patrick.net

going to correct over next 3 years

My zip code is accurate, rent is 3% (or less) current asking prices. The place sold in 2006 for $979,000. Neighbors just bought a nearly identical place for about $940,000. The HOA is $435. One would have to put down $500,000 at LEAST to come close to my monthly rent.

What are the odds of the government phasing out the MORTGAGE interest deductions for home mortgages... Like they did in some European countries over the course of a 12 year or so period of time until it's totally phased out?

It seems like this would be a practical way for the government to get out of it's national deficit relatively quickly?

rmm221 says

What are the odds of the government phasing out the MORTGAGE interest deductions for home mortgages… Like they did in some European countries over the course of a 12 year or so period of time until it’s totally phased out?
It seems like this would be a practical way for the government to get out of it’s national deficit relatively quickly?

I think unlikely, it's pretty damn popular. But on patrick's front page today is this: http://www.nytimes.com/2010/03/23/business/23views.html

pkowen says

rmm221 says

What are the odds of the government phasing out the MORTGAGE interest deductions for home mortgages… Like they did in some European countries over the course of a 12 year or so period of time until it’s totally phased out?

It seems like this would be a practical way for the government to get out of it’s national deficit relatively quickly?

I think unlikely, it’s pretty damn popular. But on patrick’s front page today is this: http://www.nytimes.com/2010/03/23/business/23views.html

I'm not sure removing the deduction makes sense. Not unless you're going to completely rewrite business tax law too, where interest is no longer a business expense. If the deduction is removed for homeowners, but landlords still get to deduct it, that would be completely absurd.

This actually deserves a whole thread of it's own.

Based on a lease we just signed in December, 94402 in San Mateo looks just about dead on at 3.3%.

People ask us often why we're not buying right now - we could certainly afford to. The questioning often ends though when we take them through this logic about how much you're really paying right now (essentially in rent to the bank and gov't) if you're buying at too high a price.

Another consideration in places like San Mateo or other expensive peninsula cities - you don't get to deduct property tax if you pay AMT. So for higher-end homes where mortgage interest deductions are capped at loan amounts of $1M, if you're also paying AMT, then the effective rent to the bank is really quite high. Say 6% for the jumbo loan, 1.25% in property tax, and maintenance and insurance. Even if you get 1/3 of the interest back, that's still some 5.5-6% in cash out the door. Our rent (for a very nice, large 4.5/3) is the 3.3% ratio. Hard to argue with paying about half-price!

And to echo an earlier comment, you can most certainly rent in the high-scoring school districts at the 3.5% level these days. I saw many examples of that over the past few months. You get the same schools, just for half the price!

Tomrisk says

When the majority think that the R.E. need to or have to go down another 20%, it is a good signal for the bottom was over, and it is time, believe it or not

That's some ace logic right there.

Tomrisk says

When the majority think that the R.E. need to or have to go down another 20%, it is a good signal for the bottom was over, and it is time, believe it or not.

Majority? Three years back majority thought home price always goes up.
Today majority thinks home market crisis is over and it is great time to buy home.

Patrick readers were and are rational but never majority.

Tomrisk says

CrazyMan says

Tomrisk says

When the majority think that the R.E. need to or have to go down another 20%, it is a good signal for the bottom was over, and it is time, believe it or not

That’s some ace logic right there.

Too bad, people never learn. Same logic had happened in 2005.
Crazyman, I bet you are one of the many who do renting now?

I rent my current dwelling but I also own (long paid off).

Your logic still doesn't make sense.

I remember you being such a bear, then you purchased. Funny how people flip flop their opinions in an attempt to justify their decisions.

>>>Same principle of why some people like leasing a car, and most like to buy a new car. People think why should they pay more in order to drive the same fancy car, since others hate to be limited under the contract. Personally, I hate to keep watching my Odometer and worry I will be over the milage limit while driving.

Your car analogy is irrelevant, as the entire premise of this thread is whether home prices are out of whack with rents, as compated to the historical ratio for same (whatever that may be). Car leasing and ownership is likely to be a much more efficient market -- there was no "bubble" in car ownership versus leasing -- so the choice between buying and leasing a car does come down to personal preference.

Does your data include information on how long units have been rented? Renters in a place like the Berkeley Hills (not a big student neighborhood) may tend to stay for long time. With Berkeley's strong rent increase limitations, these rents may be a lot below what the current rental market could fetch, which is the real comparison of interest. Other places may have high turnover and reflect current rental market rates more accurately.

Hmmm, my Oakland Zip Code shows 6.4%. I still think I'll continue to rent...

Tomrisk, you wrote regarding renting versus buying, "you pay about the same $." Not true. That's exactly the point of this thread - you're NOT paying about the same $. By renting at say a 3% equivalent (such as we are) we are paying significantly less than if we bought it, and without any of the capital risk. We're not concerned with price erosion, and we don't have to ensure the property against fire, flood or earthquake. We CAN put nails in the walls (we just need to fill them when we leave). And while I agree that there's downside around concepts like putting on extensions and other major modifications, not everyone needs to do that -- we simply rented a house big enough not to need an extention.

