US Economy

[fishguy]

Originally Posted by serpentor

houses are not investments, they are places to live.

maybe its different in the bay area, but i doubt it. This is where you might want to rethink things.
A house is not only a place to live, but it is the best investment you can make IMO, if you are a smart buyer.

A house appreciates in value, some years more than others, AND the interest paid is tax deductable.
Unless you are an impulsive/uneducated buyer you shouldnt go wrong, unless your neighborhood goes to crap.
I looked at houses that needed a bit of imagination and a remodeling job in a nice old neighborhood. I would never get the nicest house on the block, as thats the house that brings up the value of the nearby houses around it, not the other way around.
30 year fixed at a good low rate, no HELOC, and stay put for a while.

[IamBatman]

Originally Posted by fishguyAZ

maybe its different in the bay area, but i doubt it. This is where you might want to rethink things.
A house is not only a place to live, but it is the best investment you can make IMO, if you are a smart buyer.

A house appreciates in value, some years more than others, AND the interest paid is tax deductable.
Unless you are an impulsive/uneducated buyer you shouldnt go wrong, unless your neighborhood goes to crap.
I looked at houses that needed a bit of imagination and a remodeling job in a nice old neighborhood. I would never get the nicest house on the block, as thats the house that brings up the value of the nearby houses around it, not the other way around.
30 year fixed at a good low rate, no HELOC, and stay put for a while.

I agree in many instances, buying a house is a great way to build up equity. Many places in the mid west and Texas are excellent real estate buys. In MOST Major cities it is NOT.

Right now in most places in the US (did you not see the Schiller housing Chart?) prices are over valued. Houses simply can not stay at the elevated prices in almost all major cities. The fundamentals are simply not there to support it.

In my example: my landlord is basically subsidizing me to live in her house. I know how much she paid and my rent is not enough to cover the interest, let alone principle, tax, upkeep, trash removal, and gardening.
assuming she did a traditional mortgage of course.
If you can buy a house with a traditional loan, rent it out and be cash flow positive, then of course it is a no brainer. Its not the case for most places right now. In a few years, it may change.

If you own a home, good for you, no need to defend your decision. EVERYONE is different. Can we go back to talk about the Economy, which is the topic of my post?

[IamBatman]

I'm too lazy to find my spreadsheet, but here is someone else's calculations
again, this is for one case in the Bay Area, your location my be different:
http://www.viewfromsiliconvalley.com/id316.html

As is our wont, when in doubt, we run the numbers.

All examples assume a 30-year fixed mortgage at 6.25%, 20% down and a 1.25% real estate tax rate. Principle payments and real estate taxes are taken from an on-line mortgage calculator. Maintenance is assumed 1% per year. (Clearly ignoring 40- and 50-year-old shacks are routinely bought in Silicon Valley with the full knowledge they have not been updated on 20 or 30 years and need massive renovations.)

A couple months ago, we wrote about a house near the median $750K. Last week we wrote about a 43-year old house selling in a few days at $1.25M. In that same missive, we thought the upper limit would finally be exceeded with another house at $1.75M, but this house also sold within a few days.

So here we go:

Price Tot$/yr Int+Tax
$750K $62.7K $46.5K
$1.25M $95.3K $69.7K
$1.75M $120.5K $86.6K

Everyone seems to ignore the actual $63K /$95K /$121K out-of-pocket and instead salivates at the prospect of huge tax deductions. Nobody seems to ever stop and think through "deductible" means you only actually "save" the deduction at the marginal tax rate.

The table could then be expanded to:

Price Tot$/yr Int+Tax Deduction
$750K $62.7K $46.5K $17.2K
$1.25M $95.3K $69.7K $25.8K
$1.75M $120.5K $86.6K $32.1K

In other words, out of $63K /$95K /$121K spent, the actual tax savings is only $17K /$26K /32K. Worse, anyone pulling down enough coin to pay out $63K /$95K /$121K is hitting the AMT at least every other year. To account for AMT eliminating your real estate tax deduction, you have to calculate a two-year average deduction:

Price Tot$/yr Int+Tax Deduction Ded >AMT 2-yr Avg
$750K $62.7K $46.5K $17.2K $13.8K $15.5K
$1.25M $95.3K $69.7K $25.8K $20.2K $23.0K
$1.75M $120.5K $86.6K $32.1K $24.3K $28.2K

So how does that $63K /$95K /$121K feel when the two-year average deduction is only $15.5K /$23.0K /$28.2K?

