patrick.net

point #3 is key:

"Fixed-rate mortgages never rise – and eventually you pay them off."

1) I fixed my first mortgage in 2001 at 3,200 a month, two refinances later, the mortgage is now 2,700 a month with significantly more going toward principle. Not only can it not rise, it can go way down. After almost 10 years in SF, I have locked in a cost that is significantly less than prospective owner/tenant.

2) I bought investment home in Hercules Nov2009, mortgage is 1,500 a month. Hercules dropped about 50%-60% from peak to bottom and mortgage rates were down 30% or so. So 50% reduction in price and 30% reduction in interest rate pretty much drop interest from item #3 from 2,600 a month to 1,000 a month. That's a huge difference. Fixing at 2,600 may be stupid, but fixing at 1,000 is a tremendous asset considering rent is 2250 and Sec8 rate pays 2400.

You don't have to close, if you want to start over, based on their errors, and acting in bad faith, you get your money back. Or sue and win,I hope you did not take it, but I suspect you did. Too Bad. Hope it is all you hope it is. (I know I will never own again not just cause of down turn, just all the other crap that comes with it)

MarkInSF says

Yeah, paying a mortgage is “forced savings”, but it’s not a very good way to save. You pay the bank $200K over 30 years, and you end up with a home worth $100K

Let's run some numbers -- there's a nice house in Fresno going for $330,000 now so let's use that.

$330,000, 20% down, $264,000 30yr loan @ 4.25% has a P&I payment of $1300/mo.

The nominal housing cost (PITI - P) is ~$1366/mo and the actual net cash outgo is ~$1785/mo.

The value of the tax credit of mortgage interest and prop tax expense, for single filers, works out to an average of $300/mo over the life of the loan ($500/mo starting out and falling to $0 in year 27).

Anyhoo, after 30 years:

Asset Cost: $330,000
Total Interest: $203,000
Total Prop Tax: $122,000
Total Other: $136,000 (Insurance, HOA/maintenance)

Subtotal: $791,000
Tax benefit: $107,000

TCO: $684,000

Average monthly cost for first 30 years: $1900

Rents are a bit lower than that I guess, so assigning a $1600/mo value of the housing good we got, that gives us net TCO of $108,000 (TCO less $576,000 in OER).

Taxes & maintenance going forward will be $700/mo so the cash flow (assuming it still rents for $1600/mo in 2040) will be $900/mo, $10800/yr, or 10% ROI on the $108,000 net TCO.

The alternative would be renting at $1600 for 30 years and banking the $300/mo savings. That plus the $60,000 DP would give one a total savings of ~$300,000 @ 3% compounding

So in the 3% interest rate environment, after 30 years the strategies will be:

Own a $330,000 house free & clear with a ~$900/mo cash flow
vs
Have $300,000 in the bank with a ~$800/mo cash flow

This is all, of course, going with today's ZIRP environment and total non-appreciation in housing. Any return of wage inflation will slaughter the renting alternative.

Troy, thanks for the explaination. Risk vs. Reward

No appreciation, rents are flat, take the cash flow, throw a little money down the drain. (boo-hoo)
some inflation and appreciation, and it is completely different ballgame exponentially.

name me a ten year period that housing price and rents have not appreciated? Better yet, what is the appreciation and rent comparing bottom to bottom?

here's the house btw:

http://www.zillow.com/homedetails/279-E-Loyola-Ave-Fresno-CA-93720/18687914_zpid/

I could live in that for the next 30 years, no prob. Right in the core of Fresno's Fortress.

Troy says

This is all, of course, going with today’s ZIRP environment and total non-appreciation in housing. Any return of wage inflation will slaughter the renting alternative.

Troy, thanks for analysis. Your numbers look correct.

It is however also assuming a total non-depreciation in housing. And it also assumes one does not take the standard deduction on taxes, so you're not granting renters the tax benefit the are entitled to and subtracting it from their TCO. It also assumes a very modest disparity in monthly housing costs from a buy/rent perspective. The disparity is greater in San Francisco.

You're right though that normal circumstances, owning is almost always a better long term proposition if your going to stay for a long time. That house in Fresno looks like a decent buy for somebody.

SF ace says

name me a ten year period that housing price and rents have not appreciated?

1910-1920.

Assume inflation, and yeah, buying a house is almost always a good deal. Everybody who makes that case though assumes the Fed can ignite inflation, even when they financial system is already burdened with more private debt that at any time in history, and is deflating even in the face of massive fed intervention.

MarkInSF says

And it also assumes one does not take the standard deduction on taxes

? my spreadsheet was calculating the tax benefit above and beyond the single's standard deduction, which is why it goes to zero in year 27.

