9 ms·

It's A Terrible Time To Buy An Expensive House

185 points by huherto 13y ago

gigawhat 13y ago
I read this on patrick.net years ago-- a lot of it is quite outdated now. Basically the housing market nationwide is quite strong. Whether it will last is another question. Just one example of the article's outdatedness-- the jumbo mortgage market is doing great now: http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-to-save-as-jumbo-mortgages-are-cheapest.html http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-t...
Semiphore 13y ago
Unless it's in NYC and you got the rates right when they were at the bottom. Article is very useful, but it's one of those that gives 'here are x reasons'. Yes, but come up with determining how to make a decision instead
- BetaCygni 13y ago
  Did you read the article? It actually has some nice rules of thumb on how to compare the price of a house to the rent.
tootie 13y ago
He kinda ignored supply and demand.
- nilkn 13y ago
  Point 6 in the article is about supply and demand.
- kevjiang 13y ago
  Rental prices are based on supply and demand, except for in a few cases (for example, rent control). That's why he suggests using rental prices as a way to check how reasonable a house price is.
badman_ting 13y ago
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.
- minimax 13y ago
  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.
  - dxhdr 13y ago
    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, increased wages could help make up for the gap. Wages do not have to rise with interest rates (stagflation).
    - minimax 13y ago
      I understand the theory, but when I look at the data it looks like: http://research.stlouisfed.org/fred2/graph/?g=mth 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.
      - VLM 13y ago
        More like very early 80s. On the other hand, the price of everything more than doubled in the 70s due to stagflation.
  - 13y ago
jpmattia 13y ago
It's worth noting that patrick was among the few active bloggers that noticed the housing bubble early. Ben at the thehousingbubbleblog, calculatedrisk were two others. Folks that were paying attention and shorted the banks made some money. But of course: this time is different, broken clock, and <insert your financial cliché here>, etc etc.
- eloisant 13y ago
  Also you can find people saying everything and its contrary. Retrospectively you'll always find people who "predicted" any up or down in the market. That doesn't mean they will get it right the next time. Or it would be too easy, just find the guy who got it right once and you can predict the future!
- hackula1 13y ago
  Sharpshooter fallacy is my favorite.
- muzz 13y ago
  The more salient part is the broken clock. CalculatedRisk changed his opinion as the facts changed (he is data-driven, and one of the best blogs out there). Patrick.net has essentially been a perma-bear on real estate. While that view was correct at one point in time, he never changed his view significantly when the facts completely changed.
  - jpmattia 13y ago
    > CalculatedRisk changed his opinion as the facts changed (he is data-driven, and one of the best blogs out there). I should have emphasized this point myself. Also, the CR comment board used to be of HN quality, but for economics and housing. (Lately, not so much.) If you follow one econ blog, I'd heartily recommend CR: http://www.calculatedriskblog.com/ http://www.calculatedriskblog.com/ I will note though for the topic at hand: CR has commented that there is little correlation between interest rates and house prices[1]. I believe he has neglected that most of the data from which that statement is derived had interest rates (and borrowing standards) out of range compared to where we are now. [1] http://www.calculatedriskblog.com/2013/06/house-prices-and-mortgage-rates.html http://www.calculatedriskblog.com/2013/06/house-prices-and-m...
amanfredi 13y ago
In many places, homes available to rent are not and will never be comparable in quality to homes available to purchase.
- envex 13y ago
  Plus renting is basically flushing your money away each money opposed to building equity in something over time.
  - minimax 13y ago
    This argument only makes sense when home prices stay flat or go up, which isn't always the case. I'd rather be "flushing my money away" each month than get stuck tens of thousands of dollars underwater on a mortgage.
  - addflip 13y ago
    Actually if you read the article he argues otherwise. Don't fall into the banks mentality. > If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.
  - huherto 13y ago
    Same thing happens when you pay interest. Either you rent the money or you rent the house.
