patrick.net

therapy says

decent starter homes

Be careful.

Starter homes is Realtor®-Yuppie-Talk with insinuation and implication for "trading-up". It ("Starter Home Arithmetic") worked in the decades of "real" appreciation and "real" increase in purchasing power of wages over an adult life-span.

snyderkv says

I also left out the increase in rents over the life span of the person which could increase the 3,000,000 figure to double or triple.

welcome to my life.

My parents rented in Salinas in the late 70s @ $400/mo. Now the rent is $1200+.

My first rent was $390 month, 25 years ago. Now that same place costs $1000+.

Odd thing though, is that the stock market was pretty good, 1985-2000.

Running the numbers of an example I'm familiar with -- a condo purchase in 90024 in 1986 -- had the buyer chose to put that money in the market (and gone to cash after losing 5% in any down year), the numbers look like this:

Purchase: $185,000; Principal: $148,000 DP: $37000

In 2012:

Principal: $0 (refinancing to 7% in 1992 allowed the loan to be paid off in 2006)
Asset Value: ~$600,000
Monthly cost of ownership: $400/mo

vs Renting

Starting rent: $1100
Current rent: $2200
Market value of investments: $900,000
Annual yield on investments: $20,000 (~2%)
Net rent (rent - monthly yield on investments): ~$500/mo

So if you know how to play the market and go to cash when thing went bad (2000-2002, 2008), renting is surprisingly superior to buying.

However, if you were renting and DID NOT go to cash during the bad years, you'd have less than $400,000 now in investments and your net rent would be about $1000/mo more than the buy case.

I still hear a lot of you use the word Owner as if you don't pay the real owner every month (the bank)

Owners Own
Borrowers Borrow
Renters Rent

get your terms straight folks please. My Grandmother is the only person I know of who really Owns. everyone else just owns Debt and liability and a head in the clouds dream.

"I still hear a lot of you use the word Owner as if you don't pay the real owner every month (the bank)"

The banks don't own the house. They just hold a lien against it.

Mortgages are a financial arrangement that allows home buyers to pay the bank interest instead of paying rent to a LL.

If prices go up from here, borrowing to buy a house will probably prove to be a good idea, though it all depends on what investment yields, rents, and home prices do.

If everything is just flat, buying now will be the deal of the century.

Here's an example:

http://www.redfin.com/WA/Bellingham/2305-Agate-Heights-Ln-98226/home/15810927

3.5% down for 15 years @ 3% has an average monthly cost of ownership of $1250/mo, and after the mortgage is paid in 2027 the cost of ownership will be about $650/mo.

Good luck renting to beat that.

Now, it's possible that the system will either continue to decline for years, making putting off buying not a mistake, or the system will blow up in a bad way, somehow slaughtering incomes and rents altogether.

This is not an easy decision to make and people who think it is aren't analyzing all possibilities that well.

Katy Perry says

I still hear a lot of you use the word Owner as if you don't pay the real owner every month (the bank)

To help legally define owner;
The bank (mortgage holder) can not evict you to raise the rent, or to house his mother in Law or ANYTHING other than call the NOTE when unpaid.

The OWNER has what is known as the "BUNDLE of RIGHTS"
An Owner does NOT have to ask the bank if they can retain possession each month, rent it out, make improvements, sell, refinance, trade etc. ?

Same as a car. When making payments on a car, am I the owner, or does the bank pay the parking ticket ?

Keep chanting those half truths, the only ones that believe you are the ones who need to make themselves feel better about renting. An unbiased person knows better. This is the guy that said location doesn't affect price of housing. I LOVE THIS GUY!

Where I live, the median house price is 10X median income. 159 foreclosures out of 500 total. Unemployment is 14% or so. House prices fell 5.9% last year.
The peak median house price was $769K, today it's $527K. So, there are many houses that are underwater. More underwater houses, more foreclosures, 10X median income price=falling prices here.
In some towns in the USA there was 1. not such a huge bubble 2. not such a high price compared to income 3. not such high unemployment 4. not so many foreclosures (present and future expected). So, it's no big deal to use borrowed money=credit=leverage to acquire a house.
Where I live, it's a very BIG deal to borrow to acquire an asset that is falling every year for probably years to come.
My grandmother who was a businesswoman since before the depression always rented. I never knew it as a child, we visited her in her awesome house. But, she was the one who had the $5,000 cash to lend my father to buy that ocean view property in Martha's Vineyard way back when. He didn't have the dough.
Having some dough ready is the defnintion of being a renter. You can rent all KINDS of things and you can let your mind be creative to think of how many they actually are.

