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

By Patrick follow Patrick   2015 Jul 11, 12:58pm 854,165 views   344 comments   watch   nsfw   quote   share    

  1. Because house prices in expensive areas still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with a 20% downpayment. Landlords say a safe price is set by the rental market; annual rent should be at least 9% of the purchase price, or else the price is just too high. Yet in affluent areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income with tiny downpayments, and gross rents are still only 3% of purchase price. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that affluent neighborhoods are still in a huge housing bubble, and that bubble seems to be getting more dangerous by the day.

  2. On the other hand, in some poor neighborhoods, prices are now so low that gross rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there could still fall yet more if unemployment rises or interest rates go up, but those neighborhoods have no bubble anymore.
  3. Because it's usually still much cheaper to rent than to own the same size and quality house, in the same school district. In rich neighborhoods, annual rents are typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 8% of purchase price, which is more than twice the cost of renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a 6% mortgage, that's $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local employment rate (demand) to the current local supply of available homes for rent or sale (supply) should help you figure out whether a big fall in rents could happen. Checking these factors minimizizes your risk.
  4. Because it's a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. When housing falls, you lose your equity, but not your debt.

    The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. To buy an expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.

    • As interest rates fall, real estate prices generally rise.

    • Your property taxes will be lower with a low purchase price.

    • Paying a high price now may trap you "under water", meaning you'll have a mortgage debt larger than the value of the house. Then you will not be able to refinance because then you'll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.

    • You can refinance when you buy at a higher interest rate and rates fall, but current buyers will never be able to refinance for a lower interest rate in the future. Rates are already as low as they can go.

  5. Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loans. This means most banks are still actually bankrupt. But since the banks have friends in Washington, they get special treatment that you do not. The Federal Reserve prints up bales of new money to buy worthless mortgages from irresponsible banks, slowing down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense. Banks get to keep any profits they make, but bank losses just get passed on to you as extra cost added on to the price of a house, when the Fed prints up money and buys their bad mortgages. If the Fed did not prevent the free market from working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks "extend and pretend" that their mortgage loans will get

    paid back.

    And of course the banks can simply sell millions of bad loans to Fannie and Freddie at full price, putting taxpayers on the hook for the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into slavery, for the banks to make a profit. If you pay a low price for a house and manage to avoid debt, the banks lose control over you. Unacceptable to them. It's all a filthy battle for control over your labor.

    This is why you will never hear the president or anyone else in power say that we need lower house prices. They always talk about "affordability" but what they always mean is debt-slavery.

  6. Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.

    The simple fact is that the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little. Leveraged housing appreciation, usually presented as the "secret" to wealth, cannot be counted on, and can just as easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there is no more fake paper equity from the sale of a previously overvalued property and because the market for securitized jumbo loans is dead. Without that fake equity, most people don't have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's corruption of US legislators. On a $300,000 house, 6% is $18,000 lost even if housing prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

  7. Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling. Prices in the housing market, even now, are entirely a function of how much the banks are willing and able to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property. Banks have been willing to accomodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.

  8. Because there is still a massive backlog of latent foreclosures. Millions of owners stopped paying their mortgages, and the banks are still not forclosing on all of them, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don't like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Right now, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!

  9. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low.

    From The Herald:

    "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Your debt is their wealth. Every "affordability" program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it's just pushing the reckoning into the future. To really help Americans, Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even more important is eliminating the mortgage-interest deduction, which costs the government $400 billion per year in tax revenue. The mortgage interest deduction directly harms all buyers by keeping prices higher than they would otherwise be, costing buyers more in extra purchase cost than they save on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra $39,000 in purchase price. Subsidies just make the subsidized item more expensive. Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.

  10. Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 66. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.

  11. Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.

Next Page: Eight groups who lie about the housing market »

The Housing Trap

You're being set up to spend your life paying off a debt you don't need to take on, for a house that costs far more than it should. The conspirators are all around you, smiling to lure you in, carefully choosing their words and watching your reactions as they push your buttons, anxiously waiting for the moment when you sign the papers that will trap you and guarantee their payoff. Don't be just another victim of the housing market. Use this book to defend your freedom and defeat their schemes. You can win the game, but first you have to learn how to play it.

115 pages, $12.50

Kindle version available

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321   Patrick   ignore (1)   2018 Oct 10, 7:51pm     ↓ dislike (0)   quote   flag      

Evan F. says
What in the actual ass is your 401k positioned in?

I have to wonder as well. I had a pretty bad day, down about 3% due to Fed interest rate fears, but hey, it was down slightly more than that in Feb and yet recovered.

Probably going to be a bumpy ride, but OK, the trend is still my friend.
322   BayArea   ignore (1)   2020 Sep 5, 5:33am     ↓ dislike (0)   quote   flag      

Interesting to look back at these old posts

“Should have bought”
324   clambo   ignore (5)   2020 Sep 5, 9:05am     ↓ dislike (0)   quote   flag      

I know a guy who built a cool house up the coast from Santa Cruz. He has a lot of money.