    - mikeash 13y ago
      And in a lot of places, rent can actually be quite a bit cheaper than interest + taxes + whatever other costs borne by the owner. This was especially true at the height of the bubble. I was paying 6% interest on a place that would have rented for about what the interest alone cost me. So I was paying as much as rent would have cost in interest, plus taxes, plus condo fees, plus losing out on the ability to earn interest on the money I had put in for the down payment. On the other hand, I'm now paying ~3.4% interest on a place that would rent for, again, about 6% of the purchase price per year. Even including other costs, I'm coming out decently ahead. Of course there are other reasons to own rather than rent (or vice versa) aside from just which costs more, like stability, or freedom to move. But it is not a slam dunk easy decision as to which option costs less, even after accounting for the potential equity you build when owning with a mortgage.
jonnathanson 13y ago
Some very solid points about the market in general, but I wonder how several of these points (particularly the points about oversupply, baby boomers, etc.) apply to places like SF or Manhattan. SF, in particular, seems to be extremely young (though that could be observational bias on my part), well-monied, in sharp undersupply of housing, with rent matching or in some cases exceeding the cost of a mortgage. Historically, it's been a boom-and-bust sort of town as far as housing prices are concerned. And there are always places like the East Bay and the Peninsula to capture some of the demand. But it's not as if the Peninsula is cheap these days, so Oakland seems the more likely candidate to take on the burden (which then raises a thorny question of where all the low-income Oaklanders go when the gentrification accelerates). But it's conceivable that SF basically becomes the Mahattan of the Bay Area, a playground for the rich, while everyone else gets pushed into the outlying boroughs and beyond. In such a scenario, where money is little object to the buyers determined to own in SF, what happens to pricing? I don't know anyone who owns a home in SF right now who doesn't think the current prices are insane. (Anecdote: one friend just bought a condo in a new building, and three months later, the closing price for a lesser unit in the same building was $200k higher than what he'd paid for his). But are they actually going south anytime soon? Also: while mortgages and interest rates are great indicators for the housing market in general, SF seems to have an unusually large supply of cash buyers. In conclusion: I'm not disagreeing with the article, nor am I bullish on the local housing market. I don't fully understand why it's behaving the way it is, and that's never a great sign. But superficially, it seems to be the sort of "microclimate" that doesn't track the aggregate US market very closely. How many of these enclaves of wealth does the US have, or will it have, that seem to have a low to zero beta w/r/t the overall market? And if it's a significant amount, when will speaking in aggregate terms start to lose a bit of meaning? On a related note, I'd love to see a comparison of urban vs. rural vs. suburban areas across the US. I suspect that concentrated urban centers are obeying very different laws of physics, so to speak, than suburbs and semi-rurals with their huge tracts of overbuilt housing inventory. Example: I used to live in LA, and when the press spoke about how hard-hit LA was during the housing crash, they painted with a pretty big and sloppy brush. The surrounding areas (Inland Empire, etc.) got the plague, but housing in LA proper barely registered a slight cough.
- cyanbane 13y ago
kfk 13y ago
As we are on the topic, which percentage of your salary going to pay up rent would you consider "sane"? Edit: I mean post tax. It's a cultural thing, in Italy we don't ever consider the gross salaries.
- blencdr 13y ago
  Mortgage is 34% post tax salary (for the couple). the interest for the loan is 3.05% (fix interest). Do you in Italy have more fix or moving interest rate ?
- benjaminwootton 13y ago
  0%. I saved up and bought the cheapest house I could for cash escape the high cost of rent around London. I can now save double quick for my longer term house. It's a short term pain living in a small flat with a long commute, but the strategy will hopefully pay off in the long run with all of the rent and mortgage interest avoided.
- GotAnyMegadeth 13y ago
  15% of my post-tax wages go towards rent EDIT: That's 11% of my pre-tax wage
  - kfk 13y ago
    That is very low. In Munich most people are in the 30-50%. I was in the 17%, but that's just because most of my rent is paid out by the company I work for. Otherwise it would be around 30%.
    - caw 13y ago
      Where I live in the US I'm at 30% post-tax. I could probably get this down to about 20%, but I'd be adding on an hour or more of commute each way, and I'm in a pretty desirable part of the city.
