patrick.net

Rubicon says

Oh boy.
First off, there is no loss. You don’t lose a penny until you sell.

@Rubicon - this is why I don't listen to too much of what you have to say. Of course there's a loss, a loss of that sweet sweet equity you're always yammering about. The less sweet equity means the less you can pull out for more RE or tax free income.

Guess what, there's no gain either until you sell. Right?

Rubicon says

There’s a big difference between a 2.75% and a 7% rate.

Who has the bigger write off AND the most upside?

Question: is it better to buy when rates are high or when they're low?

GNL says

Question: is it better to buy when rates are high or when they're low?

@GNL,

Great question. Nobody knows IMO. History suggests the Fed hiking rates; they overdo it and cause a recession; followed by housing prices fall, then the Fed cuts rates.

The housing recession cycle tends to last 3-5 years from peak to trough.

GNL says

Rubicon says

There’s a big difference between a 2.75% and a 7% rate.

Who has the bigger write off AND the most upside?

My buddy is having this dilemma at the moment. Sell, or keep and rent it out. Another friend suggested he keeps it for the kids.

Al_Sharpton_for_President says

If you plot it on a log curve, or follow the lower high curve, the bottom will be around $350-$375k? Another 10-15% drop?

NuttBoxer says

Eman says

We didn’t do anything for the rents to go up.

That was my point that you still missed. You don't have to anything, the government does it for you. If you understood what happens when free market principles are manipulated, you'd know why this is dangerous. The market will always return to a state of equilibrium, it is a law as much as gravity. The more manipulated it is, the harder the crash will be.

We live in an inflationary economy. Time does all the heavy lifting through inflation. The rules of the game have been established. You can choose to play, or not. It’s up to you. The same goes with the IRS tax loopholes. This is why real estate investors and business owners pay much lower taxes than W2 employees. Even Warren Buffett said it himself.

Rubicon says

“Q4 2022 - Median Sales Price of Houses Sold in the US: $479,500.

Q2 2023 - Median Sales Price of Houses Sold in the US: $416,100.

Loss of 13.2% or $63,400.”

Oh boy.
First off, there is no loss. You don’t lose a penny until you sell. people don’t buy and sell shortly after. They stay put for 20years and sell for 2-3times more than what they paid for. Or never sell and rent out the property.

The first guy who paid a higher house price than the next guy in your example has a lower PITI per month.
There’s a big difference between a 2.75% and a 7% rate.

That first guy who bought the peak smiles everyday with his ~3% rate. We might not see such a low rate for a decade.

I don’t know if we will see low rates again, but I wouldn’t be surprised to see it again in a decade.

It’s brutal to buy in the current mortgage rate environment with high prices. It’s a supply/demand imbalance at the moment.

I bowed out of the apartment market since 2019. I’m also bowing out of the flip game. Keeping the powder dry and wait for better opportunity. It may come, it may not. This is not the time to be aggressive IMO.

GNL says

Rubicon says

Oh boy.
First off, there is no loss. You don’t lose a penny until you sell.

Rubicon - this is why I don't listen to too much of what you have to say. Of course there's a loss, a loss of that sweet sweet equity you're always yammering about. The less sweet equity means the less you can pull out for more RE or tax free income.

Guess what, there's no gain either until you sell. Right?

He has a point with respect to the lower mortgage payments with the lower rates. These owners don’t have to refinance even if they’re underwater. Current buyers at 6-7% mortgage rates are “hoping” rates will come down in the coming years so they can refinance. Two different kinds of pain. 😅

GNL says

Question: is it better to buy when rates are high or when they're low?

Don't overpay in either case.

Eman says

He has a point with respect to the lower mortgage payments with the lower rates. These owners don’t have to refinance even if they’re underwater. Current buyers at 6-7% mortgage rates are “hoping” rates will come down in the coming years so they can refinance. Two different kinds of pain. 😅

It's a job loss question. A lot of people started to figure out they could live on 1 income during covid. Or a spouse doing just part time work. Factor in that no one wants to work and there's a shit ton of jobs out there. Basically they'll stay in their current home if they can afford it. There's no point in moving.

The average was something like 7 years in a home a decade ago. That's changing dramatically I believe. I wouldn't be surprised if it's 10-12 years now. That alone will reduce inventory after very little was built after the housing crash outside of hipster place. If you don't move that mean no used houses for sale. Little is being built.

Interest rates matter for sure, but I personally don't think that's as big of a deal. It will stall the market and drop it in some places. But ultimately any "crash" would be due to job losses or some other catastrophic event like war.

gabbar says

GNL says

Question: is it better to buy when rates are high or when they're low?