In addition, there is the opportunity cost from the 20% down payment. Adding in the after-tax gain on a 5% treasury bill:

Price Tot$/yr Int+Tax 2-yrAvg Act"Cost" OppyCost Tot"Cost"
$750K $62.7K $46.5K $15.5K $40.3K $4.7K $45.0K
$1.25M $95.3K $69.7K $23.0K $65.1K $11.8K $76.9K
$1.75M $120.5K $86.6K $28.2K $84.2K $22.1K $106.3K

Obviously, a renter's cost is just the rent. It's very clear. It's very simple.

We know you were waiting so, finally, here is the punch line.

A buyer's true "cost" is their total outlay minus the tax deductions, minus the principle payments and plus the lost interest. The "final" table for this exercise is then:

Price Tot$/yr Tot"Cost" Equiv Rent
$750K $62.7K $45.0K $3,750
$1.25M $95.3K $76.9K $6,408
$1.75M $120.5K $106.3K $8,858

Conclusion: We've shopped around. You can rent properties which sell at these price points for much less than these implied rents.

This suggests it's buyers "wasting" money, not renters.

in summary, for a $750k house, your rent would have to be $3750 to break even. This not even counting the housing price decline projections.
Just looking at Craigslist, a 3bd or even 4bd room house in Mountain View (aka GOOGLE-land), worth at on average of $800k, you can find a majority the rent is less then $3k/month.

[cstetter]

Originally Posted by serpentor

Do you really think people that purchased a house in the Bay Area in the last 5 years can afford to put ANY money away while making mortgage payments?
people tend to buy the MOST house they can afford (many bought houses that they can't really afford) and the national savings rate is negative. Maybe a few highly paid Google engineers, management, and lawyers can afford to do that, but they are not the norm. in 2006, 40% of the people in the Bay Area took out mortgages that are interest only/neg am, if they can't afford to take out a regular mortgage, how are they going to save anything?

I'm not going to bother with charts - you can find data sets that prove any point you want - I am in marketing so I know what I am talking about

I know many people in the bay area, and yes, that includes me, that sock away a significant amount of their net income every month AFTER paying a mortgage. Unfortunately, I only work next door to Google and not for them and I am not high up in the food chain either. You can find examples of the opposite, I am sure.

Again, it is narrowminded to assume every interest-only mortgage was used because that person couldn't afford a regular mortgage. Sure, a lot of them were. You are confusing cash flow management with asset/debt management. Maybe some of these people wanted to have more available cash flow to invest in the stock market because they expect higher returns there. Not the worst strategy when you locked in 6% with a tax break and even a simple CD gives you 5+ % return. Maybe many people are waiting to pay down their mortgage and refinance just before their ARM adjusts, using the cash for other investments in the meantime.

You are so set on proving a point, you are only looking at the negative sides.

What about my point about Germany? You didn't comment on that...

Cheers,

[25psi_Elise_Killer]

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[IamBatman]

Originally Posted by cstetter

I'm not going to bother with charts - you can find data sets that prove any point you want - I am in marketing so I know what I am talking about

I'm still waiting for your data

I know many people in the bay area, and yes, that includes me, that sock away a significant amount of their net income every month AFTER paying a mortgage. Unfortunately, I only work next door to Google and not for them and I am not high up in the food chain either. You can find examples of the opposite, I am sure.

like I said, you don't need to defend your decision. if you can pay mortgage, and still sock away money, awesome. you kick ass. I showed data that you are in the very minority. It still doesn't mean we are not going into a downturn.

Again, it is narrowminded to assume every interest-only mortgage was used because that person couldn't afford a regular mortgage. Sure, a lot of them were. You are confusing cash flow management with asset/debt management. Maybe some of these people wanted to have more available cash flow to invest in the stock market because they expect higher returns there. Not the worst strategy when you locked in 6% with a tax break and even a simple CD gives you 5+ % return. Maybe many people are waiting to pay down their mortgage and refinance just before their ARM adjusts, using the cash for other investments in the meantime.

come on, do you honestly believe that? Look at the huge increase in mortgage defaults. Tell me with a straight face that MOST Americans chose ARM mortgages because they chose to invest their left over money? I'm not talking about you and your highly paid friends. I'm talking about the average American working stiff. What happens when they try to refinance and the value of their house is less then the balance of the mortgage and they have negative equity? or when rates go up, and even if they refinance they can't make the payments? or they got a Stated Income loan and the lending standards tighten?

You are so set on proving a point, you are only looking at the negative sides.

What about my point about Germany? You didn't comment on that...

Cheers,

I do NOT get you point. are you saying that if a house value stays stagnant, and you don't get tax deductions, (you have to pay property tax, interest, and upkeep in Germany right?) its still a good investment? I have no reference point, how much is an average house in Germany, what is the median income?, property tax? income tax? rent for the same house?
or are you stating that simply because having to pay mortgage forces you to make regular payments into a house?
How does it even apply to the affect of the housing bubble in the US economy?