    - hackula1 13y ago
      50% of a tech industry salary going to rent is pretty scary.
ajays 13y ago
"Because the housing bubble was not driven by supply and demand." .... except in San Francisco. Everyone wants to live here, and Facebook, Twitter, etc. are turning out paper millionaires by the bushel. Expect the house prices to tick up again once Twitter IPOs. There is some construction now[1] (just walk down Market street from the Castro), but I think the number of techie millionaires being minted seems to exceed the number of dwellings under construction. Plus: there is the externality of outside money. I've heard of buyers from PRC paying cash down, sight unseen, for properties in desirable neighborhoods [2] [3]. A lot of the analysis such as the one in this article assumes a somewhat closed market; but outside money flowing in can change the dynamics significantly. [1] http://sf.curbed.com/archives/2013/07/25/the_40_most_notable_new_developments_currently_under_construction.php http://sf.curbed.com/archives/2013/07/25/the_40_most_notable... [2] http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-spend-billions-on-american-real-estate/ http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-... [3] http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-buyers-flocking-to-peninsula/Content?oid=2184205 http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-b...
- talmand 13y ago
  I would say the housing bubble was driven by supply and demand, just not traditional home-buying supply and demand. Houses were being treated as day-to-day commodities, which is bad for people who wish to actually live in houses and not make money off of them. I was in Vegas during the start of the housing bubble and all I saw were investors buying houses to flip immediately for big profit selling to other investors who thought the same. Anyone who actually wanted to buy a house to live in was required to get caught up in a risky mortgage option that left many of them in serious problems when their house was suddenly worth less than half of what they owed on it. We looked at a house at the start of the decline and offered $50,000 less than asking. They laughed at us and we stopped bothering to look. Less than a year later the same house was for sale for more than $100,000 less than our offer. The realtor who showed us houses later moved out-of-state so she could earn a living. Someone I knew told me about his friend that bought a house, did bare updates to it, and sold it within a month for nearly a $100,000 profit. He was gleeful at the idea you could do such a thing. I told him that was good for his friend but incredibly bad for everyone else in the city. About a year or so later I was shown to be correct beyond my worst doomsday predictions. I'm seeing the same things I saw in Vegas starting again.
untilHellbanned 13y ago
Think this is all true, but when will any of these points be recognized by the masses? Never? 5 years?
- DamnYuppie 13y ago
  Hopefully not until after my house sells ;)
debacle 13y ago
I hadn't considered the impact of #3, even though I knew it was a reality. Being in a position to buy a new house but not take advantage of low interest rates (because I don't want a long amortization on the mortgage), it actually makes little sense to buy right now except maybe if I planned to leverage a diminished equity in a different market. #6 seems somewhat tinfoil-hatty. Does anyone have some data to back up #7? > Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. ...and we went off the deep end. #9 is incredibly specious. Why would retired people sell? Where are they going to live? #10 is very true, however it's so difficult to trust a new home builder. Even if you know what bad construction looks like, it takes an immense amount of effort to ensure that everything is done properly and you'll probably be adding 20% onto your cost just to babysit the construction.
- huherto 13y ago
  #9 They will probably try to downsize. Or they can do a reverse mortgage, but I don't know how that would affect the market.
- rhplus 13y ago
  #9 is incredibly specious. Why would retired people sell? Where are they going to live? If a person is physically able, then a smart option is to move to a small apartment in a location close to services and shops. Downsizing reduces unnecessary energy costs, taxes, maintenance, yard work, etc. Based on my city, the equity in a median suburban home could easily pay 15 years of rent without investment, maybe 25 - 30 with really good investment. If there's physical support required, then an apartment in the massively booming "Retirement Living" industry might be a good choice. Here's an example that costs ~$4,500/month, meaning you could probably pay 10 - 15 years after good money management from the sale of a median suburban house in these markets: http://www.retirement.org/financial-info/home-cost-calculator/ http://www.retirement.org/financial-info/home-cost-calculato... The other option is to sell the house now to investors and use the equity to support living and healthcare costs. Then you simply move out at a more convenient later date (i.e. when you die): http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_comes_due_3 http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_...
- 13y ago
josefresco 13y ago
Point 8 is an important element of the last (or current depending on your outlook) housing bust. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald: "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize." Important to remember that for every homeowner over-stretching to buy their dream house is another home-seller making a healthy profit.
eloisant 13y ago
Rent vs buy really depends (1) what's your down payment and (2) how long you're going to stay in your house. If you have a high downpayment, and in the extreme case buy your house in cash, you don't have to pay any interest. You can take into account the revenue you could have got from your capital, but nowadays you can't get much without taking pretty big risks. Then there's the long term. If you end up staying 30 years in the same house, buying is cheaper. Depending on your local market, the number of years you need to stay in house to make up for the purchasing fees (interests, taxes, etc.) is different. It's this number you need to find out. Of course when the real estate price was going up fast, the increase in value made it up pretty quickly so buying was an easy choice. That's no longer the case, you need to do the math. So it's not whether it's universally better to buy or rent. It all depends on your local market, your downpayment, and how long you're willing to stay in your new house.
