Only 5 to 10% and in the long run it doesn't matter ...
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2007 Jan 2, 5:38am 14,139 views 158 comments
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Yes, patrickm, even with a 30 yr fixed at 5%, if you buy at the peak and the value of the house goes down after you bought it, you have not only overpaid for the house but also overpaid interest to buy something that is less valuable than when you bought it.
You are right when you say "at the end I will have something" but if you have paid more than what it is worth, it is a loss no matter how you slice it.
I wonder what $2200 a month can buy nowadays with 20% down.
http://www.dinkytown.com/java/MortgageFixedvsNegAm.html
Option "Suicide" ARM: $768,750 - a very small house in Sunnyvale
ARM Interest Only: $662,500 - a fixer upper in Sunnyvale
30 Year ARM: $512,500 - a nice 2br/2ba condo in Sunnyvale
30 Year Fixed: $447,500 - a 2br/2ba condo in Sunnyvale
The biggest mistake I have ACTUALLY seen people make is comparing mortgage payment to rent, and ignoring property tax.
To be fair though, the property tax could probably be covered by the tax savings on the interest portion (e.g. 100%) of the monthly mortgage payments.
As for HOA, that's a different story. In SF in one of those fancy SOMA towers, it's over $600 a month.
To be fair though, the property tax could probably be covered by the tax savings on the interest portion (e.g. 100%) of the monthly mortgage payments.
Yes, if the comparison was made that way, that is comparing the mortgage payment BEFORE tax savings with rent.
In the case I was talking about the comparison was with 3600 per month of mortgage payment (which was actually about 5K using ARM) with a the rent. Since rent is paid with after tax money, it is fair to compare it with mortgage payment AFTER tax savings. But then you also have to consider other taxes and HOA and insurance etc also.
People make all sorts of mental accounting tricks to convince themselves to buy.
Peter P
2007 Jan 2, 9:51am
My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.
If he bought BRK with $67000 in 1975 his stock would be worth over $190M even after "adjystment".
Not investment advice
My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.
Too bad he used that money to buy a home. If he had waited to 1986 and used that money to buy Microsoft stock, he would've had $20 million today.
:(
patrickm Says:
I think this argument is time limited. My brother bought a home for $67000 30 yrs ago, the house now worth nearly $1 million even after adjystment.
But do you know what would have happened if he had bought it for 60K and invested the 7K difference in SP500 index fund for these 30 years ? Do you get the point ?
Anyway, what's your point ?
If he bought BRK with $67000 in 1975 his stock would be worth over $190M even after “adjystmentâ€.
You know, I was going to post that - but I had the hardest time finding data about BRK in 1975.
Peter P
2007 Jan 2, 9:56am
You know, I was going to post that - but I had the hardest time finding data about BRK in 1975.
skibum Says:
> patrickm’s first comment was possibly genuine.
> The second one about “longterm the purchaser
> will eventually own the property and the renter
> would have nothing†is making a false assumption
> that “renters†here plan never to buy
> Are you a Realtor ™? Or maybe you’re planning to
> sell this spring? Getting worried about the upcoming year?
The “it’s just more prudent for someone who wants to put down roots for his family to purchase a home and build equity and leave it for his offspring.†quote made me vote for Realtor ™…
But then patrickm Says:
> I’m a renter. I live in a rent controlled 1br, rent is
> $945.00 in San Francisco
And
> lets’s assume, I’m saving $1200/month on a mortgage
> of $2200/month by paying rent of $945.00/mth.
You can not buy anything in SF for $2,200 a month unless you have a huge down payment since $2,200 a month will cover a loan of about $350K. Condos and TICs like my apartment in Presidio Heights are selling for $1-2mm so I’m saving about $6K a month…
> I invest the 1200 at a return of about 8% annually.
> The 945 is still getting me nothing.
The $945 a month is getting you a place to live in a city where the chance of eviction is close to zero without the expense of property tax, maintenance or any market risk. If I GAVE you a $1.5mm condo in San Francisco you would pay more than $945 a month (taxes, insurance maint, HOA, etc.) to live in SF…
> The $2200 is getting me ownership
> of property
Let us know where you plan to buy in SF for $2,200 a month…
> and when the market normalizes at least a 5%
> annual appreciation. The owner will in the long-term
> eventually win, and the renter lose. Is this not true?
I don’t have time to look up the average stock market returns over the past 100 years but I remember something like 8%. The owner will always win in the “long-term†due to inflation, but when you buy at the top of a bubble you run the risk of dying before the “long-term†is long enough. Cisco is a great company that makes great products, but it was not worth the ~$80 a share it was selling for at the top of the bubble in 2000. In $2001 Cisco was down around $20 and I just looked and it is now up to $27. If it keeps going up in value like it has for the past six years the guys that bought at the top of the bubble will be able to sell for what they paid at the top of the bubble after a 50 year hold period (if you back out the opportunity cost of the initial investment at the risk free rate or inflation they will have to hold a little longer)…
P.S. I want to leave my kids a condo on Nob Hill, a lakeview place on the West Shore and a big family home on the Peninsula, not a crappy condo or TIC I can buy today for $2,200 a month…
Yes, Peter and eburbed and raise his 3 kids in a studio, makes perfect sense
Do people even have 3 children any more?
