11/27 http://www.economist.com/opinion/displayStory.cfm?story_id=2246402
"It is time to expose some popular fallacies about buying a home"
\_ Thank you for this, though I'm sure you'll get screamed at by
some Bay Area owners.
\_ I won't comment on the macro economic statements but I will
point out that the whole thing falls apart on point #5. My
mortgage is only slightly higher than rent in my area. In a
few years, I'll own my home and stop paying mortgage fees but
renters will keep renting and paying ever higher rent costs
over time. My mortgage rate is set and locked. Also, should
inflation ever hit big time again, which is historically likely,
then my mortgage drops to nothing while rent prices will sky
rocket in absolute terms. In the meantime, in order to lose
money on my house, it would have to drop in sale value by over
40% (my current break even point taking nothing else into
account) *and* I'd have to be *forced* to sell it at that post-
crunch point rather than doing what I intend to do if it should
happen, which is simply stay there and keep paying my mortgage.
Seriously, I was renting for 10 years hoping and praying every
day for that predicted housing price drop. It never came. So
I finally got a clue and a house and I'm up a shitload of money
in the last 4 years. I paid $428k + stuff = $440k. Someone
sold the same house for $615k 2 weeks ago in my neighborhood and
I haven't been paying rent down the drain for 4 long years. By
taking out a 15 year loan and paying in a lot of extra money,
I'll *own my house* in full at about the 7.3 year mark. Stop
praying and being bitter and reading doom and gloom articles
hoping for some crash. Go buy something and stop suffering.
Read the article carefully. It says housing prices may remain
flat, not crash by 50%. If you bought now and the market value
never changed at all you still win in the long run. If you
plan on buying to rent it out, I can't comment on that investment
as I haven't researched the possibility. I'm just really happy
to --not be a renter anymore
\_ (1) The issue is not whether you made a right decision
buying a house 4 years ago. The issue is whether one
should rush into buying a house today.
(2) I don't know about the Bay Area, but rents where I
live (a big fat city) is actually decreasing, and there
are still a lot of empty apartments for rent.
live is actually decreasing, and there are still a
lot of empty apartments for rent.
(3) Don't forget your 20% downpayment and closing costs
\_ more like years.
\_ I am thinking in terms of the returns generated
per year, without touching the principle.
(4) Don't forget the extra $ one would be paying on
which could cover several months worth of rent if
reasonably invested.
(5) Don't forget extra maintenance and utilities costs.
(4) Don't forget the extra $ one would be paying on a
(4) Don't forget the extra $ one would be paying on
(7) Don't forget property tax (another few months worth
of rent).
mortgage over rent (which is decreasing where I live)
could also be invested.
(5) Don't forget extra maintenance costs.
(6) Don't forget mortgage interest tax savings must
(7) Don't forget property tax.
subtract standard deduction first.
(7) Don't forget property tax (another few months worth
(9) A likely future scenario would be rising interest
rate (current account (iraq, homeland security, new
medicare bill) / trade deficits / improving
economy) coupled with low inflation (china / india /
productivity gains) -> not good for housing prices
and mortgages?
\_ (10) don't forget homeowner insurance. (equivalent to
half to full month of rent.)
\_ Living in earthquake country, a 50% housing crash is possible.
of rent).
(8) Inflation / Deflation tends to be a double edged
sword. While inflation may mean decreasing "real money"
mortgage payments, it may also mean higher interest
rate, meaning that less new buyers of houses or upgrades
to bigger houses, and it may also mean if you have
` cash on hand, it would likely generate better returns
if invested in stocks / bonds / etc.
(9) A likely future scenario would be rising interest
rate (current account (iraq, homeland security, new
medicare bill) / trade deficits / improving
economy) coupled with low inflation (china / india /
productivity gains) -> not good for housing prices
and mortgages?
\_ why should we scream? keep renting from us fools! We love
your money!!
\_ Ya know, when the bottom finally falls out of the housing
market, its going to be really really satisfying to gloat
on the motd. Every day.
\_ do the math kiddo. The bottom would have to fall out within
the first couple years of ownership for it to cause actual
damage to a home buyer, once you figure in inflation,
equity, leveraged mortgages, and tax savings. I'm not sure
how you think you are benefiting by not buying any kind of
house... Also, the economist article is counting on a low
inflation. Think about what that means. Among other things
it means by voluntarily renting instead of owning you're
betting against inflation. If you cannot buy a house due
to the crazy prices in the Bay Area, and you are just trying
to make yourself feel better, then I'm sorry, I don't mean
to rip on you. But there is an ugly reality that will only
hurt you more the longer you avoid it. Pool your money
with a friend or family member, or invest in a cheaper area
where you think real estate is more stable.
\_ Reality is that I'm just sick of the Bay Area and
Kaluforneeah in general. Why get locked into an area
that you think you'll be leaving within 5 years anyway?
\_ can anyone explain what this is supposed to mean?
"Initial interest payments may seem low in relation to income,
but because inflation is also low it will not erode the real
burden of debt as swiftly as it once did. So in later years
mortgage payments will be much larger in real terms."
are they talking about variable rate loans and making assumptions
that the rate will rise? a low fixed-rate low seems to me to be a
good deal regardless of inflation (well, as long as it's positive).