Don't overpay in either case.

Good grief, of course it matters. Higher interest rates "should" mean lower house price. Then when rates go down refinance and prices shoot up. You bought at a lower price than guy with low the rate.

A commenter on here is just a bit slimy.

1. We've been talking about housing on this thread in terms of investing, not as homeowner but, one particular commenter goes back and forth between investor and homeowner when it helps him make his point. That is dishonest.
2. People buy the payment, not the price. How many times have we heard this? So YES, interest rates matter. If I can afford a home at x price and x rate, if either one of those go up I can no longer buy the home/investment or make the payment.
3. If rates do not matter why is @Eman backing out right now? I mention Eman because I believe he is the one with the most credibility. Just my opinion.
4. If rates do not matter why are RE transactions and prices down?
5. If rates are high, price must be low for people to afford the same payment.
6. The best time to buy is when prices are low regardless of rates. But best when rates are high and prices are low. Haven't we learned that prices shoot to the moon when rates go/are low? That means if you bought low price with high rate, you will make out very well when rates drop like a rock because price will shoot to the moon BECAUSE MORE PEOPLE CAN AFFORD THE PAYMENT CAUSING MORE COMPETITION FOR EACH HOUSE.
7. Yes, of course inventory matters also but, haven't we agreed that inventory is low because people do not want to give up that sweet sweet low rate? And why do they not want to give up that sweet sweet low rate? Because they cannot AFFORD the high price at the high rate so they will have to settle for something less desirable.
8. Home prices or rates have to come down for RE transactions to go up. If RE transactions stay low, we will most likely hit recession. What does recession do for RE and jobs? This is how I believe residential RE will cause problems...low activity.
9. Which is more likely to happen first...rates drop or prices drop?
10. Where is my thinking wrong? Yes, I understand that over time house prices rise but people do get caught in the middle of these changes.

I think we're at an impasse. We'll just have to see how it works out. I've made no prediction but I do lean towards a recession.

I’m pausing b/c the risk/reward is not quite there although I see people, who are very smart, are still making deals.

There’s a deal that I’d love to buy for $8M. Seller bought it a couple years ago for $13M and is willing to sell it for $10M now.

Eman says

I’m pausing b/c the risk/reward is not quite there although I see people, who are very smart, are still making deals.

There’s a deal that I’d love to buy for $8M. Seller bought it a couple years ago for $13M and is willing to sell it for $10M now.

But @Rubicon said RE never goes down. :)

This is why I like to exchange info with my besties. 5 brains are better than one.

Say a deal could be strike at $9M. Put $3M down and finance $6M for a 7/1 or 10/1 ARM. In a decade, there’s a “high probability” this will worth at least $15M given someone is willing to pay $13M for the land a couple years ago when borrowing cost was cheap.

$6M in appreciation assuming the principal pay down over the decade will offset the selling costs and ignoring the cash flow, we’re still looking at 200% return in a decade. If history is any indication, the ROI will be much more.

I don’t worry about stuff I have no control over. I focus on what I can control. As Warren Buffett said “Price is what you pay. Value is what you get.” I want value when I buy. It provides a margin of safety if/when the market takes a turn right after I purchase

Rubicon says

GNL says

Eman says

I’m pausing b/c the risk/reward is not quite there although I see people, who are very smart, are still making deals.

There’s a deal that I’d love to buy for $8M. Seller bought it a couple years ago for $13M and is willing to sell it for $10M now.

But Rubicon said RE never goes down. :)

Correct. Residential RE (condo’s and SFH’s) go only up over the long run. Yeah, sure, dips in between but they don’t matter. Most people hold RE for the long run. You don’t buy/sell RE like a stock.

Don’t know anything about commercial. And very little about multi-family.

You have a good mindset of dollar cost average when it comes to real estate investing. I honestly don’t have it so I always look for value.

My buddy also likes newer housing. All the stuff he kept are newer construction, built in 2005-2007. He flipped/sold all the older products. He regretted that decision now.

The house he lived in Dublin was a newer build, which he bought as a short sale during the housing crash. The San Jose house, which is also a newer build, was bought at a deep discount at auction in the last downturn. He also has a few newer build rentals. He wish he had held onto more of them.

Eman says

We live in an inflationary economy. Time does all the heavy lifting through inflation. The rules of the game have been established. You can choose to play, or not. It’s up to you. The same goes with the IRS tax loopholes. This is why real estate investors and business owners pay much lower taxes than W2 employees. Even Warren Buffett said it himself.

