patrick.net

EastCoastBubbleBoy says

I guess my point is that there are a certain number (such as myself, and many others on this board) who have been saving for so long that, once prices get close to pre bubble levels we’ll all be trying to outbid each other.

ECBB, your thinking is being clouded by hanging out on this board. Overall, the savings rate in the US has been NEGATIVE for years. Even now it's in the low single digits. The vast majority of Americans are living paycheck to paycheck or at best have very low savings levels and so will not be showing up w/ tens or hundreds of thousands of dollars waiting to steal a house from you. The people on this board are not representative of the larger population.

Also, as for the LNKD instant millionaires, standard sell locks are 6 months not 3 and I believe the stock will be trading dramatically lower by then. Sure, early employees will still do quite well but there are a LOT of homes in the SF Bay Area - I contend that LNKD employees will not move the needle.

Why this propensity to buy a house? The government, banks, media, realtors have brain washed Americans. A house is only worth buying if you plan to never move, or if you do move you could rent it out to cover costs. Any other scenario just does not make sense.

John Bailo says

Even if I make the switch and want to buy conceptually — as in making a long term decision — there are so many disincentives right now. Every time I turn around I read about some loan or transaction gone wrong or some fine print soaking the buyer. It’s like jumping into quicksand.

I agree it's scary... It's getting awfully close to the old "Buy When There's Blood in the Streets" mantra though...

Unless your waiting until we physically see people dying in the streets?

I personally know a lot of people who are saving hardcore right now... planning to buy next year.. 2012. I think that's when the recovery will truly start to form... But then again, if the bottom drops out like back in early 2008... I'd imagine most would delay those plans and it'd get pretty ugly.

We'll find out soon enough....

Since first reading patrick.net in 2005 when I was mildly depressed because I couldn't "afford" the homes that all my peers seemed to be snatching up willy nilly, and I was looking online for housing affordability info, I have saved up exactly $197,243!

I share a 2 bedroom condo on a beautiful bay front complex in Sunny SoCal. My underwater neighbors are trying to unload their condos from $1.1million to $1.5mil ($700 per month HOA). Instead of looking down on me now and treating me like a low class renter as they have done for many years ... some of them have started to ask me for advice. My share of the rent is currently $975 per month. In the seven years here (living in luxury) I have spent a total of $79000, half the amount of money my neighbor just reduced his asking price for ... for the third time.

Considering 5% of $1,000,000 is $50k per year, plus (12 * $700) $8400 per year in HOA fees, plus $12,500 per year in tax, and additional insurance expenses, it seems my neighbors have spent in just one year in carrying costs (renting the money from the bank) what I have spent in 7 years to live here without even factoring in their transaction costs and depreciated value. Keep in mind I enjoy the unit and facilities as much as they do (even more). I use the bay front jacuzzi 4 - 5 times per week, work out in the state of the art gym, enjoy the same underground parking etc.

Some of my neighbors won't use the hot tub anymore for fear I'll be in there discussing real estate again, the same neighbors who called me dumb for renting 5 years ago. It feels good to know your gut was right even in the face of fierce judgement. Maybe it's uncouth to gloat now but after enduring all the years of my "sophisticated" peers going on and on about their "real estate genius" and looking down their noses at me, its nice to finally feel some vindication.

Thank you Patrick for your site. My bloated bank account is partly your doing!

Jonnyob says

Some of my neighbors won’t use the hot tub anymore for fear I’ll be in there discussing real estate again, the same neighbors who called me dumb for renting 5 years ago. It feels good to know your gut was right even in the face of fierce judgement.

Kodus, patients pays off. SoCal certainly has seen a nice corrections and will continue to do so for some time.

http://www.dqnews.com/Articles/2011/News/California/Southern-CA/RRSCA110512.aspx

http://www.dqnews.com/Charts/Monthly-Charts/LA-Times-Charts/ZIPLAT.aspx

common_sense says

Why this propensity to buy a house? The government, banks, media, realtors have brain washed Americans. A house is only worth buying if you plan to never move, or if you do move you could rent it out to cover costs. Any other scenario just does not make sense.