[IamBatman]

please prove to me with hard numers and data that I should buy a house right now. prove to me that we are not headed for a crash. real examples not anecdotal evidence: "my buddy bought a house and he doubled his networth in 2years..etc." Financially I'm ready, have been for years. I would love to buy a house just so my family would get off my back about settling down.

[Phill B]

Originally Posted by serpentor

In my example: my landlord is basically subsidizing me to live in her house. I know how much she paid and my rent is not enough to cover the interest, let alone principle, tax, upkeep, trash removal, and gardening.
assuming she did a traditional mortgage of course.
If you can buy a house with a traditional loan, rent it out and be cash flow positive, then of course it is a no brainer. Its not the case for most places right now. In a few years, it may change.

Excuse the question from an ignorant foreigner, but since this is an investment property, isn't the interest on the loan along with the various land taxes etc tax deductible? That can make a big difference and push it into positive cash flow.

[Lotus Fury]

I have to admit I watch "Wall Street" at least once a month. I love that movie.

I'm not worried about the economy. The "Total Picture" isn't really that bad at all. You can look at any single part of the economy and find flaws. Yes housing is bad & doesn't look like it's going to get better anytime soon. Yet manufacturing is set to make a significant comeback due to the dollar's weakness. They might not balance each other out well but it will act to minimize the issue. Even in a a less than perfect economy there are still areas that are doing well. You need to do your research to find it. If not invest in something like a mutual fund that is nicely diverse with low or no loads.

And a house is like any other investment, you need to understand what your goal is in owning it - place to live, money maker, etc and find the right mix for you. In Pgh your house appreciation isn't going to be much greater than inflation. In Cali that probably is different.

[fishguy]

Originally Posted by serpentor

please prove to me with hard numers and data that I should buy a house right now. prove to me that we are not headed for a crash. real examples not anecdotal evidence: "my buddy bought a house and he doubled his networth in 2years..etc." Financially I'm ready, have been for years. I would love to buy a house just so my family would get off my back about settling down.

You should NOT buy a house right now, you waited a few years long long sitting on the fence. For those of us who bought a few years back, AND have fixed rate mortgages, whatever happens is no big deal. Its just a swing in the market which is expected to happen.
If you want to buy a house wait until your beloved "crash" happens, and then be a smart shopper, and make a good investment.
For me, i could care less what the market is doing unless i am selling/buying. I am doing neither, so its just a bunch of nonsense to me at least.
If I choose to sell, I am not selling until its a good time to be a seller, like a year or 2 ago. If I am forced to sell because of loose of a job or something, well thats a different story, but thats why people have savings accounts, and THEN buy crap like Lotus or racecars.
If people bought more than they can afford, and got bad mortgage packages, well, thats just their problem, you cannot blame someone else for that.
no charts needed, just some common sense.
After you get your house, and look back in 10 years, you will understand what many here are saying, and be glad you made the investment. just be patient and smart.
The economy is just fine, everything goes through cycles, nothing ever stays the same in any market(that I know of). My house is still appreciating, its just not appreciating as fast as it did in the previous years. thats my bottom line. your area may be different, but thats one reason I love living in the area that I do.
good luck!!!

[IamBatman]

my "beloved crash"? I don't love any crash. Why do I want the economy to go down and destabilize my way of life ?

I understand what you feeling. Nobody likes bad news, its very easy to react negatively to bad news and lash out at the news bearer.

[IamBatman]

Originally Posted by Phill B

Excuse the question from an ignorant foreigner, but since this is an investment property, isn't the interest on the loan along with the various land taxes etc tax deductible? That can make a big difference and push it into positive cash flow.

The landlord also has to pay income tax for the rental income... my landord probably hit amt (alternative minimum tax) so a lot of the tax benefits goes away..

[Greg]

No news yet to bear.

investment property - the income, interest paid, and property taxes are all used to compute your income. It's more than "tax deductible" it's pre-tax, in essence it's computing AGI. Lowering your AGI is the name of the game.

You don't know whether your landlord hit amt. Honestly, if he has a decent accountant, probably not.

None of this spells disaster yet for ALL real estate. Location, location, location. Buy in a good, desireable zip code, and all will be well.

Tracy, Stockton, Greely? Toast.

'Greg

'Greg

[Greg]

Originally Posted by serpentor

prove to me that we are not headed for a crash.

I wish we could prove this, one way or the other. I'd be trading futures if I could.

I think a lot of people are heading for crashes. All kinds of markets crash every few years. Those are just opportunities, in the long run.