We live in a predatory economy. The most vulnerable are treated as less than human, and the rest of us aren't far behind. The design is slavery. They use inflation to appeal to our greed, as we think we make more money when the same or inferior assets go up in price(but never in value). Meanwhile we work more for less, our quality and quantity of life degenerates, but through propaganda, divisiveness, and selfishness they keep us hooked, screwing over each other, and ourselves for a place under the table hoping to catch their scraps.

I've paid 17% or less most of my life, even after I high six figures. Only recently have I gone up to about 20-21%. I know people who own property, and work for themselves, I've never found that pay less than I do.

Eman says

As Warren Buffett said

Warren Buffett is a pedo. You think the Franklin Coverup happens in his backyard without him being involved...

NuttBoxer says

I've paid 17% or less most of my life, even after I high six figures. Only recently have I gone up to about 20-21%. I know people who own property, and work for themselves, I've never found that pay less than I do.

You're on/near the west coast though. That's not reality East of the Mississippi where most Americans live. Not looking it up, it's on auto pay, but my mortgage is $1,300 roughly. 1/3 of an acre. In ground pool. Good schools. You can't even rent a 2/1 here for less than that. 1 hour to major airports. Not interested in Chicago, but that's close. Wisconsin is nicer than most people think with lakes and recreation.

If you own for 10 years, primary residence, you'll make money even if you buy at a peak. You have to be handy. I'm not relying on a landlord to take care of me if something breaks. They tend to do a shit job. I also like nice things. We all die at some point, enjoy it while you can. Owning you can dump and run if you really want and it's a credit hit if you hit hard times. Evictions are a double whammy. Hard to find a new place and a credit ding if they report it. I'll always choose owning. WHEN your landlord decides to sell your fucked as well.

Renting is a lose/lose if you need stability. I'm not trying to change your mind. I'm just saying as an owner, it doesn't make sense to me having done both. You do you. Fact is there are cheaper places to own by a long shot outside of CA or even AZ or any West of the Rockies state, CO included.

,

The invisible laws that led to America’s housing crisis

https://www.cnn.com/2023/08/05/business/single-family-zoning-laws/index.html

In the 1910s, US cities began enacting policies that would shape neighborhoods and, unintentionally, lay the roots for the severe housing shortage today: single-family zoning laws.

Zoning laws, at their most basic, follow a simple concept. In one part of town, only factories can be built. In another section of town, only apartment buildings can be built. And in a different part of town, only single-family houses can be built.

Single-family zoning laws are unknown to most Americans, but they were instrumental to the expansion of urban areas and the suburban ideal of owning a home with a front porch and backyard on a half-acre plot of land post-World War II.

,

Rubicon says

I’ll predict, In the next 5 years I am gonna bring cash to the table

This really is the crux of RE debates. Most people aren't good at saving large sums generally needed to buy a home or investment property. Even an FHA loan at 3.5% on $400k you'd need $14k for down payment. That's not including closing costs and other fees Most of the country lives paycheck to paycheck and have little to no savings. They may just put money in a 401k if that.

I'm not saying this is nutt, but from my experience after 15 years managing a brokerage, this is the #1 issue that people stay in the renter class. Many renters in Chicago land area where I worked struggle just to come up with a security deposit. And again, I'm not saying all people, but it's the majority I've witnessed.

People also spend money on stupid shit. In my town there's a lot of people I know roughly what they make. Yet they have 2 cars, a $20k side by side UTV and other stupid stuff that they really can't afford. So on top of their $1,500/mo mortgage or rent, they have another $1k/mo in other debt payment. That's $30k after tax money. You have 3 kids. Food, groceries, going out, gas and vacation, etc. is another $1k a month at least. Kids activities, school fees, etc could be another $200-300/mo. Clothing. New shoes as kids grow. Lawnmower. Utilities. On and on.

Median household income is $70k roughly. https://www.nerdwallet.com/article/finance/median-household-income#:~:text=The%20national%20median%20household%20income,to%20over%20%24150%2C000%20in%20others.

In my above example you're looking at over $40-50k of after tax expenses. This is how half the country lives. And it's why there will always be renters. IF they can get any savings over time they're probably priced out again. The key is make more money. There's really not much else to it. In my above scenario if you wanted to get into investment property you'd definitely need to be above the $150k income range. Or hope family money falls your way. Or someone blindly gives you a loan at probably an insane interest rate. RE is not easy at the start even for a primary home.

Eman says

As Warren Buffett said “Price is what you pay. Value is what you get.” I want value when I buy. It provides a margin of safety if/when the market takes a turn right after I purchase

But @Rubicon says buy now, buy always, buy at any price because price and rates don't matter.