- jonmb 13y ago
  Right. This calculator is helpful: http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...
  - twoodfin 13y ago
    It's been said a few times in this thread, but you have to remember to make this calculation on equivalent properties. In a perfectly functioning market, there'd be no difference between "rental" inventory and "owner-occupied" inventory, but in practice there are often qualitative differences between the two, and if you value certain characteristics you will likely have to buy. EDIT: Also, don't forget to change the "marginal tax rate" option under "Advanced Settings...Other..." Mortgage interest deductibility is (rightly or, as I think, wrongly) a substantial ownership subsidy, particularly for high-earners.
    - fluidcruft 13y ago
      To add to your point, I live in a suburb/city that effectively bans rentals by making property taxes extremely expensive if the property is not both owner-occupied and a primary residence (homestead taxes). This is coupled with widespread HOA agreements that explicitly ban renting/subletting to not-close-relatives. The unsurprising effect is that higher income families live here and the cost of running the schools is consequently low. There are some other suburbs, but in that case you're committed to private schooling of your kids.
ambiate 13y ago
It is important to weigh in many factors. The easiest to grasp is debt to income ratio. (Debt/Income)100. Student loans, phone bills, internet, netflix, insurance, etc. Tally it all in. Divide it by your monthly income. For example: $650 student loans,$100 cellphones,$90 car insurance,$300 food,$250 gas,$150 electric (average over 12 months),$80 water/sewage/trash ---- $1620 ($1620/$4000) 100 = 40.5% recurring debt to credit ratio Note: Most lenders do not factor in utilities. You should. They will let you drown. It is always wise to take your Good Faith Estimate and refactor your d/c ratio. $1620 recurring,$350 mortgage,$120 home insurance,$150 taxes,$80 mortgage insurance ---- $2320 (2320/4000)*100=58% 42% of your income remains to be spent on fed taxes, benefits at work, non recurring debt, random quirks of life. I really think 2x Household salary is pushing the limit of what you can afford. Vehicles break, pipes bust, utilities are going to have fees/unexpected jumps, people get sick, etc, etc. Don't waste your life preparing for the unknown. Just don't dig yourself into a hole that you can't swim out of once the floods come.
- eloisant 13y ago
  I don't know, if shit hits the fan you can change your utilities budget. Change your cellphone plan to a prepaid, take the bus instead of your car, eat ramen everyday instead of going to the restaurant... But when you have debt, you can't just decide not to pay this month or you really get in trouble.
vermontdevil 13y ago
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.
- fluidcruft 13y ago
  Rent pays property tax, too. It's indirect, but it gets paid.
  - umsm 13y ago
    The problem is that it's a bit disproportionate. A 1000 sq ft apartment will not have the same amount of taxes as a 1000 sq ft home.
  - VLM 13y ago
    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.
    - fluidcruft 13y ago
      In every state I have lived, school retirement and health plans were handled at the state level. Hoping districts isn't going to shield you from your state government. The school districts pay into state plans as directed by the state legislature. It's the state legislature that's on the hook for the unfunded liabilities, not the school districts. School districts only make the equivalent of social security payments. And it's not like the employees aren't playing into the system the same way that private sector employees pay into Social Security. Many/most state employees are excluded from participating in Social Security--the States in their infinite wisdom decided long ago that they would rather roll their own rather than submit to the tyranny of federal control.
chrismealy 13y ago
He's mostly right about low interest rates, but you can wait decades for interest rates to do what you want them to do.
samstave 13y ago
0) I have no money.
