US Economy

[IamBatman]

I'm not against buying a house, like I said, I've been ready to buy for years. Right now, for my calculations, its a better financial decision to rent for a few more years longer.

here are MY projections:

[smoseley]

Originally Posted by serpentor

here are MY projections:

Really? I mean REALLY, you think home prices will drop almost 60%? So the house that was purchased for $1 million 2 years ago will be selling for $400-450k in a year? Sorry, dude, you're crazy.

No way prices will tank like that:

1. First of all, prices will drop much slower than you project, because of sticky economics and how they apply to real estate. There will likely be many foreclosures before prices drop significantly. People get emotionally attached to real estate prices
   
   
2. People won't take a $600k loss to avoid a bakruptcy. No one is that stupid. If people are upside down and can't afford their properties, they'll cut their losses. The majority will try to make things work so they can afford payments.
   
   
3. If foreclosures on negative equity properties becomes an epidemic, banks will begin making deals with people to reduce or eliminate interest in order to make payments affordable and limit their liability.
   
   
4. By the time prices bottom out (probably in late 2009), inflation will have worked its way into the prices a bit, and so we won't be at 200% the historical average anymore. Your 500k house that was purchased for $1M in 2005 will be "worth" (by your graph) $600k in 2010, so even a drop of 40% over the next few years will be extreme.

My projection is that prices will drop by early 2010 to the 2015 100% value by your graph and hold there for 5 years. So that means a drop of about 25-30% over the next 2 +/- years, and then holding there for 5 years.

[IamBatman]

Originally Posted by transio

Really? I mean REALLY, you think home prices will drop almost 60%? So the house that was purchased for $1 million 2 years ago will be selling for $400-450k in a year? Sorry, dude, you're crazy.

Are you sure you are reading my chart right? Actually, my prediction in the chart says that it will drop in "real value" about 50-60% in 5 years. NOT 1 year. Also this chart is inflation adjusted, so its more like a 35% price drop in dollar value. ($1million down to 650k in 5years). this is my guess, and your guess is as good as mine.

Originally Posted by transio

No way prices will tank like that:

First of all, prices will drop much slower than you project, because of sticky economics and how they apply to real estate. There will likely be many foreclosures before prices drop significantly. People get emotionally attached to real estate prices

Right now prices right now are sticky due to the emotional attachment. However, I'm predicting a "rubber band" affect once the flood of inventory from the unprecedented subprime forclosures. There will be forces at work much stronger then emotion. There was "panic buying" going up ("if I don't buy now, I will be priced out forever!"), why would there not be panic selling on the way down?? Who could've predicted the meteoric rise in property values given that the largest inflation adjusted growth in history was ~25% above inflation?
Like I said, this is just my prediction. Some areas with good job markets will have a much gradual down slope, while areas like SoCal, Central Valley, Florida will have the worst decline slope.

Originally Posted by transio

People won't take a $600k loss to avoid a bakruptcy. No one is that stupid. If people are upside down and can't afford their properties, they'll cut their losses. The majority will try to make things work so they can afford payments.

exactly, a foreclosed house will have a huge affect on neighboring property values.

Originally Posted by transio

If foreclosures on negative equity properties becomes an epidemic, banks will begin making deals with people to reduce or eliminate interest in order to make payments affordable and limit their liability.

I really hope its not the case. Most experts and lawmakers are against this idea. This will only only reward irresponsible financial behavior and prolong the pain. The people that are more likely to vote: baby boomers and retirees, will be against it because most likely their house would be paid off and they would hate to pay to bail out the banks and buyers.

Originally Posted by transio

By the time prices bottom out (probably in late 2009), inflation will have worked its way into the prices a bit, and so we won't be at 200% the historical average anymore. Your 500k house that was purchased for $1M in 2005 will be "worth" (by your graph) $600k in 2010, so even a drop of 40% over the next few years will be extreme.

My projection is that prices will drop by early 2010 to the 2015 100% value by your graph and hold there for 5 years. So that means a drop of about 25-30% over the next 2 +/- years, and then holding there for 5 years.

like I said, the chart is inflation adjusted... but yeah your guess is as good as mine

[IamBatman]

I Thought Bay Area was "impervious" to foreclosures? chart attached courtesy of SF Chronicle:

[cstetter]

Damn - I'm offline for 3 days and miss all the fun.

