patrick.net

That was the whole point of my post. I don’t dispute that if house prices stay flat to up that over the long term (to amortize the transaction costs) it’s better to buy.

But that's NOT the point of MY post. Look at the NYT calculator and play with the math there. Even if a house price goes up with inflation (say 3%), current market rents make buying more expensive over the long term. I put in $4k rent and a $1.5M house price (which I've found to be pretty common on the mid-peninsula the past few years), 20% down and 5.5% mortgage (which might not even be available for such a large loan), and both house and rent going up 3%/year. Renting is always cheaper. After 30 years, you'd have paid $616k more for buying, not including any major, unexpected maintenance, higher property taxes, etc.

I don't dispute there are various reasons for buying, and if we get major inflation (which is probable) then having debt in nominal dollars will be a great deal as the cost of debt goes down. But when rents are so much lower than relative buying costs, and it's clear prices will be flat, at best, for the next few years, there's certainly no rush and a lot of risk to buying right now.

Besides, the significant money you can save by renting right now completely insulates one from any housing cost increases just in case that actually happens over the next few years. Not likely...

JimAtLaw says

OP: You posit that prices are sustainable with the mortgage eating 72% of the family’s take-home, and that’s after putting $200k down - the equivalent of 3 years of the family’s take home pay.
How many people do you know who make $140k who have $200k in cash in the bank (plus another $25k at least in reserve after the down payment)?
How many banks do you know of who will finance a house that consumes 3/4 of the family’s take home income?
How many families do you know who are able and willing, outside of bubble environments, to spend 3/4 of their income on the mortgage, even if a bank would give it to them?
Not realistic IMHO, there’s a reason that home prices have tracked incomes at around 3x and not at 7x as you suggest, the Bay Area is very much bubblicious, though falling in places piece by piece. Oh, and in your math, you left out car payments, insurance, etc.

Exactly. This is the mentality that fueled much of the bubble. "See, we can make it work and
appreciation will make us rich.". 70%+ of take-home for housing?? Seriously? This is what fueled the bubble in large part, but it in no way translates to "there is no bubble".

If you are banking on a $990k Silly Valley house to seriously appreciate - well, good luck! This mentality only occurs in places like this and the only question in my mind is how much this will continue to fuel itself. In the vast majority of America, no one, and I mean NO ONE would think this made sense. I guess "it's different here".

pkowen says

70%+ of take-home for housing??

No, 10% of takehome for housing and 60% for the investment in land.

SanMateoRenter says

$1.5M house price

With those numbers I get a $4760/mo average cost over the life of loan.

Interest averages $2250/mo (a bit low since this principal is over the $1M limit on deduction which I'm not accounting for)

Property tax is $1000/mo

Other costs are $1500/mo and include the lost $700/mo in opportunity cost on the downpayment.

So in 2040 having paid $1.7M in TCO you'll own a $1.5M house free and clear.

I don't know if the last 30 years are going to be like the next 30. Does anyone?

If Japan's ZIRP is the model then we're in for 20+ years of stagnation and slow price decay.

If 70's style inflation comes back then buying now will be awesome.

It's difficult modeling this, but the basic deal is, assuming 3% rent increases and 4% yields over the next 30 years:

Total cash outgo with rent: $2.4M
Total cash outgo buying: $3.3M

In addition, the renter saves the compounding interest of each year, which also collects the monthly savings from renting. Thus the renter's cash pile increases from $300,000 in year 1 to $2.4M in year 30 (renting saves $2900/mo in year 1 and $600/mo in year 29).

So with these numbers, which would you prefer? Renting for the next 30 years and having $2.4M more in cash, or owning what is now a $1.5M home free and clear in 2040?

With 4% yields, I'd go with buying, though with these numbers in 2040, the interest on the cash savings would in fact cover 80% of the rent (which would be $9800/mo).

Going with 6% yields, then renting looks a lot better since in year 30 you'd have $4M in the bank and the interest would cover TWICE the rent ($9800/mo).

$1.5M might as well be a moon house for me so that's all the analysis I'm going to do : )

bubblesitter says

But then they are at the mercy of their continuing high paying jobs, for e.g here in Socal Boeing folks and Apple,Google etc. in Bay area. All it will take a one more strike of economy hitting them to bring tremendous pressure on prices of homes in this area(for e.g. sudden drop in defense spending could mean disaster for Boeing, may be 2012? 2016? - end of Iraq/Afghanistan war - most will agree that we cannot stay there forever). Remember the last slump in Socal when Boeing was hit hard? So one of the reasons why some of the Socal areas are holding ground is due to companies like Boeing.

It seems many dont recall the historical facts you listed. Decline in defense spending in Socal hit home prices hard as was the case with Japan imports of Hight Tech products kicked Silicon Valley pretty hard as well. These factors come into play very quickly and there is little or no warning when they happen.

Troy says

Los Altos shows 400 sales over the TTM, Cupertino ~300 (east of the 85). There are what, 20,000 AAPL and GOOG employees now? Add in the doctors, lawyers, etc. and I don’t see the fortress as over-bought.

As with any large organization, many people, lots of segregation of duties, means little responsibility and little pay. Google is known for not paying much for their people today Google = Gilded Cage .
The younger they get them the less experience they have and are less marketable to other companies. Skills in Advertising/traffic acquisition revenue/costs does not transfer as a skill to mainline HW/SW companies in the valley.

The original assumption of average salary and average house is flawed.

1) average salary represents sum of Cupertino households
2) average household includes apartments/rentals which is about 33% of Cupertino housing. In San Francisco, your average resident is a renter. In Cupertino 1/3 of the households are renters.

3) Average house price and affordability is quite misleading. Half the homes are purchased before 1989, meaning half the residents already locked in a cost that may be less than 500K equilvalent. Perhaps if you pooled every households debt on their home accounting for when it was purchased, it's probably in the 500K range, not 990K. If you layer in the fact that homeowners make 175K and renters 110K in Cupertino, then salary to cost is not out of whack.

An average salary is not gonna be enough to buy a SFH in Cupertino, that's just the way it is going to be. IMO, it takes about 250K gross income to buy a house and raise a family of 4 in Cupertino. This town attracts plenty of 200K+ households so median salary will be pushed up even in with the great recession.