What a hassle that must be given that everything's designed for 4 or even numbers. How do you take your kids on 2 seat rides at Disney/Universal? Or how do you get a cab since they're only supposed to take 4 pax.
But trying to cast the buyer as a loser and the renter as the winner, is a suspect notion.
Yet somehow automatically casting the renter as loser and the buyer as a winner isn't?
patrickm,
The point is this: I sold my house for 1M last year. I knew it was time to sell because of the following two reasons. One, I wouldn't be able to afford my house at that price if I didn't already own it. Two, I could take the proceeds from the sale and invest in a risk free investment like a bank CD and recieve enough interest to rent a comporable property.
I'm not calling the buyers losers, they got a nice house but along with that comes higher taxes and maintenance. I just know that it was right for me to live for free by selling. I'll buy again when the price is right. I've seen comporable or better properties already asking less money.
patrickm Says:
Paul, I’m just trying to figure the purpose of these arguments and ratioanlizations, obviously it is a personal decision based on someones circumstances whether they decide to rent or purchase. But trying to cast the buyer as a loser and the renter as the winner, is a suspect notion.
I disagree with the term rationalization. The purpose of the argument is to expose one more flavor of kool-aid.
A good friend of mine bought just an year ago. A very prudent and money savvy man. He struck a gold mine in stock options and bonuses. Bought the house from less than half the proceeds. Rest invested in different asset classes. He is hardly a loser, lives well below his means. He took the risk, made an informed decision after evaluating the numbers.
This forum is not to cast buyers as losers. We just point the flaws in the cookie cutter type "Drink the kool-aid" arguments.
patrickm Says:
> Paul, I’m just trying to figure the purpose of these
> arguments and ratioanlizations, obviously it is a
> personal decision based on someones circumstances
> whether they decide to rent or purchase. But trying
> to cast the buyer as a loser and the renter as the
> winner, is a suspect notion.
I’ll go back to the recent Jordan Park home sale for $2.8mm on a block where homes were selling $600K in 2000 and where homes are renting for $4,400 today.
If you want to “Buy†and pay $120K more in after tax dollars every year than a guy “Renting†on the same street be my guest…
Since we are now seeing the price of virtually all the real estate in the Bay Area drop in value the renter will be the winner (as measured in dollars) in the near term…
You can not buy anything in SF for $2,200 a month unless you have a huge down payment since $2,200 a month will cover a loan of about $350K.
You can do better than that - see my stats above. Just for a suicide loan. That should buy at least a condo in Soma.
But some people purchase homes for more practical reasons.
Speaking of which - what I really want is a house with a basement. Having moved from the East Coast, I really miss basements. They're much more temperature stable, and a great place to keep stuff.
As opposed to California where everyone's garage is crammed full of crap instead of their cars.
Do houses anywhere in the Penn/South Bay have basements?
Do you have a family, do you have kids to keep in the same schools?
Having a family is very impractical.
Peter P
2007 Jan 2, 10:17am
Do houses anywhere in the Penn/South Bay have basements?
I have seen one in Menlo Park. They even have a full bath with a urinal down there. :)
patrickm Says:
Paul you said you could’nt afford the place you had if you did’nt already own it. Did you rent a similar place? Do you have a family, do you have kids to keep in the same schools? Do you rent in same neighborhood?
Realtor.
patrickm Says:
> Former, so how many places are
> availble for rent on your block?
Type Presidio Heights in to Craig's List to look for rentals or homes and condos for sale.
I don't pay close attention to the SF rental market since (other than Grandpa's house) my family doesen't own (or plan to own) rental property in SF...
They even have a full bath with a urinal down there. :)
NO WAY! A urinal?
That's frickin' sweet! That's totally what I'd want in my place.
Yes, patrickm has nailed it. He's right --we must accept it.
Everyone who has failed to join the Perpetual Appreciation Train in the last 6 years is doomed to a Purgatory of Perpetual Renter Serfdom. Anyone who shoehorned themselves into a 110% LTV stated-income option-ARM will be rewarded by a lifetime of riches, while the rest of us --and all children born into future generations-- are permanently priced out and relegated to living in tent cities and used Hondas.
Why just the other other day, I woke up in my miserable rented 2 Bdm house, picked some miserable rented herbs from my rented garden and sat down in my rented patio to ponder my pathetic renter's fate. The fact my rent barely covers 35% of the monthly after-tax carrying costs of the "owner" was of little consolation. Nor was the fact I was able to invest most of that difference in overseas equity index funds which were up ~26% last year.
