patrick.net

Roberto, I think troy is addressing the statement that "still WAY more than renting" is simply not true. Nothing more, nothing less.

If the PITI is 4,400 a month, there is about $900 - 1,000 in principle included in that amount. Principle repayment is a form of reinvestment to lower prospective housing cost. In addition, based on current underwriting standard, the borrower of this loan will be making a minimum 200K, which will result in a monthly tax benefit of around $1,200 - $1,500 federal and state.

Net out the tax benefits and principle repayment and it's pretty clear that the cost to buy is cheaper than renting. That in itself doesn't mean that price will go up, in fact, it would likely go down, but not as much as you think.

Sure, the buyer can go underwater, but it can gain equity in the mid/long term as well. It's a risk vs. reward type of deal. There's no way to know where price will be 10 years from now, as long as buying is cheaper than renting, there is no need to worry about short term price movement. For the right buyer, buying is far from a mistake.

"finance 900K with 20% down, 30 yr fixed at 5%,"

No one is going to finance this at 900K. It is going to be a conforming jumbo, which is around 730K. Current rates for conforming jumbo is around 4.5% - 4.625%. Insurance is about 1K-1.5K a year, property tax is about 12K. Maintenance is a function of size not price so it is no more than a home in Arizona.

"As to your tax benefit, for the LAST TIME it is not a straight deduction, it REPLACES your standard deductions… "

That is true, except in CA, people who earns 200K+ would itemize based on state income tax. personal property tax and SDI alone. No dilution issue, but there may be phase out issue if anything.

robertoaribas says

so I’ll stick by my 5% realistic estimate of rate

The difference between 4.5% and 5% is $140/mo over the 30 year life of the loan ($2180 vs $2320).

With 20% down, the $900,000 @ 5% for 30 property has:

PITI: $4990
Tax Credit: $1380

The nominal cost of ownership (PITI less the P) is $3500/mo starting out. This declines to $1100/mo as the loan is payed off, leaving the average TCO over the 30 year life at $2320/mo.

Actual monthly expense is $3900, or $4352 including the lost interest on the down payment.

Google mortgage is actually saying a 15 year condo mortgage can be had for 3.625%. Putting that number in yields:

PITI: $6300
Tax credit: $1100

Nominal starting TCO: $2950/mo
Actual cash outgo: $5540/mo
Average TCO over 15 years: $1880/mo

There is also the ~$430/mo opportunity cost (the interest on the down payment) to factor in here.

fwiw I fully believe the status quo in California is unsustainable and there's more downward movement in the cards as either taxes are raised substantially or gov't spending cut draconiously. Either and both of these are bad news for the housing market.

But the numbers are what they are. The general trend has been for incomes to double over time. Houses have to follow suit, at least in areas where this increased (nominal if not real) buying power cannot prompt additional supply to be created to satisfy it.

Historically, getting in on this escalator has paid off well, though the 20% average annual rise in the S&P in the 90s did probably make buying in the 80s a wash or less.

My parents bought in 1981. Let's say their mortgage payment was initially $200 more than equivalent rent, which due to inflation declined $20/yr, to 0 in 1992 -- and now in 2010 the equivalent rent is $340 more than the monthly loan payment.

Using these numbers and the CAGR of the S&P, if my parents had rented 1981-now they'd have $167,000 in stocks, but be out $36,000 in increased housing costs of 1992-now, when rents went above the 1981 purchase cost, for a cash position of ~$130,000 over buying.

Having bought in 1981, the house is actually paid off now and lawncare costs more than the property tax ($90/mo). We'd have a ~$250,000 asset with a cost of ownership $900/mo less than rents, plus $44,000 in savings from 1992-now when buying in 1981 became cheaper than renting.

Not having to deal with landlords over the past 30 years also has non-monetary benefits.

I don't really see a crash coming to the fortresses. There's going to be a safety premium in these areas if things continue as they are.