webwright 13y ago
This is missing something that I think is (literally) the most important change since the baby boomers: job tenure. People used to stay at their jobs for decades or their entire lives. Nowadays, what's the average job tenure? 2 years or less in tech, a touch more outside of it. So how much do you want to constrain your next job search to a commute-radius of your home (hint: research the relationship between commute distance and happiness before you answer)? People are more mobile nowadays. My rule of thumb with real estate is "If I can't rent it out for more than the mortgage + 1% of purchase price (avg. maintenance), I will not buy a house". (disclosure: I own two homes with mother-in-law apartments-- both are currently rented and profitable while I travel the world for bit)
mberning 13y ago
Or 10 reasons why it is a great time to buy a cheap house. I bought a roughly ~$100k home back in 09 which I could now rent for about $800-900 per month. There is a nice little house on a smaller lot right around the corner listed for only $65k. For somebody like me that has a decent income and decent credit the opportunities to buy nice little rental properties and make a tidy rental income have never been better it seems.
- codex_irl 13y ago
  What part of the country do you live in? I bet it is not in the SF bay area ;-)
  - virmundi 13y ago
    Probably not, but not everything is the Bay. I'm moving to Florida. I plan to buy a house that is 30k. Small bungelow. Just me, the wife, the dogs and a cat. At the same time I plan on buying a 55k fixer-upper. The first I should be able to pay in cash. The second, won't get bought until my current home sells. However, that second house, once improved (by us: we do flooring, plumbing, painting and simple eletrical) should value at 160k. Once we move to the fixed house, we'll rent the other for 500 a month. Should be doable since my wife is currently in FLA in a 300 sq/ft studio at 500 a month. I purposely didn't want to go to the Bay for this reason. I avoid California at all cost for this reason. My long term plan is to startup a tech firm, hire college grads, train them and try to keep them with the company for 5+ years. Hard, but doable. The nice thing is they can get 45k a year, and get a pretty nice home/environment that would be hard to beat. So we'll see, but again the Bay really matters in the HN echo chamber.
- olalonde 13y ago
  Wow, my apartment in China is only 800$/month but it's worth 370,000$. I really wonder why people keep buying real estate in China. I guess they are hoping to make money from the increasing value of properties rather than the rent.
  - twoodfin 13y ago
bradleyland 13y ago
When I read this, I can feel the pull of confirmation bias pushing me to nod my head in agreement, but my skeptical side longs for more citation. The author makes many claims of fact in this article, but offers no citations to back them up. For example: > Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. Aren't there statistics available that show housing inventory levels over time? I can't refute the claim, because I don't know where to find those statistics, but I'm skeptical of claims provided without citation. The entire thing seems very rational, but I'm reminded of the quote, "The market can remain irrational longer than you can remain solvent." I wish there were more citations to back up the facts. Maybe I'll do some of the footwork myself.
- twoodfin 13y ago
  Agree. And where are the indications that interest rates will rise substantially any time soon? I'm not saying that's impossible, but this piece seems to take it as an article of faith that we're in a period of unsustainably low rates.
  - dxhdr 13y ago
    http://mortgage-x.com/images/graph/fhfb_contract_rate.gif http://mortgage-x.com/images/graph/fhfb_contract_rate.gif We are in unprecedented territory here, interest rates have never been this low. Is it sustainable? Who knows. Given history I'd be more inclined to believe it's not.
    - twoodfin 13y ago
      Doesn't that chart contradict the article? Home prices didn't decline from 1960 to 1980, as interest rates climbed dramatically: http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/ http://www.multpl.com/case-shiller-home-price-index-inflatio... There's obviously some relationship there, but it's not as clear cut as this article makes it out to be.
  - wonnage 13y ago
icefox 13y ago
If there was ever an article that needed a [citation needed] this would be it. There are so many statements that are either flat out wrong, but something people like to believe to things that are only right in some locations. bla, flagged
- prawks 13y ago
  Care to list a few of the things that are flat out wrong for those not as knowledgeable?