But the real, hard cash we're saving each month is so much at these levels -- we're talking thousands of dollars a month -- that the underlying house could appreciate some 5% a year and we're still neutral on the what it would cost to buy it. In other words, the house (like so many in the better areas) is way over-valued. But the rents are quite economically realistic and a great deal.

We'll probably buy in about another two years or so, but at the current ratios, it just seems like a much better financial decision to rent. Of course to each one's own.

I think the thing we still see as pervasive is this concept (brainwashed by Realtors) that "ownership" is some status level that you are a loser without -- whatever -- our neighbors are thrilled we've moved in, and none of them has turned up their noses because we're renting the house.

Meanwhile, if someone bought that $3.5M house in Hillsborough for $4.2M in 2006, think how'd they feel? Same for the person who bought the stock market at the peak in 2001 of 2007. For some 10 years, the S&P500 has been flat. So if you choose your timeframes, you can always find big winners. And in the housing market, that's been easy. But the question isn't whether I should have bought a house in 1996 before the biggest bubble in history... it's whether the prices are realistic yet post bubble. And the rent equivalents in many of the nicer areas suggest no...

SanMateoRenter says

We CAN put nails in the walls (we just need to fill them when we leave). And while I agree that there’s downside around concepts like putting on extensions and other major modifications, not everyone needs to do that — we simply rented a house big enough not to need an extention.

Personally, I consider it a huge advantage and savings not to be:

1. obligated to do major repairs
2. tempted to do major renovations

I've saved tens of thousands on this alone, for sure. Maybe $100,000.

Patrick

Thanks Patrick - good points. We've rented homes that needed garage door repairs, had flooding problems, and other repair needs. But meanwhile, those owners also wanted to take care of their places, including installing new windows/doors, air conditioning, fencing, etc. All repairs and upgrades at their cost.

Also w/ regard to the whole "putting nails in the walls" and "painting" thing, let's not forget that you need to patch the walls and repaint when you SELL a house too. Just like when you leave a rental, when you try and sell a place you own you have to clean the place up, repaint, patch holes in the walls, etc. So I call BS on this whole "I can't do what I want to my house because I'm renting". When my wife and I are tired of our current colors we repaint.

That's a really good point -- never thought about it that way, but you're right. When I sold a condo many years ago, we spent a lot of money to repaint, replace carpets, fix up other issues, etc. And even if we hadn't, and had given the buyers a credit, money is money - we'd have lost a chunk of cash either way.

I like how Tom changed all his comments to a dot. Just as informative too.

Yeah, I was wondering what happened there...

Maybe he wanted to delete his comments. I used to not have a delete button for comments, or anyway it didn't work for threads the commenter did not create. But you could still edit them down to nothing.

I fixed it. Now anyone can delete their own comments, even if they did not start the thread.

Oh well -- will miss his discourse. Before his untimely departure, he was asking the question why, given what we've discussed, would anyone ever buy a house. My simple answer to that is that beyond the benefits of home ownership which one can certainly appreciate or not, there are pure economic reasons. And at the right price, the risk/reward costs and alternative opportunity costs can align to make it a financially sound decision. Just doesn't look like that's the case when the rent is effectively just 3.x%.

For some people it's a very self-validating and emotional decision. For others (like many here I suspect) it's more a financial prudence decision. And for those folks, this site is a great place for learning how to be informed enough to identify the better financial opportunities/timing to buy in the places we're interested in.

He hasn't gone anywhere. Tom did the same thing all the time on the old board. He's still reading the board, just pouting.

But if you ever reply to one of his posts, make sure your QFT (quote for truth).

I mapped the data to the map. enjoy!

Sunnydavid, where is that map you mentioned?

Cost in major repairs might be high, but it's also not that common. Roof needs replacing every once in awhile. If termites go wild you could be in for a world of hurt. Repairing a garage door isn't that expensive. If you replace it with the crap that a rental would have, it would be cheap. If you want something decent and respectable, yes, you'll need to pay more.

A house does give a person a nice place to live, renovations might be expensive, but it's like buying a BMW or any new car, you're paying a LOT of money any way you look at it. With a reno, you'll at least get the use of that item and depending on what you've done 50-70% return on those upgrades when you sell.

If you want to compare apples to apples, repair and live in a house like a landlord own and repair.

Maybe I wasn't clear about at least my situation -- when we've been renting at ~3% of the cost of buying a place... that's the ratio we're paying to rent the ACTUAL house in question, not an equivalent apartment or crappy "rental house." The purchase price for these actual, nice houses is significantly higher than the rent market for them. They have all been high-quality palces recently owner-occupied. The garage door is good quality, and the repair is good quality, because the owners care about their house.

And it doesn't take major repairs to make additional ongoing maintenance expenses... broken fridge, burned out oven range hood fan, dead disposal, broken toilet, landscaping, light fixtures, fireplaces... these things all have issues periodically and cost $$$ to fix. Cost nothing to the renter of the house.

help with renter right. please

Could you please elaborate? Your comment doesn't make enough sense to me.

