Cost Gap of Being a Tenant Vs. Owning Hits Widest Level In More Than a Decade (click)

I still hate renting, but the following logic keeps nagging at my mind... when I look at some of these homes-- the poor condition they're in, the poor neighborhoods they're in, the poor local school systems, etc.-- I ask myself the following:
1) what kind of income level would a young couple, with perhaps one child, need to have to afford this home?
2) what kind of profession(s) would these people need to have to support that income?
3) what kind of education level of would they have needed?
4) what kind of standard of living would they have, considering their profession(s) and education level?
5) what kind of safety and security would they require of any neighborhood that they live in?
6) would their neighbors-- people they will be living next to for atleast the next 3 years-- have anywhere near the same levels of income/professional status/education?

therefore... 7) would this hypothetical young couple move into this neighborhood and pay this much for this house?

my answer, almost every single time, has been a resolute NO. (a few "maybe"s for what the house may be listed at... but not the $30-$50K over list price they're being bought at)

considering that this same young couple could rent, and live in a neighborhood that is up to their standards of living; safe, with good schools, and neighbors with whom they have something in common -vs- buying a home and moving into a neighborhood that is a whole socio-economic class below their's... I cannot imagine that more than 1-in-10 would make that decision (aka. "mistake")

it's tough sitting on the sidelines, but I have full belief that this bubble-- atleast in the SF Bay Area-- will pop, and pop soon.

and yes, the prices most definitely will drop. I'm certain of it. as gas prices remain high... making commuting so expensive, and the prices of other goods goes up... on top of the squeeze that the rising interest rates will put on sellers and current ARM holders... the prices most definitely will drop.

in fact, expect to read articles about people filing for bankruptcy reaching record levels. is it any coincidence that the banks recently pushed Congress to pass some much tougher bankruptcy legislation? I think not. I think they see what's coming...

 

Tritium, there are a lot of posters in OT section but yours always seem to have content that strikes up intelligent debate.

I agree with the bubble theory. Check out Forbes Mar 29 issue. There is an article (and preceeding editorial) with insight from Alan Greenspan that there real risks in this "bubble" and that his office is already mitigating those risks for us taxpayers. Article goes deep into the economics of the spend-thrift society these low-rates have spawned. Trade deficit, dollar value, mammoth consumer debt(credit card's & auto) are all linked in the grand scheme of things.

Most of you guys are on the coasts. You are really at the peak (and highest risk) of this bubble. I'm in Midwest and in a small-ish suburb. If I had to buy a house now I'd wait it out. That time I waited would equate to more downpayment which would equate to no PMI needed and less $ financed.

I bought my 2,000 sqft suburban ranchstyle house back in early 2002 (right after the big rate drop) and only paid 60% of my current FMV. My rate was very low and I never felt the need to re-fi. Back then if someone told me my house would be worth this much now, I'd have looked around for the bottle of JD he was drinking. The annoying issue now is paying those pesky local propertry taxes which were not visible to me at time of purchase. I could buy a used Miata every year....

Is this the signs of doomsday? No, but there are economic patterns here. Let Greenspan do his due diligence. He will pop the housing bubble by raising consumer loan/credit interest and change the way mortgages are structured in the tax realm. Let's call it "bad medicine".

Sorry if I hijacked/diverted topic....

 

^ thanks Sergeant.

 

toronto's just as hot....

 

It is insane to pay $30k to $50k over asking price for any house in any area, San Francisco Bay Area included. This over paying for a house is a sign of bubble market, and with interest rate going up the next few years, many of the ARM holder will be forclosed and the price will come back down to earth, specially the Bay Area.

 

i know here where i live, there are so many for sale signs on A1A. It's almost like the whole road is for sale. of course, realtors keep saying the market is red hot, but when there are so many properties, each listed many months, it is obvious that there is no shortage of real estate.

 

Housing market is always like that. It is the last thing to go. It will take a catastrophic event to make it crash.

The fundamental for a major crash is there:

Home debt to income ratio; Low home equity ratio; Increase of house supply; Downsizing, outsourcing....two income families become one income families; High energy prices; high personal bankruptcy rate; weak stock market; easy credits....; inflation; rising interest rates.

It depends on whom you ask, if you ask a realtor the answer is always that the market will continue to go up, it will never crash. No offense to my realtor friends. You have conflict of interest here. I will not trust your opinion. Period. Remember, Enron? Up to the blink of fall of Eron, almost all stock analysts still rank the stock of Enron, buy or strong buy.

People, if you own a house. Just take it easy on the home equity loan and stuff, build up your equity and pay down the debts. If you are two income family. Plan your finance as if one of you is going to lose the job. Read your mortgage disclosure sheet and make sure your variable rate mortgage has safety interest cap built in. Or better yet, refinance to a fixed rate if you can afford. If you decide to buy a house, buy something smaller, don't max out your borrowing limit. Just because you quality for the maximum amount, it doesn't mean you can afford it especially when your wife or husband gets layoff.