I am planning to buy a house in one of these zips. Good house with all 3 good schools.
I feel prices are high.. and I can’t afford.
What is in future for these zips.. say in spring of 2011…
No sweat.. still in correction mode!

Troy says

If had stayed at Apple, I’d have around $5M worth of stock stashed by now.
And I was just a very ordinary lower-middle tier worker bee awarded a piddling 1000 options vesting over 4 years.

I known people who worked at Apple for 20 years, some since the early the early 80s.
They dont have much to show for it. Some live far out in parts of Morgan Hill and Gilroy.

robertoaribas says

Salaries are their own market, responding to supply and demand forces.

I completely agree. The PTB think price shocks will start pushing up salaries, but there are other things they can push DOWN on, like rents and anything non-essential like soda.

I also don't think the 80s and 90s have much to do with now, just like the 70s and 80s of Japan don't have anything to do with Japan, now.

SF ace says

Roberto, I think troy is addressing the statement that “still WAY more than renting” is simply not true. Nothing more, nothing less.
If the PITI is 4,400 a month, there is about $900 - 1,000 in principle included in that amount. Principle repayment is a form of reinvestment to lower prospective housing cost. In addition, based on current underwriting standard, the borrower of this loan will be making a minimum 200K, which will result in a monthly tax benefit of around $1,200 - $1,500 federal and state.
Net out the tax benefits and principle repayment and it’s pretty clear that the cost to buy is cheaper than renting. That in itself doesn’t mean that price will go up, in fact, it would likely go down, but not as much as you think.
Sure, the buyer can go underwater, but it can gain equity in the mid/long term as well. It’s a risk vs. reward type of deal. There’s no way to know where price will be 10 years from now, as long as buying is cheaper than renting, there is no need to worry about short term price movement. For the right buyer, buying is far from a mistake.

This is illogical. You aren't counting the principal repayment, which would only work if you are sure that the value of the house will go up. If the value goes down, those principal payments are down the toilet. Based on your assumption that the principal payments will actually gain you equity, you then conclude that it's cheaper to buy than rent. But then you go on to say that you don't know if the value will go up, but that's o.k. because it's cheaper to buy than rent. Circular reasoning.

And we won't even get into the fact that you are comparing a mortgage WITH a 20% down payment to rent with NO initial outlay, which is not a valid comparison.

gameisrigged says

If the value goes down, those principal payments are down the toilet

Sorta. Principal payments reduce the interest cost of the home loan.

gameisrigged says

comparing a mortgage WITH a 20% down payment to rent with NO initial outlay

Yes, the down payment indeed represents a loss of continued interest income.

Let's take this $700,000 bad boy in Fresno:

http://www.movoto.com/real-estate/homes-for-sale/CA/Fresno/750-E-Santa-Ana-Ave-104_361643.htm

If I pay $280,000 now and borrow the conforming limit @ 3.4% after 15 years I will have a housing expense for this place of $900/mo or so.

Over the 15 year horizon, total interest costs on this are $75,000, the property tax expense is $84,000, misc expenses are $80,000, for $240,000 in TCO or an average of $1340/mo over the first 15 years.

THAT certainly beats renting.

But as you say in addition there is the lost interest of $700/mo (@ 3%), in 2025 the $280,000 downpayment will have accrued to $430,000.

And the requirement to pay down the $420,000 mortgage over 15 years that could have found better employment.

But this does provide rent-free living, which is worth say $2000/mo to me, $360,000 over the first 15 years, call it a wash on the $420,000 given a mild rent inflation.

Buy: $280,000 downpayment, worth $430,000 in 2025 if saved instead
TCO: $240,000 in misc extra (non-rental) expenses over first 15 years

So not buying gives me the $430,000 downpayment + accrued interest + $240,000 misc extra = $670,000

Seems to me having this house free and clear in 2025, with a continuing housing expense of $900/mo is better than having an extra $670,000 in the bank . . .

^ but note they've already lowered the price on this $30,000.