Perhaps using the married deduction here would be more accurate, but married couples might be able to create more itemized deductions, giving them more money back, dunno.

pkennedy says

Containers can have up 44,000 pounds, most aren’t anywhere near capacity
You could easily ship with someone else as well, using their extra weight allotment, since they’re more dense than most products.

He's got a good point here, they would of course ship them by the pallet, with one brand, you can get 34 panels on a pallet, since each pallet is roughly 6x6, they would only be about to fit 6 pallets of panels in the container. (I'm assuming they don't on stack them, since panels are fairly fragile) so that's only 9,000 pounds of wieght for 204 units and it leaves 2 feet on the side of the pallets, 4 feet in front by the door and 5 or 6 feet to the top of the container. Now if the container cost 8k to ship, it would mean each panel is costing $40 to ship from port to port. This space could easily be filled with something like stuffed animals or other very light weigh products that take up a lot of space but wiegh very little to defer the cost. Also your figures are off, a 40' Standard Dry Container which wieghs 8,000 pounds has a Max Payload of 59,200 pounds and a Cubic Capacity of 2,350 sq. ft and 8k to ship it from China to California, shipping to the east coast adds several thousand dollars to the total.

This link is on Patrick.net and this is the meat of the story, I ask that you read it, consider it also. I think it tells it like it is, and as to your so called fortress areas, it just take longer to effect those "better" areas

http://www.irvinehousingblog.com/blog/comments/last-remaining-hopes-crushed-homedebtors-defend-home-ownership/?source=patrick.net#blogtitle

Why are market collapses signified by changes in consumer sentiment? First, we need to distinguish between deflating market bubbles and market swings causing temporarily low prices. The housing bubble was a bubble; prices became elevated from fundamental values, and they are in the process of correcting back to true value. Prices were not temporarily depressed, they were temporarily elevated. In a bubble scenario, prices do not recover.

When market sentiment is still in denial -- like most of California's coastal markets are -- people cling to the hope of a recovery that is not going to happen. Stories about the double dip may push the market into fear, but it is nowhere near capitulation and despair like the subprime markets are today. As long as there is the delusion that prime markets are somehow going to avoid the deflation of the bubble, there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties, and the distressed debt in the market remains. As long as there is overhead supply and people holding distressed debt, the market will not recover because each attempt simply brings out more sellers and prices get pushed downward.

An understanding of this market dynamic is the primary concept separating traders from academics. Traders understand this. Academics don't. Since the banks get most of their advice from academics, they will consistently make the wrong decisions, the market will not clear, and prices will grind lower until they capitulate and the inventory is finally gone. As we are witnessing today in Las Vegas, everyone must sell, abandon hope, and feel widespread despair before the market bottoms.

The problem is that people don't know where prices could fall further. The markets commonly labeled as safe havens are the most at risk whereas the markets labeled as hopeless are at or near the bottom.

The forced savings angle is bogus because in the same way renters have to "resist" spending their savings over a mortgage, homedebtors have to "resist" those constant HELOC/refi postcards in the mail. That can just as easily lead to overconsumption as having to put money into a savings account. You can't cure stupid.

Also, where I live there are plenty of houses for rent and they can be cheaper than apartments. The decision to be made out here (SF Bay Area) is do I want to rent an old house or a new apt. We have friends that live in a nearly-new apartment. 1,400sq ft 2+office/2 and pay $2,800/month. But the closets are huge, it has A/C, high ceilings, pool, etc. We live in a 1955 1,046sq ft 3/2/2 and pay $2,250/month. We have tiny closets, less space, lower ceilings, etc. But for us the yard, garage, and no shared walls is worth it.

Also, a LOT of people bought townhouses and condos because that was all they could afford. So there are plenty of "buyers" that are living in "a townhouse at best and an apartment at worse".

Troy says

MarkInSF says

And it also assumes one does not take the standard deduction on taxes

? my spreadsheet was calculating the tax benefit above and beyond the single’s standard deduction, which is why it goes to zero in year 27.
Perhaps using the married deduction here would be more accurate, but married couples might be able to create more itemized deductions, giving them more money back, dunno.