Children. It's hard to not wish you had a backyard for your children to run around it. Getting out to a park everyday is not always logistically possible, and it can be hard to get chores done around the house without an outside place to play. If my children don't get outside, they tend to be more crabby, not listening, etc.

Also, space. We're thinking about having a third child. We may end up all cramming into a 2 bedroom rental for the moment if we do. Yes, we could rent a house while we wait, but the price of rental would cut into our budget a lot more than just waiting to buy a house since we have a large down payment saved. Hence, our monthly payment would be lower for us buying, even though the rent/buy equivalent may not be at par yet.

Stuff. We have a lot of books. I grew up with a lot of books and want my children to have access to a lot of books. Most of ours are in a storage unit right now. It would be nice to have them out in bookcases.

That said, we don't want to buy a totally overpricde house. We'd like 450,000 tops, preferably 300,000 to 350,000. Well - we may still be waiting for awhile to buy that in the bay area. (By the way, I'm sure we'd qualify for much more, but we don't want our retirement, or our kids education money or most of our portfolio to be tied up in a house. We'd also rather base the price on what we should be buying with husband's current income, not what we've saved. (It is a little frustrating to be competing with dual income households sometime.)

We've been renting for 12 years. Honestly after the housing bubble and given that we have managed to save a rather larger sum of cash has me re-thinking about buying a house period. Originally the plan was to wait until prices came back down to reality. That doesn't seem to be happening in the Bay Area. In the meantime we could just work awhile longer, move to a cheaper state, and buy a house for cash outright and still have some leftover. So in other words we would semi-retire. We could do this by the time we were in our mid 30's. Semi retired as in we would have zero debt, sufficient retirement savings, and have to get perhaps boring joe jobs. Then again- that's ok with me. Everything we would be making would be almost free and clear.

In the meantime we rent a rather large, nice house with another housemate. Its probably nicer than most of the houses of people I know that bought. Its got a big back yard, a 2 car garage, and 4 bedrooms. All for under 2k a month. Split between the other housemate, our rent is about half of what condos are renting for in San Fran. The landlord likes us and doesn't raise the rent. I'm perfectly happy with that and could stay here for years. In the meantime we'll keep right on saving and watch the housing market continue its collapse.

Spelunker says

I’ll bite.
My wife and I live in Silicon Valley and have saved up approximately $650K for a house (this is in addition to retirement and short term savings). We’re both professionals with a combined gross income in the mid six figures. In other words we could buy a house if we wanted to. And yet we haven’t, because housing still seems overpriced. So the only effect we’ll have on housing prices is to help define a floor, because we’re not going to overpay.

We're sort of in the same situation-albeit we haven't saved as much as you have- but we could also buy here. Then again, in the Bay Area that still means around 500k for a starter home. No thanks. Nice houses in Austin for for under 200k. I doubt we would ever buy in the Bay Area. Its still markedly overpriced.

edvard2 says

Nice houses in Austin for for under 200k. I doubt we would ever buy in the Bay Area. Its still markedly overpriced.

Things change rapidly around here, and they often do. You may well be surprised what happens.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

Kamesh Kompella says

Bay Area is a huge market. A millionaire is likely to buy on the Peninsula (Atherton, Palo Alto etc.) or Danville rather than Fremont or San Ramon.

LOL! Guess you never been to Silver Creek down in San Ho..

http://tour.scvcc.com/

Kamesh Kompella says

Think of a boom in Lamborghini market. Now argue that this will increase the price of a new Corolla.

Its kind funny you mention the boom in Lambos. The old Los Gatos Ferrari dealer after many years went of of business. We also saw a Lambo dealer in LG last only about 6-9 months. As did Ultimate Motors in Mt view also went out of business a few years ago. With all the so called money floating around and talk of millionaires, things are not so rich as some people make them to be.

thomas.wong1986 says

things are not so rich as some people make them to be.