That's two years free rent, and I can wait, especially to see what 2012 holds. Fuckin' Mayans.

This is where my living in Japan 1992-2000 has helped me. It's like I'm watching the sequel.

Except they didn't extend everyone's unemployment 73 weeks.

People don't understand that this decade is just getting started.

Troy says

gameisrigged says

If the value goes down, those principal payments are down the toilet

Sorta. Principal payments reduce the interest cost of the home loan.

You're missing the point. If you're going to NOT COUNT THE PRINCIPAL PAYMENT AS AN EXPENSE, BASED ON THE FACT THAT YOU'RE ALLEGEDLY BUILDING EQUITY, then you would have to be positive that the value will go up. Otherwise you are NOT building equity. It makes no sense to just utterly disregard the principal payment, as though you weren't even paying it, when making a rent vs. buy calculation.

Troy says

Let’s take this $700,000 bad boy in Fresno:

Sorry, weren't we discussing Sunnyvale? There is a WORLD of difference between Sunnyvale and Fresno.

I made a $265,000 offer on a house. Houses in the area where this one is located rent for about $1600/month. To me, that makes financial sense. But I think some areas may still be in a bubble. When places like Sunnyvale are priced higher than 2005 levels, it makes me wonder if it's such a good idea to buy a house there. I don't know anything about that city; I'm just looking at the numbers.

gameisrigged says

Troy says

gameisrigged says

If the value goes down, those principal payments are down the toilet

Sorta. Principal payments reduce the interest cost of the home loan.

You’re missing the point. If you’re going to NOT COUNT THE PRINCIPAL PAYMENT AS AN EXPENSE, BASED ON THE FACT THAT YOU’RE ALLEGEDLY BUILDING EQUITY, then you would have to be positive that the value will go up. Otherwise you are NOT building equity. It makes no sense to just utterly disregard the principal payment, as though you weren’t even paying it, when making a rent vs. buy calculation.

Vice versa, you seem to be postive that the value will go down and the equity will be sunk. The fact of the matter is, this is November 2010, buying a house now means the house will close around January 2011, I can assure you your guess is just a guess as well as to where prices are in 2012, 2022.

All you seem to do is highlight the downside and ignore the upside. One bout of housing inflation and the buying case is exponetially better than the renting case. Little risk but huge rewards in the long term.

SF ace says

Vice versa, you seem to be postive that the value will go down and the equity will be sunk. The fact of the matter is, this is November 2010, buying a house now means the house will close around January 2011, I can assure you your guess is just a guess as well as to where prices are in 2012, 2022.

Not at all. I’m merely saying that it makes no sense to disregard expenses when doing a rent vs. buy calculation. If you want to calculate how much a given expense is mitigated by a given savings, by all means do so, but you can’t just disregard it. I’ve never heard of the principal payment being disregarded when considering how much a mortgage is going to cost you. That’s just silly. If you're gambling on increasing equity, just bear in mind that you are indeed GAMBLING.

gameisrigged says

When places like Sunnyvale are priced higher than 2005 levels, it makes me wonder if it’s such a good idea to buy a house there. I don’t know anything about that city; I’m just looking at the numbers.

Grew up in Sunnyvale, and never had any desire to buy there. There are many alternatives out there.

SF ace says

All you seem to do is highlight the downside and ignore the upside. One bout of housing inflation and the buying case is exponetially better than the renting case. Little risk but huge rewards in the long term.

I think I have that on my "Greatest Hits of 2005" record.

robertoaribas says

Well, I looked at 5 investment properties today, 1 under contract, stupid agent hasn’t updated status and doesn’t answer or return phone calls, 1 I can’t get a hold of agent or owner to get permission, 2 POS’s 1 with potential.. bank owned, so if they don’t have an offer, I’ll write one Sunday night. Homes that will cashflow 15% on an all cash purchases. Let you know how it works out.

