patrick.net

rblack : can you re-do the math with 981K at 0% versus 375K at 8%

this time include the property tax.

If I understand your hypo correctly, this part of your math is questionable based on faulty assumptions:

Home Value: $562k $ 375k
Appreciation: 2% 2%
Total Value in
30 years: $1mil $ 679k
Difference: +$20k -$188k

The point of debate regarding high versus low interest rates is that you are overpaying when you pay $562k simply because there is a low interest rate. Realistically, if you pay $562k for a house that has a fair market value of $375k with average mortgage rates, you are going to have negative appreciation for many years, while if you pay $375k (fair price), appreciation will generally track inflation (2-3% or whatever) from that price.

A real world example:
People spent $800k for houses in Brentwood (NorCal) in 2005. Those same houses now sell for $300k-$400k. Clearly if you bought at $800k in 2005 because mortgage rates were low, you can't assume 2% appreciation from $800k for the next 30 years. You need to first account for a huge drop in price. Places that are still highly inflated in the Bay Area risk the exact same thing happening.

Thanks Chrisborden for sharing your example. But in current US order [disorder] I don't see interest rates being pulled higher until value of dollar is deteriorated.

Dear Lived, excuse me, but I recall back then in 1994, my dollars went a lot further despite high interest rates. It was ridiculous, but as interest rates plummeted in 2000-2002, I was at home "earning" free money at the rate of $3,000 a week appreciation on my crap condo, and when I found out I could flee with a free $200,000, I ran as fast as I could to the bank. That was more than twice my weekly income. Clearly, low interest rates were fueling speculation, and if someone was stupid enough to pay me nearly triple what I paid, why would I NOT take it? Now we have stupid people STILL buying houses for way, way way more than they're worth, and for way, way more than they earn or can pay. When you give money away, people will gamble, such as the fool who bought my condo. I believe that higher interest rates are the only answer to stopping this madness. And I also believe the bankers and the corporate globalists WANT to destroy the dollar and this country, and they are doing a great job of it with the help of foolish Americans who can't resist a bad deal.

rblack, first, who stays in a house for 30 years? second, what if you bought high thanks to low interest rates but then had to sell 4-5 years later but interest rates are now high putting you maybe at a break even point. Just some thoughts.

rblack, one more thought though Serpentor already said it. You are locked into that higher purchase price but you can always refi to a lower interest rate.

I find it quite amusing to be described as a troll. I have been an observer and reader of patrick.net for years and I find it shocking to believe that people with such rational opinions on the highly inflated housing market can be so judgmental and prejudiced to someone who is truthfully describing the going-ons around them. All I did was state the plain facts about the utter stupidity I see around me when in fact all that has happened since the economy slowed was only more money being pumped in by the Fed. Why attack the messenger ?

I am a firm believer in the truth. The problem in America is not left vs right policies, it is the fact that nobody wants to play it straight and uphold the principles of truth and justice which are the true pillars for peace, prosperity and happiness

Bap33, you are an extremist. You jump to conclusions without trying to understand the gist of my original post. Let me ask you something - Are you waiting for someone to push the magic button to allow you buy the house at a price you desire ? Do you think the world revolves around you ? Nothing wrong about thinking like that, but tell me, what have you done to protest at these extremely unfair laws and policies being passed by the government ? I can bet the answer is NOTHING. You just whine and spite others, even if they are on your side. Adopt a positive philosophy - it is called LIVE and LET LIVE. First write letters to your rep in congress strongly protesting the policies and demand an explanation from them. Only then you have the right to judge others & btw you have demonstrated your impulsive rush to judgment by wrongly identifying me as a sellout. I have worked with 5 realtors over the past 18 months and they all gave up on me after racking about 40 showings in total, many REO properties, because I would not budge on offering over asking price, a fact that I am extremely proud of.

What is happening in America today is nothing short of broad daylight thievery and destruction of the currency, right under our bloody noses while we are arguing about who is to be blamed.

And btw, I am a firm believer in the fact that houses are GROSSLY overpriced!!

camping says

As for the original poster’s “rents are increasing,” according to this:

http://finance.yahoo.com/tech-ticker/article/349606/Dropping-Rents-Will-Drag-House-Prices-Down-with-Them
San Jose rents are down 8% this year.
Maybe the original poster is just being devious, but he referred to people as “home debtors,” not usually a phrase used by trolls.