Not every one can be rich. The foundation of the bubble was everybody wanted to bank on their newly acquired nest egg, out of phantom money. An overpriced wooden box that contributes nothing to country's productivity. :)

So right bubble sitter...

i just wanted to say i never laughed so hard in my life reading your comments. especially the Apolyptic guy [i'm not gonna cuss], LA Renter & Bubblesitter. y'all are hilarious.

i mean apocalypse

"We do own a house (mortgage) currently, but have 50k saved and are looking for a second even CHEAPER house for us to live in (we have a 3/1 with a one car garage and want a bigger lot/garage and second bathroom). The more expensive house we currently live in will be a rental for us and about break even right now rent/mortgage payment."

So you want a new house that is both cheaper and bigger? How exactly does that work?

grywlfbg says

Also, as for the LNKD instant millionaires, standard sell locks are 6 months not 3 and I believe the stock will be trading dramatically lower by then. Sure, early employees will still do quite well but there are a LOT of homes in the SF Bay Area - I contend that LNKD employees will not move the needle.

The options on LNKD start trading after 5 business days. :) I'll be standing in line for the $95 or even $90 puts... Hell, I'd have shorted it when it opened...but you can't.

common_sense says

Why this propensity to buy a house? The government, banks, media, realtors have brain washed Americans. A house is only worth buying if you plan to never move, or if you do move you could rent it out to cover costs. Any other scenario just does not make sense.

"never" is a scary word, but let's just say the propensity comes from the want/need to put down some roots. Yes, you could rent and still put down roots, but if you want something "nicer"....gotta buy. The nicer properties are almost always never up for rent (why would they?? folks who bought them can afford them), and to have them, there is no choice but to buy.

That being said, in the "current" US economic environment, I'm scared shitless to buy. The state and local govts are way overbloated and instead of cutting out the fat, they will keep raising taxes on the home "owners" to sustain their bloated budgets. They can't do jack shit to the renters other than increase income taxes at the state and local level. While that's possible, the probablity of that happening is much lower than the sneaky tax increases like water, sewer, property taxes, easement fees, speacial tax assessments and what not.

It's almost as if they are unknowingly flashing the message... "Buy a house, and your ass is OURS!!"...

kapone says

That being said, in the “current” US economic environment, I’m scared shitless to buy. The state and local govts are way overbloated and instead of cutting out the fat, they will keep raising taxes on the home “owners” to sustain their bloated budgets. They can’t do jack shit to the renters other than increase income taxes at the state and local level. While that’s possible, the probablity of that happening is much lower than the sneaky tax increases like water, sewer, property taxes, easement fees, speacial tax assessments and what not.

It’s almost as if they are unknowingly flashing the message… “Buy a house, and your ass is OURS!!”…

Isn't raising taxes shooting the recovery in the foot though?

The government OWNS most of the homeowners mortgages.. and if they raise taxes enough to cause any pain or risk of default by a homeowner.. Then they are stuck with the property when they foreclose...

Seems like moving forward the government is going to do anything to prevent foreclosures and a bigger headache when all the FHA buyers default because they raised their taxes too high?

Los Angeles Renter says

Isn’t raising taxes shooting the recovery in the foot though?
The government OWNS most of the homeowners mortgages.. and if they raise taxes enough to cause any pain or risk of default by a homeowner.. Then they are stuck with the property when they foreclose…
Seems like moving forward the government is going to do anything to prevent foreclosures and a bigger headache when all the FHA buyers default because they raised their taxes too high?

Everything you said is true....up until you mentioned the govt doing something that seems "logically" right...

You'd THINK they didn't have their collective heads up their collective rears, and shoot themselves in the foot, but that's precisely what they are and will do. Why? Because the mortgages are backstopped by the "federal" govt and they look after themselves (a.la. the Federal Reserve). The "local" govts don't give a crapshoot about mortgages, they give a shit about property taxes. And guess what, after a bank reposseses a property, THEY have to pay the taxes. Yup.

