Ten Reasons It's A Terrible Time To Buy An Expensive House


By Patrick   Follow   Sat, 11 Jul 2015, 12:58pm PDT   216,064 views   178 comments   Watch (16)   Share   Quote   Permalink   Like (10)   Dislike (2)  

  1. Because house prices are in expensive areas still dangerously high compared
    to incomes and rents. Banks say a safe mortgage is a maximum of 3 times
    the buyer's annual income with a 20% downpayment. Landlords say a safe price is
    set by the rental market; annual rent should be at least 9% of the purchase
    price, or else the price is just too high. Yet in affluent areas, both
    those safety rules are still being violated. Buyers are still borrowing 6 times
    their income with tiny downpayments, and gross rents are still only 3% of
    purchase price. Renting is a cash business
    that proves what people can really pay based on their salary, not how much they
    can borrow. Salaries and rents prove that affluent neighborhoods are still in a
    huge housing bubble, and that bubble seems to be getting more dangerous by the day.
  2. On the other hand, in some poor neighborhoods, prices are now so low that gross
    rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there
    could still fall yet more if unemployment rises or interest rates go up, but
    those neighborhoods have no bubble anymore.

  3. Because it's usually still much cheaper to rent than to own the same size
    and quality house, in the same school district. In rich neighborhoods, annual rents are
    typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more
    to borrow the money as it does to borrow the house
    . Renters win and
    owners lose! Worse, total owner costs including taxes, maintenance, and
    insurance come to about 8% of purchase price, which is more than twice the cost of
    renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out
    the house and make a profit. Then you'll know it's pretty safe to buy for
    yourself because then rent could cover the mortgage and ownership expenses if
    necessary, eliminating most of your risk. The basic buying safety rule is to
    divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you
    $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a
    6% mortgage, that's $12,000 per year in interest instead, so it works out about
    the same. Owners can pay interest with pre-tax money, but that benefit gets
    wiped out by the eternal debts of repairs and property tax, equalizing things.
    It is foolish to pay $400,000 for that same house, because renting it would
    cost only half as much per year, and renters are completely safe from falling
    housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local
    employment rate (demand) to the current local supply of available homes for
    rent or sale (supply) should help you figure out whether a big fall in rents
    could happen. Checking these factors minimizizes your risk.

  4. Because it's a terrible time to buy when interest rates are low, like now.
    House prices rose as interest rates fell, and house prices will fall if interest rates rise
    without a strong increase in jobs, because a fixed monthly payment covers a
    smaller mortgage at a higher interest rate. Since interest rates have nowhere to
    go but up, prices have nowhere to go but down. When housing falls, you lose your
    equity, but not your debt.

    The way to win the game is to
    have cash on hand to buy outright at a low price when others cannot
    borrow very much because of high interest rates. Then you get a low price, and
    you get capital appreciation caused by future interest rate declines. To buy an
    expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a
    high price with a low interest rate, even if the mortgage payment is the same
    either way.

    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.
    • As interest rates fall, real estate prices generally rise.
    • Your property taxes will be lower with a low purchase price.
    • Paying a high price now may trap you "under water", meaning you'll have a
      mortgage debt larger than the value of the house. Then you will not be able to
      refinance because then you'll have no equity, and will not be able to sell without
      a loss. Even if you get a long-term fixed rate mortgage, when rates
      inevitably go up the value of your property will go down. Paying a low
      price minimizes your damage.
    • You can refinance when you buy at a higher interest rate and rates
      fall, but current buyers will never be able to refinance for a lower interest rate
      in the future. Rates are already as low as they can go.
  5. Because buyers already borrowed too much money and cannot pay it back. They
    spent it on houses that are now worth less than the loans. This means most banks
    are still actually bankrupt. But since the banks have friends in Washington, they get
    special treatment that you do not. The Federal Reserve prints up bales of new
    money to buy worthless mortgages from irresponsible banks, slowing
    down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense.
    Banks get to keep any profits they make, but bank losses just get passed on to
    you as extra cost added on to the price of a house, when the Fed prints up money
    and buys their bad mortgages. If the Fed did not prevent the free market from
    working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP
    bailout cash taken from taxpayers to be loaned directly to the worst-run
    banks, those that already gambled on mortgages and lost. The Fed and Congress
    are letting the banks "extend and pretend" that their mortgage loans will get
    paid back.

    And of course the banks can simply sell millions of bad loans
    to Fannie and Freddie at full price, putting taxpayers on the hook for
    the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into
    slavery, for the banks to make a profit. If you pay a low price for a house and
    manage to avoid debt, the banks lose control over you. Unacceptable to them.
    It's all a filthy battle for control over your labor.

