Posted on 09/21/2007 10:49:53 PM PDT by Freedom_Is_Not_Free
It was the easy credit terms that caused the run-up in prices in the first place.
The banks will almost certainly not be rushing back in to sub-prime lending by next spring.
Well, that is the very definition of “housing affordability”. Either salaries will have to skyrocket, or home prices will have to drop significantly, or mortgage rates will have to go back to 1%.
I am betting on home prices dropping significantly.
I believe a lot of the meteoric rise in home prices was due mostly to the availability of very cheap money. Now that the cheap money is gone, how are buyers supposed to maintain the sellers high asking price? They can’t. Sellers must lower their prices to what buyers can qualify for in the absence of Very Cheap Money.
It is simple economics. Home buyers will be furious at the thought, but homes in bubble cities are WAY overpriced and have to come WAY down to allow buyers to purchase them. It is simple economics.
Yeah, I agree that some of that looks bothersome. It’s really hard to say to what extent people have ever extended themselves and what percentage of defaults there will be.
Some people may have took out a second mortgage to invest in something, and made a bundle who knows.
That’s exactly what I’m saying however, is that we can’t use this housing bubble to predict trends from past bubbles, and say with any certainty how far housing prices will fall to adjust for the obvious over pricing.
We also know that it wasn’t as bad in some regions as it was in others, Certainly places like LA and along the west coast were the most insane.
I can’t even hazzard a guess as to how much this ajustment may be. I was thinking 15%, but that is based on what I see around my neck of the woods. I can’t see any more that 25% though, or people will walk away from the debt. I would.
The reason why I would (if I were the average person) is because I would never ever realize any equity. That 25% financed of what 30-50 years in some cases is a lot of money.
If you buy a $100,000 home for cash, and it doubles in value after 10 years, you made $200,000. You tied up $100,000 and made $100,000. Of course, the Realtor will take 6%, or $12,000. So you will net $88,000.
Now consider that if you put that $100,000 in the stock market at an average of 10% return for 10 years, and pay $600 a month in rent, or whatever the local equivalent is where homes go for $100,000 today, you just MIGHT have made more than $88,000 in the market, even accounting for the money you wasted in rent.
I’m not going to do that math, but that is the question. What is financially better. In this case, I don’t know, but I am NOT going to take it on faith that tieing up $100,000 in a home is going to outperform a $100,000 investment in the stock market.
And THAT is the crux of this entire discussion. For a given home price, down payment and monthly rent, which combination of numbers makes it worth owning or worth renting. Because if I could rent for $1 a month, I sure as hell won’t buy. If I can own a house for $10, I sure as hell won’t rent.
The financial question for each of us in each of our locations in the USA is, how much does rent cost compared to buying. Is it cheaper to buy and have a home that appreciates, or is it cheaper to rent and invest the balance? Every location is going to have a different answer and it WILL depend on each person’s income and tax liability.
This is pretty complicated. I don’t see a once-size-fits-all simple answer such as “buying a home for cash and having no bank payment is always better than renting.” I just don’t see it. It is a case by case basis.
I disagree with one part of your assumptions. You took the full value of the tax deduction off of your mortgage. Everyone gets the standard deduction regardless of whether they actually have anything to deduct.
You should only be figuring the difference between your tax deductions once you are carrying the mortgage and the standard deduction.
This would reduce your tax savings on the interest on the loan, and make owning a little less attractive than you made it seem. If you are married, the standard deduction is up around 13,000 per year. I can't speak for you, of course; but my wife and I don't itemize because we can't get above the standard deduction. The deductability of mortgage interest is irrelevant to us.
2012. Sounds like a plan...
15 years ago I bought 2500 acres for $50 an acre. It's over $1000 an acre now, and no cookie cutter hoods are going up anywhere within 25 miles. I have a 2800 sq ft ranch house,a 1400 sq ft guest house, pool, a couple steel shops, and a lot of privacy. deer, moose, bear hunting right out my back door.
My total cost was under 500g.
What would have been the sense in waiting till now? You have to take a bite of the pie sometime, just do your research and really know what you want. You can only wait so long, once the spike passes it's not going to get any cheaper.
Condos are the first to go down and are the hardest to sell in a tight market. I think most real estate investors use Condos as the canary in a coal mine. When Condo prices start to drop, it is time to dump the single-family homes, which will drop next.
I am not even considering a condo for a home. You pay way more per square foot and they never appreciate as much as single family homes, dollar for dollar, except in insane places like Manhattan where average people are completely priced out of single-family homes and Condos are the ONLY option open to them. Then they act like single-family homes.
In most of the USA, Condos go up last, go up less, and come down 1st and farthest. All while they cost more per sqft. Not a bargain in my book... And for that you get to pay association dues and may have a crappy organization.
I will never buy a condo. The only upside is freedom from some maintenance and upkeep required of a house.
Yes it is. Then those people trapped in a high priced homes will walk away from them.
That will drive interests rates through the roof. Remember 18-20% interest rates in the 80's? Banks will recover their money, bet on it. And those rates will be up there before you realize what's happening.
In California, property tax is 1.25% of the homes value, plus whatever your local city wants to tack on. So call it 1.5% of value in a lot of place.
A $400,000 home will cost $6,000 a year in property tax for a new buyer. So if that home went down to $300,000, the buyer would only pay $4,500.
So yes, property tax goes down with the lower purchase price.