Please spare us your pompous, braggart rants about your impending housing exploits in Arizona. You try, and sometimes succeed in hijacking the forums while telling others they are wrong but you are always right. Good thing others call you out on your rants. This forum is a SF Bay Area (Sunnyvale) forum but you always find a way to get your points in about Arizona. You realtards are all the same.

gameisrigged says

SF ace says

All you seem to do is highlight the downside and ignore the upside. One bout of housing inflation and the buying case is exponetially better than the renting case. Little risk but huge rewards in the long term.

I think I have that on my “Greatest Hits of 2005″ record.

The affordability index was somewhere around the all time low in 2005, now it is around the all time high. Huge difference. Buying now is hardly a mistake and a reasonable risk.

http://www.nahb.org/reference_list.aspx?sectionID=135

Syracuse, N.Y., was the most affordable major housing market in the country, edging out Indianapolis-Carmel, Ind., which had held the top ranking for nearly five years. In Syracuse, 97.2 percent of all homes sold were affordable to households earning the area’s median family income of $64,300.

San Luis Obispo-Paso Robles, Calif., was the least affordable of the smaller metro housing markets in the country during the second quarter. Others near the bottom included Santa Cruz-Watsonville, Calif.; Ocean City, N.J; Santa Barbara-Santa Maria-Goleta, Calif.; and Napa, Calif.

gameisrigged says

It makes no sense to just utterly disregard the principal payment, as though you weren’t even paying it, when making a rent vs. buy calculation

It's really tough to know what's going to happen in the next 15-40 years. I'll likely be dead at the end of this.

If you pay down the principal on that $700,000 property -- which is a fucking park btw -- in 2025 the carrying cost will be $900/mo, about what the usual shitty house rents for today, or close to it.

The value on an acre of "prime" Fresno real estate isn't going to go to $0. Plus they don't build houses like that anymore.

The value of this property will be driven by area after-tax incomes. They may go down due to deflation and increased taxation. They may go up due to Weimar money-printing.

Dunno, but I'd rather hedge against the latter and suffer the former than expect the former and get hit with the latter.

nevermind

gameisrigged says

I’ve never heard of the principal payment being disregarded when considering how much a mortgage is going to cost you. That’s just silly. If you’re gambling on increasing equity

In my $700,000 analysis above, I was not "gambling" on appreciation, just prices remaining where they are.

Equity may or may not increase in the short term, but after the 15 year note is paid there will be some equity -- valuation less money owed -- in the property unless the Valley turns into a Mad Max wasteland.

Prices have NEVER stayed depressed for 15 years in this country, at least not since the Fed was created to manage inflation.

EVERY decade has seen substantial price inflation. This house was probably sold for $50,000 in 1950. Maybe worth $100,000 in 1970. By 1980 maybe $175,000 (its Prop 13 value of $217,380 bears this out). 1990, $250,000. 2000, $400,000. 2010, $600,000.

When will it stop?

thomas.wong1986 says

Grew up in Sunnyvale, and never had any desire to buy there

I live in Sunnyvale now and don't think it's any better than (the good part of) Fresno. Worse, actually.

Los Altos *might* be good enough, but for the money I'd rather live on my own acre in Fresno. I actually like the Valley heat, it's the winter fog that sucks.

Tory, regarding your $700K home analysis, I think you should ditch whatever calculator you're using right now, because it does not give you correct numbers. 700K, down 280K, principle 420K, interest 3.4%, 15 years. The interset cost over the term is more like 117K than 75K.

I did question about your math before and you corrected a problem by checking your spreadsheet. I really do appreciate that attitude, and i guess I am asking the same again because you don't want to see things based on wrong numbers given by broken calculator. As a side note, your math is usually based on best case scenario. It's all good when that works, but you may want to have a little margin of safty, maybe not for the sake of argument, but for yourself when you want to buy home and things turn out to be tougher than you thought. So try that too.

BTW, the bad boy in Fresno is nice. I hate wooden pannels though, I can take it when the house is like that. Thanks for sharing.