    This is why you will
    never hear the president or anyone else in power say that we need lower house
    prices
    . They always talk about "affordability" but what they always mean is
    debt-slavery.

  6. Because buyers used too much leverage. Leverage means using debt to amplify
    gain. Most people forget that debt amplifies losses as well. If a buyer puts 10%
    down and the house goes down 10%, he has lost 100% of his money on paper. If he
    has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the
    real world.

    The simple fact is that the renter - if willing and able to save his money -
    can buy a house outright in half the time that a conventional buyer can
    pay off a mortgage. Interest generally accounts for more than half of the cost
    of a house. The saver/renter not only pays no interest, he also gets interest
    on his savings, even if just a little. Leveraged housing appreciation, usually
    presented as the "secret" to wealth, cannot be counted on, and can just as
    easily work against the buyer. In fact, that leverage is the danger that got
    current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there
    is no more fake paper equity from the sale of a previously overvalued property
    and because the market for securitized jumbo loans is dead. Without that fake
    equity, most people don't have the money needed for a down payment on an
    expensive house. It takes a very long time indeed to save up for a 20%
    downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause
    big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's
    corruption of US legislators.
    On a $300,000 house, 6% is $18,000 lost even if housing
    prices just stay flat. So a 4% decline in housing prices bankrupts all those
    with 10% equity or less.

  7. Because the housing bubble was not driven by supply and demand. There
    is huge supply because of overbuilding, and there is less demand now that the
    baby boomers are retiring and selling. Prices in the housing market, even now, are
    entirely a function of how much the banks are willing and able to lend. Most
    people will borrow as much as they possibly can, amounts that are completely
    disconnected from their salaries or from the rental value of the property. Banks
    have been willing to accomodate crazy borrowers because banker
    control of the US government
    means that banks do not yet have to acknowledge
    their losses, or can push losses onto taxpayers through government housing
    agencies like the FHA.
  8. Because there is still a massive backlog of latent foreclosures.
    Millions of owners stopped paying their mortgages, and the banks
    are still not forclosing on all of them, letting the owner live in the house for free. If a
    bank forecloses and takes possession of a house, that means the bank is
    responsible for property taxes and maintenance. Banks don't like those costs. If
    a bank then sells the foreclosure at current prices, the bank has to admit a
    loss on the loan. Banks like that cost even less. So there is a tsunami of
    foreclosures on the way that the banks are ignoring, for now. To prevent a
    justified foreclosure is also to prevent a deserving family from buying that
    house at a low price. Right now, those foreclosures will wash over the landscape,
    decimating prices, and benefitting millions of families which will be able to
    buy a house without a suicidal level of debt, and maybe without any debt at
    all!
  9. Because first-time buyers have all been ruthlessly exploited and the
    supply of new victims is very low.
    From The Herald:
    "We were all corrupted by the housing boom, to some extent.
    People talked endlessly about how their houses were earning more than they did,
    never asking where all this free money was coming from. Well the truth is that
    it was being stolen from the next generation. Houses price increases don't
    produce wealth, they merely transfer it from the young to the old - from
    the coming generation of families who have to burden themselves with colossal
    debts if they want to own, to the baby boomers who are about to retire
    and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with
    children. It is foolish for them to buy at current high prices, yet government
    leaders never talk about how lower house prices are good for American
    families, instead preferring to sacrifice the young and poor to benefit the old
    and rich
    , and to make sure bankers have plenty of debt to earn interest on.
    Your debt is their wealth. Every "affordability" program drives prices
    higher by pushing buyers deeper into debt. Increased debt is not affordability,
    it's just pushing the reckoning into the future. To really help Americans,
    Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even
    more important is eliminating the mortgage-interest deduction, which costs the
    government $400 billion per year in tax revenue. The mortgage interest
    deduction directly harms all buyers
    by keeping prices higher than they
    would otherwise be, costing buyers more in extra purchase cost than they save
    on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra
    $39,000
    in purchase price. Subsidies just make the subsidized item more
    expensive. Buyers should be
    rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia
    have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that
    housing is becoming truly affordable via falling prices, they want to stop it?
    Their actions speak louder than their words.

  10. Because boomers are retiring. There are 70 million Americans born between
    1945-1960. One-third have zero retirement savings. The oldest are 66. The
    only money they have is equity in a house, so they must sell. This will add yet
    another flood of houses to the market, driving prices down even more.
  11. Because there is a huge glut of empty new houses. Builders are being forced
    to drop prices even faster than owners, because builders must sell to keep
    their business going. They need the money now. Builders have huge excess
    inventory that they cannot sell at current prices, and more houses are
    completed each day, making the housing slump worse.

