patrick.net

You can bank with bank of APF if you want to.

Who is APF?

The housing price seems to be coming down. Anything that is listed in Zillow is reducing their pricing or giving deep discount.
The thing is that this is just a beginning of what is to come. I started actively looking a few months ago. Now, I decided that I need
to wait a few yearsspan as it is for real estate as usual.

I don't see a crash coming, because I do not see a reason for it.

Economy is doing well, there is no bubble that I see or am aware of. Now I know nothing about Bay Area, I hear it's crazy there. But LA County... everything is just expensive these days. Worst case maybe it'll slightly cool off, but not a "crash".

HeadSet says

ALL of that "unrealistic" inflation in home value is caused by government backed loans. Take away the government guarantee and the banks would require larger down payments, serious appraisals, and shorter terms. Without the easy money sloshing around, home prices would be held in check.

That's not really true. If the last crash taught us anything, it's that investors will come in and buy houses in bulk before prices would fall much below rental parity.

Government loans actually help the middle class by allowing them to buy a house and build equity rather than paying rent for their entire life. House prices are set by supply and demand and the market is all housing (including rentals as one can easily choose to buy or rent. They are obvious substitutes)

Good houses in my area are selling for list, marginal ones are taking price cuts.

HappyGilmore says

Government loans actually help the middle class by allowing them to buy a house and build equity rather than paying rent for their entire life.

No, government backed loans give people the ability to borrow much more than the fair price of the house. And most people will borrow as much as they possibly can, because of wife-pressure, family pressure, and a general inability to do math.

Every house has a certain "fair price", which can be calculated from what it would rent for. Just use the NY Times rent vs buy calculator with your assumptions and see what the fair price is.

Another way to put it: if a landlord cannot profitably rent out a house after paying a certain price, then you should not pay that price either.

Paying rent for the rest of your life could well be the best possible financial decision. If rent is $1/month and the house costs $400,000, you should absolutely continue to rent that puppy. See what I mean? There is a break-even point, and current SF house prices are well above that point. Rents are high, but prices are even higher.

Patrick says

No, government backed loans give people the ability to borrow much more than the fair price of the house

I fail to see this. Government backed loans do not default at rates higher than any others. They require an appraisal.

Why does the availability of a mortgage cause someone to overpay?

G = (R - ((P T) - (P / 29) - I - M - D)

if(G > (P X)), purchasing is a good investment.

R: rent
P: purchase price
T: prop tax rate
I: insurance cost
M: maint/HOA overhead
D: debt servicing costs
X: return you think you can get on some other investment

let's play:
1br apt in SF, price $1M, rent it for $3200, prop tax is 0.018 (1.8%), maintenance+HOA lets say is $8k/yr, insurance $1k/yr, and let's pay cash (no debt servicing), so that's:

G = (3200 - (( 1000000*. 018) - (1000000 / 29) - 1000 - 8000 - 0)

or:

G = 28682

that's 2.8% annual return on investment on your original $1M. Think you can do better elsewhere? probably. you can reduce your original investment by financing, and you might see a higher return, but that's just leveraging, and the D value (debt servicing overhead) will also go up and eat into your bottom line.

That's if you're renting it out. If you want to live there, the math is different, but this is your landlord's math conundrum.

Supply and Demand. Government backed loans artificially increase demand and drive up price, and consequently result in more interest payment for banksters during the life of the mortgage because people have to take out longer mortgage (which also have higher interest rate than shorter mortgage). Banks borrow short and lend long, so they profit from the interest rate differential. Longer term mortgages have the highest interest rate differential vis fed window borrowing during crisis.

Investors buying up houses at market bottoms in order to produce yield on their money when the government suppresses interest rates. Government rent subsidies such as Section 8 drive up rent for everyone.

Reality says

Government backed loans artificially increase demand and drive up price

Wrong--there's nothing artificial there.

and btw, this is why rent is high. if it were much lower, your landlord would not break even and would likely have to forego maintenance. even if the property is owned outright, you can see how small the margins are. forego maintenance for some years and you start to get slums. bronx 1975 kinda stuff. if prop 10 passes in California and we get vacancy control, this could happen.

HappyGilmore says

Wrong--there's nothing artificial there.

"Demand" in economics means Qualified Demand, not unqualified "Want." Everyone wanting a Mansion and Olympic sized pool plus a landing strip for his/her personal jet airplane is not "Demand."

Reality says

"Demand" in economics means Qualified Demand, not unqualified "Want." Everyone wanting a Mansion and Olympic sized pool plus a landing strip for his/her personal jet airplane is not "Demand."

Correct.

Why does the availability of a mortgage cause someone to overpay?

We are not talking about mortgages in general, we are talking about government backed mortgages. The government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.

