patrick.net

Peter P

If I am to buy a house today, I will be extremely happy to recover the inflation-adjusted original purchase price in 7 years.

That's because you're ignoring the other holding costs to owning. Those are the alternate uses of money. So long as what you would Rent is less than PITI of what you would buy, you have something left over. I assume that you're not just pissing that away (a big assumption, as most people actually need something like a mortgage payment to force the to save in the form of home equity). So, there is a cost to what you'd do with that extra money, like put it in the market at the risk-free rate.

I use the halfway point between the expected long-term market return (around 7.2% if I recall...I'm on a different cptr now) and the risk-free rate. The problem is that this investment compounds, and grows pretty quickly, forcing a home you buy to also appreciate or else you're doing worse by buying. This is another reason rising rents is non-linear. For each dollar rent goes up, you lose the present value of a dollar invested less than PITI. Since that compounds over your expected holding period, it's more than $1.

This has been discussed, and we are again hitting the core issue. It's not just about various ratios and metrics. It's about sound financial planning.

If I pay a huge portion of my income towards mortgage interest, how will I save for my retirement, my kids' education ? Hoping that the house will pay for all the future needs is putting all your eggs in one basket. It may work, who knows, but is extremely risky.

That's what makes me laugh about Cupertino. People are willing to take so much loan just to put their kids in the public schools there. When their kids need the money for their college, what happens then ? It is really ironic.

FRIFY,

I know a lot of folks who got only $250Kish out of the dot-com lottery, yet they were very smart with those "winnings" and they are financially very solvent today. These are inevitably the folks who always exercised at every opportunity, and took their gains at that point, regardless of how exuberant people were about potential upside, and paid their AMT correctly. I know one guy who tried to ride the wave, and turned about $1.8M he could have exercised into about $50K, and then he screwed up his AMT trying to turbotax it and ended up losing net.

...note the "loser" above had AMT because of options he exercised and held, I should have mentioned that for the tax-astute here.

assume that you’re not just pissing that away (a big assumption, as most people actually need something like a mortgage payment to force the to save in the form of home equity).

I may fall into that category. ;) Sushi. Food.

If I pay a huge portion of my income towards mortgage interest, how will I save for my retirement, my kids’ education ? Hoping that the house will pay for all the future needs is putting all your eggs in one basket. It may work, who knows, but is extremely risky.

One thing though, if you buy a house with better feng shui and/or positive energy, you will make more money and your retirement will be set anyway.

NOT INVESTMENT ADVICE

LILLL Says:

I look around and suddenly I’m in my 40s...

Exactly...I'm heading toward 40. God almighty!

Help! Mr. Wizard, help!

If I pay a huge portion of my income towards mortgage interest, how will I save for my retirement, my kids’ education ?

You don't at first, and if you keep refi'ing and re-amortizing* or HELOCing then you won't either. But if you do it like your parents did, then you essentially have a savings account that slowly gets bigger infusions each month, and historically meets or beats inflation over the term.

*note, you can refi and not re-amortize so long as you do it right.

Peter P says:

One thing though, if you buy a house with better feng shui and/or positive energy, you will make more money and your retirement will be set anyway.

I don't know you, so I am just trying to understand. Do you mean it, or is this a tongue-in-cheek comment ?

Exactly…I’m heading toward 40. God almighty!

Worse... I am approaching my first Saturn Return. Astrologically, I have such an urge to buy a house.

I don’t know you, so I am just trying to understand. Do you mean it, or is this a tongue-in-cheek comment ?

You can take it either way. I am open to alternative science, but I do not expect people to accept it as is.

craigslist search = 404

Huh? 404 Not Found (HTTP code)?

This spring is silent
The tide is turning
Going into Thanksgiving
What will happen?

What data source is used to generate the rent graph on the front page of patrick.net ?

I think it uses online sources like craigslist but I am not sure. Perhaps you should ask Patrick.

Thanksgiving, what will happen ?

My guess:

Inventory will continue to build
Short term interest rate will be 50 - 75 basis point higher
30YR fixed rate will be around 7%
Psychology will be different
Attitude will be about the same

NOT INVESTMENT ADVICE

HARM, If you think we’re “out there” what about the guy in China that’s getting the word out for people not to buy a house for another 3 years!

i say the only question is whether the realtors or the landlords should be the first against the wall come the Glorious Revolution... :twisted:

how's that for 'out there'? :mrgreen:

Returning to BA,

I agree with you. My wife and I make close to $180k and we are just out grad school as well. We are new here from TX and we just cannot understand how ppl with our incomes cannot afford a place. I asked a mortgage lender at WellsFargo about this. He said that many people that are buying bought houses earlier. Well who are they selling to? Others that bought early as well? This does not make any sense. We want to purchase a place but since we just graduated a year ago, we would be forced to pay I/O just to get a 3/2.5 place in a decent suburb - and that would stretch our budget. This is very perplexing for me.