Next Page: Eight groups who lie about the housing market ┬╗




The Housing Trap


You're being set up to spend your life paying off a debt you don't need to take
on, for a house that costs far more than it should. The conspirators are all
around you, smiling to lure you in, carefully choosing their words and watching
your reactions as they push your buttons, anxiously waiting for the moment when
you sign the papers that will trap you and guarantee their payoff. Don't be
just another victim of the housing market. Use this book to defend your freedom
and defeat their schemes. You can win the game, but first you have to learn how
to play it.

115 pages, $12.50

Kindle version available

Discuss the book

#housing

« First     « Previous     Comments 139-178 of 178     Last »

Perplexed   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 9:29am PST   Share   Quote   Like   Dislike     Comment 139

tatupu70 says

It's a nice narrative that makes intuitive sense, but history shows the real world doesn't work that way. In reality, what happens is that interest rates rise when inflation is rising and wage growth is good. And the effect of wage growth is more powerful than the effect of rising rates---nominal housing prices go up.

Normally, interest rates go up to cool a heated economy, which includes factors of inflation and wage growth, but wage growth is weak, real unemployment remains high and rate of inflation is practically nil. http://www.usinflationcalculator.com/inflation/current-inflation-rates/

The fed rate is climbing because "Officials said the economy was strong enough to keep growing >with a little less help from the central bank

tatupu70   befriend (3)   ignore (12)   Sun, 10 Jan 2016, 10:38am PST   Share   Quote   Like   Dislike     Comment 140

Perplexed says

Normally, interest rates go up to cool a heated economy, which includes factors of inflation and wage growth, but wage growth is weak, real unemployment remains high and rate of inflation is practically nil. http://www.usinflationcalculator.com/inflation/current-inflation-rates/

The fed rate is climbing because "Officials said the economy was strong enough to keep growing >with a little less help from the central bank

That's correct. And I don't think the 0.25 point change in Fed funds rate off of basically zero constitutes "rising rates". Mortgage rates are still extremely low. There is wage growth, but if it weakens you can be sure that rates will stop rising.

Logan Mohtashami   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 11:35am PST   Share   Quote   Like   Dislike     Comment 141

Rates can stay low for a very long time when inflation is low

Perplexed   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 1:05pm PST   Share   Quote   Like   Dislike     Comment 142

tatupu70 says

That's correct. And I don't think the 0.25 point change in Fed funds rate off of basically zero constitutes "rising rates". Mortgage rates are still extremely low. There is wage growth, but if it weakens you can be sure that rates will stop rising.

Which gets me back to why I found this thread, trying to determine if buying a home in north-northeast atlanta in the 400k range is a good idea in Q1 of 2016? I am looking at low $/per SQFT, etc to maximize my value, but uncertain.

tatupu70   befriend (3)   ignore (12)   Sun, 10 Jan 2016, 1:09pm PST   Share   Quote   Like   Dislike     Comment 143

Perplexed says

Which gets me back to why I found this thread, trying to determine if buying a home in north-northeast atlanta in the 400k range is a good idea in Q1 of 2016? I am looking at low $/per SQFT, etc to maximize my value, but uncertain.

That's a decision you have to make on your own. How long are you planning on staying there? What is the rent on comparable houses in your preferred area?

Tough   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 1:11pm PST   Share   Quote   Like (1)   Dislike     Comment 144

Can someone help shed some rational on this. Housing has been increasing because:

-Oversees Investors CHINA
-Millennials moving out of their parents house
-Low interest rates
-Strong economy and low unemployment
-Housing starts low.

BUT:

-China is pulling back from US Housing according to the (WSJ)
http://www.wsj.com/articles/chinese-pull-back-from-u-s-property-investments-1448649226

-Millennials have too much student debt, and no down payment, let alone a full time job (FORTUNE)
http://fortune.com/2014/07/08/millennials-home-ownership-renting/

-Mortgage applications plunge after rate hike (CNBC)
http://www.cnbc.com/2016/01/06/mortgage-applications-fall-27-after-earlier-rate-hike-rush.html

-China slowing economy is pulling down the US economy (BOSTON GLOBE)
https://www.bostonglobe.com/news/politics/2016/01/07/will-stock-crash-china-take-down-economy/mmMmUEED8a6BH5EsCzi3wJ/story.html

-Housing Demand and Housing Starts are surging today, Housing Demand and Starts surged from 2003-2006 then crashed (BROOKINGS / NY TIMES)
http://www.brookings.edu/~/media/Projects/BPEA/Fall-2003/2003b_bpea_caseshiller.PDF
http://www.nytimes.com/2015/07/26/upshot/the-housing-market-still-isnt-rational.html

