patrick.net

Where’s X when we need him?

If the reference to Peter Paul and Mary didn't ellicit an X rant, he must be offline.

ellicit = elicit

Another quote I've heard a few times:

"Your current rent may be only half of what you'd pay monthly to own the house, but think about how fast inflation will make the rents catch up".

Reality check:
The time required to inflate an amount to double it is
@ 5%: 14.5 years
@10%: 7.3 years
@20%: still about 4 years

In some corners of the Bay Area, the current asking rent is IMHO no more than a third of what would be required to buy the house (no money down). Here are the numbers for catching up to that.
@ 5%: 22.5 years
@10%: 11.5 years
@20%: 6 years

Let's do a little thought experiment:

Let's imagine two houses right next to each other. One is for sale and comes at $1,000,000 after all closing costs and whatnot. The other one is for rent. The asking rent is $3,000 per month.

Both Mr. Owner and Mr. Renter have $200,000 at their disposition. Mr. Owner buys the house for sale with 20% down and gets a $800,000 30 year fixed mortgage at the low, low rate of 6.5%. His monthly PI payment comes to $5056. Let's add property tax, maintenance and insurance and subtract the tax deduction. Let's say it comes out to about $6,000 per month for Mr. Owner.

Furthermore, let's say the rate of inflation grows to a mind-boggling, hard asset-friendly 10% right after Mr. Owner secures his loan at 6.5%. As we've seen, at that rate of inflation, Mr. Renter's rent will catch up to the cost of owning in a short 7.3 years.

Now let's see where we stand in those 7.3 years:
Mr. Renter happily collects 11% interest on his $200,000 (using TIPS or something), growing it by 114%: $428,500. Mr. Renter also saves some money because his rent catches up slowly. In those 7.3 years, he ended up paying only 67% the $$ in rent than what Mr. Owner has spent to own. Let's add the savings (a non-trivial $162,500, which, for simplicity, did not collect any interest) to Mr. Renter's balance, making it $591,000.

But what about the equity that Mr. Owner has now amassed? Well, his principal payments have decreased the loan balance by a cool $80,000, putting his overall balance to $280,000. Now, the big question is: Has Mr. Owner's home value increased by another $311,000 get him on par with Mr. Renter?
Let's see what a buyer would need to spend to take the house off Mr. Owner's hands to see whether that's plausible:
A $1,311,000 30 year fixed mortgage @12% (remember, inflation is now a hard-assert-friendly 10%!) comes out to a monthly payment of $13,485.
Hm. Wait. Doesn't Mr. Renter now pay $6,000 per month in rent for the house next door?
Hmmm... If credit is not as easy then as it is today, maybe Mr. Owner's prospective buyer won't be able to spend much more on mortgage payments than the prevailing rent. For a $6,000 monthly payment on a 30 year fixed @12%, the buyer can get no more than about $580,000 from his bank and thus cannot pay Mr. Owner more than that.
Mr. Owner's mortgage balance is still $720,000, so in that scenario his overall balance is now a negative $140,000. Ouchie. Mr. Owner's only solace is that the $731,000 difference to Mr. Renter's balance is worth a lot less than 7.3 years ago.

Looks like maybe inflation won't bail you out after all (or your time horizon has to be very very very long).

Bap33 Asks:

What powers does a broker have an agent don't?

The basic difference is that an agent needs to be working under a broker, while a broker can work alone.

Then Owneroccupier Says:

"Brokers have more access to financial resources (bank financing, deal structuring skills, contacts to private party investors or buyers) that agents don’t usually have. Brokers’ worth is in the number and quality of industry players they know to make a deal happen, treat them as a relationship broker. Relationship / networking is something you cannot displace easily."

Many top real estate agents (often people who have been in the top 1% for years) have a great deal at a big firm never become a broker. Most top agents are brokers, but a large amount are not.

"realtor agents are practically as useless as travel agents and they will go extinct very soon."

I agree that new agents are useless and anyone that works with an agent who has been in the business for less than five years is foolish.

Owneroccupier,

When I lived in Belmont, I tried to do something similar for the middle school. I offered to teach a kind of real-world economics and finance exercise to help kids realize why they need to think about economics and know how to understand basic finance. There are a couple of really good, exciting, fun-to-learn lesson plans developed at UC for grade school kids.