Easy money always drives up prices. Think about what has happened with college costs. I also recall when I was car shopping in Jan 1991. Easy credit was everywhere and jokers were buying with 5 year loans. All the dealerships I went to were selling for above sticker price, with packs like "undercoating" and "etched glass" padding the price. These extras were non-negotiable. I decided not to buy. Then in June of 1991 we had the S&L collapse, and car loans were hard to get. Now I noticed the packs were removed and since was a cash buyer, I could deal from invoice instead of sticker. I ended up buying a $32k sticker price car for $7k below sticker. Not having to compete with Joe HowMuchAMonth was the key.

HeadSet says

The government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.

All that would do is create more landlords and higher rents. That would increase inequality and hurt the middle class. Housing prices would not fall much because anybody who is no longer a buyer becomes a renter and drives up the rental cost. This means investors can and will pay more for housing.

HeadSet says

Easy money always drives up prices

My beef is that government backed mortgages are "easy" money. I don't see that at all.

My beef is that government backed mortgages are "easy" money. I don't see that at all.

The government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

Case Schiller Index 269

Monthly change: -0.28%

It’s small but it is negative.

Will we see the index drop below 200?? If it does, I’m buying!

cmdrdataleak says

that's 2.8% annual return on investment on your original $1M. Think you can do better elsewhere? probably. you can reduce your original investment by financing, and you might see a higher return, but that's just leveraging, and the D value (debt servicing overhead) will also go up and eat into your bottom line.

That's if you're renting it out. If you want to live there, the math is different, but this is your landlord's math conundrum.

Don't forget to add in the mega appreciation rates that are typical of California.

Strategist says

cmdrdataleak says

that's 2.8% annual return on investment on your original $1M. Think you can do better elsewhere? probably. you can reduce your original investment by financing, and you might see a higher return, but that's just leveraging, and the D value (debt servicing overhead) will also go up and eat into your bottom line.

That's if you're renting it out. If you want to live there, the math is different, but this is your landlord's math conundrum.

Don't forget to add in the mega appreciation rates that are typical of California.

Yes, the value of the property is likely to appreciate in actual market terms, even though you're getting tax advantage to claim depreciation of the premises.

In fact, my calculations in the comment above do not take into account at all what gain an investor would realize per year if they later sold that property. It could be a tidy sum. However, they'd have to pay North of 50% taxes between state and fed on the gains from selling the property. So even if the property appreciated 20%in value, they'd only net 10%. Over that amount of time, you could probably get better returns on, say, investing the same amount in total stock market index + total bond market index blend.

cmdrdataleak says

However, they'd have to pay North of 50% taxes between state and fed on the gains from selling the property.

How do you figure? Investment property held a certain time frame would be taxed 20% max federally. If it was primary you'd get $250k (single) and $500k (married) tax free and then pay long term cap gains on the remainder of the gain after the 2 of 5 years rule (20%).

I don't see how there's a path to being taxed 50% on real estate gains. No one would invest in real estate then. Or mostly no one. I'm open to seeing this path, but I don't think it exists.

cmdrdataleak says

Strategist says

cmdrdataleak says
Don't forget to add in the mega appreciation rates that are typical of California.

Yes, the value of the property is likely to appreciate in actual market terms, even though you're getting tax advantage to claim depreciation of the premises.

IMHO, the value of the property is simply the rental-equivalent value. Sure, there is momentum and speculation, but that's all sentiment, and sentiment can change on a dime.

It's very much like stocks. The price of a stock should be approximately the earnings per share divided by the current interest rate. Say that a stock earns $1/share and the current interest rate is 5%. The stock would be fairly priced at $20/share ($1 / 0.05). At $20, it would be a tossup whether you should buy the stock or just get interest.

Similarly, the price of a house should be approximately the annual rent (minus upkeep, etc) divided by the current interest rate. If the house brings in $10,000/year in profit, and the current interest rate is 5%, then the house is worth $200,000. At that price, it's the about the same to rent or to buy.

Everything else is a bet on the future, and the future is hard to predict. Maybe the company is growing so the price deserves a bump for that. And maybe the Bay Area is growing (more workers coming in than housing being built) and so house prices deserve a bump for that. But that part of the equation is extremely iffy and fickle. It's more of a lottery ticket than an investment unless you have some special knowledge that others do not.

Hmm, my house would rent easily for $3200/month or $38400/year. At 4% interest that’s $960,000 that my house is worth. But Zillow lists a market price of $760,000. So is it a great time to buy?

If interest rates go to 5% then it’s worth $768,000. That would be break even territory with this math.

Calculators never factor in time it takes messing with the investment. Real Estate is not a static paper investment, and takes time that could be put to other labors or even leisure time, vs. mutual fund, so the pain in the ass factor also has to be considered.