The only difference is Subprime Mortgages and Mortgage backed Securities. Homes are being bought with PMI and 3% down, and speculation will allow them to refinance out of the PMI, only if values continue. But even today, HELOC's are starting to reset for people who bought and held during the Bubble 1 and this is added debt to an already stretched family who held onto their home, 56% are potentially resetting with higher, fully amortizing monthly payment.

http://www.housingwire.com/articles/33535-trouble-ahead-tidal-wave-of-heloc-resets-about-to-hit

Patrick   befriend (63)   ignore (3)   Sun, 10 Jan 2016, 1:12pm PST   Share   Quote   Like   Dislike     Comment 145

anyone have a graph of mortgage rates before and after the fed's interest rate hike on dec 20th?

i want to see if any correlation is visible, but cannot find december mortgage rate graphs anywhere.

indigenous   befriend (0)   ignore (9)   Sun, 10 Jan 2016, 1:16pm PST   Share   Quote   Like (1)   Dislike     Comment 146

Strategist   befriend (2)   ignore (4)   Sun, 10 Jan 2016, 1:17pm PST   Share   Quote   Like   Dislike     Comment 147

Patrick says

anyone have a graph of mortgage rates before and after the fed's interest rate hike on dec 20th?

i want to see if any correlation is visible, but cannot find december mortgage rate graphs anywhere.

Just go by the 10 year T Bonds. Mortgages are highly correlated with that.
There is little or no correlation as the Bonds had already factored in the Fed move.
http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#{"range":"1mo","allowChartStacking":true}

Logan Mohtashami   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 1:38pm PST   Share   Quote   Like (1)   Dislike     Comment 148

Patrick says

anyone have a graph of mortgage rates before and after the fed's interest rate hike on dec 20th?

i want to see if any correlation is visible, but cannot find december mortgage rate graphs anywhere.

Yields fell ... then they rose and now they're back down again

In mortgage land 1/8th down, back up again 1/8th and now back down again 1/8th

Perplexed   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 2:02pm PST   Share   Quote   Like (1)   Dislike     Comment 149

Here is a good place to download all that data: https://research.stlouisfed.org/fred2/series/MORTG/downloaddata

Perplexed   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 2:08pm PST   Share   Quote   Like   Dislike     Comment 150

Anyone know where I can download recent sales info for a given area? I can get that from Zillow, Realtor, etc one by one and type into a spreadsheet, but would much easier if I could download the stats. Sales data is publicly available, BUT....made very painful to aggregate meaningful information. I want to see overall $/Per SQFT, lot size, age.

Perplexed   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 2:33pm PST   Share   Quote   Like   Dislike     Comment 151

Other factors impacting RE markets:

Americans Are Moving South, West Again
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2016/01/08/americans-are-moving-south-west-again

Ironman   befriend (0)   ignore (17)   Sun, 10 Jan 2016, 4:37pm PST   Share   Quote   Like (1)   Dislike     Comment 152

Tough says

Housing has been increasing because:

Tough says

-Low interest rates

You answered your own question. For 2/3rds of home buyers, they buy with a mortgage, which usually means a payment. Just like cars, most buy a "payment" and not a "house". First, look at the trend for rates:
-

-
-
Now, look at the trend for prices:
-

-
As rates trended lower, prices went up because people could afford a higher priced house for the SAME payment.

mell   befriend (8)   ignore (4)   Sun, 10 Jan 2016, 4:57pm PST   Share   Quote   Like   Dislike     Comment 153

Logan Mohtashami says

Patrick says

anyone have a graph of mortgage rates before and after the fed's interest rate hike on dec 20th?

i want to see if any correlation is visible, but cannot find december mortgage rate graphs anywhere.

Yields fell ... then they rose and now they're back down again

In mortgage land 1/8th down, back up again 1/8th and now back down again 1/8th

0.25% is a token raise doing close to nothing to long term yields. "Normal" fed rates around 5% would tell a different story, but maybe we might see a trend when approaching 1% or more.

Logan Mohtashami   befriend (0)   ignore (0)   Sun, 10 Jan 2016, 5:24pm PST   Share   Quote   Like   Dislike     Comment 154

mell says

"Normal" fed rates around 5% would tell a different story, but maybe we might see a trend when approaching 1% or more

tatupu70   befriend (3)   ignore (12)   Sun, 10 Jan 2016, 5:47pm PST   Share   Quote   Like   Dislike     Comment 155

mell says

0.25% is a token raise doing close to nothing to long term yields. "Normal" fed rates around 5% would tell a different story, but maybe we might see a trend when approaching 1% or more.