I was told, quite politely, that they had no room in their lesson plan schedule. They blamed it on the standarized testing regime (although I'm not sure I really buy this excuse). They also said that students could take an econ course in high-school if they chose, so it was already covered. When I asked the admin if she knew how to figure out her payment for her car or house she said "I don't understand, it's printed on the payment coupons. Of course I know what the payment is."

qed (although they probably don't do math proofs anymore in school either, so even qed is probably a lost art)

I have three RE agents who send me listings daily. I heard from two of them last week via email. One of them said that houses are moving quickly in the Silicon Valley and that the only houses sitting on the market are the ones that are over-priced (hmm, aren't they all really?). The other realtor told me that he is receiving multiple offers on his listings and that I better get into gear and get pre-approved. He also asked me if I've been watching the news because local stations are talking about the hot RE market. Is this true? I don't watch the local news at all.

It strikes me as odd that these realtors claim to have so much activity but both of them sent me emails this week trying to scare me into buying. This is my biggest problem with many realtors - they use fear to manipulate. (I do have to give credit to my third realtor because he never bothers me and has been sending me listings for two years now.)

OT - I drove by Vallco yesterday (yes, I'm obsessed) and it looks like those condos are really coming along. They literally sprung up overnight.

As much as I am disgusted by these sales pitches and the unethical behavior on the part of many realtors, there is an axiom that I believe in strongly:

*Freedom comes with responsibility*

This country is fast becoming a place where people are losing their freedoms at an alarming pace (but only a few of us are alarmed!) and at the same time, people don't want to take any personal responsibility at all.

No matter how devious the sales pitch, there is still no coercion or force exerted by the realtors. If I (and many others here) could think for ourselves and resist the pressure, then so can everyone else. In a free society, "Caveat Emptor" always holds true. It is the buyer's fault for not doing enough thinking before commiting to pay millions of dollars over the next 30 years.

If the realtors are outright lying and provably so, then prosecute them on that basis. Otherwise, stop blaming them and start laying the responsibility where it belongs - on the doorsteps of the sheeple.

Could most the realtors have been ethical? Yes.

Still, if you want to be free, you have to learn to take responsibility for your decisions. And, ultimately, it is YOUR decision to buy or rent.

This isn't a cliche, but I think it fits.

I drove by an open house today in NW Phoenix.

I took a quick look around then asked for the flyer, which
didn't list the price of the house.

The real estate agent lady told me the price of the house but quickly
followed up with, "Of course, the price is negotiable."

I looked at her and asked, "How's business."

Her answer? "................................"

Silence!

Then a smile that quickly faded into fake smile
and then into a blank stare of hostility.

I quickly scurried off to my truck and tore ass out of there.

Weird scene.

Bap 33, ha, ha that was hilarious!

She wasn't too bad looking, so maybe you're right!

Ha, haaa!

Please stay away from the sophmoric argument that Realtors and Mortgage Brokers created this mess. Ulitmately, human nature is to blame for this mess we are in!

Ok, for the last time (I hope):
I DON'T THINK THAT REALTORS ARE PRIMARILY TO BLAME FOR THE HOUSING BUBBLE.

I agree that the Fed, the GSEs and politicians had FAR more to do with creating this mess by pumping massive amounts of easy credit into the system, all but eliminating default risk for mortgage lenders, and creating perverse tax incentives for RE speculation. And the buyers themselves shoulder much of the blame for being ignorant, greedy, math-illiterate sheeple.

Yes, I know that Realtors are basically used-house salesmen/women. Even so, there are a lot of irresponsible agents out there making a bad situation even worse by preying on sheeples' ignorance and fear. On top of that, the private MLS system is designed to restrict competition and is rife with abuses. This thread is designed to poke a little fun at such irresponsible license with the truth.

Ok, back to fun with Realt-whore bashing now!

@ha ha,

Of course I agree that the "real" CPI (stuff real people actually need to buy) is considerably higher than reported. Even so, a 10% increase per year?? You'd have to be either pretty ballsy or pretty indispensible (or both) in today's job market to "demand" that! I wish you best of luck, though... ;-)

"Prices have never fallen...They have flattened for a short time...but they have always gone up>" Now, when I walk into an open house and inform the salivating reatl-whore that I'm waiting for at least a year before I buy again...I just raise my hand(as in talk to the hand) and politely say"I don't want to hear it...We obviously have different opinions." Just because I'm there, the realturds try to subject me to their BS lies! I'm lucky. I sold in Aug 2005 for a good deal of dough and I'm hangin onto it for a while while I rent. I'm glad to find you guys...because prices haven't fallen much here in LA...but houses are staying on the market much, much longer. I believe it will really start here in Studio City after March 28...when the Fed meets.

With the housing bubble starting to burp air, will the Federal Reserve ruin the U.S. dollar by trying to stave off a collapse of the mortgage debt market? How drastically with the Fed act?

make that "How drastically will the Fed act?"