Why do you think the banks are that slow in processing foreclosures?? Not by accident...

I live in Orange County. Our household income is $300K. We have $220K saved, and I choose to live in a 900 sq ft apartment. And it makes me sick what I pay for a stupid 2 bed 2 bath apartment. I want to move to South Carolina/Texas/anywhere else every day. Would we like to buy? Yes, at some point. But I will NEVER buy until the real estate market is in line with rental parity and local area incomes. I will be a fence sitter for the rest of my life if I have to.

We've been renting for 12 years. Honestly after the housing bubble and given that we have managed to save a rather larger sum of cash has me re-thinking about buying a house period. Originally the plan was to wait until prices came back down to reality. That doesn't seem to be happening in the Bay Area. In the meantime we could just work awhile longer, move to a cheaper state, and buy a house for cash outright and still have some leftover. So in other words we would semi-retire. We could do this by the time we were in our mid 30's. Semi retired as in we would have zero debt, sufficient retirement savings, and have to get perhaps boring joe jobs. Then again- that's ok with me. Everything we would be making would be almost free and clear.

i am one of the fence-sitters. when i'm the brink of going forward when buying a home, a chix out. i will probably be one of the ones that can afford to buy, but won't. i am 50 yrs old and i think i waited too long. it's the 30 yr commitment that's killing me. also, i keep wondering if price$ will con't to drop and i am holding out for the best deal. i have agonized over this decision and drove my realtor crazy, although she has been very patient. i guess indecision is a decision.

National savings rate is possibly negative, so I doubt hardly any money in the aggregate has been saved. And with supply/demand of course more demand is going to drive price up. But where is the demand?

I'm personally waiting for hyperinflation.

@Becket, In case you were not aware, you can always reverse-mortgage your place after you reach a certain age. So, your 30-year commitment is not really for that long.
However, I am not suggesting you buy now if you don't feel like it.
I had one grandmother who was a successful businesswoman since the 30's, and to my knowledge she never owned property.
She did have cash however, and she loaned my parents the dough when they bought property in Martha's Vineyard in 1962.
When my grandmother died, she left us all a nice chunk of change.
There may be something to say in favor of having a couple hundred thousand in a few bond funds and living simply with the flexibility to hop on a plane and see the sights somewhere.
My experience is that in almost any locale there is someone who wants to rent a place to hang your hat.
I saw this in the most exclusive place I have ever seen, a ski resort town in Switzerland.
Fear motivates people to do things. Fear of poverty if you don't buy a house. Fear of criticism if you do not own a house. Fear of making a financial mistake and "missing out" on the free equity you should have made on real estate, etc.
Keep your own financial counsel, and if you like a place, and it's cheap enough, consider buying it. The county where you live needs the tax money :)

"They can’t do jack shit to the renters other than increase income taxes at the state and local level. While that’s possible, the probablity of that happening is much lower than the sneaky tax increases like water, sewer, property taxes, easement fees, speacial tax assessments and what not."

Come on now. Certainly you know by now that RENTERS pay property taxes. You dont think the property taxes are factored into your rent? I am not aware of a single landlord who pays property taxes. And I know quite a few of them.

If the US gov would have stayed out of manipulating the housing market, I would have bought a house by now (as prices would have fallen to affordable prices). But by interfering in the housing market (and basically everything else these days) I am pretty much out of the market for any house in this so-called capitalist country. I will rent forever now....

Kevin eats cheese says

If the US gov would have stayed out of manipulating the housing market, I would have bought a house by now (as prices would have fallen to affordable prices). But by interfering in the housing market (and basically everything else these days) I am pretty much out of the market for any house in this so-called capitalist country. I will rent forever now….

Couldn't have said it better myself. However technically prices have finally fallen to a level I can afford on the SF peninsula. By "afford" I mean buy with 100% cash or nearly so. Only in some sketchy areas of Redwood City and San Mateo though so for now I continue to wait.