GNL says

Eman says

As Warren Buffett said “Price is what you pay. Value is what you get.” I want value when I buy. It provides a margin of safety if/when the market takes a turn right after I purchase

But Rubicon says buy now, buy always, buy at any price because price and rates don't matter.

@GNL,

Each person has their own way of investing/buying. It seems like his approach is dollar cost average. I don’t have a W2 so my approach is different. I need “value” so I can recycle my seed capital in a short amount of time.

@NuttBoxer is also looking for “value” when it comes to renting and waiting to buy. He’s willing to compromise on certain thing to get the value.

@Clambo like his freedoms and his stock dividend/growth play. Everyone is different.

I would love to buy a house because it would mean a number of huge positives. Prices have corrected to what is realistic, so my exchange of labor for time gets me a fair return in a house purchase. The economy looks stable enough for me to justify the up front cost in savings I will recoup by owning. And most of all, we have found a place we are willing to commit to staying for more than a few years.

Rubicon says

GNL says

Eman says

As Warren Buffett said “Price is what you pay. Value is what you get.” I want value when I buy. It provides a margin of safety if/when the market takes a turn right after I purchase

But Rubicon says buy now, buy always, buy at any price because price and rates don't matter.

You could have paid peak price and pay less than someone who buys at a lower price today because rates doubled.

I am glad I got both, pre Covid price and super low rates because I did the opposite of what perma bears told me: they told me the market would crash and I shouldn’t buy. Lol

Don’t be surprised to hear the market is going to crash this year. They tell you this ever year since 2014.

Actually, some of my friends thought real estate prices were too high in 2013, and they stopped buying. Then they thought prices were ridiculous in 2015.

They finally snapped out of it. One person “bit the bullet” and bought his house in January 2016. He’s 38 now. He went on and syndicated 27 rental units in 2021-2022. Another also snapped out of it and kept accumulating more real estate in 2017 and 2018. She was lucky and refinanced her apartment in early 2022 at 3.15% before interest rate took off. She’s quite happy and comfortable now.

I understand your point about “timing the market” although most of us will try myself included. 😅

Eman says

I understand your point about “timing the market” although most of us will try myself included. 😅

I assume most of the interest rate timing is arbitraged out of the market already. When interest rates are 7%, people with cash may buy houses for cash instead of parking their cash in 4% bonds or in speculative stocks or commodities. With today's general inflation rates, a house offers a decent hedge.

Another thing to consider is that a 7% mortgage rate is excellent when compared to general inflation.

Rubicon says

“7. Yes, of course inventory matters also but, haven't we agreed that inventory is low because people do not want to give up that sweet sweet low rate?”

No. This makes zero sense:
When a seller sells a house he is traditionally a buyer also.

You sell one: +1 to inventory
And you buy one: -1 to inventory
Net inventory doesn’t move.

Inventory increases if more people die or due to massive unemployment or due to builders building a lot more.

More activity does increase inventory. During that matched sell/move/buy scenario, there's a month or two when the house you are exiting is for sale and the house you are buying is also for sale. If the average person stays in a house for 7 years and the average house is on the market for a month that means 1 month out of every 84 months the house is on the market --> 1.2% of all houses are for sale at any given time. If people stay in houses for 10 years, that drops to 0.8% of houses for sale at any given time.

The numerator of that equation (months on market) also swings the numbers; if houses sit on market for months at a time, inventory will be seen as high. I've been watching the $1MM to $3MM houses in Florida for a few years. There, asking prices have been dropping as these behemoths sit vacant for many months; some, even years!

I'm wondering if home ownership (verses renting) will follow the model of many other aspects of life over the last hundred years: mass production and specialization. In the most obvious example: We no longer grow our own food. Instead, a small number enormous farms with highly specialized equipment efficiently perform the task and have freed up 95% of the country's population to do other things.

In the case of real-estate, the specialization would take the form of more rentals and fewer owner-occupied houses.

I'm seeing more and more homeowners who are incapable of maintaining their own home (other than getting on the phone and paying someone else at great expense). If not for the (seemingly) ever-increasing price of real-estate in this area, owning a home would be much more costly than renting and letting a professional manage the maintenance more efficiently. I dated a woman who owned a dozen rentals and managed another twenty for other people. She spoke Chinese and Spanish and had a slew of personal contacts to fix or maintain at 1/2 cost just about anything related to properties.

The reason I mention activity (which I also mean transactions) is because churn helps the economy.

SunnyvaleCA says

Another thing to consider is that a 7% mortgage rate is excellent when compared to general inflation.

Honestly it's just an average interest rate. I think many of us are 60 or under. We got spoiled.



