Simple Poll on Housing

[Hetmann]

It's pretty amazing to me that someone would be willing to buy a property and rent it at such a loss. Wayne's situation works because someone is willing to subsidize him to the tune of about half of what it costs to live where he's living. Clearly the rent is too low or the houses are priced way too high. I like owning my home, not just for the investment but also for the fact that I need to live somewhere and the equity I have in my house will always roll forward into my new living situation. Rents in Denver are pretty much right at what a mortgage payment on the property woud be. Renting is not a long term solution in this environment.

[dmcummins]

I can't imagine paying what some of you guy do for housing. We had our house built in 2001 and paid what amounted to one year salary of my wife and I combined. It's about a 45 min. drive to the ballpark in St. Louis.

We own the house free and clear now. We couldn't rent anything similar for the same amount. My wife is a middle school Priciple and I am a Construction Manager.

[dmcummins]

Insurance and taxes run me about $350 per month.

[Porsche-O-Phile]

Very concise answer Wayne - you've made me reconsider. Geez, I didn't even consider inflationary effect - the answer was right under my nose the whole time!

I find it odd that none of the "brokers" I've posed that very question to have come up with this, it's always been some B.S. about "we want to do what's best for you" and "right now it'll give you the best monthly payments until you can re-fi" or "it's the easiest thing to qualify for". None of which are satisfactory answers. Yours is. If you ever open a brokerage service, I'll be in line as a prospective customer.

[fastpat]

Originally posted by Wayne at Pelican Parts
Your investors are right, from a purely mathematical standpoint. However, when you factor in the emotional part, most people would not rather rent.

-Wayne

That's true in California, but in most parts of the country as an age group grows older they move into a more afluent situation, their jobs pay more, they've saved some money, and buy instead of renting. What is interesting is that as sociofascist strength in an area increases, the general trend is to lower home ownership rates. That's what one should expect.

For example:
2005 homeownership rates by family.*
California 59.7%
South Carolina 73.9%

*Home ownership rate by state.

[jluetjen]

Yes, I would definitely go with an Interest Only loan, if it were fixed for 30 years. The short explanation is that if I borrow $500,000 today, in 30 years, the inflation erosion of those funds means that $500,000 will be similar to say $50K these days.

Wayne, you're assuming inflation -- which really hasn't been a big deal for a number of years in our economy. Here's the OMB's inflation chart which shows an inflation rate of 2%-3%.



Forgive me, but I'm digging back 10 years into one of my weaker classes (Finance).

- The NPV of $500,000 30 years from now is $205,993, not $50,000.

Without going through the math, yes using OPM (other people's money) to invest (aka: Leverage) can significantly increase your returns. But the other thing that it does is significantly increases your risk exposure. Assuming everything goes well, you can actually get a 30 year, interest only loan (a quick search suggests that a 10 year interest only period is more like the norm, after which the interest rate goes up or some portion of the principle starts to become due) and the property values go up as expected -- you're golden. But if all of those things do not happen as planned, you can wind up deeply in hot water, with rising payment due, no equity built up in the house or debts greater then the value. This is one of the things which is contributing to the growing rate of mortgage foreclosures of late. Keep in mind that leverage is just as strong in the negative direction as it is in the postive direction.

It sounds like a remote chance, but if you then consider that many people's financial portolio (if they have one) is often comparably risky with a large portion of their money in a few individual stocks which may have similar betas, or a single family business. The next thing you know, you may have significant exposure to an economic downturn.

I'm not saying that it's a bad deal, just that people need to carefully consider their family's financial security carefully before they go down that path.

[Porsche-O-Phile]

And a good counterpoint as well. Even if you buy the government forecast figures for inflations (which I personally don't, let's face it - they have an incentive to low-ball), you're not doing too badly. Basically the average price paid over the course of the loan on our example $300,000 house is ($300,000 [2007 dollars] + $205,993 [2037 dollars]) / 2 = $252,996.50 you're REALLY paying (in 2007 dollars) for the property. Of course the usual disclaimers apply (this is only a crude two-point interpolation, etc.) but the point is, it's still a very significant factor.

One thing I'm willing to assume is that there is significant short-term volatility in the market, that the re-fi market will continue to be fairly strong for the next few years and that housing prices will eventually go up over the long-term. Based on this, it's not such a bad thing perhaps.

