It's A Terrible Time To Buy An Expensive House • Hacker News Board

Re: It's A Terrible Time To Buy An Expensive House

#151

Post by VLM » Tue, Sep 17, 2013, 5:08 PM UTC

fluidcruft wrote: post #84

vermontdevil wrote: post #40

I now do not consider buying a house a good investment due to property taxes. The bill is coming soon for a lot of school districts (especially those with strong unions) with the rapid costs of health care for retirees. This is going to be our next crisis as we can see it playing out in Detroit.

Rent pays property tax, too. It's indirect, but it gets paid.

You can leave the district when it hits the fan in a month (or so) if you rent. If you own, you're stuck paying the "rent" aka prop tax or you eat the obvious capital loss. A owner is a sheep ready for the shearing...

The older the district, the worse the financial conditions, roughly. If you rent and move to an exurb that didn't exist in 2005, they can't by definition have employees retiring from the local school in 2015 with 30 years experience and 30 years of benefits to pay out. Also roughly speaking the older the community the more corrupt it is in general, which is expensive. This is before we get into infrastructure expenses.

Re: It's A Terrible Time To Buy An Expensive House

#152

Post by snowwrestler » Tue, Sep 17, 2013, 5:08 PM UTC

rtpg wrote: post #140

snowwrestler wrote: post #129

Earlier quoted context omitted.

Cars are not an investment because, unless we are talking about collectible antiques, cars always depreciate. That's why it's more accurate to think of cars as expenses. Real estate can appreciate. It's not guaranteed to do so, but it can, and with significant leverage. That's why it's considered an investment.

but the appreciation only happens because everyone wants it to right? I get that building a pool makes your house worth more, but trying to ride a bubble seems messy

There are measurable fundamentals that consistently lead to local real estate appreciation, like population growth, economic growth, increasing mean income level, school district ranking, nearby commercial development, nearby infrastructure development, etc.

Of course all of this can be trumped over short time periods by nationwide trends like the recent financial crisis. But with strong local fundamentals, such trends create more volatility than permanent depreciation.

Re: It's A Terrible Time To Buy An Expensive House

#153

Post by karl_gluck » Tue, Sep 17, 2013, 5:11 PM UTC

penguat wrote: post #91

I don't believe this to be correct: "the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage" I don't think this is taking into account the rent that a renter pays. If a renter can just afford to pay a mortgage, then using the figures given (3% pa to rent, 8% pa to own) - that's 5% of the house value they're gaining p/a. At that,…

You assume the 5% per annum is going entirely to equity. Consider that property taxes, HOA fees, utilities, mortgage interest and maintenance all contribute to the ~8% figure, and your p/a equity looks closer to 3%.

Now let's compare if you were to purchase stock/ETFs with that equity investment instead of investing in your house.

Let's do a housing-optimistic comparison. Let's say you get a 2% dividend (nothing special) on the stock and the stock price declines at 0.5% per year. For the house, let's say you gain 3% equity per year and the home price stays flat. Rent costs are 20% higher than your expenses for the house, so you can only gain equity in the stock at 80% the rate you do in the house.

Over the same time period that you would pay off your mortgage and get 100% equity in a $100,000 house, thanks to compounding interest, your stock is now worth $107,000. That means that you have 7% MORE value in stock--even though you paid 20% more rent for the entire period of investment AND the stock price tended to decline (slowly) over time.

If we adjust to something more balanced (3% equity per year, 3.5% dividend, stock price stays flat, rent costs are 15% higher) the result is even more dramatic: 53% more value in the stock option.

Of course, all these numbers would be better if backed up with real-world statistics, but it's something to think about.

Re: It's A Terrible Time To Buy An Expensive House

#154

Post by VLM » Tue, Sep 17, 2013, 5:13 PM UTC

minimax wrote: post #54

badman_ting wrote: post #6

The part about high price/low interest rate vs the opposite was really helpful. I am trying to figure out how to think about this so it's well-timed. Thanks.

I have seen this argument (that higher interest rates will lead to lower prices), but it would be nice to see some historical (or at least anecdotal) evidence of it. I think at least one problem is that it assumes wages will remain flat. If wages start improving, home buyers will be able to spend more money on their mortgage each month which would tend to prop up prices.

"If wages start improving"

LOL a better assumption over a large non-tech area and long term is the median wages are permanently dropping, not holding steady or rising.

That has a certain effect on the dollars that will be available for monthly housing payment even if interest rates are dropping. Look at, say, Detroit.

If you want to clear a market, supply and demand insists that the median income dude will live in the median quality house. All the interest rate controls is given the median dude's fixed (dropping) monthly housing budget, how much of a reward does the previous owner get from the check the bank cuts for the new owners mortgage?

Re: It's A Terrible Time To Buy An Expensive House

#155

Post by minimax » Tue, Sep 17, 2013, 5:15 PM UTC

dxhdr wrote: post #137

minimax wrote: post #54

Earlier quoted context omitted.

I have seen this argument (that higher interest rates will lead to lower prices), but it would be nice to see some historical (or at least anecdotal) evidence of it. I think at least one problem is that it assumes wages will remain flat. If wages start improving, home buyers will be able to spend more money on their mortgage each month which would tend to prop up prices.

The data is out there, but really it's common sense. On the margin, a buyer purchases a house with a monthly payment he/she can afford. The monthly payment is determined based on the purchase price of the house and the interest rate. The higher the rate, the higher the payment. If rates raise, the margin buyer will no longer be able to purchase the same priced house. Prices must fall to clear the market. Yes, increas…

I understand the theory, but when I look at the data it looks like:

http://research.stlouisfed.org/fred2/graph/?g=mth

The last real period of rising mortgage rates was in the 70s. You can pretty clearly see that home prices were rising in spite of rising financing costs.