  - notahacker 13y ago
    Fairly early on he states that where rents are typically 3% of house prices and interest is typically 4% of a house price "it costs more to borrow the money as it does to borrow the house". Except that interest is 4% of the house price in $YEAR_PURCHASED per annum, and the rental rate is 3% of the house's value in $CURRENT_YEAR per annum so the comparison isn't very meaningful except in the short term: the mortgage payment is a fixed cost whereas the rental rate is a variable that will tend to rise over the course of a 25 year mortgage unless there's something very strange going on with the regional housing market or US inflation and economic growth. Even at modest rates of inflation the total cost of interest paid over the course of a mortgage will tend to be lower than the total cost of renting over the same period (even without accounting for nominal appreciation in house values); whether the additional cost of renting is a reasonable premium for not incurring the risks of owning that home is another matter
    - prawks 13y ago
      Makes a lot of sense, thanks!
adaml_623 13y ago
I don't know the US housing market very well but I think anybody discussing the national market as a whole is talking through their hat. Different areas are massively different and are going to react differently to stimuli like rate changes.
- 300bps 13y ago
  Different areas are massively different and are going to react differently to stimuli like rate changes. I agree with the first half of your sentence and disagree strongly with the second half. In many ways, a house works like a bond. The price moves inversely with the interest rate. This is because, for most people, what determines affordability is the monthly payment. There are two factors involved in monthly payment: 1. Amount borrowed 2. Interest rate Consider someone that can afford a monthly payment of $2,000 per month. That means that they can afford: $541,097 borrowed @ 2.00% $474,328 borrowed @ 3.00% $418,922 borrowed @ 4.00% $372,563 borrowed @ 5.00% $333,583 borrowed @ 6.00% $300,615 borrowed @ 7.00% $272,566 borrowed @ 8.00% You can see how the price of the house someone can afford is pushed down as interest rates go up. And here's the thing - the affordability population is a bell curve. Once you get above a certain payment per month, there aren't enough people above to replace the people disappearing below. That is, there are fewer people that can afford a $3,000 per month payment than can afford a $2,000 per month payment. The bottom line? The article is spot on. You don't buy a house when interest rates are low and expected to go up.
  - kjackson2012 13y ago
    You likely won't get high interest rates like 8% unless you have higher inflation rates. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased.
    - 300bps 13y ago
      I happen to be an expert on this topic (i.e. I work as the technology person on a fixed income trading desk managing $28 billion of assets including a few billion in mortgage backed securities). You likely won't get high interest rates like 8% unless you have higher inflation rates This is completely wrong. The only thing preserving low interest rates is the Fed purchasing mortgage backed securities (see http://www.newyorkfed.org/markets/mbs_faq.html http://www.newyorkfed.org/markets/mbs_faq.html). When that stops, interest rates will go up dramatically. You could argue that the Fed will only stop doing that once inflation kicks in but that is not true. The Fed is on extremely thin ice as it is now. They're only supposed to purchase and sell Treasuries for their open market operations (http://www.federalreserve.gov/monetarypolicy/openmarket.htm http://www.federalreserve.gov/monetarypolicy/openmarket.htm) and manipulating the mortgage market is significantly outside of their charter. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased. There are literally millions of possibilities that could happen that don't fit your theory. Never heard of stagflation? My goal is not to write a dissertation in an HN comment so that's enough for me.
corresation 13y ago
There are a perilous lack of actual facts backing this up (and some red flags disclaimers like "in expensive areas". What does that even mean from a statistical perspective). For instance I would instant call bullshit on the rent versus owning notion based on basic economics (when rents are less than the price of the mortgage, people don't rent out houses. The notion makes absolutely no sense). Even more indicting is the description of the nationwide market as a singular, when there are enormously different realities across the nation.
- AnIrishDuck 13y ago
  > when rents are less than the price of the mortgage, people don't rent out houses. The notion makes absolutely no sense So they're just going to let the house sit empty? Buying/selling a house is a long term proposition because of transaction costs. Partially covering a mortgage payment temporarily is better than not recovering it at all. If the rent payments can't cover the mortgage, they're probably going to take a hefty loss on sale, if they can sell the house at all.
  - corresation 13y ago
    Awesome, so show me (I don't literally demand that you do, but rather mean anyone) actual data of rents that are lower than corresponding mortgages. Anecdotal evidence is very, very much to the contrary.
    - huherto 13y ago
      It would be useful to be able to compare the rental market with sales market to get a good idea if the houses are good to buy or not. But I have no idea how to monetize such a thing.