I don't see much in the way of rising prices in the next 3-5 years, maybe a couple percent here or there. The market is flat overall or slightly declining right now. I expect it to stay that way, despite what the NAR puppets would have one believe.

It's interesting, I actually had (another) realtor sort of piss me off the other day by claiming that a property we were looking at would "have equity in it right away" since he had it appraised for something like $30k more than asking price. I just gave him that "are you effin' serious" look and pointed out that there are only two ways I know of to build equity - paying down principal and appreciation, based on what someone else is WILLING TO PAY, not what some bought & paid for appraiser says. He kind of shut up after that.

I guess the effect due to inflation could possibly be thought of as a third way, but didn't think of it at the time. . .

[berettafan]

Originally posted by Wayne at Pelican Parts
We're renting right now, paying $2950 a month. Several things went have gone wrong with this house in the past four months - the owner has taken care of it all. The house sold (to him) in August for 880,000. To service that type of loan, on a 30-yr fixed, we'd be looking at $5490/mon to service $880K in debt. Add the 1.1% property tax to that number, and you get an additional $806/mo, for a total of $6296/mo. Add in insurance, and you're probably in the $6500/mo range.

Combine that with a declining market for property values, and also add in the recent problems that the owner had to pay with the house.

Before any tax considerations, I figure we're saving close to $3500 a month by renting this house, over if we had purchased it. That's $42,000 a year. You can buy a few Porsches with that...

-Wayne

Be sure to print this post out and put a copy in your will for your kids since you won't be leaving them a house using this logic. I'm sure they'll appreciate that you had more cash flow at the time.

[Rick Lee]

Originally posted by berettafan
Be sure to print this post out and put a copy in your will for your kids since you won't be leaving them a house using this logic. I'm sure they'll appreciate that you had more cash flow at the time.

Why would anyone buy a house with the purpose of leaving it to their kids? Isn't it a place for the kids to live before they're old enough to go out and work and buy their own houses? I think they would appreciate that Wayne has more cash flow right now, since they are still his dependents.

[berettafan]

Originally posted by Wayne at Pelican Parts
Actually, no, it's a *very* unusual situation. This fellow is pretty smart actually. He inherited a house in an area that he didn't terribly like. That one was being rented out. So, he sold that one, and then shopped for a house to move his family into, finding the one that we're in right now. So, he did what is known as a 1031 exchange, and will be converting the rental property into a personal residence in 2 years when we move out. This saves a lot in capital gains taxes.

Very smart move if you ask me...

-Wayne

Good lord who is giving you tax/investment advice?


1-Inherited property gets a step up to fair market value at the d.o.d. (or alternate date, but same idea).
2-See point 1.
3-Capital gains tax rates are the cheapest tax rates anybody is going to be paying for a very long time. Of course, thanks to point 1 this was presumably not an issue for your landlord.

Given the facts presented your landlord is an idiot. I suspect the facts are a bit more complicated as nobody would do a 1031 out of an inherited property if it had recently been inherited because there would be no gain.

Erik

[berettafan]

Originally posted by Rick Lee
Why would anyone buy a house with the purpose of leaving it to their kids? Isn't it a place for the kids to live before they're old enough to go out and work and buy their own houses? I think they would appreciate that Wayne has more cash flow right now, since they are still his dependents.

To build wealth. We don't know what Wanye's income is right now (and whether he could have afforded to buy a comperable house) and can assume buying in the past year or two might have been a mistake if it was indeed the top of the market which would mean Wayne did the right thing (assuming housing prices come down and money doesn't cost more), but the assertion in his post that i quoted is silly (renting for less to afford p-cars).

[svandamme]

i'm single, and in a country i don't plan to say, so i rent

[Porsche-O-Phile]

Originally posted by Rick Lee
Why would anyone buy a house with the purpose of leaving it to their kids? Isn't it a place for the kids to live before they're old enough to go out and work and buy their own houses? I think they would appreciate that Wayne has more cash flow right now, since they are still his dependents.

+1

For one, I don't WANT my parents' house. The satisfaction of building one's own empire and paving their own road through life is all the more satisfying.

The way I look at it, my parents already made enough sacrifices for eighteen years dealing with my schit. I shouldn't feel entitled to a free house from them too.