He’s still pissed off at two checks for $25,000 he writes each year to the county for property tax.
In return he gets nothing of course.

Now he’s more pissed; he had a gigantic water tank in case of fire, but when Calfire went to save his house, it was empty. His $5 million bucks went up in smoke.

Evidently a neighbor tapped it to save his house, or maybe an illegal growing weed did.
So much for “helping your neighbor.”

A girl recently was giving me shit for being a renter; I reminded her that my net worth rose the price of a crummy place here in a few weeks, but no fire can burn down my mutual funds and shares of AAPL, MSFT, ROKU, BABA, DE.

The California and county governments want you to buy a house; you will be on the hook paying for pensions, health care for losers and illegals, schools run by maniacs, and worse, the dimwit realtors fuel the illusion saying that the house is an investment, although you will have a difficult time getting the capital gains into your checking account.

I don’t know a lot of people but I know two who are leaving the taxes behind, ironically one is a “realtor” , one is in Washington State (no income tax) , the realtor is considering Texas and Florida.
325   Dholliday126   ignore (0)   2020 Sep 5, 9:46am     ↓ dislike (0)   quote   flag      

I think people get negative on housing because the are priced out or cant afford it. Housing is just like stocks, both pretty much go up and down together because they are wealth havens and inflation hedges. If stocks crashed, housing would too and Visa versa. Except housing is a little more sticky when lending is normal. Maybe housing is a little more scarcity driven. Plus with housing you get tax reduction and forced saving. However, you do get upkeep and taxes, which maybe offsets that, not sure. I've always thought that owning a house comes with 2% yearly fee, usually 1% of house cost in taxes and 1% in maintenance. That's kind of like stocks too, although management fees have been falling.

My point is that dont be negative on one or the other, they are kind of the same, just one is more accessible because of cost. In a perfect world you are in both, that's how you grow wealth.
326   Tenpoundbass   ignore (15)   2020 Sep 5, 10:03am     ↓ dislike (0)   quote   flag      

Trump's second term is going to be all about "Build Baby Build"
He's going to build so many Suburbs that the median price for a 1200sqft to 2100sqft Burbdale Ranchero house wont be worth a penny over $175, no matter where you live.
America needs starter houses ranging between $75K to $175K or we can't survive, the Commies will take over for sure, when the American dream is dead. Trump needs to charge up the paddles and yell "CLEAR!"
327   Ceffer   ignore (5)   2020 Sep 5, 10:06am     ↓ dislike (0)   quote   flag      

One of the arguments was that owning forced people to save and acquire equity. However, borrowing against equity kiboshed that notion. Clambo is a 'prudent renter' in that he still saves and redirects assets to increase value. Patrick has always been right that renting can allow you to acquire net worth without the anchor weight of owned real estate. You never own this shit, anyway, you are just always leasing it from the government tax monster that in California gets bigger and bigger with all the crooked pols in this state.

Majority of the population spend everything they have on bling and monster trucks. As they age, they become unhealthy AND improvident with no place they own to live. Then, they are the ones who need to scrape by on fumes past the age when they can meaningfully work.

If owning actually forced people to save and gain equity, it might be a good argument for owning, but people are shiftless, fickle and short sighted, so that argument doesn't apply. People that are prudent and save can either rent or own, they will make it work for themselves. People who aren't prudent will never be prudent.
328   clambo   ignore (5)   2020 Sep 5, 10:14am     ↓ dislike (0)   quote   flag      

I’m negative about the “benefits of ownership” for reasons not related to affordability.
I have the dough, but I’m greedy. I want real capital gains that I can actually use.
The equity in your house is useless unless you 1. Move 2. Take in boarders 3. Reverse mortgage.
My grandmother who lent my father the cash for the water view lot on Marthas Vineyard was a businesswoman and a renter, but she had cash.
329   Patrick   ignore (1)   2020 Sep 5, 12:47pm     ↓ dislike (0)   quote   flag      

clambo says
I have the dough, but I’m greedy. I want real capital gains that I can actually use.
The equity in your house is useless unless you 1. Move 2. Take in boarders 3. Reverse mortgage.

Agreed. I did pretty well in the stock market, at this point far ahead of where I would be had I bought a house.

Now I have the cash, mostly stock actually, but I'm definitely not going to buy in California. California's prospects are terrible as long as Democrats are in power here.
330   Patrick   ignore (1)   2020 Sep 5, 12:51pm     ↓ dislike (0)   quote   flag      

Ceffer says
Majority of the population spend everything they have on bling and monster trucks.

Yes, there are a lot of idiots who make themselves poor through bad decisions. No one else's fault.