Also if rates increase and prices (nominal) stay flat, even with saving up for down payment we are no better off tomorrow than if we were to buy today except that we have more skin in the game (hence more risk), which means that it is still getting more expensive tomorrow. Prices have to drop in real terms, but when will this happen 5 yrs? 10 yrs? Do we have to wait that long just to own even though we make significantly more than the median income?

one more thing. my wife and I really want to buy too - why? well partly its because of the pride and sense of achievement. Yes we are renting from the bank and taking on the asset risk, we know that - but there is a value to the emotional satisfaction -- especially those around you, friends and family, own homes. One side of me says that there must be a reversion to the mean - and that could be true on a macro level, but not on an individual house level.

Its something that is quite draining to have worked so hard and gotten good jobs and still not be able to afford a place that is not 50 yrs old POS.

Well one reason is that existing homebuyers tend to protect their homes through legislation. How is it that Shanghai and Beijing and Singapore look so incredible and they don't mind tearing down POS houses to build better ones, yet in the BA existing homeowners pass laws to ensure that everyone has a POS just like them.

HARM,

Wonderin' is MP or a close resemblance thereof. I've been editing and deleting his trolls from my last thread for the past few days. He posted the same message above to my last thread, which I've edited, so you can safely delete this one if you see fit.

--Randy H

Wonderinandwaitin,

Wow, thanks for that STATISTICALLY REPRESENTATIVE sample you've provided for the entire Bay Area! You've completely changed my outlook on this whole Bubble thing. How can there be a bubble if some clueless asshole paid way too much for a 3/2 condo sitting on Marina landfill? We've clearly achieved a New Paradigm.

You are truly an amazingly persuasive individual! Now, pat yourself on the back, turn off your mom's computer, and go wack off in your room like a good little Troll.

b) rentals in NYC are cheap because of rent stabilization though I don’t know how it affects the housing prices (infact rent stabilization would keep house prices lower).

I don't know if the BA could ever mimic Manhattan that closely for the reasons given by others. There could be many similarities, especially comparing SF to Manhattan and the greater BA to all of NYC and commutable suburbs.

As to rent controls, they have very unexpected effects on the economics of a market. For one, they tend to cause homes to increase dramatically in price, despite the obvious counter-intuitiveness to this. I forget the microecon reasons as to why, but I do recall that rent controlled areas suffer higher home prices empirically. One of our resident income property managers could probably tell you more about really why it happens. Rent control also creates a whole other set of problems and causes really unpleasant behaviors to emerge as people figure out how to game the system.

You are truly an amazingly persuasive individual! Now, pat yourself on the back, turn off your mom’s computer, and go wack off in your room like a good little Troll.

X, is that you?

@Randy H,

I read your notes on "Wonderin'" after posting mine. I really liked your little postscipt to his nearly identical post on your charts 'n graphs thread. Methinks I shall unleash a can o' Troll B-Gone on this fuckknob.

X, is that you?

No, it's just little ole' me. I guess that DID sound very Surfer-esque, didn't it? Why, I'm flattered by the comparison. 8-)

I don't know about Bay Area becoming like NYC. But BA is an expensive place to live, and I don't see that changing. I like this area, and it certainly deserves a premium. The question is how much. Answer whatever people are willing to pay.

That will not stop the BA RE market from going up and down, up and down forever. Even in the most bullish scenario, I do not see any appreciation - even nominal - happening in BA for a long time to come - like 10 years. there is no hurry to buy. In the most bearish scenario, I can easily see far away places like Tracy dropping 50%, and core areas like Cupertino dropping 25%.

I will change my view if I see wage inflation.

Prop 13 helps keep the rents low.
I'm renting a smal TH that my landlord bought a zillion years ago and pays some ridiculously low tax on it. My rent is pretty low and I have a nice feeling that I'm getting my share of Prop 13 protection. For me it's another reason to rent.

John Haverty,

Maybe I did not express myself clearly. I do not have any debt. I abhor it. I actually dislike debt more than I should. As Randy has pointed out numerous times, debt can be used to advantage in an inflationary scenario.

I was only pointing out the perils of servicing a huge debt. It comes at the cost of your retirement savings etc. People treat their home as an investment vehicle to their retirement, college and what not. That is akin to putting all your eggs in one basket.

JH,

You can always engineer your own amortization schedule if you have a fixed-rate simple interest mortgage with no prepayment penalty.