The thing is, in the meantime as I continue to save and invest I really don't see myself buying in better areas when I can due to the nutty politics of this state. What I may do is (1) continue my career here until it doesn't make sense anymore then drag my money bags to some other state or (2) invest in some rental properties in a state that won't affect my ability to sleep well.

It will depend heavily on what the US govt does as well.

Renting (apartment in my case )isn't all that bad if you don't have an owner breathing down your neck. I look for 'property managed' places that are in nice areas but where the building isn't so nice looking from the outside. Attic access is key. You can fix the place up nicely to suit your needs. In my case I've got networking and sound in every room including outside. Shelving, Wall mounted audio/TV, extended the plumbing through the kitchen wall to I can automate watering of my garden and bonsai plants. A nice view and so far one rent-reduction - they can't seem to keep this building occupied the past 2.5 years so I asked and received. The prior 2.5 it was always full.

Just pay your rent on time and early and mind your own business - property manager won't care what you did until you leave. In my case I'll repair small holes so it will be as if I was never even there. The place is cleaner now that when I moved in to it 5 years ago.

HousingWatcher says

“They can’t do jack shit to the renters other than increase income taxes at the state and local level. While that’s possible, the probablity of that happening is much lower than the sneaky tax increases like water, sewer, property taxes, easement fees, speacial tax assessments and what not.”
Come on now. Certainly you know by now that RENTERS pay property taxes. You dont think the property taxes are factored into your rent? I am not aware of a single landlord who pays property taxes. And I know quite a few of them.

Of course landlords have to take taxes into account when determining rents, but they can only charge what the market will bare. I live btwn NYC and Philly and here the rents have been going down over the last couple of years.

The apartment complex where I rent has dropped monthly rents $400. plus they are offering the first month's free rent. They had to do this because apartments were sitting vacant for four months or more. Even with the lower prices they are still taking 2-3 months to fill. From three yrs ago going back into the 1990's they would get filled within a month. In fact, when we moved here there was a waiting list to get an apartment.

How times have changed!

True. Renting still has its advantages, and rents have not (yet) exploded to keep up with rising costs.

I was just commenting to a relative today... if all these people are loosing their homes, and rentals have vacancies, where are the people going? Are they moving out of the area entirely? out in the streets? shacking up with extended family?

HousingWatcher says

Certainly you know by now that RENTERS pay property taxes. You dont think the property taxes are factored into your rent?

Property taxes determine at what price income properties change hands at (since it affects the cap rate), but don't really have anything to do with the rent level. That's determined by what the market will bear.

EastCoastBubbleBoy says

if all these people are loosing their homes, and rentals have vacancies, where are the people going? Are they moving out of the area entirely? out in the streets? shacking up with extended family?

Mostly extended family. Number of homeless is more now than during the Great Depression too but due to various social programs and efforts by local and state governments you're not seeing the masses of people in the streets.

HousingWatcher says

Come on now. Certainly you know by now that RENTERS pay property taxes. You dont think the property taxes are factored into your rent? I am not aware of a single landlord who pays property taxes. And I know quite a few of them.

That's a silly assertion. What the landlord pays has nothing to do with what the renter pays. My landlord could own the house outright and pay $0 in property taxes, or he could be paying double in his PITI than my rent costs, plus large property taxes, and it has no impact on me. The rental market in the aggregate is satisfied with supply and demand, not the desires of landlords.

EastCoastBubbleBoy says

Some of us would be first time buyers have been waiting for a very long time to buy, and given the uncertainty are still on the fence. How much money do you suppose these first time buyers have saved up, and what impact (if any) will they have on prices as they start to be drawn out of the woodwork?

I don't think that will be the case simply because those people were very prudent with their money. Savers don't save so they can throw it all away frivolously.