I think this woman's plan is good basic advice for them, black, white, or whatever:


#1 Finish School
#2 Take Any Job
#3 Get Married
#4 Save and Invest
#5 Give Back to Your Neighborhood
331   Dholliday126   ignore (0)   2020 Sep 5, 2:52pm     ↓ dislike (0)   quote   flag      

You can always pull money out of your house in a refi or borrow against your equity for like nothing these days. I agree cash is king, but pure cash deflates at x% a year. It has to be invested, plus it's a debt and borrowers world, might as well play the game. The Fed will always screw savers and favor the borrowers or else the whole thing collapses. It will eventually fail anyhow, but until then, be is assets, a house is just a way to diversify.
332   ad   ignore (0)   2020 Sep 5, 3:00pm     ↓ dislike (0)   quote   flag      

Dholliday126 says
I agree cash is king, but pure cash deflates at x% a year.

That is why I convinced my mom to invest at least in the Vanguard Target Retirement Income Fund (VTINX). It at least provides an annual return of 5.5% with inflation around 2%. And its 70% in investment grade bonds and 30% in stocks.
333   Patrick   ignore (1)   2020 Sep 5, 3:46pm     ↓ dislike (0)   quote   flag      

ad says
Dholliday126 says
I agree cash is king, but pure cash deflates at x% a year.

That is why I convinced my mom to invest at least in the Vanguard Target Retirement Income Fund (VTINX). It at least provides an annual return of 5.5% with inflation around 2%. And its 70% in investment grade bonds and 30% in stocks.

@ad Why do you think it provides an annual return of 5.5%?

Yahoo Finance says the yield is 2.29%:

334   Blue   ignore (0)   2020 Sep 5, 4:24pm     ↓ dislike (0)   quote   flag      

Look under Average annual returns which is above 5%.
335   Patrick   ignore (1)   2020 Sep 5, 5:01pm     ↓ dislike (0)   quote   flag      

I was hoping for something with a 5% guaranteed return. I guess that's not possible these days.
336   anonymous   ignore (null)   2020 Sep 5, 5:25pm     ↓ dislike (0)   quote   flag      

KMI patrick. Kinder Morgan looks good! It is an oil pipeline utility.
337   ad   ignore (0)   2020 Sep 5, 10:24pm     ↓ dislike (0)   quote   flag      

Patrick says
@ad Why do you think it provides an annual return of 5.5%?

Yahoo Finance says the yield is 2.29%:

Here you go P-man. The info on VTINX is from Vanguard's website. It has returned an average of 5.48% annually since its inception in 2003.

338   ad   ignore (0)   2020 Sep 5, 10:28pm     ↓ dislike (0)   quote   flag      

Patrick says
I was hoping for something with a 5% guaranteed return. I guess that's not possible these days.

Best bet is to get a 70% investment grade bond and 30% stocks fund like VTINX.

Figure over the next 20 years investment grade bonds will yield about 3% annually, and stocks will earn about 10% annually.

total annual return = 70% x 3% + 30% x 10% = 2.1% + 3% = 5.1%

Or a 60% / 40% fund like Vanguard Lifestrategy Conservative Growth Fund.
339   ad   ignore (0)   2020 Sep 5, 10:32pm     ↓ dislike (0)   quote   flag      

Patrick says
I was hoping for something with a 5% guaranteed return. I guess that's not possible these days.

I was being conservative with my above estimation as Vanguard's bond ETF is representative of the bonds held by VTINX.

The ETF (symbol: BND) earned 4.51% annually since its inception in 2007.


The best bet is to put 70% in BND and 30% in Vanguard Total Stock Market ETF (symbol : VTI).

Also, you can write covered calls for both BND and VTI.

That way you can buy the Vanguard ETF's through your brokerage instead of the mutual fund.
340   HeadSet   ignore (2)   2020 Sep 6, 7:15am     ↓ dislike (0)   quote   flag      

Patrick says
I was hoping for something with a 5% guaranteed return. I guess that's not possible these days.

True, especially when mortgages are advertised around here at below 3% and car loans for less than 2%.
341   ad   ignore (0)   2020 Sep 6, 11:32am     ↓ dislike (0)   quote   flag      

HeadSet says
True, especially when mortgages are advertised around here at below 3% and car loans for less than 2%.

Banks are still making money. Mortgage origination fee is at least $750. I suspect for car loans it is $500.

Also think about the average duration of the loans. I think mortgages usually get paid off in 7 to 8 years based on people moving.

Car loans get paid off within 5 to 7 years.

342   HeadSet   ignore (2)   2020 Sep 6, 2:04pm     ↓ dislike (0)   quote   flag      

Car loans get paid off within 5 to 7 years.

Wow, that long a term now. I always thought that one should only get a car loan for the first car when one is first starting out,and pay cash for all future cars. And even them, if you need more than 4 years then you are buying something you cannot afford.
343   Patrick   ignore (1)   2020 Sep 6, 2:05pm     ↓ dislike (0)   quote   flag      

Yes, and even if you are first starting out, you should not take on a car loan at all unless the car is truly essential to getting you to work or school.

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