Re: It's A Terrible Time To Buy An Expensive House

#156

Post by kyllo » Tue, Sep 17, 2013, 5:26 PM UTC

jameshart wrote: post #39

amanfredi wrote: post #8

In many places, homes available to rent are not and will never be comparable in quality to homes available to purchase.

Nor can you customize rented property to suit your needs more precisely. Want to run ethernet to every room? convert one room into a gym, or a recording studio? Add more space? Not your property, so not your call. Nor can you guarantee that a rental property will continue to be available at a cost you can afford for a long time. Your landlord may elect not to offer a lease renewal. And if you have kids in school, or…

Or, if rents in your area go up, your landlord might ask you for hundreds more per month in rent when it's time to renew your contract.

I was renting a place for $950/month starting in 2011, then for 2012 it went up to $1,050, then for 2013 the landlord wanted $1,350/month to renew. Meanwhile home prices were still low (30% of inventory still short sales in my area) and mortgage interest rates were under 4%. No-brainer. I now pay less in principal and interest than I paid in rent, for a much larger, nicer house compared to the apartment I lived in. And my mortgage payment is never going to go up. (My property tax bill might go up, but that just means my investment is appreciating.)

Re: It's A Terrible Time To Buy An Expensive House

#157

Post by encoderer » Tue, Sep 17, 2013, 5:28 PM UTC

Trulia has published a great analysis on this that really contradicts what the author claims: That you can get better homes for the same price by renting.

http://trends.truliablog.com/2013/06/mortgage-rates-rent-vs-...

Moreover he claims you can get as nice of house in the same good neighborhood cheaper by renting. That's only true if you assume home prices will fall. Even if you just assume they will stay constant, backing out the principal you pay from your payment, the remainder most certainly does not buy a home of the same quality in area's I have a first hand knowledge of. Often homes that make it to the rental market are less desirable IME even if just because they are not cared for to the same standards.

Re: It's A Terrible Time To Buy An Expensive House

#158

Post by ctdonath » Tue, Sep 17, 2013, 5:28 PM UTC

lacksconfidence wrote: post #127

ctdonath wrote: post #81

Earlier quoted context omitted.

Discussions about "rent vs buy", and the corollary of "mortgage vs cash", rarely address the problem of you MUST make that payment every month . Pay up or lose it. The notion of paying every month, pretty much for life, is deeply ingrained in society to the point of not renting/mortgaging seems downright weird. (It's kinda like the recurring threads where living on $1/meal is met with outrage by most, despite many do…

This seems to miss a large percentage of the population which live in mega-citys. People arn't putting out a million dollars for "McMansions". A million dollars buys you an 800 sq ft 1 bed 1 bath condo. We are accepting the "brick shoebox", and we are paying through the nose for it. Edit: And, at least for me, moving far away where its cheaper is not an option. My children will know their grandparents, and not becaus…

Oh, I'm not missing that scenario. My point still applies in full. Too expensive is too expensive, not just in cost but in risk and lost opportunity. Better maybe to talk the extended family into moving somewhere far less costly.

Re: It's A Terrible Time To Buy An Expensive House

#159

Post by taopao » Tue, Sep 17, 2013, 5:31 PM UTC

If you can pay off the mortgage quickly, the low interest rate discount works in your favor.

Re: It's A Terrible Time To Buy An Expensive House

#160

Post by VLM » Tue, Sep 17, 2013, 5:33 PM UTC

snowwrestler wrote: post #107

dan1234 wrote: post #22

Earlier quoted context omitted.

You're flushing money every month with the interest on a mortgage + taxes + maintenance. You just have to hope that this is less than the amount you'd be paying in rent. (assuming property prices stay flat)

Property prices never stay flat because of inflation. This matters because the payments on a fixed-rate mortgage do stay flat; they don't adjust with inflation. I just refinanced to 4.5%. Long-run inflation is 3% so my actual cost to borrow is 1.5%. With the mortgage deduction it is just over 1.1%--nearly free money, in other words. It's true that I pay property taxes. In my jurisdiction they are just over 1%, so now…

"Long-run inflation is 3%"

LOL the political reported rate is what the .gov is willing to provide in COLA increases. It has nothing to do with actual costs. You're budgeting based on made up numbers provided for someone elses "pay" rate increases.

Look at say... gas prices. Double in a decade. Thats about 7% per year. Or the price of food, or medical insurance, or tuition, or price of cars, etc. Think of what real people actually spend money on.

You can get better numbers from shadowstats. Somewhere toward the low end of 6% to 10% is about right. We'll call it 7% long term average.

The problem with 7% annual inflation rates is very few people can maintain those pay increases, every year, for an entire 30 year mortgage... So eventually you end up house poor.

Lets say J6P gets a 3% pay raise but the cost of everything else increased by 7%, for a generation or so. That means the money left over after food, car, etc aka the rent either directly for land or indirectly for money to buy land, will drop by about 4% per year. For awhile you can mask that by lowering interest rates, but once you reach "basically zero" like now, problems develop.

Finally the mortgage interest deduction doesn't work like that. If you pay more interest to the bank than the standard deduction fraction then you don't have to pay income tax on the fraction above that. Basically you need low income, high interest payments, and then all you save is taxes on the portion above the standard level. You're still out the same money, just not out the income tax on a small sliver of the total interest over a certain limit. I've paid enough of my mortgage off that I no longer get a mortgage interest deduction. Oh, I could file it anyway, but I'd have to pay more in taxes than just taking the std deduction. Eventually you reach AMT range and then things get weird.