patrick.net

The landlord (the first one) had no choice. After filing bankruptcy, the landlord could no longer collect rent. The luck came in the length of the bankruptcy process and the subsequent foreclosure. But yes, I realize this is not the norm.

Buying makes sense only if you plan to be there for a long time, and/or if the costs are less than renting. Some properties are there on the cost front.

The problem that I, like many other buyers face, is that if 2 years from now I lose my job and despite having an emergency fund, can no longer afford that house, the supposed equity is gone, especially if I have to sell.

I'm not one of those people who say "don't buy" just to be contrary. There are a lot of good facts presented here, I just think some important ones (like bad landlords and lack of quality rentals) are not highlighted.

Most Sundays I'm out looking at houses. It's the usual mix of REO/foreclosure, which are decently priced but neglected, 1-2 decent properties at a fair price, then the bulk are grossly overpriced attempts at humor by their underwater owners trying to recoup their equity, or at least their downpayment. :)

I previewed my rental about 2 weeks before I moved my family in. It had medium quality light brown carpet in all the living areas and all the walls were custom painted nice neutral colors. We did the walk through with the management company the day before we moved in. All the walls were repainted white, the carpet was replaced with a bottom of the line off-white cheap carpet, and the entire hallway was replaced with cheap vinyl flooring!! I was incredibly upset, but we were already moved out of our old house, and had already signed the lease on this place. I called the management company to give the boss lady a piece of my mind. She tried to convince me that the vinyl was an upgrade! Off white carpet? I have 3 little kids!! What about the paint? I specifically told the representative showing us the house that I loved the interior paint and want it to stay even if it had a few marks on the wall (I saw her write this down, and it was mentioned again at the lease signing). After giving her a piece of my mind, her final answer? "What's the big deal.... it's only a rental." Chaos ensued..... but of course, I still live here today, almost 2 years later. Nothing was ever rectified. Irritating. Oh, but I sold my last house in summer of 2006 for 475k, and could re-buy it today for 210k. I guess I'll survive, after all, "it's only a rental."

I'm on the renter side as well, moving out of a place the landlord is losing to foreclosure. We've found another great place and will be moving in two weeks. I've owned two houses but got out of the LA market because I could see the writing on the wall, and I'm glad I did. I pay half in rent what I would for a mortgage, and couldn't really afford to buy in the great school district I'm in anyway.

There are hassles, but overall renting is the right choice for us (yes, even with kids and pets) now. Ask me again in a year or two.

I've always rented.

The downside for me, which you make a small mention of, is the slipshod maintenance & upkeep that is all too common.

If you get an owner who live the next street over, and is a FixIt type, great.

However in Prop13 country as far as SFH, what is more common is the owners haven't lived in that town in years, and run it through a property management company. The property managers will do minimal repairs, and if you need a new fridge say, will get the cheapest one in the outlet store not a better Energy Star model. So you pay for this in higher utility costs, and so does society. I've even had idiots like this want to nickel-and-dime over smoke detectors. You pay for it in reliability and quality of life issues too. When I'm putting in even a disposal unit, I put in Insinkerator Evolution Compact which is a quiet and excellent unit, not the plastic cheapo grinder.

Living in a Streng home these days that I'm pretty happy about though. The owners moved out of town and let me do repairs and send the bills for parts. When I do the job, it's done RIGHT not as cheap and fast as possible. I find it very sad the Streng "Carter Classic" series of homes didn't take off, and just petered out after the Strengs left the business. It's a neat design with atrium and large skylight in the entryway.

Speaking of living a simple life, this looks interesting:

http://www.guynameddave.com/100-thing-challenge.html

2006-2009 is not the norm and will not be the norm going into the future.

You either guess or hope or both. 2000 - 2006 was also not the norm. We are not at the norm now because the government has decided to put a floor under housing.