Bellingham Bill says

The banks don't own the house. They just hold a lien against it.

Mortgages are a financial arrangement that allows home buyers to pay the bank interest instead of paying rent to a LL.

If prices go up from here, borrowing to buy a house will probably prove to be a good idea, though it all depends on what investment yields, rents, and home prices do.

If everything is just flat, buying now will be the deal of the century.

God you sound like realtor. You've really bought in and drunk the BS kool aid. even if you do own 100 percent of the house you can still lose it to the tax man.

Not only do they really own the house they own you also until you pay it off.

Plus whats the rush to buy other than your wife will be happier and you can use the word "owner" even when you own nothing but debt and a dream.

debt is slavery
teach your children to be debt slaves.

TMAC54 says

Katy Perry says

I still hear a lot of you use the word Owner as if you don't pay the real owner every month (the bank)

To help legally define owner;

The bank (mortgage holder) can not evict you to raise the rent, or to house his mother in Law or ANYTHING other than call the NOTE when unpaid.

The OWNER has what is known as the "BUNDLE of RIGHTS"

An Owner does NOT have to ask the bank if they can retain possession each month, rent it out, make improvements, sell, refinance, trade etc. ?

Same as a car. When making payments on a car, am I the owner, or does the bank pay the parking ticket ?

How much invested ? How much back ? What's the risk ?

What do you call An owner with no house payment then??

super owner maybe? extra special owner? you're really are drinking that kool aid!

Plus I don't care if your house payment is less than my rent. get the F over here and fix my water heater please. you work for me biotches!!!!!

toothfairy says

I'm sorry but I do not like renting. To me renting is throwing money away. At least with owning, even if you have a mortgage, some portion goes to the principal. You get some deductions. You can pay off, pay down, or refinance your loan.
Renting is a 100% expense every time and there's nothing you can do about it.

If you're trying to justify renting, he biggest advantage is probably that you can easily move to another place without having to deal with selling your house.
But that is pretty minor.

You just don't get it.

Given the right combination of factors (e.g., cost to rent, interest rates, appreciation vs. depreciation, etc.), purchasing a home can be beneficial if you plan to live in that home for an extended period of time. I believe under "normal" circumstances, the period of time required to break even is approximately 7 years. Given current economic factors, the break even point is probably 10+ years. And here in the Bay Area, I don't know a lot of folks who have lived in the same house for 10 years or more.

You think being able to move without having to bother selling a house is a *minor* advantage? Tell that to the massive number of Americans who would love to relocate for a better job, but who can't because they are too far underwater on their homes.

You and many other folks have an emotional need to buy, and that's fine. Just don't try to make it sound like you're making a logical decision by throwing out a bunch of vague statements about the benefits of buying without considering the downsides.

ducsingle5313 says

You just don't get it.

Well I dont think I'm missing much here. I've bought, sold, been a renter, been a landlord.

The house I live in now I own outright. So however much your rent is each month I can almost guarantee mine is less.

Plus I own the land.

My guess is that you're a first time buyer? If so, You have a lot to learn. I've bought 4 different houses in the bay area alone. Needing to move is a minor disadvantage in my case it's always been by choice.

I would argue that your choice to rent is not a financial one at all. It's an "emotional" lifestyle choice. You probably dont want to tell me how much you're paying or where you live but if you do, I can almost guarantee that I can find a house to buy that would be cheaper than what you're paying in rent. Especially in today's environment.

toothfairy says

Well I dont think I'm missing much here. I've bought, sold, been a renter, been a landlord.

The house I live in now I own outright. So however much your rent is each month I can almost guarantee mine is less.

Plus I own the land.