The key is know your spending and plan for the worse. As long as you can still make the mortgage payment, you can ride out the crash.

The last thing you want is to sell your house during a crash. You will lose your shirt, it will take you years to recover.

Then again. I am talking about this before it happens. Most of you will not buy this. That's how history repeat itself. Meanwhile, I will do exactly what I preach here. Wait for the crash and buy some cheap properties from people who did not prepare for the worse.

 

Some people in California did just what you are doing. They sold their houses in 2001, after stock market crash in 2000, hopping that the real estate market will follow the stock market, then they will be able to buy either bigger house in a nicer location for the same $ they sold thier houses for, or buy similar house for a lot less $ few years later.

Guess what ? They are still renting now, they can not afford to buy anything, not even a condo. The mistake they made was timing, they timed the real estate market totally wrong, most houses in Orange County, Southern California went up double in 5 years, from 2001 to 2005.

If they sold their houses in 1990 then buy back in 1996, they would buy the same house for about 30% to 40% less. They missed that chance, and tried to do it in 2001 and they loose again.

Just like trying to time the stock market, it is easy to see the price history of all the stocks, but it is impossible to see the future performance of any stock.

One thing is for sure, the price of any house in any area in 48 states is too high right now. The chance for future increase is much less than the last 5 years, the chance for future drop in price is much higher than anytime in the last 8 years.

 

Trying to time any market still carry risk. Selling your house to rent is a total different story. It is extreme. Then again, it might look extreme now, if the timing works, they will be the ones laughing. Unfortunately, my friend did not sell his condo in Hong Kong when the prices were high, he is kicking himself now, because he held on to his condo.

Take Hong Kong for example, the R.E. was red hot for a very long time. Back in 1997 a sq foot in an upscale condo will cost you close to $1,300. Almost everyone who had a few bucks were buying and selling properties(speculation). People use one property to secure the purchases of the others. It was a classic snow ball effect. Why not to speculate, when you can have 20% to 30% of gain every year. People are lining up for applications of new condo. Yup, I believe the same thing is happening in the Bay Area when a new condo building is for sale. People lined up to see the condos. Back to my example, a few years ago, the stock market crashed. It was a domino effect, people who had margin accounts needed to come up with cash to maintain their accounts. It caused more selling. The Banks could not meet the demand of withdrawal from their customers. Many people lost all their shirts when they could not get the cash they needed to keep their margin accounts. Tons of stocks, condos and houses were dumped into the market, there was little demand for them. House prices drop 40% to even 50% overnight. Tons of people declared bankruptcy. As far as I know, after almost ten years, the prices still have not recovered to the 1997 level.

People should understand it is inevitable that the real estate market will have its correction or even a crash one of these days. You have to give credits to Alan Greenspan. His monetary policy allows small corrections from time to time by raising interest rates gradually. Personally, I prefer a bunch of corrections than a big crash. As the matter of fact, the RE market in the Northeast has cool down a bit. I was able to bargain during my house hunting process. A few years ago, good luck, I had to compete with multiple bids all the time. The key is if people's debt to income ratios keep getting higher and their solvencies keep getting worse, their abilities to hold on to their properties during an economic crisis is significantly diminished.

That's a receipt for disaster.

Just like a market boom. You need everything just right to make it happen. Now, People are buying bigger houses, bigger cars or even some big gas guzzling SUV, equity loan for home improvement, refinance multiple times to absorb their personal debts(reducing their home equity), soaring health care cost, energy cost, food prices.......etc.

Like I said the ingredients are there already. All we are waiting is one big event or a series of events.

It is quite scary.

 

I bought my last place a three years ago for $220k. My friend was looking too but he said "Houses are wayyyyy over priced. These things are gonna come way down. I will just wait." We make about the same amount of dough.

I am now listing that one at $350k probably get about $330k after commission and negotiation. Thats $110k in equity in three years. He made $0 by renting, and I am moving up to a nicer place and he is now trying to afford to buy places that were well within his reach three years ago, but now, at a higher salary, he has to stretch to buy one because the appreciation outpaced his income.

I understand the point that the Hoth is trying to make, and in some markets that have the potential to burst, his stategy might work for him but here is what I find universal to ANY market. If you pay attention and dig around a bit, you can ALWAYS find property that is undervalued and will appreciate. If you take care of it and even put a little work and money into it, you can increase your return. If you wait hoping for a bubble, you may make out like a bandit, you may get passed by. But you can always make gains if you put in the time and effort, in any market. Just do your research, be patient, and sell when the time is right.