As to the original post: No, renting is not the best of all possible worlds. You could look at it as a sacrifice in your standard of living for the benefit of increased savings. I would suggest taking the money you're saving by renting and using it to afford items of interest which were out of your range before the HELOC-go-round finally seized.

my total net worth is up around six figures since last year (when most asset classes like stocks, bonds and even commodities have been flat year to date).

i rent.

i would not be up anywhere near that if i owned a home.
it would've been a double whammy.
less money to invest because of the down payment and a house that probably would've lost value.

most new home owners i know (that bought in the higher priced areas in the last 3 to 5 years) are not happy with their purchases since they were expecting appreciation. everyone i know who bought after 2005ish, are down at least $100k or more; well one guy bought in palo alto last year and his home value is "up" although he'd have to sell to realize any gains.

i love that i'm in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I'm paying minimal rent at $1100/month. not really a fair comparison, but who cares, i'm saving a boatload of money and happy where i am.

between the amount of money I'm saving (mainly because I'm not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it's not even a close call.

there's a stigma with renting, but in the bay area in prime, sought after neighborhoods, it's absolutely the right choice.

But the norm IS a steady appreciation of real property, and despite what Case-Shiller wants you to believe that rate is greater than the rate of inflation.

This means someone who rents and saves is fighting two wars. Housing is going up while the value of his money is going down.

Renting: personally speaking, my savings power and mobility would have been seriously impaired by mortgage debt these past few years. Renting can suck, yes, but I think renting is the way to go for savers. Frankly, the BS that's played out over the last few years with housing has made me reconsider ever taking on a mortgage. Those big silver roach coaches are looking better and better.

As for housing going up up up; I just...doubt it. I think the housing market enjoyed its seven years of feast and is just barely into its seven years of famine. The reason it might not seem that way is because of the aggressive government intervention programs which had the effect of throwing a gargantuan area rug over the hole in the floor -- that, and likely even shadier back door shit that we won't know about until ten years from now when nobody cares anymore. In any case, unless this new housing policy becomes permanent, along with other more radical measures, (40 yr mortgages with 2% down; community service in lieu of down payments, etc.), it seems clear that we will continue to see a very slow but sure reversion to a healthy norm, where residential RE tracks more closely the local wages/salaries of buyers.

What could prevent such a reversion to normal? Undying legions of bubble equity barons endlessly beguiled by the scent of their own bullshit? An increase of foreign investors with property worship? Trickle-down from financial sector bonuses or war profiteers? Could be...a colleague of mine in San Jose just accepted a one year contract in Iraq and will be making just shy of 400K for a job that pays about 150K in the States in order to pay off his mortgage. Sorry, but I can't help thinking what a boring waste of that kind of bread. He'd be better served in the long run by buying a copy of Spider Man # 1 or an Elvis Presley toe nail clipping.

mike4518 says

i love that i’m in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I’m paying minimal rent at $1100/month. not really a fair comparison, but who cares, i’m saving a boatload of money and happy where i am.
between the amount of money I’m saving (mainly because I’m not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it’s not even a close call.

BINGO!!! I'm in the same boat. Moreover, mike's comment regarding mortgage payments being $4000 + and being able to rent at just over a quarter of that cost is the whole point of Patrick's site. Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position. Hence, why it is far more likely than not that prices will come down as we move forward. Currently, the purchasing environment is still a laughable, shameful joke.

It's not just the crapy appliances that I hated when renting, it's also the crappy repairs. As in if you owned the place you would fix it right. One apartamnt I had they would not replace a copper pipe run until it had more than a certain amount of patches in a length of pipe (as in piece for rubber clamped over the pipe as a fix). That and crappy single pane windows.

I'd say about half the prospective tenants I get are moving because "the house they're renting is being sold"

I guess it's a bigger issue when you're renting a house. When I rented it was always an apartment so that was never an issue. However the one time I rented someone's condo a year later I was forced to move.

I've rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded. The owner paid nearly $1 million in 2006, and we rent for well under 1/2 the nut. We are thinking of moving to something cheaper because there is so much available that is just fine, for less.

I'd estimate landlording on the peninsula is a losing proposition, unless you inherited the house and have been sitting on it for 20+ years. You certainly can't get anything like positive cash flow without major capital outlay (think $500Gs at least), and I think there are better returns on your capital elsewhere. All the negatives noted here are of course possible, so all I can say is do your research - and, "you don't get what you deserve, you get what you negotiate". I have pretty high standards and as a good tenant, I just walk away from 'crappy'.