"Normal" wage growth might tell a different story too.

Logan Mohtashami   befriend (0)   ignore (0)   Mon, 11 Jan 2016, 7:51am PST   Share   Quote   Like   Dislike     Comment 156

conservativethinker   befriend (0)   ignore (0)   Wed, 13 Jan 2016, 1:53pm PST   Share   Quote   Like   Dislike     Comment 157

So what does the downward stock market of 2016 mean for housing?

- Will people get concerned and hold back? Even in hot areas like the Bay Area?
- Will people continue to feel like if they don't buy now, they will be priced out forever?

Seems like the few properties that have come on in south bay for 2016 so far all have been getting multiple offers still. Will be interesting to see what happens over the next 1-2 months... more properties seem to be coming on to the market here.

Ironman   befriend (0)   ignore (17)   Wed, 13 Jan 2016, 2:52pm PST   Share   Quote   Like   Dislike     Comment 158

conservativethinker says

So what does the downward stock market of 2016 mean for housing?

First, move out of Silicon Valley if you want to buy at a realistic price..

Tough   befriend (0)   ignore (0)   Wed, 13 Jan 2016, 2:53pm PST   Share   Quote   Like (2)   Dislike     Comment 159

Conservative....

Ponder this, Who is buying Bay Area Housing? China? Soros? Facebook? Maybe a combination of each but maybe, just maybe its a speculator millennial who is working in the tech sector. Imagine you are a Harvard Grad, just completed an intern at Google, now looking for a tech startup. You receive an offer from SnapChat, $150-200K and Stock worth $400K, but you need a place to live and no your not going to commute from Livermore. So you get a mortgage based on your education, your employment and your potential asset of $400K. But something happens, there are valuation concerns and over the next 2 years, the tech sector looses it's luster and even the owner of SnapChat goes in-front of the camera stating his company is "over valued", next thing is that employment ebola sets in and people start loosing their jobs. Now that grad is working at Sneaker Shack or Home Depot just trying to put grub in the refer. Hopefully they can refinance and live off the equity until that next awesome tech job comes calling, maybe they can dump the home for 30% over sale price and live off the diff in a cottage on the ivory coast while consulting through dial-up? Bottom line is that when the lights go out in these million $ crap shaks throughout SF, many techies are reaching for a shot NyQuil just to sleep, because being highly leveraged in a fight or flight industry isn't bliss. Add to it a 2016 10% drop in NASDAQ and it's a double shot. I bet you, they are thinking exactly what you are writing.

wave9x   befriend (0)   ignore (0)   Wed, 13 Jan 2016, 3:09pm PST   Share   Quote   Like (1)   Dislike     Comment 160

SnapChat is in LA, just sayin'...

conservativethinker   befriend (0)   ignore (0)   Wed, 13 Jan 2016, 3:50pm PST   Share   Quote   Like   Dislike     Comment 161

Here's the interesting thing with the tech industry:

- 1996-2000: internet was new and there was a lot of promise but lot of other things weren't in place yet (broadband, user adoption, mobile etc). So the hype was early. Hence the crash

- 2005 - Present: the whole world is practically connected, mobile devices are everywhere and software is at the center of everything (communication, transportation, appliances, etc)

- Silicon Valley will always be the center of innovation, that is not going to change. No other part of the world is going to replace or come close to us here.

- The 1000s of startups that have come up in the last 5 yrs will probably not be around, so there is a chance of a crash there. However, it's not like the innovation and technology will crash, it will keep moving to other things... so startups doing dating apps and social networks will become startups or big companies that do AI, robotics, IoT, etc...

- Technology is going to continue to advance and silicon valley will be the hub... whether it's 1000s of startups or the Apples, Amazons, Facebooks and Googles getting stronger... there will be demand for talent in this field

...This type of thinking is causing people to pay premium for housing in this area. They just know tech will always be around, there will be jobs in this field for the next 10yrs and education will always be a priority among those here. Whether this totally justifies the crazy housing prices or the rate they have increased since 2012 is another story. At some point, a couple with a combined salary of 200-300k will cap off at what they can afford... and there will be ups and downs, but I do wonder if there will ever be a massive crash here. Price corrections, yes, but an all out 30% drop in prices in real estate, probably not.

I've been one of those guys that has just been waiting for the housing market to really crash for the past 8yrs, but I've also been living in premium areas like Santa Monica and Silicon Valley... so my perspective on these markets is slightly changing.

indigenous   befriend (0)   ignore (9)   Wed, 13 Jan 2016, 4:38pm PST   Share   Quote   Like