Home Buying Math Question...

[Porsche-O-Phile]

Man! The answer was right in front of me all along!

[snowman]

I just realized why Wayne is whining. If he sold 2 years ago he just missed doubling his investment. That’s a lot to whine about, IE in CA probably $500K. I didn't see this appreciation in your calcs Wayne.

Any CA property that was worth 400k two years ago is now 800k or more.

Why the heck did you sell and not re-buy right away? If you are trying to time a bubble or bust, don't, no one has ever made out trying to beat market timing.

One really nice thing about a 30 year fixed mortage, its the same year after year. Rent keeps increasing, sometimes, by leaps and bounds. After 10 years there is simply no comparason, owning is the only way to go. Especially if you need a tax break.

[island911]

Doubling? . . Really?

Well here's the thread. . .almost 2 years ago.

http://forums.pelicanparts.com/showthread.php?threadid=167340

[jyl]

Doubling . . . not.

CA RE still rose from late 2004 to present but not even close to doubling.

[JeremyD]

Well, he probably left some money on the table... and yes, if you can predict the future - then pennies to be made in the porsche parts business, millions to be made elsewhere.

[charlesbahn]

Methinks you're looking at it from the wrong angle. You have a good income and good work and can probably afford to live where you want. If you enjoy renting and don't want the hassels of ownership, then keep renting. If on the other hand you want to own a home, wait until you find one you will be happy in at least for 5-10 years, that your spouse likes, that has a good school district, etc. If you buy, there is a very good likelihood that you will come out ahead financially with a long term horizon, that's how real estate almost always works. Just remember it isn't a very liquid investment and you can't get your money out at the drop of a hat if you need to. As long as you don't overextend and create financial hardships, ownership provides an intangible (family) security that you don't have when you rent. Just my .02.

[Porsche-O-Phile]

Originally posted by Wayne at Pelican Parts
Maybe I should buy the Ameriquest blimp and put a big Pelican on it!

-Wayne

You do that and I'll go get an airship rating on my pilot's certificate.

You can deduct the depreciation too (dunno anything about depreciation rates on blimps though).

[island911]

Originally posted by Porsche-O-Phile
You do that and I'll go get an airship rating on my pilot's certificate.

You can deduct the depreciation too (dunno anything about depreciation rates on blimps though).

Yeah, I hear, lots of "inflation" & "Deflation" with those things.

[Porsche-O-Phile]

(hijack back on topic)

Good point Wayne - I wonder if the trend towards unwillingness to come up with high down payments is the inevitable consequence of the faster pace of society today or the simple rise in price (both as portion of disposable income and overall dollars), or both. Probably both.

Seems to me a case could be made that saving up for a "standard" down payment is actually a pretty lousy way to invest one's money. Let's say you save for 10 or so years, like we alluded to - you're getting (probably) some very poor rate of savings on that money, maybe 5% if you're lucky. The loss of earning potential off that money, particularly early in a young adult's life (when it could do the most for you long-term) offsets a lot of the potential return on investment later if the RE market appreciates (which it typically does, albeit a lot more slowly than we've seen lately). In a way, it probably creates pressure on the RE market to perform better to cover the extra "cost" (opportunity cost in this case).

Case in point - I'm basically saying "screw it, I don't want to live like a pauper for 10+ years to get a mediocre rate of return on an unpredictable housing market". Not at all uncommon. I can take the same money I'd "waste" saving up for that down payment, live a little more comfortably and put it into MUCH better performing funds (my Fidelity Emerging Markets fund comes to mind - 30%+ return last year. . .) I realize this is tied into the "impatience" that a lot of more traditionalist thinkers lament (and I actually tend to find myself leaning that way more often than I don't), but I just wonder whether it's "cause" or "effect".

[dan79brooklyn]

hmmmm. This is an interesting thread...My wife and I live in NYC where RE is GOLD. Unfortunately it is very expensive and we still don't have enough for a down payment on a small 1 bedroom coop/condo in even a semi-sketchy area in Brooklyn. We have maybe 30K saved up but need 80K for downpayment+closing etc...We can probably rent a nicer place then we can afford but the stability and investment in owning is too tempting. While we don't want to get in over our heads we could probably afford a mortgage of $2200 per month, which would be like a $350,000 condo/coop. I have not looked into mortgages yet, is it possible that they would loan enough to help towards the downpayment or is that up to us (plus friends and family) to come up with?
It's really amazing how expensive things are but we are pretty commited to the area and would stay in a place for at least 5-10 years.
Renting just seems like throwing money away at this point.
BIG SIGH
Thanks for any insights you guys can offer!

