Simple Poll on Housing
 

This week I was with some investors, and we were talking about people and cars, and they thought that most people would rather rent something and have a nice car. I felt they were wrong and off base, so I am posting to poll to help prove my case!

So vote if you are a renter or own.

Thanks

They are wrong.
My house comes first, cars are an accessory.

One group is different though, in OC we call them getto rich.
They live in a rental in the slums and are probably behind in the rent, but are driving a new escalade with 23" rims and a $3000 stereo.
You can imagine what I think of these people.

http://forums.pelicanparts.com/uploa...1172430851.jpg

(edit) Once you reach a certain age, you realize that some games are no longer worth playing. A line from the Forrest Gump movie said it well...something about once you have the $$$ to meet your real needs, the extras are all about bragging.

Because the cost of real estate has become prohibitive for many here in the Bay Area (and I'm sure elsewhere), I know people who prefer to rent in nice areas closer to their work, good schools, etc. rather than own a nice home and endure a ridiculous 2-3 hour commute, or own a smaller, older home in a closer, yet less desirable neighborhood.

+1
 

We own two homes but I only voted once.

I own some apt blds. I find that some people don't want the responsibilities of owning a home and others are doing what they can to save up for a home.


The only group of people that I found that ONLY want to rent are mostly under thirty.

+100.

Prices are ridiculous although they're getting better. I'm hoping that in the next 3-12 months things implode enough to allow us to get into at least a condo without taking on one of those idiotic "sucker mortgages" that's little more than a rent payment to a bank rather than a landlord.

Right now, the jury is still out, but I'm looking at 2-4 places a week (been doing it for the last few weeks) but it appears that it's still cost-prohibitive, with occasional properties getting tantalizingly close to affordable range.

To put it in perspective, we're well into the six-figure range and there's still no way we can afford a modest detached single family home either. And it ain't because we're both driving brand new cars either. Something simply has to give in this market. And I'll be damned if it's equity building.

I'd love to own, but if the choice is continue to rent or get all of the problems of home ownership and none of the benefits (e.g. "I/O" sucker loan where you build NO equity), I'll stay renting.

So the owner is gambling on appreciation to bail him out down the road?

Other than my current home in Las Vegas, where I could not find a similar home to rent, all the other homes I have bought were significantly cheaper than renting. It must be strange living in CA.

The thing is, your poll assumes that people here have nice cars. I think the average here is a $15K 22 year old car that needs work! That likely doesn't meet the definition of "nice car" for most people. That's be the new $899/month leased BMW. I don't think most here drive late model, expensive ($70K+) cars.

Damn it, below average again.

Lots of people are STILL buying betting on appreciation in the market. This is no doubt a lie being promulgated by sellers, the NAR and the CAR - and lenders. Every single lender and/or agent I've spoken to (with the exception of two, which are the two I'm continuing to work with) have parroted the NAR bull$hit about "there's no bubble - we should see a significant rise in values and a significant drop in interest rates over the next year or two", with little to back it up other than their opinion, which is hardly impartial or unbiased.

Unfortunately there are enough suckers buying into this hype that it does keep prices more-or-less flat, or in only slight decline rather than dropping precipitously. I don't know who these people think they're helping through their collusion - it'll only prolong the day of reckoning and when it comes, there will be all the more people in over their heads and even deeper. It makes a bad situation worse.

I have a co-worker of mine that got suckered into a $450,000 house (mind you, this is a 600 sq. ft. bungalow built in the 1920s in a ****hole neighborhood where she's the only one that speaks English as a first language). She's HORRIBLY upside-down on the property - it's listed at $380k now and she's only had one person look, who she never heard from again. Her mortgage payment is $3,600 a MONTH for this place. She's in foreclosure proceedings simply because it's too expensive (she bought into the B.S. "the market will appreciate" hype and is paying the price for it). To her benefit, the bank isn't pushing the foreclosure proceedings very hard, since they wouldn't get any more for the property than she's already signed onto it for. She's far and away not the only one in this situation I know or that I've heard of.

Point is, don't believe the party line crap about appreciation. This downturn is going to be very prolonged and very bad, only offset by how easily the NAR and company can manipulate the very naive or very stupid or very desperate. Right now though, I'm finding (sadly and a bit shockingly) that there really ARE enough stupid people out there to offset what would otherwise be a far more rapid decline in pricing.

$750/SF. Mercy, you guys are in for a brutal ride out there.