If your question pertained to tax re-assessments when existing homes go down, I don’t know the answer. If you buy a home for $400,000 and your neighbor’s identical home sells for $300,000, in California, I am pretty sure you can have the county re-assess your home and reduce your property taxes.
I am not sure of this, and have no clue how quickly the assessor would perform the re-assessment or make the reduction in taxes. For all I know, it could take years to make this change. Maybe someone else can answer this question...
There is a blog called “Sacramento Flippers in Trouble”. They post home selling prices and asking prices for flippers and investors in Sacramento. It is incredible to see the asking prices for homes 35% and 40% below the actual selling prices in 2005 or so, and they haven’t yet defaulted on the homes.
I agree with you. I’m surprised these people just don’t walk away. It would be sad if I didn’t think they had it coming by being overly greedy. Who knows, maybe many of them made millions and can afford to lose a few hundred thousand on their last investment property or two.
I wish I could find the link. Oh, here it is...
http://flippersintrouble.blogspot.com/
And those prices shown in “Flippers in Trouble” are merely the losses they would take if they got today’s asking prices. The properties aren’t sold, so they will be going down even more. I have yet to see a property listed for a 50% loss, but I expect to see one eventually.
Just brutal.
I’m not sure either. They come around here every 5 years. I don’t know how they do things in CA. Usually when you buy a house, you look at what the current prop taxes are.
They can’t tax you on purchace price, they must reassess before they can change the property tax, and part of that reassessment is a reflection of the nieghborhood as well.
Thanks for the help. I’ll have to adjust that.
I don’t know the outcome but if a $225,000 home is break even for me now, then break even could drop to $210,000 or even lower. Renting is looking better all the time, unless or until prices plunge to around $200,000 and I don’t see how they will. As long as people can afford to pay their mortgages, they will probably stay trapped in a home they can’t sell, rather than sell short.
The only homes that may go that low may be the motivated sellers, from foreclosures to REOs to divorces or forced relocations.
Renting is looking like the winner, unless rents go through the roof.
Thanks again for catching my error. I am pleasantly shocked that anyone had the patience to actually go through my cals. Most people are turned off by math in a long post and just skip over it. I am pleasantly stunned you actually read it.
Thank you.
I agree with the article. I own a home which I have not lived in yet as I am currently living overseas, (it’s rented out to cover expenses). Where I live now property and homes are sky high and I choose to rent. I’ve been living here for 12 years and probably will be here 4-5 years more. Recently I considered buying a home. A nice little 2200 sq.ft. with a separate rental included in the basement. Only $800,000. I’m single and have a take home of about $5000 a month. Even if I mortgaged my home in the states and made a down payment of $200,000 or so my monthly payments would still be about $4500, take away the rental income and it’s about $3500 a month, plus $1500 on the additional mortgage in the states. How can I afford to live in a home here under these conditions. My take home, which I don’t consider to be too bad, is equal only to what my house payments would be. Good deal. Alternatively I choose to rent for $1300 a month a living space almost equal to what I could own for $5000 a month.
Yes, that would be brutal. I would run, not walk.
It’s beyond me what could happen in this country, but a massive DE-flation isn’t impossible. There is plenty of speculation that it could be twice as deep and three times as long as what happened in the dirty thirties. At that time my great grandad was buying land for 2 cents an acre.
Let’s ray we don’t see times that bad.
Anyways, I need a nap.
Enjoyed the discussion.
rent is definitely throwing away money.
i have wasted so much cash just on apt rent. As soon as i get my financial bearings (im just 24 lol) i am going to aim for making payments on a condo or something
blah. i would NEVER EVER rent a house. ever. never ever.
Not to be a party pooper, but young people who have never owned real estate tend to vastly underestimate the cost.
I think the best way to save money is... to save money. If you sock it away in a house, you will end up with some net worth. If you sock it away in the stock market, you will end up with some net worth.
Nothing is worse for saving money than to blow all of your income on fun and consumption, living month to month with full credit cards tapped to the max.
I would not fault anyone for buying a home. It is a forced saving account that almost always appreciates with time, and keeps up with the rate of inflation. I don’t think buying a home is ever a bad move. Even if you buy a home at the top of the bubble, and take a short-term hit as a result, it is never a bad move. You have to live somewhere and property values will rise.
The entire point of the article is simple? Is buying a home the BEST use of your money. Will buying a home MAXIMIZE your net worth. And that is where things get very complicated.
For people like me, buying a home that costs over 350 times my monthly rent does not seem like the best use of my money or the way to maximize my net worth.
But even I admit that buying that home would only put me $50,000 down compared with renting, which is just not “big money” for a lot of people anymore. Not when people are paying $35,000 for a car or truck these days.
Buying a home is never a BAD move. The question is, can you do better. The answer is yes, if your rent is cheap enough. Saying you would never rent, then, becomes more an emotional decision than a financial one.
Or possibly, your rent is so high that only buying makes sense. If that is the case, then you would be unwise to rent.
My dad lived through the Depression and lived his life as if those times could come again. He never wanted to be without money and security.
I do pray we never have those times again. Maybe I’m deluded, but I don’t think a depression is possible, with the level of financial management we see in the world today.
Of course, even the experts can make mistakes. So I will never say never. But I don’t think a depression is possible, so if it happens, I am going to be stunned. I won’t be alone in that...
It is a good discussion and I’m looking for insight from all sides. Thanks for your contribution.
Perhaps it means there was a big capital gains tax exemption given to home owners in 1997.
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