My apt complex ownership changed a couple of months back and these new guys have increased the rent across the board. Looks like they are trying to push the buttons on existing residents to see how much they will put up with. ( I have 2 kids and it will take time for me to gather all of our belongings and move & before that I need to find the right location in the same school district ). I am not disagreeing that rents are dropping everywhere else but there are a few exceptions - call it taking advantage of people's tendency to avoid moving unless limits are exceeded which they think a $150 increase in rent does not.

Sure, rents can increase. But so can house payments - even for fixed mortgages. In Vegas, my home taxes started at $900 per year. After 8 years they were $1300. During the boom they rose to $2,200 and have increased during the boom. The old neighbors say that homeowner's insurance rose several hundred dollars due to house prices increasing, and after an unfortunate flood brought on by change in infrastructure they're now paying flood insurance. So, the increase was about $2,000 per year to the homeowner, or $167 per month.

Ain't no guarantees out there. But just 'cause rents are unstable and unpredictable doesn't make it the time to buy now.

Don't even get me started on why it's completely asinine to sue the govt for discrimination based on choice of housing. I'm sure you could find an attorney, tho. They'll do anything for a chunk of change.

Unless they are raising your tax rate, are the county is doing something fishy with appraisals your taxes going up generally imply your home value has increased. If my home value doubles, I would expect my taxes to double also. In most cases I would not use that as an argument for owning a home as a great expense. Unless the county tax rate has doubled complaining about having to pay more in taxes is not a bad thing. If I purchased $10k in stock and those stocks go up to $20k and sold than the stocks. Yes I would have to pay a few thousand dollars in capitol grains, but I would state that having to pay taxes on my gains put me at a lost. The only exception to this would be if you bought at the peak, had to pay taxes against that peak and now your home has lost value. In that case though your taxes "should" be going down and not up.

My management keep pushing all the utilities on me. I negotiated with other management half a mile away and got the same size unit for $150 less(This is in Socal). Rents are definitely falling at most places in Socal. Bottom line is OP must try to move out and give a 30 days move out notice to current management.

The taxes in my "new" house were about $u700/year when I moved in. They rose to $1,000 during the bubble. My house was "reappraised" this year, and I should have had a $200 decrease. However, they increased the tax rate to match the current amount paid.

They touted "transparency" in that anyone can find out what their taxes are and the rates are easily understood. But my house taxes increased during the bubble and according to the local govt, won't ever go down. It's not my fault that assholes overbuilt luxury homes on golf courses that are losing money and going into foreclosure (houses and golf courses), I wouldn't mind paying a little more to help offset the monies that aren't being collected from foreclosures & walkaways. But the majority of that money goes to schools - and I deeply resent having to pay taxes for huge mormon families with 10 kids when they're paying the same amount that I am.

We have "school trust" land all over the state, they should sell that shit and lower my taxes or at least use my taxes for my community. I feel like everyone should pay for a couple of kids, but huge families pay the same taxes as I do and that just plain sucks.

...but I'm not bitter...

Today you are saying you are not bitter, many more are bitter beyond the edge and I am wondering how long before unrest sets in for crashing dollar.

Ellie, sorry to hear about that. My county was fairly good about taxes. They automatically lowered mine this year because of the drop in value of homes.

SMW,

>>All I did was state the plain facts about the utter stupidity I see around me when in fact all that has happened since the economy slowed was only more money being pumped in by the Fed. Why attack the messenger ?

In this particular case you (the messenger) did not make it very clear that you were posting a critique of somebody else's message. Add to that the headline "Missed the bottom again?", and I would say that except the fine print, it read an awful lot like a shill or a troll.

The fine print was:

>>"Here are some of the points that were made by the newly crowned home debtors…"

One common technique of an (indirect) shill is to quote lots of other people that have the "right" message, but at the same time create an appearance of distance or objectivity. It is similar to how a journalist can claim to be objective but by prominently quoting the opinion of other people that agrees with him, still gets his preferred message across.

Your post read a lot like such as shill. If you were arguing *against* a bottom having been missed. I think you did not do a very convincing job. I suppose time will tell what your true colors are.

there are always loosers in a boom and bust cycle : people who sell in bottoms and buy at peaks.
for every loser there is a winner : people who buy at bottoms and sell at peaks.
in every instance , the winners are rational thinkers and losers are emotional.

I was one of those 'winners' that sold at the peak. I do wonder if we didn't have other circumstances playing out (tech bust lay-offs, career change, baby) would we have sold? Would we have paid that close of attention to the market. Yes, I think we would have been aware of the craziness when the neighbor's house sells for $400K and you wonder how the young couple could afford it when one works as a barista and the other as a web designer/developer. But would we have sold to make the profit we did and sit and watch this debacle from the sidelines? I don't think so.