The thing I noticed about your spreadsheet is you seem to use X- standard deduction. Technically that can't be correct as most people pay state income tax, state SDI, personal property tax (vehicle) anyway. If I pay 15K in state income tax already (may be different for others and by state like Texas where there is no income tax), there is no standard deduction dilution. The entire amount of mortgage and property tax is deductable. (subject to phase out and AMT)

hmmm. That kinda changes all the numbers quite substantially. . ..

grywlfbg says

The forced savings angle is bogus because in the same way renters have to “resist” spending their savings over a mortgage, homedebtors have to “resist” those constant HELOC/refi postcards in the mail. That can just as easily lead to overconsumption as having to put money into a savings account. You can’t cure stupid.
Also, where I live there are plenty of houses for rent and they can be cheaper than apartments. The decision to be made out here (SF Bay Area) is do I want to rent an old house or a new apt. We have friends that live in a nearly-new apartment. 1,400sq ft 2+office/2 and pay $2,800/month. But the closets are huge, it has A/C, high ceilings, pool, etc. We live in a 1955 1,046sq ft 3/2/2 and pay $2,250/month. We have tiny closets, less space, lower ceilings, etc. But for us the yard, garage, and no shared walls is worth it.
Also, a LOT of people bought townhouses and condos because that was all they could afford. So there are plenty of “buyers” that are living in “a townhouse at best and an apartment at worse”.

+1 on the forced savings. I don't know why its so hard for people to put away a portion of their income. 401k + Employ stock purchase plan automatically ensured I put away 1/3 of my income and on top of that I specified a portion of the paycheck to be deposited in a separate savings account. Do people actually have such low discipline?

If I had gotten to be stuck with a mortgage, I would've never been able to save for retirement or taken advantage of the generous ESPP plans. All your eggs in one basket is bad, all eggs in one illiquid, highly leveraged basket with huge transactional cost in a highly overvalued market is the worst investment choice you can make.

1. You are your own landlord. :

I can paint my own walls if I wanted to, I just have to paint it back. Not a big deal.

2. Paying the principal is forced savings.

See my post above

3. Fixed-rate mortgages never rise – and eventually you pay them off. With mortgage rates at record lows, people who buy now are locking in terrific bargains.

I think most of us here wants to buy at some point. We just don't want to be locked into a horribly overprices property. We would rather buy at a low price. Short term the number does not work out. it is certainly not a good reason to BUY NOW

4. Good schools. The best school systems are supported by owner-occupants who are willing to pay substantial taxes. These same people are involved in the schools and push to make sure their kids get the very best education.

Wrong. There are plenty of rentals available at any of the fortress areas, for much cheaper then actual purchase cost.

5. Spacious properties in pleasant neighborhoods. Sure, you can find a four-bedroom rental, but they aren't a dime a dozen. Family-sized homes in attractive communities are almost always owner-occupied -- not rentals.

Wrong again, I'm renting at a beautiful neighborhood with excellent neighbors (SFH and Duplexes) when we moved in, the neighbor came over with a gift basket to welcome us. This is right in the center of the silicon valley within 10mins from work. The cul-de-sac regularly have block parties and bbqs and all the neighbors have each others phone numbers. Searching for craigslist refutes this statement easily.

Serpentor says

Short term the number does not work out. it is certainly not a good reason to BUY NOW

Now that we're somewhere in the bottoming process, buying now may not be a bad strategy if mortgage rates continue getting pushed down.

I was looking at a $370,000 house in Fresno last year -- 30 year @ 5.25% would have been $1750/mo nominal ( $2200/mo amortizing) starting out.

http://www.zillow.com/homedetails/2117-W-San-Jose-Ave-Fresno-CA-93711/18707515_zpid/

Now a 4.25% refi is possible, lowering the nominal to $1550/mo and $2100/mo amortizing (a 3.5% 15 yr mortgage would require an extra $900/mo principal payment and lower the nominal cost to $1400/mo).

Should 30 year rates go to 3.25%, refi-ing to that would set the nominal cost at $1350/mo and amortizing would be $2000, and for the extra $900/mo the 15 yr @ 2.5% would lower the nominal cost to $1200/mo.

$1200/mo ownership cost for that house would be ridiculous. In 2001 pre-Bubble Fresno -- when rates were 7% -- this house was easily worth $330k, $1900/mo nominal and $2200 amortizing.

I don't know if rates are going to 2.5%/3.25%, but it's certainly not unlikely.

I'm not sure why people keep bring up low interest rate as a good reason to buy. I'd rather wait until rates go up to buy a lower priced house. Buying a high price house with low interest locks you into the high price while you can always refinance when the rate drops.

Fresno is not in my radar for living or investment so I can't comment to say whether or not its bottomed. I have no idea why anyone would want to live there though

Serpentor says

I’d rather wait until rates go up to buy a lower priced house.

Japan has had low rates for 10+ years now.

We're not the usual up & down cycle here:

I think it's a pretty safe bet that rates are going to go up in response to inflation, making market timing better to err early than late.