There are a number of excel spread sheets on Microsoft website that can provide such numbers your seeking.

http://office.microsoft.com/en-us/templates/CT010223096.aspx?tl=2#

seaside says

The interset cost over the term is more like 117K than 75K.

I'm factoring in the interest deduction, 35.2% off.

Troy says

I’m factoring in the interest deduction, 35.2% off.

Got it.
California tax thingy. Things won't work that way outside CA though, the home is in CA. So, I can't give a damn.
But factoring in that way will work as intended when you're going to pay more upfront regardless of 15yr average number you got there?
Calculation is calculation. Reality is not the same.

thomas.wong1986 says

There are a number of excel spread sheets on Microsoft website that can provide such numbers your seeking.

Thanks thomas. I got my own spreadsheet though, I always can use other resources.

I'd just go to the local schools and observe. Look and see the students and parents. This will tell you if those are the neighborhoods that are coveted by wealthy immigrants. As we send more and more of our money out of the country, those neighborhoods will be even more coveted and affordable (for them) in the future.

Troy says

gameisrigged says

I’ve never heard of the principal payment being disregarded when considering how much a mortgage is going to cost you. That’s just silly. If you’re gambling on increasing equity

In my $700,000 analysis above, I was not “gambling” on appreciation, just prices remaining where they are.
Equity may or may not increase in the short term, but after the 15 year note is paid there will be some equity — valuation less money owed — in the property unless the Valley turns into a Mad Max wasteland.
Prices have NEVER stayed depressed for 15 years in this country, at least not since the Fed was created to manage inflation.
EVERY decade has seen substantial price inflation. This house was probably sold for $50,000 in 1950. Maybe worth $100,000 in 1970. By 1980 maybe $175,000 (its Prop 13 value of $217,380 bears this out). 1990, $250,000. 2000, $400,000. 2010, $600,000.
When will it stop?

It's still the same bubble argument: "Housing is a good long term investment, so it's always a good time to buy". Sorry, but we now know that this is bullshit. Ask someone who bought in 2006 and lost 45% of the value of his house. People are defaulting on their loans, because they know it will be a long, long time before they could ever possibly come out ahead. So spare us your 15 year projections, because they were saying EXACTLY the same thing in 2005. EXACTLY.

And so what if you do finally break even in 15-20 years? Let's say that instead of buying for $900,000 right now, you wait until next year and get it for even just 15% less. Then you saved $135,000 AND you still have everything you WOULD have had. That's not chump change.

I guess where we differ is that you think the Fed's meddling in the market is going to quickly cure all the problems, and I just don't see that happening.

SF ace says

gameisrigged says

SF ace says

All you seem to do is highlight the downside and ignore the upside. One bout of housing inflation and the buying case is exponetially better than the renting case. Little risk but huge rewards in the long term.

I think I have that on my “Greatest Hits of 2005″ record.

The affordability index was somewhere around the all time low in 2005, now it is around the all time high. Huge difference. Buying now is hardly a mistake and a reasonable risk.
http://www.nahb.org/reference_list.aspx?sectionID=135

Yes, I trust the Nat'l Association of Home Builders and Wells Fargo to inform me when it's the best time to buy in a given city. HA HA HA HA HA.

Sunnyvale 94087 in September 2005: $792,500

Sunnyvale 94087 in September 2010: $880,000

Yes, slightly more affordable than the PEAK of the bubble, due to somewhat lower interest rates. Affordability at an "all time high"? You have GOT to be kidding. If you think Sunnyvale is a great deal at HIGHER THAN 2005 prices, then be my guest. Buy a house there. Have fun with that.

Troy says

The value of this property will be driven by area after-tax incomes. They may go down due to deflation and increased taxation. They may go up due to Weimar money-printing.
Dunno, but I’d rather hedge against the latter and suffer the former than expect the former and get hit with the latter.

Don't you already OWN a house?

Troy says

fwiw I fully believe the status quo in California is unsustainable

This is certainly true, but the Fortress Neighborhood enclaves are priced mainly by the purchasing power of wealthy foreigners /immigrants who covet those enclaves.