So I would imagine no impact at all. Savers will just get a benefit of buying cash and paying a lot less while not being a debt slave.

klarek says

What the landlord pays has nothing to do with what the renter pays. My landlord could own the house outright and pay $0 in property taxes, or he could be paying double in his PITI than my rent costs, plus large property taxes, and it has no impact on me. The rental market in the aggregate is satisfied with supply and demand, not the desires of landlords.

That's not completely true. Whenever I've discussed this with other people, they tend to focus on two extremes:

1) the renter is directly paying the landlord's costs, e.g. taxes, mortgage, etc. + a reasonable profit
2) the landlord's costs cannot get perfectly absorbed by rent, such that if property tax went up by 40% next year, the landlord could not raise rents by that amount to make up for it, so the renter's costs have nothing to do with the landlord's costs

The reality is somewhere in the middle. Most input variables into landlord costs do not change very much from year to year, so it's closer to #1 than #2, but still somewhere in the middle. Renters mostly do pay property tax.

corntrollio says

Renters mostly do pay property tax.

While theory and practice often diverge, theory says:

"A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. "

Adam Smith, The Wealth of Nation, Book V, Chapter 2, Article I

corntrollio says

Whenever I’ve discussed this with other people, they tend to focus on two extremes:

1) the renter is directly paying the landlord’s costs, e.g. taxes, mortgage, etc. + a reasonable profit
2) the landlord’s costs cannot get perfectly absorbed by rent, such that if property tax went up by 40% next year, the landlord could not raise rents by that amount to make up for it, so the renter’s costs have nothing to do with the landlord’s costs

The reality is somewhere in the middle.

My point is that the landlord's net monthly rental cashflow is irrelevant. The rental market sets the rental prices: supply and demand. If my landlord were trying to rent his house out at the amount he's paying per month, the house would be empty. On the same token, if someone who owns a house outright were generous enough to rent it "below market", covering only the property taxes and maintenance, people would be fighting to get in there, and other vacant rentals would have to compete.

So the notion of a landlord passing the bill onto the tenant is a misnomer. The tenant is paying for use of the house, regardless of the financial situation of the owner, and shaped by the aggregate market of supply and demand. The owner in turn is paying to keep the house in livable condition, paying the local ordinance the taxes he owes, and the loan that he may or may not have taken to buy the house. Typically, investors ought to know what the rental rate is before buying a place. As we saw during the bubble, this is frequently not the case. Regardless, he isn't likely to have any luck in passing that burden to a renter who would be foolish enough to overpay for the rent on that house rather than an equivalent across the street at half the rental price. Owners may get to choose which applicant occupies their house, but they don't get to choose what the market is willing to pay.

klarek says

Typically, investors ought to know what the rental rate is before buying a place. As we saw during the bubble, this is frequently not the case. Regardless, he isn’t likely to have any luck in passing that burden to a renter who would be foolish enough to overpay for the rent on that house rather than an equivalent across the street at half the rental price.

But that's only true for stupid property investors who can't calculate return. The smart thing to do in the scenario you're describing is to sell the property.

For example, a smart property investor wouldn't buy a residential property for investment in large parts of the Bay Area because renting is much cheaper than buying in those parts, and you can't get a great return anyway.

A smart property investor would instead buy a residential property for investment where they get a good return on equity. Smart property investors usually try to get a real return from their properties, so usually the rent is the cost of having the property + profit. The landlord's monthly rental cashflow is only irrelevant for people who shouldn't be "investing" in the first place.

Troy says

While theory and practice often diverge, theory says:

As you said, theory and practice often diverge. Quoting Adam Smith doesn't mean much here. Trying to compare the rental market in the 1700s to the rental market today doesn't really work.

I have been fence sitting as the prices in my area never really fell, but instead have just been flat for a while. However, things look worse and worse every month. I see a lot houses that are still on the market from 2 or 3 years ago. Yesterday, I just learned that the house I am living in is being foreclosed on. The house is owned by the builder, who couldn't sell it. About 20 of my neighbors are in the same boat.