Buying a high price house with low interest locks you into the high price while you can always refinance when the rate drops.

Theoretically, yes, but this cycle hasn't really been present since 1983, it's been all monotonically downhill since Volcker killed everyone.

I might be dead before we see that up & down cycle that you're waiting to time. 3.5% 15 year mortgage is free money, almost. The average after-tax interest payment over the 15 year 3.5% $370,000 loan would be $370/mo (Property tax is ~$250/mo).

I have no idea why anyone would want to live there though

Look at that house I linked above, it's nicer than 95% of the houses in Los Altos. Summers are pretty hot but throw some PV on the roof and you'll be running the meter backwards and still having some nice A/C, plus pools are best on the hottest days. It's a dry heat so after 7:00 it starts getting rather comfortable too. Fresno weather sucks most in the winter, cuz its foggy and blah.

As for that house, it's on the edge of Fresno's fortress area, another half-mile north would be better but that adds $200K to the price. Costco, Chipotle, Taco Bell, Panda, Quiznos, In N Out are very all convenient (plus the usual assortment of upscale chains in the new shopping area more to the N). Fresno is in the middle of nowhere but LA, Carmel, SF, Yosemite and Kings Canyon are all ~3 hrs away.

The main problem with Fresno is 2/3rds the city is a no-go zone. My mom hasn't ventured two miles south of her place in 30 years of being there (the city has been oozing N from the old business downtown since the 1950s, it hit the river in 1990 and started coalescing there).

One additional point about house price vs interest rates are property taxes. They're based on the price of the house, not the monthly payment so overpaying for a house means you're going to overpay taxes.

Troy, your comment about Japan works against what you're saying. House prices in Japan have continued falling even as interest rates have continued to fall so lower interest rates do not necessarily translate into higher prices. The converse is also true in that rising interest rates do not necessarily translate into lower prices (see the late 70's). Interest rates and lending practices can clearly affect house prices but absent a bubble, employment and wage growth are what matter the most. I don't see those happening for awhile thereby I wouldn't be in a rush to buy.

Troy says

Look at that house I linked above, it’s nicer than 95% of the houses in Los Altos. Summers are pretty hot but throw some PV on the roof and you’ll be running the meter backwards and still having some nice A/C, plus pools are best on the hottest days. It’s a dry heat so after 7:00 it starts getting rather comfortable too. Fresno weather sucks most in the winter, cuz its foggy and blah.

As for that house, it’s on the edge of Fresno’s fortress area, another half-mile north would be better but that adds $200K to the price. Costco, Chipotle, Taco Bell, Panda, Quiznos, In N Out are very all convenient (plus the usual assortment of upscale chains in the new shopping area more to the N). Fresno is in the middle of nowhere but LA, Carmel, SF, Yosemite and Kings Canyon are all ~3 hrs away.

Yes but what will you do for work in Fresno? There's a reason house prices are cheap there and elsewhere in the Central Valley - there isn't any work.

grywlfbg says

Yes but what will you do for work in Fresno? There’s a reason house prices are cheap there and elsewhere in the Central Valley - there isn’t any work.

Retire on the cheap! Like many who lived in the Bay Area in prior years, got feed up with the rat race and moved.

Troy says

In 2001 pre-Bubble Fresno — when rates were 7% — this house was easily worth $330k, $1900/mo nominal and $2200 amortizing.

As i recall they were around 200K or so before the bubble...Post 1998 prices were also bubbly like the rest of the BA. I would say more room for declines.

http://www.zillow.com/homedetails/2144-W-San-Jose-Ave-Fresno-CA-93711/18707513_zpid/

Price History
Date Description Price % Chg $/sqft Source
07/09/1999 Sold $308,000 155% $86
04/15/1993 Sold $121,000 -- $34

grywlfbg says

Yes but what will you do for work in Fresno? There’s a reason house prices are cheap there and elsewhere in the Central Valley - there isn’t any work.

And make sure you get a swimming pool......it can get damn hot in Fresno.

grywlfbg says

your comment about Japan works against what you’re saying. House prices in Japan have continued falling even as interest rates have continued to fall so lower interest rates do not necessarily translate into higher prices.

My assumption about lower rates is that they are intended to prop up prices from falling, so there will not necessarily be a price rise. But as rates fall, refinancing is possible (assuming LTV is kept from increasing), reducing the cost of early timing.

The converse is also true in that rising interest rates do not necessarily translate into lower prices (see the late 70’s).

I've thought about this a little and I think the 1970s was a buying-power surge that the system had to control with the high interest rates.