Leigh

The comparison should still hold since I am assuming appreciation from date of purchase (doesn't matter how long you live there). Also, the assumption is that interest rates are increasing and prices dropping (thats why a person should wait to buy right?), so planning to refi when rates drop may not work. I can remember my parents telling me interest rates were 13% in 1970's when they bought their first home. Of course the house was only 20k, but does anyone really believe home prices will drop that low again? Imagine 13% on a modest $ 300k loan!!!

My concern is that homeownership may become something only the wealthly or double income no kids crowd can afford. Remember homeownership is relatively new, most people lived in the city or on the family farm prior to WWII.

Gee. Maybe homeownership may become something only for the wealthy or DINKs. Hmm. Think that might be the goal? Sounds like Soviet Russia. Go ahead, buy now or you'll be priced out forever!

Chrisborden

Using your earlier example of a 117k loan at 9%, you will have paid $ 1.5 mil at the end of the 30 years. If on the other hand you had waited several years and say the house more than doubled in value (inflated), and you paid $ 300k at 5% interest, your total payout would then be $ 1.2 mil at the end of the 30 years. Which is the better deal?

I see your point rblack but what sticks out to me is the risk you take buying high with a low interest rate. If you have to sell w/in a few years and interests rates have increased significantly putting pressure on prices then you risk losing money on the sale, ie, maybe even a shortsale and there are plenty examples of that going around these days though the rates haven't gone up YET!

But just think of the massive tax breaks you'd get for having such a high interest rate, just think of that deduction;O)

rblack,
You are correct, it is better to pay a higher price with a lower mortgage rate...
as long as you ignore:
-property taxes
-mortgage interest deduction
-the inability to sell if rates do rise and prices subsequently fall (possibly to the point where you are underwater for 10+ years)
-the inability to refinance if you get a bottom floor rate
-the fact that a house can be purchased with cash if prices fall enough thus avoiding a mortgage entirely

As long as you are sure you will stay healthy, have a job and maintain the desire to stay in the same house for 30 years, then it definitely makes sense to pay a higher price and get a lower mortgage.

Hi, I've been reading patrick.net for awhile, ever since I really started researching today's housing market. I think most people out there are easily fooled by the media, the government, and their friends/family/realtors/etc. in telling them this is a bottom. I'm 24, and while I still aspire to own my own house at some point in my life, I realize now is not the time. It make me cringe, literally cringe, when my friends are telling me their plans to buy houses now, (while rates are low), or (while the $8,000 tax credit is in place), or in areas that will have very little, if any appreciation! Even when stating the COLD HARD FACTS, they still feel like its the best time to buy. I speak to them from experience (I just helped my boyfriend SHORT SELL his condo that went down about $200,000 in value since the peak), yet still no one listens. In the Bay Area, prices in neighborhoods around me, (Danville, San Ramon, Dublin) for a STARTER HOME (2-3 bedroom) are still WAY OVER $300,000, now my question is this: while I know SOME (probably less than more) can afford a $300,000 home on their current salary, but let's be realistic, who can afford a $600,000 one? Obviously there are exceptions, and people who've been in this game a long time and played the market right (not taking risky investments). Am I dreaming in thinking that one day those McMansions in Danville, Alamo, etc. that are now priced btween 700-900,000 will someday be affordable? (lets say $550,000 or under)---in the next 6 years? (It's going to take about that long to save the down payment of 20% for my family.) and... Are my friends crazy for buying now while interest rates are low/tax incentives, etc.... or am I right in telling them that it will be damn near impossible for them to buy these so called starter homes, and then flip them once they have kids in lets say 3 years...

Advice, Input...!!! :)

lilsuperstar16, don't forget to remind your friends of the 6% realtor fees when they go to sell in a few years...watch the appreciation, if any, get eaten by those fees!

that's exactly my fear!!!! I guess the best I can do is warn with wisdom, and just sit back and watch.... I feel like a lot of those "first time home buyers" out there have LITTLE TO NO experience, or knowledge WHATSOEVER of today's market... they still have optimistic views, and sadly, for them...the market in my opinion is no where near a bottom...NO WHERE NEAR!!!

lilsuperstar16 says

that’s exactly my fear!!!! I guess the best I can do is warn with wisdom, and just sit back and watch…. I feel like a lot of those “first time home buyers” out there have LITTLE TO NO experience, or knowledge WHATSOEVER of today’s market… they still have optimistic views, and sadly, for them…the market in my opinion is no where near a bottom…NO WHERE NEAR!!!