With the housing bubble starting to burp air, will the Federal Reserve ruin the U.S. dollar by trying to stave off a collapse of the mortgage debt market? How drastically with the Fed act?

To combat a deflating bubble, the mortgage interest deduction tax reform can be pushed to help homeowners.

Most US mortgages are well below 400K and many homeowners do not itemize. Imposing a 400K cap while changing deduction to a tax credit will help many.

I was born and raised in the BA...In SJ on the east side in the hills by Alum Rock Park. It's so much like LA... a big smoggy pit..without the entertainment industry.
We had a big old spanish style house my parents bought for $60,000 and sold years later for $120,000. It was by the 16th hole of the Country Club and had a pool, tennis court, and a beaut. view. I should zillow it but I can't remember the address.I guess zillow is now a verb!
I think the fed will be careful about raising rates to fast...Bernanke dosn't want to blow it too soon!

I think the fed will be careful about raising rates to fast…Bernanke dosn’t want to blow it too soon!

Or he can first blow it and then ease aggressively to save the financial system from damages.

Do you think Bernanke will blow it sooner rather than later? I mean, with this scenario, he's in for quite a challenge. I'm no expert, but he seems to be in for a lose-lose situation.

The problem that I have w/Realt-whores is that EVERYTHING that comes out of their mouths is a tired, meaningless cliche'! There is no original thought at all. My wife and I have been homeowners for most of the 23 years we have been married and realt-whores STILL address us like we were first time buyers for chrissakes! It's a total "dumbed down" emotional appeal sales schtick that just drives me insane! The smarter (less dense) ones keep quite unless you ask a question and then don't follow it up with a circa 1950 "close". ABC. Always Be Closing. Or; Answer, Benefit, Close.

Actually the roof was replaced in 2002, that also helps with your utility bills, where you thinking about making an offer today?

With all of the exciting variables that RE has to offer, they "fall back" on emotional appeal every time! They're too lazy and can't be bothered to really know the listing beyond the things that you can see for yourself. Ask them something specific and you get a quick reply that is almost always followed up with a question of their own. Everyone else in sales has grown, evolved and improved. Do we really need any further evidence that this is a monopoly?

need 2 leave ca,

Thank you! Great observations. I had an appointment with a young mort. bkr. and he started telling me what a "sales stud" he is. I didn't really wail on the poor guy but I did make it clear that there is a vast distinction between working with a clients existing equity (real $$$) and selling, how is is that you put it? "A lifetime debt prison"? He looked shocked frankly as if no one ever had the guts to challenge his "debt=wealth" schpeel.

Happily Renting makes some good points but absolving realt-whores and mortgage brokers of any and all guilt isn't one of them. The thing that just amazes me is that realtors have gotten so defensive when they are updating price reductions or fielding a question with the slightest hint of a "bubble" in it! I've had several out right rude responses that seem to imply "then obviously you are not a PLAYER". If you're not willing to play, why are you asking me stupid questions? Stupid questions? Stupid, like why is this home selling for 50% more than it just sold for 2 years ago? So anyone that questions why an unremarkable home that sold for 400K 2 years ago now sells for 600K just doesn't get it? O.K, I'm not a player and I don't "get it". Why are they burning so much energy defending the bubble? Embrace the crash, encourage low ball offers and get this thing over with!

Liz in Long Island,

Or is it "on" Long Island? It would appear that there is a new wrinkle in the RE Bubble. No longer will couples fight over the profit from the proceeds of the sale they will now fight over who gets to "write off the loss"?

The problem with falling for someone that is a "horse person" is that they will always love their horse more than you. Were they horse people or "horse property flippers"?

This last weekend was weird here in Alameda. Everyone has been saying that inventory has gone up, but in the case of where I'm living, it seems that in the last 2 or 3 weeks, the inventory has SKYROCKETED. We're talking sometimes miles on end of having the ability of seeing at least one or 2 "for sale" signs within view of one another. We bike ride all the time, and recently, we've noticed a phenomina of people parking dumpsters out front, and basically emptying the contents of their houses into the trash. Good stuff. Like TV's, sofas, chairs.. you name it. At the local Salvation Army, people are donating VERY nice furnishings. Last week.. a $6500 leather couch for $800. In the corner, an almost new Sony Trinitron flat screen TV for $700. These are things people are DONATING. You never saw this stuff last year. We see lots of old people with cans of cheap paint on ladders painting their beat up houses. Then the next week: For sale! We saw an old guy the other day just about shoveling all the crap he had collected for what looked like decades out of his garage. 2 weeks later.. For sale! The neighbor's house was painted in less than a day by some fly by night spraying outfit. Some ugly hideous green color. They got overspray all over the windows.. no matter.. For sale! It's almost unsettling to me. The worst part is that while there is talk of a slowdown in sales, it doesn't seem to bother these people. Nope.. the prices they're asking are as high as ever. Now we see open house signs on top of cars, with balloons, with the driveways sitting empty. You get the real feeling now that there are a lot of people where we live who are just getting the hell out of dodge. Didn't see a soul at any of these houses. It will be interesting to see what will happen in the coming months.