[rrsrsr]

Originally posted by dan79brooklyn
hmmmm. This is an interesting thread...My wife and I live in NYC where RE is GOLD. Unfortunately it is very expensive and we still don't have enough for a down payment on a small 1 bedroom coop/condo in even a semi-sketchy area in Brooklyn. We have maybe 30K saved up but need 80K for downpayment+closing etc...We can probably rent a nicer place then we can afford but the stability and investment in owning is too tempting. While we don't want to get in over our heads we could probably afford a mortgage of $2200 per month, which would be like a $350,000 condo/coop. I have not looked into mortgages yet, is it possible that they would loan enough to help towards the downpayment or is that up to us (plus friends and family) to come up with?
It's really amazing how expensive things are but we are pretty commited to the area and would stay in a place for at least 5-10 years.
Renting just seems like throwing money away at this point.
BIG SIGH
Thanks for any insights you guys can offer!

How much would the same $350,000 condo rent for?

[dan79brooklyn]

How much would the same $350,000 condo rent for?

Probably for about $1800-$2500.

[jyl]

You can buy for 10% down, 5% down, even 0% down. And for fixed interest rate or variable. So assuming sufficient income and decent credit you could buy a $350K condo for $17.5K (5%) down plus closing costs. Consult a mortgage broker, preferably a few, to learn what you can do. [Edit: But please think really hard before using a variable right now, or anything with a low initial "teaser" rate.]

Of course, can do isn't necessarily the same as should do. Coastal cities in the US (NYC LAX SFO BOS etc) tend to have up and down cycles in home prices. Over the long term homes go up in value, but you buy right at the top of a cycle, you are likely to see prices go down, then sit flat (maybe for years), before starting to go rise again. If you're going to stay there for 10 years, then even if you buy at the top, the house will very likely be worth more at the end of that time. If you're going to stay 5 years, might be more like break-even. If you have to sell in 2 years (change job, lose job, outgrow house, etc) then you'll likely lose money.

So you should figure out where NYC is in its real estate cycle. Realtors won't always (usually won't?) tell you the truth, and on forums like this you'll get conflicting opinions. I have my opinion, but since I live on the West Coast you shouldn't listen to me. Some suggestions:
- Look at years of local home price data, e.g. download from http://www.ofheo.gov/HPI.asp and chart it in Excel.
- Use www.zillow.com plug in a house (not sure if they do condos, prob do), look at the chart of value over time.
- Find a broker's website where they post monthly info on the market, e.g. the monthly newsletter from the local real estate agents' association (here its called the RMLS letter) that gives the month's new listings, accepted offers, closed sales, days inventory, etc. Read enough months of these and figure out if things are accelerating, slowing, or what.
- Start monitoring local homes on brokers' websites, www.realtor.com is one. Go to open houses. Figure out if prices are being reduced, if houses are selling at/under/over listing price, if sellers are pulling unsold houses off the market, if open houses are crowded or deserted.
- Basically, figure out what is happening in your area.

Use a rent vs buy calculator (maybe the one Wayne did? I haven't checked it out) to see if you're financially better off renting or buying. I'm okay with buying even if financially you're somewhat better off renting, because it is emotionally nice to be in your own home and you can benefit from the long-term investment. But if the math is grossly skewed toward renting, then buying means you're either paying a heck of a lot for emotional satisfaction, or betting on major price increases, and at least you can make that decision with your eyes wide open. Also, when renting is financially far better than buying, that is one indication that homes may be overvalued.

Note that home price movements have an exaggerated effect on your wealth because the home is a leveraged purchase. Say that to buy a $10 house, you invest $1 of your own money and $9 of borrowed money (mortgage). If the house value goes up +$1 or +10%, you made $1 on $1 of your own money, or +100% return. If the house goes down -$1 or -10%, you lost -$1 on $1 of your own money, or -100% return. (I'm leaving out the additional amount you invest every month, for simplicity.)