[formatted]
\_ Say inflation is 4%, and you get a fixed-rate mortgage with
payments of $2000/month for 30 years. Your payments are fixed,
\_ then isn't this predicated on the assumption that you know
how the inflation rate is going to be? if you wait a few years
till inflation starts up again, what makes you so sure that
some years down the line after that, inflation isn't going to
stall again?
but inflation means they cost less every year; after 29 years
you'd be paying only $641/month in real money.
Now, imagine that there won't be any inflation at all for the
next five years. That same mortgage is now going to be costing
you $780/month in 29 years -- that's the "much larger in real
terms" they're talking about.
The alternative is to put off buying your house. Say you wait
five years, until inflation starts up again. You'll have a
higher interest rate -- maybe your payments will be $2300/month
-- but inflation will bring them down to $737/month after 29
years, *lower* than your final payments would be if you bought
at the lower interest rate now.
\_ WOW thanks motd econ dude. So the whole article is based
on the premise that if deflation occurs, houses would be
a bad bet?
\- if i have to venture a guess, i think there are some
people here who dont worry about their finances as
much because they are perhaps only children of
upper middle class parents and know they are going
to inherit ~$1million ... of course some are not
only children but their parents might be worth even
more [and probably paid for their college so no debt].
so rather the prefer to not sweat over this stuff, and
they dont personally get much milage over owning a house
and they avoid the hit to the cash flow. note: i'm
not saying all the people in this financial condition
dont worry about it, but some may prefer to say live
in an expensive part of SF as renters, and have to
income to buy a nice car/stuff, travel, eat out etc.
for some of them a home might be even a bigger time
liability than money issue.
\_ I'm certainly not set to inherit any money. My
dad is already dead, and he died poor. My mother
is also a poor hippie with little cashflow - she
an obligation to leave something to their
owns a house but that will get eaten up by
medical bills when she is older. I grew up without
electricity until I was 5 years old, and without
a functioning toilet until I was 11 (do you know
what an outhouse is?). So yeah, I worry about
money some. For me, its just not the time to be
going into debt. Buying a home is a very worthy
thing, but I wish motd people would stop acting
like its the be-all-end-all of existence and
\_ what's this supposed to mean
that you're a total idiot if you don't do it.
\- seriously: do you have a point here aside
from telling your story? you make a reasonable
point on the medical bills issue. i dunno how
many middle/upper middle class parents see
an obligation to leave something to their
children vs. "i paid for their college now i get
to have a good time". i'm sure it's differnt
at harvard/princeton/bennington etc but there are
plenty of berkeley families worth 2-4 million
with 1-2 kids ... these people have a pretty nice
"safety net" and can get away with living a
zero savings lifestyle, and not worrying about
\_ i dont live in the bay area, and even w/in the bay area, there
is a lot of differences in overvaluation based on what part
of the bay area.
\_ Look at this more simply. For house prices to fall there would have
to be less demand. If there's less demand that likely means fewer
people able to buy homes. Odds are that the non-home owners will
also be in the "not able to buy home" category. The homeowner may
take a bath on paper, but the renter likely *still* won't have a
house, because the very factors driving prices down will also affect
that person's ability to buy (e.g. interest rates).
\_ Nah, I have more than enough to buy a house, but I am not
buying because:
(1) I don't have a need for a big house now.
(2) As an investment, the next few years could be mediocre,
if not downright horrific.
(3) Just like stocks which can become overvalued or
undervalued, if the housing price drops sufficiently,
it may become fairly priced, and I may consider
buying one.
(4) In short I am not buying now because I don't want to
lose money, or have my money stuck in the house for
a long time unable to work for me.
(5) Sure, interest rate may go up, but I would be able to
pay for a much bigger chunk of the house a few years
down the road, and borrowing less, interest rate would
play a much less important role.
\_ If I owned a house, I'd have to clean drainpipes, which I hate, and
I probably wouldn't be able to hear my cute neighbor getting off
through t ewals. And that, I think, sort of brings the whole
discussion to moot. -John
\_ finally, a voice of reason
that the rate will rise? a low fixed-rate low seems to me to be a good
deal regardless of inflation (well, as long as it's positive).
money some. For me, its just not the time to be
going into debt. Buying a home is a very worthy
thing, but I wish motd people would stop acting
like its the be-all-end-all of existence and
that you're a total idiot if you don't do it.
many middle/upper middle class parents see
and obligation to leave something to their
children vs. "i paid for their college now i get
to have a good time". i'm sure it's differnt
at harvard/princeton/bennington etc but there are
plenty of berkeley families worth 2-4 million
with 1-2 kids ... these people have a pretty nice
"safety net" and can get away with living a
zero savings, dont worry about the future
existence.
their future existence. i think various asians
also have different expriences in this area.
\_ That article links to another article that shows that Britain and
most of the EU are >40-50% inflated, whereas the US is only about
15% inflated. 15% over 4 years is <4% a year. It seems like you
shouldn't go and buy a house in England, but a 15% drop isn't much
given the pros of home ownership. Of course, I don't want to buy
a home because I don't want to be tied down... home ownership is
like marriage, it ties you down and kills your life, regardless of
whether or not it is a good investment.
\_ Yea, but Bay Area != US. According to Smartmoney, WSJ's
personal finance magazine, Bay Area communities are from 23%
to 41% overvalued (For comparison, Chicago, for example, is
only 2% overvalued). See above points (1) to (9) on why
the other "pros of home ownership" may be overrated.
\_ i dont live in the bay area, and even w/in the bay area, there
is a lot of differences in overvaluation based on what part
of the bay area. |
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