Obviously, I can't convince you - but I didn't really expect to anyway.

My point about Germany was simply that even if you don't expect a gain and you get no Tax benefit, purchasing a home can be the right thing to do. Same in US.

My prediction is that your expected downturn will be a lot less severe than you think

Time will tell who was right, won't it?

Enjoy paying rent

Peace out.

[IamBatman]

you didn't convince me with yourvague opinions, statements with no solid numbers, and lack of data. I did not expect to convince you with real calculations, real data, and hard numbers because I knew you would ignore them.
enjoy your big beautiful house.

[TimMullen]

I haven't read all the above posts, but one thing that was explained to me many years ago.

Whether you rent or buy a house, you are paying the mortgage - either your's or the landlords. It would probably be better if it was yours.

If renting is such a great deal, and buying is so bad, why do people buy houses, rent them out, and make money?

I will admit that temporary ups and down in a specific market may tip the scales toward renting, but I've never seen it myself. Even when I bought a house, and had to move three years later (not the optimum length of time to own a house), I broke even when you figure everything into the deal - I didn't lose money and although I sold it for more than I paid, the real estate commissions tipped the scale to breaking even.

The house I'm in now, however, has gone up at least 3 times it's value in the last 8 or 9 years...

[texige]

IMO you can't take averages for the whole country and apply them to individual cities, states or areas. Some cities will boom while others suffer and some parts of the market such as low end houses may suffer while $1 million houses may boom. There are too many variables to discuss in this small space however renting makes sense in some cities and buying makes sense in others.

[IamBatman]

my guess is that TX will be fine.. the property values and rental rates are still faverable towards owning (i think.. I have not looked specific numbers.. )

[charliex]

Tim, come see my house, i'm renting it and theres no way the rent way is covering anyones mortgage, the owner just refinanced too.

There are about 8 empty houses on my street, and there are only 20 or houses altogether, i talked to the realtor and they said expect to see more as the people how've just bought in the last year or so are about to get whacked with those ARM's.

We're expecting quite the drop, if the market drops by the amount they say it will then i'd be better off renting til it stabilises,a 10% drop is equivalent to 3 years rent.

[smoseley]

Originally Posted by TimMullen

Whether you rent or buy a house, you are paying the mortgage - either your's or the landlords. It would probably be better if it was yours.

If renting is such a great deal, and buying is so bad, why do people buy houses, rent them out, and make money?

The simple answer is "they don't". Not today. People who buy today and rent lose money.

Right now, if you buy let's say a condo in Miami, you'll pay $400-500 / s.f. - that means a 1,000 s.f. condo will cost you $400-500k. Your expenses, conservatively, will be:

• Mortgage: $2500-3000 / month
• Insurance: $4-500 / month
• RE Tax: $8-1000 / month
• Maint: $4-500 / month

Total cost to you: $4,000 - 5,000 per month, or $4-5/s.f. per month to own.

Rental rates right now are about $2-3/s.f per month. and headed downward. In a year, they'll be at $1.50/s.f.

That means that every month you own and rent out a condo in Miami, you lose $2000+. And since values are headed downward, it's not like you're putting that money into equity. Nope. It's going into the garbage.



Let's look at this another way - total cost of living. Let's assume I'm going to live in the condo outlined above for 5 years.

Case 1: I buy the place for $500,000 and pay $5k a month, and in 5 years, the place is now worth $400,000, and I've paid off $50k of my mortgage. My total costs are:

• $180k in mortgage payments ($3000 x 60 months)
• $30k in insurance payments
• $30k in maintenance payments
• $60k in taxes

Total cost of living: $300,000
Total equity change: -$50,000

Case 2: I rent the place for 5 years, and then buy once the market has begun to recover. My rent payment is $2,500 a month (avg. per year). My total costs are:

• $150k ($2500 x 60 months)

Total cost of living: $150,000
Total equity change: $0

So there you have it, according to my estimate (which are pretty conservative all around) it costs more than twice as much to own real-estate if you purchase today.

