Simple Poll on Housing

[1973911s]

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

[sammyg2]

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.

[pwd72s]

(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.

[ikarcuaso]

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.

[austin552]

We own two homes but I only voted once.

[bt1211]

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.

[Porsche-O-Phile]

Originally posted by ikarcuaso
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.

+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.

[lendaddy]

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

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

[fintstone]

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]

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.

[lendaddy]

Originally posted by the
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!

Damn it, below average again.

[Porsche-O-Phile]

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.

[turbo6bar]

Originally posted by Porsche-O-Phile
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).

$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

[Rick Lee]

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.

[turbo6bar]

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.

[pmajka]

Own and Own rentals:

[Porsche-O-Phile]

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?

[jluetjen]

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.

[hytem]

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.

[Rick Lee]

Originally posted by Porsche-O-Phile
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?

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.