HappyGilmore says

Wrong--there's nothing artificial there.

wtf?

cmdrdataleak says

In fact, my calculations in the comment above do not take into account at all what gain an investor would realize per year if they later sold that property. It could be a tidy sum. However, they'd have to pay North of 50% taxes between state and fed on the gains from selling the property. So even if the property appreciated 20%in value, they'd only net 10%. Over that amount of time, you could probably get better returns on, say, investing the same amount in total stock market index + total bond market index blend.

They would only pay the much lower capital gains tax upon sale. There is also the benefit of depreciation. You get a full tax write off against the income with depreciation, and then only pay the capital gains tax upon sale.

Patrick says

It's very much like stocks. The price of a stock should be approximately the earnings per share divided by the current interest rate. Say that a stock earns $1/share and the current interest rate is 5%. The stock would be fairly priced at $20/share ($1 / 0.05). At $20, it would be a tossup whether you should buy the stock or just get interest.

Similarly, the price of a house should be approximately the annual rent (minus upkeep, etc) divided by the current interest rate. If the house brings in $10,000/year in profit, and the current interest rate is 5%, then the house is worth $200,000. At that price, it's the about the same to rent or to buy.

Everything else is a bet on the future, and the future is hard to predict.

Both stocks and real estate as a whole appreciate over time. It's one step back, and two steps forward. This phenomenon has withstood the challenge of time and country where there is a steady rise in population and economic growth.

Quigley says

Hmm, my house would rent easily for $3200/month or $38400/year. At 4% interest that’s $960,000 that my house is worth. But Zillow lists a market price of $760,000. So is it a great time to buy?

If interest rates go to 5% then it’s worth $768,000. That would be break even territory with this math.

Interest rates are the same for the whole country, but the rent you get for every $100K in home value varies tremendously. High price appreciating regions have much lower rents. Investors are willing to accept lower rents in exchange for higher appreciation rates. Like Patrick said, it's a bet on the future. However, I disagree with him on predicting future appreciation rates. There is a wealth of data that clearly shows long term appreciation is very likely in these scenarios:
1. Population growth.
2. Limited supply.
3. Economic growth.
You can add in lots of other variables like weather, local laws and tourist attractions, but the above 3 points are all you really need. I can't think of any region on the planet, where given these three scenarios, home prices do not appreciate over the long run. If anyone can name such a region, please inform us.

personal

HeadSet says

he government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.

The bubble was caused by poor understanding of risk and outright fraud.

Patrick says

Similarly, the price of a house should be approximately the annual rent (minus upkeep, etc) divided by the current interest rate. If the house brings in $10,000/year in profit, and the current interest rate is 5%, then the house is worth $200,000. At that price, it's the about the same to rent or to buy.

You're leaving out the biggest value of owning which is as a hedge against inflation. Over longer periods, that becomes enormous value. Which is why you must use most sophisticated calculators to analyze rent vs. buy rather than the simple calculation listed above.

Stocks are also a hedge against inflation.

Take Visa for example. As the price of stuff goes up, the 2% or so that Visa takes also goes up.

Not saying stocks are always better than real estate, but historically, they have been.

Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits.

You forgot risk. If your statement was true, why is government backing of loans needed at all?

HeadSet says

My beef is that government backed mortgages are "easy" money. I don't see that at all.

The government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

+1000 This is EXACTLY why gov't-backed loans distort the housing market.

HappyGilmore says

HeadSet says

he government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.

The bubble was caused by poor understanding of risk and outright fraud.

Happy - sorry, but you're wrong on this one. If the government backs the loans, banks will absolutely take a more risky approach to loans because downside risk is limited, while upside is there.

HappyGilmore says

HeadSet says

The government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.

All that would do is create more landlords and higher rents. That would increase inequality and hurt the middle class. Housing prices would not fall much because anybody who is no longer a buyer becomes a renter and drives up the rental cost. This means investors can and will pay more for housing.

Government backed loans do not keep deadbeat borrowers in their homes (nor would it be fair if they did: what would be the responsible people who do not chase mania? chopped liver?). They still get foreclosed; the lenders/banks get paid by the government backing/put. Encouraging people who are not financially responsible to buy homes end up becoming a way of ripping off the down-payment money from the lower middle class at economic cycle peaks. It's the same as when government encourages women and minority to buy stocks at the stock market cycle peaks.

HappyGilmore says

That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.

Banks typically originate loans and sell them to government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. The banks don't care if they are bad or unprofitable loans since they sold to someone else who is ultimately responsible for them. Private money lenders and other lenders who actually hold the loans they originate will be much more concerned with the quality of loans they are making and the current state of the real estate market.

A major reason for the real estate crash in 2008 was due to banks making terrible loans and then passing them off to other entities. Make the commission then sell off the garbage loan.

Reality says

It's the same as when government encourages women and minority to buy stocks at the stock market cycle peaks.

I am neither woman nor minority, but my retirement fund manager was haunting me just before market crashed telling that I should immediately buy stocks (I am in bonds now). I wonder how he could have timed the worst time to buy with such precision...