You seem wise for your age, keep the faith! Remember also, to those who say someday only the rich or dual incomers will be able to own, the only places (and I mean THE ONLY PLACES) that has ever, or will ever hold true, is in NYC, SF, their best bedroom communities, and a few other isolated areas. I have lived in NYC, SF area, VA, AL, and MI. In these latter three locations I COULD afford a house and can STILL afford a house on ONE fairly modest proefssional salary. A mansion? No. But I have friends and family in MI who live in very fine homes that are well under $200 k. I'm talking teachers, IT engineers, etc. Granted, income is lower there, but not relative to housing. As my Dad says, "CA is not the real world". Well, I believe reality is striking now. Does that mean you'll be able to buy a house in Atherton? Of course not. That is the second richest zip code in America according to a recent study. But during the bubble a dump in south San Jose would have cost your $625,000. Now take a look. Still a dump, but under $300k. Ultimately, should be even less and I think will be.

Fundamentals always come back. The bubble is OVER and it won't come 'roaring back'. Count on it. In the rest of America, an average house will generally be 2-3x median income for the zip code. In SF bay area what should it be? I am still saying less than 5x, factoring in all the hype about CA and "the weather". So what's it in your zip? $100k family median?

smw, I'd be interested in hearing more about your circumstances. Any chance (vague generalities) of us getting more information on your location and rent?

pkowen says

You seem wise for your age, keep the faith! Remember also, to those who say someday only the rich or dual incomers will be able to own, the only places (and I mean THE ONLY PLACES) that has ever, or will ever hold true, is in NYC, SF, their best bedroom communities, and a few other isolated areas. I have lived in NYC, SF area, VA, AL, and MI. In these latter three locations I COULD afford a house and can STILL afford a house on ONE fairly modest proefssional salary. A mansion? No. But I have friends and family in MI who live in very fine homes that are well under $200 k. I’m talking teachers, IT engineers, etc. Granted, income is lower there, but not relative to housing. As my Dad says, “CA is not the real world”. Well, I believe reality is striking now. Does that mean you’ll be able to buy a house in Atherton? Of course not. That is the second richest zip code in America according to a recent study. But during the bubble a dump in south San Jose would have cost your $625,000. Now take a look. Still a dump, but under $300k. Ultimately, should be even less and I think will be.
Fundamentals always come back. The bubble is OVER and it won’t come ‘roaring back’. Count on it. In the rest of America, an average house will generally be 2-3x median income for the zip code. In SF bay area what should it be? I am still saying less than 5x, factoring in all the hype about CA and “the weather”. So what’s it in your zip? $100k family median?

Hi,
Thanks for the input on median family income... while I have done extensive hours of reasearch on housing, I've never looked into that! (go figure!) I just looked it up, and it looks like median family income in zip code 94526 is $160,560... median home price = $875,000... so needless to say, we still have a while to go....on top of the fact that high end housing is literally just sitting and rotting on the MLS, with no bids-and tremendous price drops...

hopefully I'll find a steal in a 5-6 years!

I am not trying to justify anything here but there is a huge difference between dual income and single income in terms of disposable income.
A couple with two kids and 100K single income salary will have 20K of money after all other expenses ( cable, food, phone..etc)
but the sane couple with two kids and 200K dual income will not ahve 20K times 2 = 40 K but much more than that after expenses on basic stuff. they will more likely have around 60-70K

just an observation...may be thats one reason why the home price = K times of median income is not fixed and K is dependent on the median income itself. More the median income , more K.

What's happening in Portland now is what I've been curious about all along. Mind you our pay scale/housing prices are lower than the Bay Area. So started homes, around $225-250K are still supposedly experiencing bidding wars (wonder how much of that $8K housing credits comes into play in that mindset) BUT anything over $500K is just sitting, houses that were once listed at $1.2 mill eventually MIGHT sell for $900K if they sell at all. One of the local realtor blogs (www.agent503.com) tracks the desperate sellers (defined as X number of days on the market and/or X% of price reduction, sorry, I don't recall his exact definition). He is noticing that a lot of previously listed $500K homes now have asking prices near $300K which he thinks is in the first time home buyers range though I think is still pretty steep but hey, I have childcare and baby expenses in my world.