It stings to see them go up so much, but most of all our adult lives they've been historically low. This is why I don't get some of the doom and gloom. It will pause housing inflation to an extent but there are just too many other factors. NOT BUILDING being the biggest where I'm at. Houses last days in my town still unless they're shit holes. Anyone building in town, 4 homes over the last 3 years, is moving from another home that they sold. Inventory can't increase unless it's in another town or city.

GNL says

Question: is it better to buy when rates are high or when they're low?

@GNL If you can pay cash, it's way better imho to buy when rates are high.

Then:

1. You personally don't have to pay those high rates.
2. The house price you pay will be lower because high rates push prices down.
3. When rates eventually fall, you should have increased equity from the falling rates pushing prices up.

Patrick says

1. You personally don't have to pay those high rates.

This is true, but I'd still get a loan and save all the other cash for other opportunities and still have a roof over my head.
Patrick says

2. The house price you pay will be lower because high rates push prices down.

I don't think it will in many markets. You median home price in most of flyover country is probably $250-300k. It hits the expensive markets waaaaay worse than most of the country. Going from a 3.5% to 7.5% isn't all that big of a deal on a $300k home. And if they're not building new ones, there will be no downward pressure.
Patrick says

3. When rates eventually fall, you should have increased equity from the falling rates pushing prices up.

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks). Obviously don't be a moron and leverage yourself to the gills, but if the payment goes down because interest rates do give yourself a tax free paycheck of $20k or whatever your equity is. That's what investors do. They then roll it into another cash flowing property or flip.

This why owning is so important in my opinion. Every 10 years you have an opportunity to cash out refi and your house pays you tax free money. You can't do that renting. I don't even care about the rent to own comparison at my stage in life. If you're going to be there 10 years, buy it. Principle is savings and it will almost certainly appreciate. Just don't go overboard buying more house than you need. Or some hipster area.

WookieMan says

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks).

If you are taking this HELOC from your residence, it is not "other people's money." It is a loan you have to pay back with interest, and for most of the country that interest is not deductible because of today's high standard deduction. No different buying that new truck with HELOC than financing it through Ford Motor Credit.

HeadSet says

WookieMan says

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks).

If you are taking this HELOC from your residence, it is not "other people's money." It is a loan you have to pay back with interest, and for most of the country that interest is not deductible because of today's high standard deduction. No different buying that new truck with HELOC than financing it through Ford Motor Credit.

If taking a HELOC for investment, it's assumed the new investment will produce enough income to repay the HELOC. Now you have 2 investments (RE) and you didn't have to come up with any cash. 2 REs going up $20k is better than only 1 RE going up $20k.

This is why I've been making fun of @Rubicon when he said he didn't care if he lost equity if/when RE goes down. Laughable because in the next breath he talks about using equity in his RE to purchase more RE. This is but one reason I think he is a chest pounder. @Wookieman and @Eman are better to listen to.

If you can save by renting, you should rent. If it's cheaper to buy, you should buy. The calculation is not very hard, but there can be a lot of details:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Basically, compare the rent to the current interest rate. Rent and interest are the same kind of thing. If the rent for a house is not in line with the interest payment on what the house would cost to buy, something is wrong - and there is an opportunity.

The stock market has almost always been a better bet than housing, though not leveraged. That's OK, because leverage is dangerous.

“I’ve seen more people fail because of liquor and leverage — leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” - Warren Buffett

Rubicon says

“This is why I've been making fun of Rubicon when he said he didn't care if he lost equity if/when RE goes down. “

You don’t lose equity just because your house price goes down. That’s like noob/rookie level. Homeowners don’t treat their house like a stock and sell shortly after they buy. Do you own a house? Do you tell you friends: my Zillow value went dont a % point. They’d laugh at you. Have you ever heard someone writing off an unrealized loss on a house?

In most cases you make money in RE if you hold on for the long run. Believe me kiddo, nobody is going to go for your “I lost equity BS statements”. Just wake up, stop renting, get yourself a house and forget the noise. No reason to overthink this and make the same noob comment over and over again.

I'm not a RE investor and I do own a mortgage. But again you missed the point. I'm pretty sure you said you shouldn't be too concerned if your investment doesn't produce enough to pay the loan even. We are unquestionably in a unique time when it comes to RE though. The government is out of control and causing all kinds of problems. I do believe most of these problems all tie together. And you keep going back and forth between homeowner and investor when I'm debating the investor position. Yes, even though I'm not an investor. LOL

Patrick says

“I’ve seen more people fail because of liquor and leverage — leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” - Warren Buffett

Depends how you invest the money saved by renting and not buying. I'd at least put it in a 60% stock / 40% bond fund.

.