One last thing: The weather. I sort of wonder that with the absolutely crappy weather we've been having all winter long( we have gotten more rain than Seattle 2 yrs in a row) will sort of provide more momentum in putting a dramatic halt to home sales, further erroding consumer confidence, and therfore causing a faster depreciation cycle. Just a thought.

About those retirees..
Well I know that quite a few of those retirees are in good condition, but those are the people who stayed in the same house for 40 years, lived in less exotic locations, as in not NY or CA, and saved by not buying overpriced toys like bimmer and boats.
On the other hand, I wonder just what the future will be like for my generation( 30-something) For example, I drive a truck with almost 200k on the speedometer. Someday it will require more extensive repairs than I care to sink into it. I looked at another bargain-basement stripped toyota tacoma with cloth seats, a 5 speed, and a 4 banger engine. I paid about $9500 for my current truck, a 96' Tacoma back whe it was brand new. The price of the new version of my truck now sells for close to 17k. The price almost doubled. You can forget the "nicer" model that's bigger, nicer, and with a V6. That one is almost 30k! A smallish truck for 30k?! yet you see all kinds of people who by guessing at the number in the Wal-mart parking lot driving them, who make perhaps less than I do. Sure, I could afford to buy one, even the nice one at that with all the whistles and bells. But that would leave little left over to save and invest.
I basically avoid buying anything non-essential these days. I am in a constant state of monetary saving not because I am cheap, but because with housing prices high, I may either have to wait, or move somewhere else that doesn't have as good a job market, hence I would want to have enough to buy a house outright in that location to counter job prospect issues. So here I sit, with signifigant savings, not spending a penny,and therfore not contributing to the economy.
I think the unseen effects of a bad economy will be contributed by people like myself, the younger generations that feel insecure about the state of things in this country along with the lost faith in procuring basic life ameneties, and refuse to buy into it.

Liz,

It is difficult for me to be objective about horse property. My older sister as well as my ex-sister-in-law have contorted family budgets, depleted inheritances and short changed children that were not into horses. Everything goes into the horses. Stable fees and boarding, vets bills on and on in addition to the all of the other black holes of "acreage" add up to being destitute (along w/your horses of course). I'll pass.

Well SFwoman,
actually, I have looked at a number of used toyotas. The problem is that it seems that dealers mark them way up. For example, I looked at a 2003 tacoma last year. 34,000 miles, with an original cost of 15k, on the lot for 13k, a 2k reduction. That and used toyota trucks seem to be almost impossible to find. They also made a huge change in the model in 2005. I'm willing to wait another couple of years until a few of the new models are used and hopefully cheaper. I know quite a few people with over 400k on their toyota trucks so who knows.
On the other hand, Ford trucks are almost a steal used. My brother has a 94' ranger with almost as many miles as my truck. He abuses the heck out of it, but it has never had a problem. Because of Ford's notoriety, they sell for way less, but then again, I'm familiar with the drivetrain of my truck so I can always fix it myself Vs a Ford which I have little experience with.The Ranger's engine came from a German Ford design, so they are diffrent animals. Took me all day to change the plugs on my brother's Vs mine which takes 10 minutes.
The point I was ultimatly bringing up was the potential stop on economic growth a younger, less willing to buy population could have. Of course I also know a ton of people my age who have yet to save a penny, but anyone my age with a family is totally opposite and buying the Safeway shampoo.

I love the idea giving your best shot to the realt-whore. Perhaps next time one approaches me with their BS I'll just say..."My Dad always told me about buying when the market is turning...never catch a falling knife...it's best to step away and watch it till it lands"

DinOR,

Do we really need any further evidence that this is a monopoly?

I thought that issue had been settled, resettled, and post-settled, and post-resettled. Let it be writ in stone.

6% commissions for nothing more than maybe 1% worth of value and 5% worth of having illegally collusively closed MLS systems and a nifty little (tm) symbol.

Sidebar:

The 10-yr has surpassed 52-week high this morning:

http://finance.yahoo.com/q?s=%5ETNX

Driving back from Sacto yesterday evening in the pouring rain, I saw a couple of SUVs trying to get mud on their tires. It was past Fairfield off I80, people were trying to go off roading in their SUVs on someone's field. What people have to do to pretend that they ever use the 4WDs on their SUVs.
Back to bashing the realt-whores.

http://news.yahoo.com/s/ap/20060306/ap_on_bi_ge/housing_slowdown

This is sort of a cliche. Why do realt-whores put their picture on everything in sight?