So my thoughts are...how many of those in the $250K area/bidding wars will now think hey, $300K is not that much of a stretch, let's go for it and get into our 'dream home' of course neglecting the thought that they will likely have much higher taxes, utilities and upkeep but let's not think about THOSE things.

So what kind of twist is this going to bring to the Portland market? Do you guys see outrageously priced homes now coming w/in reach of the better off 1st time home buyer?

dream homes still require DP's and if anyone goes into debt beyond 3X HH income, they deserve what's coming. So, if the Portland crowd is walking around with great job prospects, $60K DP, and make $100K HH income, then they just might be good-to-go on a $300K home.

Not with FHA's loan limit at about $418K for Portland, only need what? 3% DP and closing costs?

Sure as hell ain't saying it's wise to get in over one's head but many folks haven't had reality hit 'em over the head yet. I still remember the day the spouse and I got approved for our VA loan in 1999. Got approved for $250K. We were making about $70K together. We had only about $5k in savings, a boat load of student loans as we were just out of college, a crappy car about to die. I knew we could only afford about $180K at 7%. I asked the mortgage lady what we were supposed to eat if we took out the $250K, she just ignored me.

I do wonder if FHA is tightening their lending?

rblack says

Chrisborden
Using your earlier example of a 117k loan at 9%, you will have paid $ 1.5 mil at the end of the 30 years. If on the other hand you had waited several years and say the house more than doubled in value (inflated), and you paid $ 300k at 5% interest, your total payout would then be $ 1.2 mil at the end of the 30 years. Which is the better deal?

Hey rblack, could you please explain your math? Is it the following?

[Principal Balance] x [Interest Rate] x [Length of Loan] = [Interest Paid]

Just curious how you are coming up with these numbers...

Bap33 says

dream homes still require DP’s and if anyone goes into debt beyond 3X HH income, they deserve what’s coming. So, if the Portland crowd is walking around with great job prospects, $60K DP, and make $100K HH income, then they just might be good-to-go on a $300K home.

A $300K mortgage at 5% is $1610/month not including taxes and insurance. If we didn't have kids we could pull it off though it would be tight. We make about 15-20% less than 100K you mention ( I always feel odd stating my income on these blogs).

in case you missed it the first time around ... "how-much-a-month" was a very big part of the first bubble. Never - EVER - buy anything based on that. Step 1) stay within budget. 3X HH income is the absolute max .. MAX .. so shoot for 2X to 2.5X of HH income. Step 2) do not pay anywhere near "asking" price. 1998-99 prop-tax assessed amounts are fair for a live-in ready REO home. Subtract from there for repairs. Step 3) Do not buy anything built in the last 10 years unless it is absolutly EXACTLY where you want to live. There's more coming, just wait. The bottom will not be going anywhere but flat, so relax. Save more money.

don't listen to all the unproven theories ...just look for case shiller index for your area and if its in line with long term trend and you want to buy a home...go for it. If the prices are higher than historical case shiller index, there is a "high probability" that it will return to mean or if the prices are much lower than historical case shiller index there is "high probability" that it will go up and return to mean. this is all true assuming not much has changed in your area fundamentally like industries gone or other major "permanent" shifts in employment or population or macro economics.

return to mean of cases shiller index is a "proven" thing for predicting housing.

http://www.recharts.com/cme.html gives you case shiller index and also what some traders predict about housing in future.

Bap33 says

in case you missed it the first time around … “how-much-a-month” was a very big part of the first bubble. Never - EVER - buy anything based on that. Step 1) stay within budget. 3X HH income is the absolute max .. MAX .. so shoot for 2X to 2.5X of HH income. Step 2) do not pay anywhere near “asking” price. 1998-99 prop-tax assessed amounts are fair for a live-in ready REO home. Subtract from there for repairs. Step 3) Do not buy anything built in the last 10 years unless it is absolutly EXACTLY where you want to live. There’s more coming, just wait. The bottom will not be going anywhere but flat, so relax. Save more money.

90% True.

1) How much per month got twisted from renting from a landlord -> Renting from the bank -> holding it for a greater fool -> Slavery and/or bankrupcy (morally and financially)
2) Asking prices are just that. When do you pay MRSP on a car, jewlry, etc.
3) Lots of bad construction out there in the last 10 years. Some good.

Save your money. but don't do it in USD.

@homeowner in SanHosebag,
really? dig up that index from 2001 and tell us what was predicted for 2005. It was way way wrong.

The bubble was predicted by the case shiller index? That would mean it was published before 2001 and foretold the peak date and bubble size. I have to say, I must have missed that news. Please put up a link to that. Thank you.