The sad, miserable truth is I AM A RENTER! Oh, woe is me! I am but a pathetic indentured serf, doomed to a life of servitude under the thumb of the all-wise, all-powerful, landed flipper gentry. All I can do is toil away and count the hours until the Grim Reaper release me from my earthly bondage. Save me, patrickm, save me!!
patrickm,
Same neighborhood, no kids / would be same schools, properties are similar in size, the rental is more updated - the sale had some vintage woodwork.
eburbed Says:
> Do houses anywhere in the Penn/South
> Bay have basements?
Very very few Northern California homes have basements…
The 1920's Mediterranean I grew up in on the Peninsula has a big basement and I've seen a few other 1920's Mediterranean style homes in Burlingame and San Mateo with small basements...
When I was a kid most of the South Bay was orchards and almost all the homes built in the past 40 years have been slab on grade, but there are some old San Jose/Los Gatos/Saratoga homes with traditional basements…
How do you account for the fact that a owner can mail back the keys to the lender instead of bringing cash at the closing table if he is upside down?
Not if you refi-d. Going by CA rules, most refi'd mortgages automatically convert to full-recourse loans. Given that virtually everyone here has refi'd and/or HELOC'd in the last 6 years, mailing the keys back would be a non-starter.
eburbed Says:
> NO WAY! A urinal?
> That’s frickin’ sweet! That’s totally
> what I’d want in my place.
When my Uncle added a bathroom to the detached garage behind his house in San Mateo he only put a urinal (and a vintage Snap On calendar) since he wanted the women to stay out of the garage...
@eburbed,
Sure --to brag at dinner parties, impress the opposite sex, experience the joys of paying for unscheduled maintenance yourself, feeling like a big shot at tax time, etc...
Plenty of reasons :-)
If you folks want to read a really interesting post, check out the comment here:
http://www.burbed.com/2007/01/02/12-price-drop-in-1br1ba-condo-in-mountain-view/#comment-5557
Written by someone who sold on 10/2005
Where did patrickm go? I want info. on that 30 year fixed at 5% with no points!
Intresting add on to Schiller's inflation adjusted home price data:
The new loans should make values fall a lot faster this time...
patrickm :
What is your point ? What you do is your decision. Leave the subjective analysis out. The one thing common to everyone's decision is the numbers. Let's discuss that.
We have patiently answered your questions and refuted your numbers. Do you agree or disagree ? If you disagree - with what ? And what is your counter analysis ?
What would get me off the fence ?
If I can live in a place that I actually like in a good school district and even after my PITI I can still save for collage and retirement.
Till then, I rent in a good school district and save even more for collage and retirement.
Simple.
From the usual troll trickle of info, it looks to me like patrickm is likely a realtor (TM), who happens to rent an apt in SF for $945.
The final straw for me was his invocation of the usual last refuge of the beaten troll: drudging up an example of incredible home price appreciation (brother who bought 30 years ago, and now house is worth almost 20x more). And how does your example make it a good time to buy NOW? Oh yeah, it's ALWAYS a great time to buy (or sell) real estate!
I’m just at a point of considering whether to buy something or renting till I die.
This is borrowing a trick from the ol' GWB playbook - false choices. You try to force the debate into a false choice between buying vs. "renting till I die." (Sort of like, "you are either for the War or against the troops.") Who the hell is planning to rent until they die here on this board? Very few, if any. Those people probably don't give a rat's ass enough about the RE market and the bubble, and they probably aren't here reading this board. They're over on the lifelongrenters.com blog or some $hit like that.
Nice try, though!
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Happy New Year to you all ! Hope everyone had a great holiday.
There is a new kool-aid flavor in town. During the holiday parties, I sensed a different mood and encountered a new argument. Coincidentally, I also overheard a similar argument while in the line at a local Safeway.
Here is a snippet of conversation between two males, standing behind me in the line while I was paying.
First : So did you buy a house yet ?
Second : No man, still waiting. Prices seem to be coming down.
First : Oh common. They won't go down much. Maybe 5 to 10%. At the most. And you know what, in the long run it doesn't matter.
Second : Yeah, that's right.
I completed my payment and had to leave, so I do not know how it ended.
Now, it's not a completely wrong argument. But when it was made to be, I calmly pointed out that 5 to 10% of a typical BA home (800K to 1M range) is anywhere from 40K to 100K. This amount is nothing to sneeze at. Considering how long it takes to save this amount of money, IT DOES MATTER ! The discussion ended right there.
Given the most bullish scenario seems to be for prices to stay same in 2007, there is absolutely no harm in waiting. Even in that case, I will have saved more for my down payment, which would help offset any increase in mortgage rates.
Assuming many would come to similar conclusions, I think it is very safe to make one prediction. This year, buyers will not feel the pressure. There is no hurry to buy in 2007.
StuckInBA
#housing