SanMateoRenter says

And it doesn’t take major repairs to make additional ongoing maintenance expenses… broken fridge, burned out oven range hood fan, dead disposal, broken toilet, landscaping, light fixtures, fireplaces… these things all have issues periodically and cost $$$ to fix. Cost nothing to the renter of the house.

I wonder how long it will be before folks say "It's cheaper than renting. And you can fix all that stuff yourself when it happens, rather than paying the greedy landlord a premium every month just in case something goes wrong"

Well, a colleague of mine just bought a condo in SF where the monthy rent comps were about equal to the monthly ownership costs.

SanMateoRenter says

Well, a colleague of mine just bought a condo in SF where the monthy rent comps were about equal to the monthly ownership costs.

Really? Could you be more specific? Not asking for addresses of course, but I would be very interested to hear general area and rent vs. ownership costs.

@SanMateoRenter

I think you've lucked out, as many rental places keep costs minimal by avoiding, deferring, or applying very cheap replacements.

I agree. I think it's the difference between renting someone's home and renting a "rental house." The latter will certainly have the problems you've described. Try to rent a place that was owner-occupied and just went on the market, but isn't selling. Or a place where the owner has just moved and doesn't want to sell yet due to the market, or is planning to come back in a few years. I've rented all of these scenarios and the key is avoiding the under-maintained rental homes. I think you can quickly sniff out those places. But the others are out there.

I got one of those, it was pretty nice! But a total fluke.

Only once! And it was from a realtor! Amazingly, they put up the WORST pictures on craigslist for this place, it looked like a total dump. When we got there, we just said we'd take it. We knew the next person who saw the place was going to grab it. It was 10X better than anything else out there. Unfortunately, I've only had that luck once! I spent a decent amount of time looking too.

I hear you -- you do have to search a lot. We've been very lucky -- three times in a row now. Though I do think, if prices become economical again, that our next move will be to ownership. But otherwise, we'll go for #4! :-)

The SJ Mercury had a chart a couple days back which can help explain why prices have not fallen in "The Fortress" as they have elsewhere. Unfortunately I could not find it online, so please believe me.

The highest unemployment rate in Santa Clara County was Gilroy, about 17%. Morgan Hill was 15. San Jose was 13.

Cupertino was 7.1. Los Gatos was about 7. Los Altos, Saratoga, and Palo Alto were in the 6 range.

Now, 6% unemployment is worse than it was a few years back, for sure. But it's a lot better than 15%. So there's fewer people forced to sell, therefore prices have not fallen the same way. Surely the lack of buy up market is going to prevent price increases but this factor helps explain why prices have not fallen as much in those places.

SanMateoRenter, congratulations on a good renting deal. You seem to have hit the jackpot. Usually with rentals, they are one of the following:
- long term rentals. Good point is, owner probably can pay the mortgage/tax from rent. Bad point is, appliances and stuff are low grade. But it's cheap which is important. I've lived in such a place, and it was the right thing for me at that time.
- Recent rentals, such as "was owner-occupied and just went on the market, but isn’t selling." Will be nicer. Until the owner gets tired of paying more per month in mortgage and tax than he's getting in rent and sells or lets it foreclose.

The best is to rent from someone who has a job assignment outside of the area for a few years and intends to re-occupy. Of course, by definition that's a limited-term deal which may or may not be desirable.

MarkInSF says

SanMateoRenter says

Well, a colleague of mine just bought a condo in SF where the monthy rent comps were about equal to the monthly ownership costs.

Really? Could you be more specific? Not asking for addresses of course, but I would be very interested to hear general area and rent vs. ownership costs.

South of Market and mid 600's to buy (low interest rate) vs. ~3k/month rent.

Vallejo is a very dangerous city. It makes sense that it would top the rent to buy ratio. If you have to live in Vallejo, renting is clearly the best option, because you can always walk away from the property. But, if you own a house and can't convince a buyer that the guys hanging around dealing drugs and nice friendly neighbors, you have an asset that is not easily sold, and one that may take a serious price reduction to move. So, beware of basing purchase decisions on the rent to buy ratio.

Something tells me certain zipcodes will remain high for a long time on the basis of high incomes, high number of wealthy part-time residents, reversal of the flight to the burbs demand for living close to work and short commute distances is increasing), and/or high performing school districts. This will usher in a highly stratified society of islands of desirable areas and seas of impoverished crime-ridden crap. This trend is even more pronounced in the LA area. There are numerous "no-go" zip codes with dirt cheap real estate prices and then there are the still highly desirable zip codes that people fight to live in. As the "no-go" ares deteriorate the desirable areas will remain fairly intact with some spill over crime. There are very limited areas that are not "no-go" and many people will either endure the high cost areas or move away to another metropolitan area. Also look at Oakland, there is a HUGE disparity in prices of adjacent zipcodes and even areas within the same zipcode. Check out the disparity in prices between property in the "desirable island" east of 24, north of 580 in Oakland versus the prices outside this desirable island. There are many islands of desirability in seas of crap all over the Bay Area and CA.

Doesn't Berkeley still have rent controls and wouldn't this skew the numbers there. If Berkeley were a free market I would think the ratio would be much more ownership favorable. The Elmwood area in Berkeley (94705) is very desirable and has very little supply of housing for sale.