My favorite are the realtor face shots on shopping carts at my local supermarket. Big, blinding smiles. It's almost like: "pick me! I'll be the best student body pres. ever" And, given the amount of dog lovers up here, I've also noticed many realtors pose with their dogs. I suppose it's important we know you own a dog, because that makes you a good person, a good realtor, etc.

My favorite clichéd brain-fart sofar:
"Real estate in M_____ is a great deal--at anyprice!"

Hey Dinor,
It isn't just Dallas. Austin, Raleigh, Nashville.. even Memphis are all having this massive influx of Californians. It really bothers me because the whole time I've lived in CA( I am from TN) I've chuckled to myself that I can always get out and buy cheap elsewhere... except now that Californians and New Yorkers have fucked themselves into a corner, they're now flooding other cities, like rats fleeing a ship.
My hope is that once CA's RE crashes, the rest will have a domino effect in other cities across the country.

For the WHOLE FORUM... for the sake of an interesting change of subject, Lets say that for some reason, everything above that HARM mentioned as cliche's become true: Housing prices go into the stratosphere, and California becomes an impossibilty. Where would you move? Pick a city anywhere outside of CA, name why you would move there, what kind of area that you would want to live in, and how you think your decision would make your life easier. Just curious.

Hmmm. Well, I think I might have misposted the topic. What I meant to say was that Let' say that the target cities in the US, which would include SF, LA, NYC, Boston, DC,Naples,FL, the rest of CA, and so on become impossibly expensive, even for those of you who are doing quite well, then where in the US would you choose to live. This of course assumes that the rest of the country will not be affected by the net out-migration of residents from these areas and the prices stay 5-10 times cheaper than the mentioned areas.
On a side note, I lived in Boston for 3 years. It is a nice city. very much like SF in many ways except for the weather. The cost of living is perhaps more there than here because not only are houses really costly, but you'd have to pay for heating as well. You're right: the spring and fall there are stunning, especially if you take a train to Martha's Vineyard. The food is great too, particularly the seafood. The other thing is that unlike here, Rents are very expensive and there's not much of a supply thanks to all the students. It isn't such a stark contrast as it is here. Perhaps if people from SF saw that in most east coast cities, people complain about the cost of RENTING, they'd appreciate the relative cheap rents in SF.
I've been trying to research little known but plesant cities that offer diversity, art, a younger population,and a technologically invested economy. I especially want a place that is Off the radar of any investors, California and NY refugees, and high prices. So far, it seems that Chappel Hill, NC is a good bet. We'll see.

except now that Californians and New Yorkers have fucked themselves into a corner, they’re now flooding other cities, like rats fleeing a ship.

nomadtoons2,

I'd say it's more like a combination of a$$hole specuvestors and desperate working-class families, but, yeah, I've seen plenty of evidence that CA/NE outmigration is fueling rising home prices all over the country. The priced-out families just looking for affordable housing aren't the ones I'd be concerned about.

For the WHOLE FORUM… for the sake of an interesting change of subject, Lets say that for some reason, everything above that HARM mentioned as cliche’s become true: Housing prices go into the stratosphere, and California becomes an impossibilty. Where would you move? Pick a city anywhere outside of CA, name why you would move there, what kind of area that you would want to live in, and how you think your decision would make your life easier. Just curious.

I think we already did a thread on this a while back, but if you'd like, we can do another one.

SFWoman, I agree that Paris and Boston are both very nice. If I move there I would definitely gain weight. Boston has the best chowdah in the world. Paris also has wonderful cuisine. And there will be no idiots trying to ban foie gras. Also, London is less than 3 hours away by eurostar.

The other thing is that unlike here, Rents are very expensive and there’s not much of a supply thanks to all the students.

Not really, my friends was able to get a rather decent 1/1 for just over 1800 a month. Not cheap, but not expensive either.

Peter... $1800? Is that cheap? I rent an entire 4 bedroom house with a yard and 2 car garage for $1750. I rent with a few other guys that are never there. I've been here 7 years and never paid over $500 a month to live here.

Peter… $1800? Is that cheap? I rent an entire 4 bedroom house with a yard and 2 car garage for $1750. I rent with a few other guys that are never there. I’ve been here 7 years and never paid over $500 a month to live here.

1800 is not bad at all for about 1000sf of space in a major city. It is slightly more expensive than Silly Con Valley and is slight cheaper than San Francisco.