The baby boom turning 15-30 in 1975 introduced a lot of new wage earners into the system, and thanks to the general condition of the world (the US developmentally far ahead of the world) and internal opportunities in the US this new labor was largely integrated into our productive base. Additionally, women entered the workforce and banks started qualifying households on two incomes.

All this was horribly inflationary for housing, so up it went. Wages responded to the rising housing costs, producer prices responded to rising wages and energy costs, and these rising incomes increased everyone's borrowing power, so debt increased too.

The contrast between the 1970s wage-price spiral and the 2000s housing-debt spiral is that debt was rather constant in real terms in the 1970s and wages were largely driving debt growth, while in the mid-2000s debt was going hyperbolic even in real terms and wages were being driven by new debt, indirectly via the home ATM and directly via housing bubble employment.

How all this relates to now, dunno, but we have the main cases going forward, ordered in probability:

1) Wages go down, rates down -- buying now is neutral to good
2) Wages go down, rates same -- waiting will pay off
3) Wages remain same, rates go down -- buying now is good since prices will rise
4) Wages go up, rates up -- buying now is good, for locking in low rate
5) Wages remain same, rates go up -- waiting will pay off if you bring cash
6) Wages go down, rates up -- armageddon, US ceases to exist
7) Wages go up, rates down -- impossible

Note that "wages" here are after-tax, after-energy incomes!

I don’t see those happening for awhile thereby I wouldn’t be in a rush to buy.

yeah, I'm in no rush either. The ptb are pushing for another 1994-style "New School" Republican revolution since we apparently have to have one every 15 years or so. I see pain for the middle class coming, a whole lot of pain, it was a nice ride, 1945-2000, but welcome to Brazil.

grywlfbg says

Central Valley - there isn’t any work

One solution to that problem

Seems like the communities on the Shinkansen line are part of integrated Japan, and everywhere else is backwater dying off places.

Fresno will be on the California version if it ever really does get built.

Property taxes are based on what it costs to run a town/city, not how much you paid for the house. Even if the value of your home goes down (as it has for most of us) your taxes almost never go down accordingly, because people still gots to get paid. You have to do some serious bitching to get it reduced, and even then they just raise the rate.

robertoaribas says

my property taxes just dropped by almost 10%… I just got the notice friday.

We've got a different taxt structure here, with no sales/income but high property taxes so 10% would be more than $100, closer to $1,000. What do you figure the value of your house dropped? AZ I'm guessing over 20%.

I've been reading this thread with great interest.

I see one aspect the pro own a house side is failing to account for.

RISK

If you are renting and you lose your job or have some financial crisis the most that will happen is you will get kicked out of your rental unit. If this happens if you "own" on your home and have a loan on it and can't make your payment you will lose your home that you "owned". Thereby forfeiting your down payment and any payments you may have made.

The odds of losing your employment or having a financial crisis have gone up drastically the last few years. The U.S economy is undergoing drastic changes it is not a good time to buy until the changes are complete , I would say in 5-10 years would be a good time to buy a home. Do not step in and catch a knife right now, not worth it.

>>robertoaribas says

>>my home is down probably 50%.

>Nomo says:

>Jesus, Mary, and Joseph. You sit here and spout off your so-called “expertise” about RE investing and it turns out you don’t know jack.

Nomo, your claim isn't valid unless Aribas *bought* at the peak. Or are you saying that everyone who did not *sell* at the peak "does not know jack"?

Armando148 says

If you are renting and you lose your job or have some financial crisis the most that will happen is you will get kicked out of your rental unit. If this happens if you “own” on your home and have a loan on it and can’t make your payment you will lose your home that you “owned”. Thereby forfeiting your down payment and any payments you may have made.

If you "own" a house and lose your job, become disabled, etc., the government will step in with a million and one safety net programs designed to keep you in your current residence, or at least delay your eviction for as long as possible.

An apartment? You're out at the end of the month.

Cvoc13 says

You are not re evaluating your reasons, you should. Start as if you never had bought a home. See if you would still think it is a good investment. It is not that good, many many better ones, at least here in the USA.

The last line should read--at least here in parts of the Bay Area.

Phoenix is going to run out of water. Water and free labor.

Nomograph says

alpine says

An apartment? You’re out at the end of the month.

That’s because owners are better people. They deserve extra help.

I should be a better person and get a "million dollar" house for "no money down" and a "pick a pay" mortgage that is less than half the debt service. Then not even pay that, and get foreclosed on, and live there rent free for 6 months or so during the process. Then get a news article published about how the evil mortgage company is taking away my "home" and how I am a "victim" and have lost my "American dream".

If only I were a better person.