Wayne, I had no idea the numbers were so upside down in SoCal. Presuming your landlord keeps expenses below 20% of income, his CAP rate is 3.2%. 10 yr treasury bond yields have fallen to 4.63%. He either knows something we don't, or he has a fetish for pain and suffering. I'm banking on the later case.

jurgen

Wayne, you're assuming your landlord bought the house with 100% financing on a 30 yr. fixed loan. There's no more expensive way to do it and it's even more expensive if he was honest and disclosed that it was an investment property. You could own that house for far less per month. The avg. life of a 30 yr. fixed loan is seven yrs. How many people your age and younger do you know who honestly think they'll stay in the same house for 30 yrs.? Probably none. And even if you were 110% sure you'd never move, chances are very high you'd be refinancing or tapping equity at some point down the road. Get an ARM.

If you can afford a decent down payment and have big bonuses or cash windfalls coming once or twice a year, an I/O loan, MTA or option ARM can be good products. The problem with those loans is that they are going to mostly unsophisticated borrowers who only look at the min. monthly payment, ignore the neg. amort. and don't invest the money they save by making the minium payment. I heard even Alan Greenspan has an MTA on his own house. Those are only sucker loans for people who believe in a free lunch.

Regardless of the financing, it still doesn't pencil out as a decent investment. The only way to make this a decent investment is for appreciation to outstrip inflation by a significant margin.

While I do agree Wayne could utilize sophisticated financing to maximize return on his dollar, you need to remember he's $3500/month ahead by renting. Throwing a down payment, I-O, and option ARMs will only reduce that net gain.

Own and Own rentals:

Okay, here's the question regarding I/O loans (since I have one particular mortgage broker that seems hell-bent on pushing them):

"In anything other than a rapidly appreciating market (which we don't have), why on earth would anyone be willing to give up the most beneficial aspect of home ownership - that being equity building?"

With an I/O loan, you build NO equity whatsoever. It's essentially an overpriced rent payment to a bank instead of a landlord per-se.

Why would anyone even consider this?

Geez. While property out here on the east coast is hardly "bargain", looking at Wayne's numbers it's pretty clear how how property values have distorted the market and economy of urban California. I suspect that there's more to the story, and a number of factors which "prop-up" housing prices in a downturn. Whenever I talk to coworkers in CA, I always hear how nobody can afford to buy because prices are so high. But yet prices don't fall! So there are a lot of people holding on to high priced real estate because it's not worth the price that they're asking, and so nobody will buy it.

It reminds me a little bit of being the reverse situation to some of the cities on the east coast which have "rent control", such as Boston and NY. In that case there were a large number of appartments which had artificially constrained low prices -- the result of which they NEVER -- EVER went on the market. So the appartments were cheap, but not available. In CA, the real estate values are high, but no buyers. Both are examples (I believe) of economic distortions cause by artificial controls on the market. In the case of CA, I just don't know what those controls might be.

Either way, both are examples of inefficiencies introduced into a market by artificial controls.

Reminds me of an Msn.com "poll" I saw a while back:

"Do you think the housing market will crash?"

Answer: Sure, when the population declines.

Bill Gates should clean up the tabloid on his web page.

I don't know why a mortgage broker would be hell-bent on these. At my last mortgage job, we tried to steer people away from I/O loans because we got paid almost nothing on them. 50 yr. amort. was much more attractive both from our commission standpoint and also underwriting guidelines.

I/O loans do not prevent you from paying down principal. If you only make the minimum payment, your princ. balance will never go down and you're betting on appreciation. But your princ. balance will not go up either. Option ARM's and MTA's are different. They have negative amortization. But if you put 20% down like I did, your house would have to depreciate at least 20% before you got into trouble. My own house has appreciated almost 30% at the peak and back down to a net of around 10-15% positive. So I don't pay more than my min. balance because the house was a bit of a stretch for me when I got it and I've just had a rough spot in my job change. I won't keep the house more than another year or so. So it's not like I'm gonna build a ton of equity by paying down principal in the 3-4 yrs. I will have lived in the house by the time I sell it.

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.

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. http://forums.pelicanparts.com/uploa...1172539180.jpg

Insurance and taxes run me about $350 per month.

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. :)

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.

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%.

http://www.whitehouse.gov/omb/budget.../economy-3.jpg

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.

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. . .

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.

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

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).

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

+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.