My guess is that you're a first time buyer? If so, You have a lot to learn. I've bought 4 different houses in the bay area alone. Needing to move is a minor disadvantage in my case it's always been by choice.

I would argue that your choice to rent is not a financial one at all. It's an "emotional" lifestyle choice. You probably dont want to tell me how much you're paying or where you live but if you do, I can almost guarantee that I can find a house to buy that would be cheaper than what you're paying in rent. Especially in today's environment.

Again, you just don't get it. It's clear you are reading other posts, but you unable to comprehend what people are saying. Weird.

My guess is you entered the Bay Area real estate market quite some time ago. If so, you got lucky and made a bunch of money when times were good. Pretty much everybody who bought real estate in the Bay Area before the 90's benefited the same way, just in case you're thinking you were smarter than the average Joe.

The problem is you can't understand that times have changed. Buyers must spend a much larger percentage of their income to purchase a home. And the Bay Area is a less attractive place for businesses to operate. Take a drive through Silicon Valley and note the number of empty commercial properties. Those businesses have moved elsewhere, and it's highly questionable whether new businesses will pick up the slack.

I pay $2100/month to rent my house in Emerald Hills, which includes utilities. I'm sure I could buy a house in your neighborhood that would cost less than my rent, but I prefer my woods to your 'hood. My annual gross income is about $250k/year, but I've made a *logical* choice not to buy because I'm not sure if I'll be living in the Bay Area for the 10+ years it will take to break even on renting vs. buying. If I could break even in 3-5 years I would seriously consider buying, but I see no reason to catch a falling knife. Those are the cold hard facts, although I doubt you'll understand them.

Realtors Are Corrupt says

And I guarantee you're paying more and your losses are mounting by the day.

How does he incur losses when he hasn't sold yet? You have to sell in order to have a loss so how can you speak for him?

You have nothing else here to contribute so troll off

Katy Perry says

What do you call An owner with no house payment then??

super owner maybe? extra special owner? you're really are drinking that kool aid!

Oh I see. You are more concerned with a TITLE than the benefits. Your title does not change when you pay off anything. You just lick fewer stamps which may cause stomach problems.

ducsingle5313 says

I pay $2100/month to rent my house in Emerald Hills, which includes utilities. I'm sure I could buy a house in your neighborhood that would cost less than my rent, but I prefer my woods to your 'hood.

here you go. The payments would be about $2300/mo

http://www.redfin.com/CA/Emerald-Hills/623-Glenloch-Way-94062/home/873595

which looks pretty nice compared to renting in that price range which gets you this
http://sfbay.craigslist.org/pen/apa/2806423822.html

Kalifornia is a scam. Unless you're buying in one of its many dirt towns (and who the hell wants to live in the Inland Empire??), the cost of renting is usually significantly lower than the cost of buying.

I don't know many people in my age/income bracket that can stay at the same address for 10+ years given how shaky short-term and long-term employment is in any decent job, so closing costs and used-house salesman fees when you move every 5-10 years to stay respectfully employed in your industry becomes more expensive than renting.

We are circumventing that whole "starter home" propaganda and just going straight for the "once and for all home" once we cash out and leave this idiotic state. We will go to a quieter state that doesn't nanny every aspect of our lifestyle and demand top dollar for the privelege. A mortgage in our hometown in Florida for a cute house in an established neighborhood would be appx. $600/mo--in a few years with our savings we could semi-retire and clerk at low-level part-time jobs to pay this paltry sum.

Looking forward to getting out of the rat race and Commifornia.

snyderkv says

Um, because you can't rent for half the total monthly cost of buying? That's why!

Lies!

Bellingham Bill says

I don't know where the bottom on the $500,000 price point is going. I don't think 3.7% declines can last for too many years. . .

http://www.redfin.com/CA/San-Jose/1255-Westbury-Dr-95131/home/28894957

is what $500,000 buys today apparently.

I'd pay $1200/mo to rent that for the next 30 years, no problem.

Wow, 1/2 million and the biggest part of the house is the garage. Nice. If this game is not rigged by the Banks and Realtors then I'm a monkey's uncle. This is laughable.