I'd also like to point out, that I think you mentioned a 39% correction in California in the next 5 years. Well, that still won't erase all the gains from the previous 5 years.

That would've put me still up roughly 20% if I'd have kept my house in the bay area. In the bay area, you have limited inventory, and excellent job opportunities. Tracy may crash, but Palo Alto will always be Palo Alto.

All zip codes are not created equal, in spite of what charts may say.

'Greg

[Ginetta]

Assuming these things:

Rent data – It is the average rent in a market per REIS.
Household Income – It is the average household income per REIS.
Mortgage Data – Mortgage Market Statistical. We used the average of the three-monthly averages to get the quarterly figures and the average of the twelve-monthly averages to get the annual average.
Median Home Prices, National Association of Realtors.
Equity – assume a buyer puts down 10%.
Insurance – 40 bps of the home price annually.
Property Taxes – 1.5% of the median price.
Principal amortization – Based on a 30-year schedule.
Tax rate – 25%.

Rent, on a nationwide average, is approximately 63% of what it would take to own an equivalent property on an after tax basis.

For a first time homeowner, it really makes little sense to purchase right now. I am not a believer in a sudden housing market crash, but I definitely do believe that we will see an unwinding in the housing market over the next 4-5years and that prices are going to continue to decline.

The rate of return on other investments is much higher currently.

[Ginetta]

I also wanted to add that I think a lot of people over-estimate the amount of tax savings. True it can be a decent amount, but you are still paying at least 2/3rds of the interest you have borrowed in the long run, and you are borrowing the money to buy an asset that at least for the next 5 years, isnt going to return much. On top of that you have to add the cost of property taxes (after tax), insurance, and maintenance/common charges (which here in NYC is nothing to sneeze at). Looking at all these things compared to the amount of home appreciation forecasted in the next few years, and it doesnt really make much sense (to me at least).

[IamBatman]

Greg, I actually said a decline of 35%, but keep in mind over 5 years, you also have an inflation of (conservatively) 3%, which puts us right around 50% "real value decline" over 5 years, and add another 5yrs from the start of the up turn, we are right back where we started. Anyway, its just a ballpark number, the guy who put out that number is not a fortune teller.

[Greg]

Originally Posted by serpentor

Greg, I actually said a decline of 35%, but keep in mind over 5 years, you also have an inflation of (conservatively) 3%, which puts us right around 50% "real value decline" over 5 years, and 70% over 10yrs (from the start of the upturn) . Anyway, its just a ballpark number, the guy who put out that number is not a fortune teller.

I understand. There were many years, though that we had 35-40% gain PER year. There's a lot of gain to evaporate there before you have a net loss, DEPENDING on when you bought.

I remember having the exact same discussions with lots of people when I bought my house in the bay area in 2002. I don't think SF/SJ and LA are in the same boat as all other major cities. The geography is such that you just can't build that many new homes. It's not Dallas, or Vegas.

I don't think it's valid to apply nationwide averages and statistics to such a localized decision. If I were sitting on a boat load of cash, and renting. I'd buy a house in Mountain View. I'd take a bullet in the head before buying in Gilroy, however...

'Greg

[IamBatman]

I agree bay area demands a premium. hence I put a premuim of 4x income on a reasonable home value versus 3x income in most other areas. right now its at 11x for santa clara county!
compared to 1999, median income has declined for the bay area, population has finally recovered back to about the same level, empolyment is still slightly below '99, while supply is up (new townhomes are still in construction even in sunnyvale and Mo'View.) you made the right decision to pull out :-)

[Praksis]

Originally Posted by fishguyAZ

renters have zippo(zero) to show for after years of renting, and they get no tax break for PAYING SOMEONE ELSES MORTGAGE, and have accumulated no equity. You need to live somewhere, why not make that somewhere be an investment.

Depends on the local market. Where I've lived so far, unless you stayed in the same place for 5 to 10 years, you would end up better off renting after taking into account the amount earned in equity. Can't quite remember if those calculations took into account interest earned on the difference in monthly payments, but I'm thinking it didn't which would go in renting's favor (assuming you were a decent investor)

Take that up to 20 or 30 years and then I agree with you as buying easily wins in almost any market, but there are times where renting makes more sense than buying. You can't make a generalization of it since it all depends on your particular circumstances.

As for doom & gloom...on a purely personal benefit standpoint I'd love to see the market take a decent dip since I'm starting to look for a home now, but I honestly don't see a drastic drop in the future for my particular market. Rebound I don't expect through 2008, but as others have said: if the market is low only those that have to move end up trying to sell, the rest ride through it.