Not really related to the overall well being of the overall California economy.

>Don’t you already OWN a house?

Technically, no (mom does and I should inherit that unless Medicare liens the hell out of it).

Proud renter since 1986, LOL. Going to Japan straight out of college kinda took me out of the game, alas.

Coming back in 2000 right into the teeth of the dotcom bubble I wasn't prepared financially or knowledgematically to buy.

Shoulda bought in 2001 in retrospect, right when interest rates were still over 7%. You could get a very nice 2/2 condo in the good part of Mountain View for $350K back then, right when AAPL was down and GOOG hadn't made their move yet.

Part of the problem was I had a pretty good deal with a friend renting for $700/mo, didn't want my housing expense to jump from that to half my pay.

sybrib says

Fortress Neighborhood enclaves are priced mainly by the purchasing power of wealthy foreigners /immigrants

While they are one source, I think the enclaves will also preserve their value by keeping their shit together while the borderline areas become much worse living spaces. This unravelling will serve to reduce the supply of competing offerings.

But all bets are off if they actually start boosting taxes back to Clinton levels or worse.

Ah, who am I kidding. We're going for the Brasil model of 5% enclave class and 30% middle and 65% favela.

Troy, you're a renter renting SFH or condo w/ roommate who is paying $700/mo? Is that right?

And a question for you. When will you buy your own? When certain conditions met your expectation? or do you have certain things in mind or have your eyes on?

Troy says

>Don’t you already OWN a house?
Technically, no (mom does and I should inherit that unless Medicare liens the hell out of it).
Proud renter since 1986, LOL. Going to Japan straight out of college kinda took me out of the game, alas.
Coming back in 2000 right into the teeth of the dotcom bubble I wasn’t prepared financially or knowledgematically to buy.
Shoulda bought in 2001 in retrospect, right when interest rates were still over 7%. You could get a very nice 2/2 condo in the good part of Mountain View for $350K back then, right when AAPL was down and GOOG hadn’t made their move yet.
Part of the problem was I had a pretty good deal with a friend renting for $700/mo, didn’t want my housing expense to jump from that to half my pay.

Guess that raises the question, then: If it's such a great time to buy, and such a great hedge against inflation, why haven't you bought?

seaside says

who is paying $700/mo?

That was 2000-2004. Pretty sweet deal.

I haven't bought for several reasons.

Foremost, being semi-retired / self-employed I can't commit to a hefty mortgage payment now.

Also not entirely committed to staying here in the states much longer. Going back to Japan or trying my luck in Canada or some other socialist hellhole like Germany is kinda attractive.

I think the fix is in & there's going to be increasing pressures towards outright economic collapse here; the 2012 election going the wrong way wouldn't surprise me, bringing us another 4-8 years of creative destruction to round out the decade.

But if I could afford to commit to a mortgage, I wouldn't mind getting a nice place that I wouldn't mind getting "stucco" in -- a doomstead in Bellingham, Santa Cruz mountains, Sierras, or the nice part of Fresno.

Chances are we'll bumble through the next 20 years with prices doubled like what happened in the 70s. Prices TRIPLED between 1974 and 1994. If the PTB can get that amount of inflation going, and if this inflation pushes up wages or just pushes down homeprices, dunno, but betting against the Fed -- probably the most powerful single entity on the planet -- is generally a losing bet.

In those zips as soon as prices go down you'll be outbid by someone with more money than you.

xenogear3 says

while (1)
{
x = monthly payment if buy the house;
y = monthly pay check;
if (y > x)
{
buy the house;
smile;
break;
}

Poor error handling in that one: what if y is only 1 dollar greater than x? What if y suddenly goes to zero? What if x increases?

I prefer x = total monthly cost of owning assuming 7 years, the average actual length of ownership; y = cost of renting the same thing. It still may be too high for your salary, but at least you'll save money each month compared to the alternative.