Bellingham Bill says

In 2042, the buyer will have the $500,000 house paid off, enjoy an asset value of $660,000 or so, and a monthly cost of ownership of $700 thanks to Prop 13.

Here is another likely scenario. The housing gig finally is up, not just stressed like now. Somewhere during the early stages of paying off the house (still 400k+ left on mortgage) the housing prices are actually down 20% (real value of house is now 400k). The owner(s) lose their jobs or worse have large medical bills accumulating. They cannot refi or reverse mortgage and fall into foreclosure with a large chunk of the country. It can happen. Now they are penny less (actually debt ridden) and are back into the renter market. They have no good renting history so suffer trying to find a deal. The foreclosure on the books and their bad credit score doesn't help either.

Moral: should have stayed renting and watched from the sidelines.

toothfairy says

The payments would be about $2300/mo

$600,000 buy, 20% down, 3.75% 30yr shows an initial cash outgo of $2500/mo ($2800/mo counting opportunity cost on the down payment), The $1750/mo cost-of-ownership falls to $800/mo as principal is paid, for an average over the loan of $1400/mo cost of ownership.

What's the average rent going to be over the next 30 years? If history is any guide it will be double the $1400/mo cost of buying.

toothfairy says

The house I live in now I own outright. So however much your rent is each month I can almost guarantee mine is less.

Now, can you tell the jury in what year you bought the said property? Was it at the height of the bubble or even at today's elevated prices? Or to your extreme benefit, was it pre-bubble when prices and rents were still connected and more reasonable? Interesting minds would like to know.

toothfairy says

here you go. The payments would be about $2300/mo

http://www.redfin.com/CA/Emerald-Hills/623-Glenloch-Way-94062/home/873595

I have to laugh. I have been to this house (uh um cottage). 1130 sqft is a big stretch. The 0.26 acres is all pretty unusable except for the flat piece the house is built on. This is an oversized dog house at the best. To use it as a comparison to houses in Emerald Hills is just misleading. Also, this house has been forsale now for over a year (maybe more).

The fact it says "Treehouse living" should have said something to you right away.

TMAC54 says

To help legally define owner;
The bank (mortgage holder) can not evict you to raise the rent, or to house his mother in Law or ANYTHING other than call the NOTE when unpaid.

The OWNER has what is known as the "BUNDLE of RIGHTS"
An Owner does NOT have to ask the bank if they can retain possession each month, rent it out, make improvements, sell, refinance, trade etc. ?

Same as a car. When making payments on a car, am I the owner, or does the bank pay the parking ticket ?

Really, you are the owner? Can I have a piece please? Oh wait, let me talk to your bank first (the real owner). Try stopping the payment and see who calls you. At this stage many mortgage holders don't even know the true owner. The note has been passed around gaining leverage to banks, investment houses, hedge funds, etc. for years. You were a piece of paper to them and treated as such. Now, the whole country has to bail out your asses for your foolishness. Overpay cause houses always go up, refi to live the life you think you deserve and pay off your credit cards to start anew, new cars, new boats, etc. etc. Now reality comes hard and you keep proclaiming the half truths. The only owners are the ones without mortgages. And most of them happened before the bubble prices. FACT.

toothfairy says

Yes you are still throwing money away. Even at $100 Your rent is an expense, like the cable bill it gives you some immediate gratification but it's not getting you any closer to owning anything of value.

And interest and a depreciating asset that you could not have afforded if it was not for the corrupt low interest environment the fed is using to dive for the field ball that is out of reach, is not an expense. Losing money is losing money no matter what way to slice it. The question is where do you lose more.

Own when you can afford to buy. Unfortunately, many will disagree with this because that means never at these prices. Quick term solution to a long term problem is the easiest right?

Bellingham Bill says

What's the average rent going to be over the next 30 years? If history is any guide it will be double the $1400/mo cost of buying.