You just pay an extra amount to every payment (that will apply directly to principal) which preserves your amortization schedule, by reducing your number of total required payments.

You can use Excel or a financial calculator to figure the amount you should pay (as opposed to what your payment stub says).

If you want to prove this to yourself, go into Excel and blow all your payments out in rows for Loan A. Then copy a Loan B next to it, and change the length from say 30 to 29 years, but keep the interest rate the same. You'll see the INT and PRIN amounts in Loan B work out to an extension of Loan A, only ending in year 29, at which point you're paid off.

Or, you can just tell your bank that this is what you want to do and they very well may give you a 29 year loan. I've done this once (got a 22 year loan), but that was a while ago.

By the same mechanism, you can get a 30-year loan but turn it into a 15 year loan with a free payment option of 15 extra years of "buffer" at no cost (and ignoring the interest rate difference, of course, which is why they give you a lower rate on a 15 year, to keep you from arbitraging them in this way, but often the rate difference still aren't enough to compensate for the value of this free "option").

In fact, all US-style mortgages that are fixed, simple, have a built in free option because you can pre-pay.

You can always engineer your own amortization schedule if you have a fixed-rate simple interest mortgage with no prepayment penalty.

I may stir up some fur here but I think interest only loan with a reasonable rate-lock period is a pretty good instrument to engineer such custom amortization table. One can even "amortize" into a liquid account for more flexibility or potentially higher return.

A lower monthly obligation can actually reduce risks in the hands of a responsible homedebtor.

NOT INVESTMENT ADVICE

JH,

Inflation is not 1:1 linked to nominal rates in the US. In fact, nominal rates very often diverge from real rates given inflation in the US because of a bunch of stuff no one wants to read about.

It is not at all common to find opportunities to "personally arbitrage" low rate, fixed loans at greater than the risk-free rate of return if one is properly financially positioned. Rich people do this all the time, even Mr. Buffet.

Everyday people do it all the time too, with low rate student loans. Why pay off a 2.5% loan early when you can get 4.0% on a long CD? Sure, if rates fall to 1.0% on CDs, you should think about paying that loan down, but normally, you should not.

As to all the core inflation stuff, I understand your point about "not wishing for inflation". I certainly don't. I'd give up all my opportunities to exploit debt for the promise of no "extra" inflation in the future. But the fact is inflation is an EXTERNAL force on all of us, while debt leverage is an INTERNAL decision. Since I cannot control inflation, I'll pay $4.00, $5.00, $6.00 for gas regardless of what I do with debt. If the Fed forces nominal rates down, then I am damned well going to take advantage of that where I can, because that's all I can control.

I was thinking I go, switch banks and re-fi and not get the amortization reset.

BofA did this for me once some years ago. I got a Wells Fargo refi offer and went to BofA and got them to match the rate but give me a 22 year loan.

It doesn't hurt to ask.

Peter P,

I may stir up some fur here but I think interest only loan with a reasonable rate-lock period is a pretty good instrument to engineer such custom amortization table.

You are technically correct; but the only guy I know who did this and I would personally qualify as "knowing what he's doing" was a bond trader who works at Pimco.

For mortal men, it is not advisable. I think you have to match durations, which gets into all kinds of bond math and forward rate kind of junk. But, if you're up to the task, you can gain advantage from IO loans.

Again, lots of rich folks' have wealth managers to engineer such instruments for them, even though they have the cash to just buy stuff outright. Why buy stuff with your money when the bank will pay you to buy it with theirs? (The answer to that rhetorical is sadly because the Fed is paying the bank to pay the rich guys to pay the wealth managers, and who pays the Fed? Mr. Everyday does with inflation.)

But a Corolla is a bit light and small...

Fuel efficiency is overrated. Gas is so cheap in America that it does not matter anyway. We should be more concerned about safety (among big SUVs).

Maybe I should stop looking and just be happy with my jeep.

How about the Toyota FJ Crusier? It looks very nice in blue.

I like drum brakes, they last longer.

Huh? I just need the safest possible equipment.

The article by A. Gary Shilling in Forbes.com on 666 entitled, Implosion.

http://www.forbes.com/forbes/2006/0619/168_print.html

You want the truth? You can't handle the truth!

The price correction in real estate will make your head spin.

I need better mpg and a little more space….Basically a small wagon will do just fine.

How about a subaru?

Happy 06/06/06. Good night!

06/06/06? keep a close eye on george bush.... especially see if his eyes start glowing or changing to black or similar... ditto for wolfy, cheney, ricey, rummy, rovey, mclellan, ... one of them's gotta be the anti-christ...