or buy a house in LA to either live in or rent out to capture the gains. That way 5-6 years down the line when we're financially ready for our purchase we can sell and buy a decent home. Please advise! Thank you!

88   Tenpoundbass   2015 Dec 5, 2:25pm  

I wonder what local ISIS chapters will do for RE prices?

89   MAGA   2015 Dec 29, 12:49pm  

11: You are buying a loan, not a home.

90   tatupu70   2015 Dec 29, 12:54pm  

jvolstad says

11: You are buying a loan, not a home.

Funny, when I leave work--I don't drive to my loan. I don't park my car in my loan. I don't sleep in my loan's master BR.

91   conservativethinker   2015 Dec 29, 2:01pm  

I have been a long time reader of Patrick and have been sticking with renting since 2007. Instead of buying a place, I put some of that money in the stock market...then the 2008 crash happened and I lost money. I took my money out of stocks/bonds and just kept it in the bank. I stuck with renting instead of buying in 2008 when house prices sank... and now they are up as much as they were up from 2003-2008. So, I basically timed everything horribly.

My simple question is this, if I was to just keep my potential housing down payment money in a savings account instead of putting it in the stock market, then is it still better to rent vs. buy now? I can get at best 1% return on the savings account and I'm not sure what the inflation rate is. And, I find the stock market just as risky as the real estate market right now. Both could crash.

And, if I had $400k, and I allocated $200k for a down payment on a house, and kept the other $200k in savings, is it still not wise to buy? If so, what is the logic there?

92   turtledove   2015 Dec 29, 2:16pm  

conservativethinker says

I can get at best 1% return on the savings account and I'm not sure what the inflation rate is. And, I find the stock market just as risky as the real estate market right now. Both could crash.

A 1% return is a ridiculous investment strategy. So yes, you need to do something else with your money. I sense that you are the type of person who is so terrified of a loss that you'd rather let inflation eat away at your principle than risk some catastrophic investment that wipes you out. Obviously, the worst case scenario could happen, but you really cannot live your life that way. That's kind of like shutting yourself up in the house because you are afraid of being mugged. Sure... a mugging is a possibility, but statistically speaking it's not very likely. You are going to have to take a chance on something, at some point or someday, your $400,000 risks turning into chump change.

93   conservativethinker   2015 Dec 29, 2:47pm  

turtledove says

I sense that you are the type of person who is so terrified of a loss that you'd rather let inflation eat away at your principle than risk some catastrophic investment that wipes you out.

That is probably pretty accurate :) But, I'm not totally terrified... I do have a decent amount of my 401k money in stocks, and I do own a condo that is being rented... but I'm mostly cash for now... waiting for a slightly less bubble-y environment in both real estate and stocks. I do want to diversify more, which is why I asked if in a hypothetical scenario if I had $400k of cash available, if investing $200k or $300k as a down payment on a house makes sense in this crazy housing environment.

94   FNWGMOBDVZXDNW   2015 Dec 29, 3:09pm  

IMO, owning one house is a neutral and safe position. Owning less than one is risky. The only reason not to own one house is the desire to be mobile. In your situation, owning and renting out a condo while renting a place to live sounds reasonable. Sitting on $400K in cash does not sound reasonable to me. It sounds way over-cautious. If you put it into stocks, you risk a downturn in the stock market. If that happens, taking money out after the crash would be shooting yourself in the foot. So putting money into stocks requires being willing to ride out a down market (and not use the money for a while). In other words, you have to be willing to not buy a house with 20 down in the near future. OTOH, in that instance, you could sell your condo, and use the proceeds as a down on a house.

95   conservativethinker   2015 Dec 29, 3:17pm  

Would the following justify buying an "expensive" home in today's climate based on some of the notes I provided previously:

- Keep the condo and keep renting it out
- Leave the 401k alone and keep the investments somewhat aggressive assuming retirement is 30yrs away
- Assume there is enough cash for 1yr in case of job loss
- If the left over is $400k as mentioned above, does it make sense to put 50% on a down payment on a new "expensive" home (where the rent would be 3% or purchase price)... and the other 50% in stocks/bonds... or is it better to put all 400k in stocks/bonds because according to Patrick, it's a terrible time to buy an expensive home (which I sort of agree with, but is it also a terrible time to put the would-be down payment money into stocks/bonds?)