You don’t have to convince everyone that living in the same house for 30+ or 60 years have more sense then renting. Every kid knows that. Beside, property value after that long time, systematically going to be closer to land value with current construction standards. Be realistic and consider 8-10 years ownership period

Bellingham Bill says

The $1750/mo cost-of-ownership falls to $800/mo as principal is paid

But don't they front load the interest in the loan payments so that this doesn't happen? I'm not sure that's always the case, but heard a TV talk show person telling someone that was the reason not to pay off the mortgage early. Kind of like a car loan, the interest and principal are built into the payments in a way that benefits the org loaning the money. Paying off early doesn't even save you any interest in the ways most loans are structured. Is that right? I've only recently learned this kind of thing goes on, which has made me think if I ever did buy a place I would negotiate to have the loan structured such that I could pay it off early and avoid most or all of the interest.

ducsingle5313 says

Buyers must spend a much larger percentage of their income to purchase a home.

This hints at one of the most important pieces of data I consider when buying a house. I want to keep my housing costs at less than 33% of my net income. So when I budget, I plug in that number and then go shopping. In San Francisco, I have never been able to afford even a cookie cutter loft condo in an arguably "bad" neighborhood for that 33% number. That's without considering a lot of additional costs of owning. That's just looking at the ARM loan that was quoted back to me in 2003 when I was thinking of buying.

So instead, I've rented in VERY nice neighborhoods(Noe Valley, Potrero Hill). My net worth goes up significantly every year. Know why? Because my budget also includes a "savings" item or two.

I'd love for someone to point out this magical cheap house on Potrero Hill. All the ones with similar beds/baths to mine have sold at $1MM+.

FunTime says

I'd love for someone to point out this magical cheap house on Potrero Hill. All the ones with similar beds/baths to mine have sold at $1MM+.

The Hill was cheap 10 or 15 years ago.

That's how Bay Area real estate generally works. Expensive to get in, but wait a while and it becomes cheap, compared to rents.

Whether or not this historical pattern will continue is the interesting question.

I had a friend buy in the Sunset in mid-2000 for ~$450,000. They overbid on it because they were tired of getting shut out. I thought they were cruising for a bruising but they did OK.

The person they sold to in 2004 sold for $530,000 last year.

Of course, interest rates falling from 8% to 4% over the decade "saved" the market -- back in 2000-2001 the Fed was trying to tap the brakes on the economy with higher interest rates:

http://research.stlouisfed.org/fred2/graph/?g=4EU

Bellingham Bill says

The Hill was cheap 10 or 15 years ago.

Yeah, the place I rent was bought for $550k in 1999, as far as I can tell. Given the mortgage, investment vehicles game, I'm sure it feels good to have bought then.

Working in my favor, I'm sure it feels good to get what I pay in rent since people who buy seem to remember their purchase price better than they keep up with the time value of their purchase.

Bellingham Bill says

That's how Bay Area real estate generally works. Expensive to get in, but wait a while and it becomes cheap, compared to rents.

Well, maybe if prices hit 1991 levels, it will start to seem that way. The timing for me hasn't worked out. I got married in 2007 promoted significantly in 2008, but prices are still completely stupid relative income for me to even consider buying.

My wife and I just had our first baby. She's decided not to work for a while. So we lost a six figure salary out of our income and are still "affording" rent. We think we've lost at least one couple as friends because they just can't relate to the choices we're making. They own their house and, typically, the new mom in the family has gone back to work during the first six months of their baby's life. I work a mile from home. I often visit my wife and baby during lunch. I picked lemons off one of the fruit trees in our back yard while holding my baby. We had friends visit from Palo Alto(he's an architect, she's a medical researcher) and comment that our back yard is bigger than theirs and, "We live in the suburbs." It's a nice life.

I'm not promoting some '50s family lifestyle, but it's nice when it's an option even if temporarily. My wife seems to enjoy it quite a bit.

FunTime says

maybe if prices hit 1991 levels, it will start to seem that way.

The problem is we're in a very strange policy cycle now compared to the early 1990s.

Taxes were raised substantially in 1991 and 1993. Greenspan cut the Feds a break by allowing interest rates to fall from 10% to 7.5%.

There was something of a hangover from the go-go 1980s for a while, which lasted in many areas until dotcom activity and then cheap-ass goods from China started flooding the nation:

http://research.stlouisfed.org/fred2/graph/?g=4EX

shows we were importing $100B/yr in goods by 2000. We forget now, but this was really great, almost like getting free stuff.