Also remember that you pay points and fees when buying, and brokers' commission plus fees when selling, and in between you pay lots of interest. So selling a house for 8% more than you paid two years earlier is kind of like breaking even.

Anyway, I'm not sure if this is what you were looking for, but just some random (and probably too basic) thoughts.

Come to think of it, there was a thread, started by Porsche-O-Phile a few weeks ago, where some people who are in the real estate business gave lots of tips, don't bother reading what I wrote (too late!) instead go find that one.

P.S. There are books on home buying too. Avoid the "get rich in real estate" sort.

[snowman]

Wayne has been on this real estate bubble thing for quite some time now. Eventually he will be right, but in the meantime his is loosing his shirt. People said the bubble would burst in 1977, 1987, 2000, 2002, 3, 4, 5. It did a couple of times, but that $30k house from 1974 is now going for a cool $1,000,000. Even if it burst, say went down to $700k, so what??? You can't time real estate investment. Todays prices may be at a peak, but the same thing was said a couple years ago, and yes, local CA real estate did almost double in the last 2 to 3 years. You buy a house you like and can afford and intend to live in for 10 plus years, and you will most likely not lose. If it goes down in price, so what, you have fixed payments that you can afford. Rent, on the other hand, can and does go up, sometimes a whole bunch.

[RickM]

Originally posted by snowman
Wayne has been on this real estate bubble thing for quite some time now. Eventually he will be right, but in the meantime his is loosing his shirt. People said the bubble would burst in 1977, 1987, 2000, 2002, 3, 4, 5. It did a couple of times, but that $30k house from 1974 is now going for a cool $1,000,000. Even if it burst, say went down to $700k, so what??? You can't time real estate investment. Todays prices may be at a peak, but the same thing was said a couple years ago, and yes, local CA real estate did almost double in the last 2 to 3 years. You buy a house you like and can afford and intend to live in for 10 plus years, and you will most likely not lose. If it goes down in price, so what, you have fixed payments that you can afford. Rent, on the other hand, can and does go up, sometimes a whole bunch.

I agree with this line of thought 100%.

[turbo6bar]

Wayne, you forgot to add maintenance to the own scenario. Wear an tear on roof, exterior and interior surfaces, flooring, HVAC, plumbing, water heater, kitchens and baths. 1%/yr/value of home is conservative.

I am not sure how Wayne is "losing his shirt." Some will falsely value equity over current and future cash flow. Equity doesn't put food on the table. The primary good of owning housing lies in the fact it is indexed for inflation. If your property doubles in value over 10 years, it is not necessarily an indication of a good investment. That appreciation is primarily attributed to inflation. The danger lies in the fact housing has appreciated far in excess of inflation for some time. When wage inflation does not match housing appreciation, the fundamentals become stressed.

I am glad that folks are finally willing to admit that housing can and may go down. At least we're getting somewhere.

[jyl]

Originally posted by snowman
that $30k house from 1974 is now going for a cool $1,000,000.

SP500 in 1976 was 104 now 1325.

No interest payment, no maintenance, not tied down to one location, reinvest the dividend yield, no 1% to get in and no 6% to get out.

OTOH, housing is highly leveraged, ongoing tax benefit (though both decrease w/ each year of mortgage), and you get to live in it.

Not sure what point I'm really making - stealing time from work here - but if you'd put house down pymt into SP500 in 1974 and every following month for 30 yrs had put diff between mtg and rent into SP500, I think you'd be far ahead - speaking only financially, agree emotional aspect of "ownership" very important too.

[snowman]

I guess Wayne can be excused for not buying another house as he put the money in something worthwhile and more than a home, Car (I presume). THis market does seem due for a correction, but houses don't just go in the dumps, they just don't appreciate. Some opportunities will present themselves in forclosures. Thats the index to watch. http://hud1.towerauction.net/NY.htm check your city or zip. or http://hud2.towerauction.net/CA.htm No forclosures, then things are good and right now the list is very short, meaning things are good.

[jyl]

Originally posted by snowman
houses don't just go in the dumps, they just don't appreciate.

You must not have been watching Los Angeles and Riverside Country house prices during 1990-1995.

[snowman]

Yeh, I was there. Most prices held steady, only the repos went down.