I do feel sorry for you Californian renters especially. In exurban and rural Minnesota many of the brand new apartment buildings they build have their own private movie theatres, beauty salons, tons of pools, music room, billiards room, community room with mega-theatre screen, heated underground parking, etc. The apartments themselves are like 4-star hotel suites. Not every building has every amenity mentioned above, but it's usually at least a few extra special things (like a concierge service or marble baths or something to set them apart from all the other brand new complexes). In the exurbs apartment residents live like spoiled hogs for a small fraction of what it would cost elsewhere.

Many 1-bedroom units in these buildings go for about $700-750 per month. I am not joking.

Have a look:

http://www.grandview-estates.com/gallery.php?gazpart=show&gazgal=2

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I've seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

Vain says

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I’ve seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

This is kind of what's wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I'd say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little 'compound', and these aren't rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it's a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

You can find great deals in the bay area too in the exurbs. Just remember the bay area is large. So you're looking at past Tracy. Or out past Brentwood or out past Gilroy.

Everything within a decent commute's distance is going to be bid up, because it's not worth throwing away your entire life to a commute to live in something you'll never get a chance to use.

There are really nice homes around here, they're expensive. They get bid up. There are nice apartments as well, they get bid up as well.

As most investment professionals advise - Don't put all your eggs in one basket, spread them around. Don't put all your stock money into one stock, and don't have all your money in just stocks. Housing isn't a great return, but it's been steady for a very long time. Placing bets on how housing is going to unfold using the last 7 years data is pretty fool hardy. Look at over the last 50-70 years. Don't pick the top of one bubble and the bottom of the next to be fair judgments either.

I must admit I find the entire concept of the stock market strange, as most investment seems to be based on stock value rather than the value of the underlying company. As a kid, not having even basic economic principles, I imagined the stock market to be based around identifying companies with strong fundamentals but limited cash and investing in the stock of said companies to provide them with that cash. Most people I talk to invested in the stock market either buy stocks based on them being recommended by talking heads or use an investment company or broker to invest for them. None of these people are remotely interested in identifying companies with long-term value, because they expect to only hold any given stock in their portfolio until it increased or decreases in value a certain amount. By my way of thinking, this is not investing, this is gambling, trying to stack the chips in one's favor as much as possible before the cards are dealt. I prefer to invest locally in start-ups that provide what I consider to be a good product or service.

ahasuerus99 says

The standard deduction plus a few children puts the majority of potential homeowners in a financial situation where they gain nothing on their taxes from owning a house.

Children are irrelevant to this issue. Most people who own a house gain on their taxes from the interest and property tax deduction. Many gain significantly. Doesn't mean it makes buying better than renting however....

Vain says

hooch_raider says

Hey, if you have several hundred thousand dollars lying around to put toward a down payment that will bring you to a mortgage payment level that is even somewhat close to average rents in the area you want to live then good for you. I suspect, however, that not many people are in that position.

I’ve seen trends, and this holds true in San Jose as well, that families pool together loads of money (yes, even from Grandma), and has a monster downpayment. There are many people in that position. After the purchase, their parents/grandparents will still move in with them. Not so much luck for the nomad looking to start a life on their own without their parents though. They will then rent out their old homes which will fund them majority of the mortgage payment on the new home.

Vain,

I have no doubt this is taking place in various parts of San Jose and the greater Santa Clara county area; however, I don't think that is a major driving factor, particularly in the Los Gatos, Monte Sereno, Saratoga, Cupertino, Campbell and Willow Glen areas (not to mention other similar areas). In fact, I credit easy money via low rates, dual incomes from professional industry work (i.e., doc, lawyer, accountant), as well as employee stock plans (although dwindling now) as the real driving force behind the sky high prices in the greater San Jose area. I mean, to buy a 1300 + sq/ft home in any of the above mentioned areas, the cost is going to be north of 1 million dollars, and that is with the declines!!!! With a million dollar purchase, one has to come in with a down payment of at least $500-600K in order to get to a mortgage payment that is anywhere in the ball park of rental costs. And that is for a 30yr fixed!!! Forget the 15yr! That is simply an amazing amount of money and totally wacked. Why anyone would do that is unknown to me. People are still selling their souls to get these properties. It can only end badly. This is unsustainable.