Plus the cost of gasoline was actually falling!

So much for the 1990s.

Can we here in the US, California, SF raise taxes on ourselves any more? It doesn't seem like it!

Are we going to cut any spending? NOPE!

So what's going to happen later this decade? If Romney wins, we can expect massive tax cuts and massive borrowing, probably straight-up printing on top of it too.

This will be very inflationary. The system wants to inflate away its debt, but to do so it's got to get serious about it.

Whether this inflation hits rents or not is a difficult bet to make. I guess you could buy gold or something instead, but housing is a leveraged bet that the PTB will fuck up the future. Seems like a safe bet to me :)

ducsingle5313 says

Take a drive through Silicon Valley and note the number of empty commercial properties. Those businesses have moved elsewhere, and it's highly questionable whether new businesses will pick up the slack.

Vacancy in Class A offices and R&D are huge. No Nano, Bio or Solar technologies were able to take over growth of dot.com era. Now Facebook is trying to capitalize on euphoria of Wall St speculators, but they produce anything unlike Apple. Beside not many corporations flock to states sitting on stinks big debt shit.

I think the majority of the people here agrees that if times were different. (prices are inline with income & multiples of rent, expanding local economy, and secure jobs) they would buy in a heartbeat.
The argument for the pro-buying NOW crowd doesn't take into consideration the affect of expected depreciation in home prices.

some are using the example of someone who bought 30years ago and now has a house free and clear as the reason to buy now, no matter how inflated prices are... Wrong. It was a different time back then, you can not expect what happend back then to repeat.

The argument back and forth is pretty funny because the world is not black and white. There may be some areas that make sense to buy now, and others where you are better off renting for the next 15 years.

The right answer for me is not "rent forever!" or "buy now!". its rent now and buy when it makes sense. The whole reason Patrick has the rent vs buy calculator is help you make that decision.

for me, in the short term, renting is a no-brainer for the area I live in.
If prices drop back to reasonable levels, I will buy.
If not, I will keep saving and rent. I'm not falling behind and getting "priced out" because I'm still putting away piles of cash and my investments are still keeping with or beating inflation. I'm also expecting home prices to lose ground to inflation in MY AREA. Can I be wrong, maybe, but it is a calculated risk that I've thought long and hard about. If prices never come down to where it make sense to buy, I'm ok with it, I'll retire somewhere with a pile of cash and buy in a place where it makes sense with all the cash I saved.
Anyway... my main point is that its not rent forever or buy now. Its buy when it makes sense for you. Nobody can tell you when that is except for you.

gregpfielding says

Rent for another 3 years. You'll probably "earn" 75K a year in not-lost-equity by doing so.

good call, greggers. that's the plan.

for the past year, my roommate and i have been renting a nice 2/1.25, 1025sf apartment for $900. our lease is up, and we're renewing for 12 months @ $905. signing the lease today, yay!

I want to simplify - why buy when property values are not inching up in the so called desirable areas?

egads101 says

common! 3 years 3 months later, how did all that "don't buy it will fall another 50%" advice workout???

common @gregfielding, if I don't understand markets, explain this gem of a prediction you made 39 months ago!!!!

My investment condo is up 40% since 2 years ago and the renters are making me rich. My home is up 50k since last year.

This is a permabear site you go to when you you want others to feed your pessimism and agree with you. I advise people to do their own research and filter out those uneducated nobodies who obviously aren't investors and don't know their markets.

just the thought of dishing over the realturds 6% commission will keep me in my lovely mission dolores rent controlled 1850sqft pad FOREVER!!!!!! ( or at least as long as I can hold on to it).

I understand when some say that "no debt" is the best way...but it is all semantics instead of economics. Unless you plan to live "rent free" somehow, you have to pay for a roof over your head. So you may not be in "debt" but if you plan to not live with your parents for free or in a 'box', you still have "expenses" that must be met.

So I believe it is just a matter of semantics and not ecomonics in that you should always base your 'living' situation on what you can afford... do the math and be realistic and you will be able to decide. the Patrick.net calculator rent vs buy is a good way to start. Take care as this is a very important decision.