I guess that old adage doesn't hold true in a market in decline.

[TimMullen]

Originally Posted by charliex

Tim, come see my house, i'm renting it and theres no way the rent way is covering anyones mortgage, the owner just refinanced too.

So the guy you are renting it from is loosing money on it because he's a nice guy?

It could be that the prices have dropped so fast/far that he's renting it for less than he's paying, and he can't sell it, so loosing a little is better than loosing a lot - but I doubt that.

Chances are though, he bought it when the price was lower and has held it for a long time. He's paying a mortgage at a lower value of the house than what it would be if it sold now. He's still making money at it, and you are still making the mortgage payment for him.



As for re-financing - we did that a couple of years ago. We did it at no cost to us, dropped the loan rate several percentage points, changed the remaining 20 years of the 30 year mortgage to a new 15 year mortgage, got rid of the requirement for the mortgage insurance, and dropped the monthly payments by a couple of bucks. We didn't pocket any money, but the equity is building much faster.

If we were renting the house out, we could still rent it a rate that would be half what a new buyer would be paying for their mortgage, and we would still be making the mortgage payment and extra money because we are paying that mortgage on a lesser value (from 14 years ago).

There is a reason that people buy and rent out houses, and it's not from the goodness of their hearts.

[Greg]

Originally Posted by charliex

Tim, come see my house, i'm renting it and theres no way the rent way is covering anyones mortgage, the owner just refinanced too.

You probably have no idea how much equity your landlord has in that house, and therefore you don't know how much the mortgage is. If the property has been owned more than 3 years, chances are very, very good that even with a 30% drop, your owner has made a good bit of coin EVEN if your rent didn't quite cover the mortgage.

'Greg

[TimMullen]

Originally Posted by transio

The simple answer is "they don't". Not today. People who buy today and rent lose money.

All that is based on the "fact" that things are going to drop significantly.

No, redo all your calculations, and assume that the value of the house will double in 5 years. You also didn't include the tax deductions on the insurance, and you live in an area of very high taxes obviously. I live where the taxes are high, but still I'd pay not much more in a year than you quoted for a month.

I also acknowledged that depending on the market and circumstances, renting may be better. You are taking an extreme example, and using it for the whole US - that's obviously not appropriate.

My whole point is that someone is making the payments on the house. You or the landlord - and landlord isn't renting it out because he's a nice guy...

[Andrikos]

Originally Posted by Greg

You probably have no idea how much equity your landlord has in that house,
'Greg

That info is public.
It's pretty easy to find out.

[IamBatman]

Transio: good analysis, I would only add renters have the option of putting the difference of $2500/mo into investments, that way your "total equity change" would be much more then 0.

PS. Please change your avatar, I beg you.

Tim: most of these owners in Vegas are amateur speculators. (They can't possibly have bought a long time ago because these are new developments.) They were ok with the negative monthly cash flow because at one point, property values were going up by double digits every year. They were counting on it to go up, but now they are stuck.

[smoseley]

Originally Posted by TimMullen

All that is based on the "fact" that things are going to drop significantly.

No, redo all your calculations, and assume that the value of the house will double in 5 years.

So what you're saying is that you create investment projections in denial of all logical indications that prices will decline?

Yes, that must be the same genius advice that late investors in stock market followed just prior to the the dot com collapse.

PS - You just earned a - no, make that 2

[charliex]

Originally Posted by Greg

You probably have no idea how much equity your landlord has in that house, and therefore you don't know how much the mortgage is. If the property has been owned more than 3 years, chances are very, very good that even with a 30% drop, your owner has made a good bit of coin EVEN if your rent didn't quite cover the mortgage.

'Greg

Except that i do, one of the benefits of a gf that works at the bank

i know how much they bought it for, what the payment is etc.

[smoseley]

Originally Posted by serpentor

Please change your avatar, I beg you.

I'm holding out for cash offers.

[uclacyc]

Originally Posted by transio

I'm holding out for cash offers.

I agree. Your avatar is incredibly disturbing. I am willing to PayPal you a dollar. If we can get some other people to put money into the "transio-please-change-your-avatar fund," you can stand to make quite a bit of money here.