Two people earning 125-150K each, saving for 3-4 years. SF ace has a nice earnings to loan amount. 1M isn't that hard to get.

This *IS* sustainable. It's not just not what most of us want.

repeated

the general idea of 3X income to afford a home loan is flawed because:

1) it ignores the impact of interest rate. The lower the interest rate, the less housing will cost.

2) Affordability and living cost is a function of house cost and non-house cost. If housing cost is 3X more, that doesn’t mean food payment, insurance and everthing else is 3X more as well. In many instance, it cost less to maintain a 1M house in CA than a 300K house in Texas. But in general I believe non-housing cost is pretty much fixed within the boundary of 0% to 25% more. So once we comingle the impact of housing cost and non-housing cost, 3X cannot be applied evenly.

The higher the earnings, the more valuable the 401K and benefits package, this is the hidden value of wages in the bay area people seem not to be able to recognize.

3) The house cost itself is a function that the more you make, the more tax benefit there is relative to lesser household income, especially in CA, varying anywhere from 0% subsidy to 40% interest and property tax subisidy. The income tax subsidy is worthless in TX, FL, NV and midwest. The income tax subsidy is the most lucrative in places like Menlo Park.

The income tax subsidy is a huge reason why a million dollar home rents for $3,500 in places like Menlo Park (utilizable) compared to places like Concord where home rents for 2,000 but sells for 250K (not utilizable). High income people simply don't buy in Concord. Conversely, if you are making good income and renting, you are losing out on huge income tax breaks vs. people who have low income that loses nothing.

Here is my guideline of what people can afford (probably in tune with underwriting standards) in CA based on the following income scenerio based on current interest rates. I do have calculations behind them but too exausting to detail here: Interest rate are down quite a bit between then and now so probably can increase the loan amount by 10% or so.

25K income = not affordable
50K income = 100K loan 2x income
75K income = 225K loan 3x income
100K income = 350K loan 3.5X income
150K income = 600K loan 4x income
200K income = 900K loan 4.5x income
250K income = 1.25M loan 5x income

Anything beyond is probably not based not only on salary, but net worth so correlation breaks here. So prime Palo Alto is probably a function of people’s net worth as well as salary.

If anyone can dispute this table, I like to know why/how.

"i love that i’m in a nice, safe, high income area (redfin shows the average home price in my city is listing at $1M or about $4000/month mortgage payment) and I’m paying minimal rent at $1100/month. not really a fair comparison, but who cares, i’m saving a boatload of money and happy where i am.

between the amount of money I’m saving (mainly because I’m not paying a huge mortgage) and being disciplined and experienced enough to invest it wisely, renting is an easy win for me. it’s not even a close call."

If you are renting a million dollar place for 1,100, congrats and yeah of course rent, and sign a lifetime lease too. But that is not the norm. A million dollar house probably rents for anywhere between 3K to 4K in SFBA.

The real question people face is if I make 200K, am i better off renting for $3,500 or buy a similar place for $1M based on current environoment. Considering that ITI net of income tax benefits is around 3K after 200K downpayment.

> If anyone can dispute this table, I like to know why/how.

simple.

your prices are predicated on a home as an investment, implying some form of positive return on investment.

taking an extreme example to make a point - if a home owner was guaranteed to -lose- money on his house every year he owned it, he would not pay those prices.

i'm just clarifying one of your underlying, unspoken assumptions. it is the mentality that the home is a great investment.
if it is true, prices will remain stable or appreciate.
if not prices will decline.
over the last 4 years the housing bears have been right.
prior to that the bulls were right.
only time will tell who is right in the next 5 years.

simple.

"your prices are predicated on a home as an investment, implying some form of positive return on investment."

No it's not, it doesn't say whether it is a good deal, the table represents what is affordable based on current underwriting standard, nothing more. 3X income cannot be applied evenly if you put in more advanced variables. Most people rely on 3X income as the benchmark when it is not true at all.

Your're absolutelly right people are not buying based on falling price expectations.