96   FNWGMOBDVZXDNW   2015 Dec 29, 3:25pm  

conservativethinker says

but is it also a terrible time to put the would-be down payment money into stocks/bonds?)

I think it's not a great time to invest in a house or stocks, but you can't go back 7 years and invest then. It's now or later, and it's just worse to sit on a huge idle pile of cash unless you are trying to make a huge market timing bet. Study the local market, see if it makes sense for you. There are intangibles to consider. There is no right answer based on what you've given.

97   turtledove   2015 Dec 29, 3:32pm  

conservativethinker says

Would the following justify buying an "expensive" home in today's climate based on some of the notes I provided previously:

- Keep the condo and keep renting it out

- Leave the 401k alone and keep the investments somewhat aggressive assuming retirement is 30yrs away

- Assume there is enough cash for 1yr in case of job loss

- If the left over is $400k as mentioned above, does it make sense to put 50% on a down payment on a new "expensive" home (where the rent would be 3% or purchase price)... and the other 50% in stocks/bonds... or is it better to put all 400k in stocks/bonds because according to Patrick, it's a terrible time to buy an expensive home (which I sort of agree with, but is it also a terrible time to put the would-be down payment money into stocks/bonds?)

Personally, I don't think that it makes sense for you to put 50% down in a low-interest rate environment.

98   conservativethinker   2015 Dec 29, 3:35pm  

I live in Silicon Valley and you have to shell out 1.5m to get an okay house. So does it make sense to put all 400k on that house which is what would be required to get a house in that price range based on income, or do I just accept that I can't afford a house here and put all that 400k in stocks/bonds and keep saving until I can afford something?

99   turtledove   2015 Dec 29, 3:53pm  

conservativethinker says

I live in Silicon Valley and you have to shell out 1.5m to get an okay house. So does it make sense to put all 400k on that house which is what would be required to get a house in that price range based on income, or do I just accept that I can't afford a house here and put all that 400k in stocks/bonds and keep saving until I can afford something?

I don't know that any choice you make -- makes sense. We have crap shacks selling for millions... we have stocks valued at ridiculous amounts on companies with no earnings... None of it makes sense! Personally, I'd rather have my home. Why? I have kids, dogs, people who need some stability (which I know is just an illusion to some degree -- stability, not the kids and the dogs :-)). What I couldn't have was rents going through the roof, changing homes, changing schools, etc... So, for me, it made sense to buy the house. It froze my monthly house payment at an amount I could afford at the time, and over time, my monthly payment should become easier to afford as our earnings go up. We plan to stay long term, so we should be able to get some of the money back when we sell. We have a business here, so this plan should be possible. But no plan is foolproof. Someone might find a cure for infertility and then I'm out of business.

100   Strategist   2015 Dec 29, 5:47pm  

conservativethinker says

Would the following justify buying an "expensive" home in today's climate based on some of the notes I provided previously:

- Keep the condo and keep renting it out

- Leave the 401k alone and keep the investments somewhat aggressive assuming retirement is 30yrs away

- Assume there is enough cash for 1yr in case of job loss

- If the left over is $400k as mentioned above, does it make sense to put 50% on a down payment on a new "expensive" home (where the rent would be 3% or purchase price)... and the other 50% in stocks/bonds... or is it better to put all 400k in stocks/bonds because according to Patrick, it's a terrible time to buy an expensive home (which I sort of agree with, but is it also a terrible time to put the would-be down payment money into stocks/bonds?)

Buy a home with 20% down, and put the rest in stocks. You will be glad.

101   Patrick   2015 Dec 29, 7:27pm  

conservativethinker says

I live in Silicon Valley and you have to shell out 1.5m to get an okay house. So does it make sense to put all 400k on that house which is what would be required to get a house in that price range based on income, or do I just accept that I can't afford a house here and put all that 400k in stocks/bonds and keep saving until I can afford something?

actually it all depends on predicting the future well.

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