    - AnIrishDuck 13y ago
      Examples are rare, because they require a perfect storm of market conditions. I'm not challenging that, just the notion that it "makes no sense". If you don't have enough equity to cover your loss on a sale, it absolutely can make sense to take a small hit on recurring mortgage payments.
toddmorey 13y ago
I think the madness won't end until we stop looking at housing as an investment vehicle. Housing is an expense. We're all renters to some extent. Even when I own my home "in the clear," I'll continue to have tax and maintenance obligations forever. There's also a very real lifestyle component. If it's a purely fiscal decision, we should all be renting in Dayton, Ohio. That's why these sorts of articles drive me nuts. He's assuming equal inventory across renting vs. leasing. There are six people in my family, and the local home rental market doesn't support those numbers, at least not in the area where we want to live. In other markets, our only sane options would be renting. EDIT: I should clarify that I mean owner-occupied housing. You can certainly make money in real estate that you can leverage; properties that you can rent or sale. (Still, as an investor, I have yet to add any real estate.)
- rtpg 13y ago
  I've always been confused about the housing as investment idea. We don't consider cars to be an investment either do we? I feel like the idea can only help to drive the prices up further.
  - snowwrestler 13y ago
    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.
    - rtpg 13y ago
      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
      - snowwrestler 13y ago
        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.
jpadkins 13y ago
a low probability, high impact tidal wave could be the switch to remote working. If remote working catches on in corporate america, it will wipe out the value of a lot of homes in higher priced areas.
varelse 13y ago
This looks like the same set of points Patrick has been making since before the bubble burst. They're all great rules of thumb. And all bubbles pop eventually, but the problem is that it's very hard to predict exactly what pops them and when it will happen. So in retrospect, it would have been a terrific idea to buy a house in SF in mid-2009 and then sell it now. But if you followed Patrick's advice, there's no way you would even consider doing so. And bluntly, if you're a hacker, you probably should follow Patrick's advice. SF is the land of perma-renters. Paying too much rent now and moving when the current bubble pops and/or sticking around long enough for the Ellis Act to make your apartment a bargain both seem like better strategies than speculating to me. Focus on what you're good at to pay the rent in the short term. It's the people whose brains are wired into local and national real estate markets who stand a decent chance of knowing when to buy or sell, many, not all, of them realtors. Now if you can give people a better finger on the pulse of this market, go for it. Zillow, Trulia, and Redfin need not apply - their attempts at property valuations are wacko.
- hackula1 13y ago
  Buy when people around you say the market sucks. Sell when people say it is awesome. This goes for real estate and basically anything else.
  - varelse 13y ago
    And that's just it, Patrick is mostly a perma-bear. So trotting out his recommendations when the market is stupid up makes him seem more sagely than I personally think he is. When I used to participate in his online forum, it seemed to me that his main objective was to eliminate the mortgage interest and property tax deduction immediately so it would trigger an immediate crash in the market and allow anyone with cash on the side to clean up. Whatever floats your boat of course, but that seemed a pretty reckless plan to me. That said, reforming said deductions gradually is probably sensible, just not all at apocalyptically once.
penguat 13y ago
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, they can buy outright in 20 years. Is a typical mortgage 40 years?
- karl_gluck 13y ago
  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.
  - penguat 13y ago
    I don't make any assumptions about that 8% - I used the figure and the assumptions from the original article. If you rent, and put the difference into a savings account, then using the assumptions from the article, you'll be able to buy a house outright in 20 years. I think you're pretty much agreeing with that..? I am of course assuming that interest rates (or other return on investment), house prices, inflation and salary increases are all sensible, going in the same direction at the same rate, or near enough. If you put your money in a pure tracker (e.g. tracking the Dow Jones, FTSE 100, or similar index), then you'll probably be better off in the long term, perhaps able to buy outright in a little less time.
nsxwolf 13y ago
If you have a family, there are benefits to setting down roots and buying a house. When you rent, you never know what the future holds. The owner might want to sell the property at some point and not renew your lease. This becomes a very disruptive life event for children. Homeowners of course do relocate for other reasons, but it tends to be on their own terms and not someone else's.
- sailfast 13y ago
  This changes quite quickly if the homeowner is living in a home worth less than their mortgage (underwater - can't move) or if they can no longer afford to pay their mortgage (have to move / declare bankruptcy). Having to shift to another rental property is a relatively small jump by comparison unless you have to shift school districts due to lack of inventory. How much risk would you take on to ensure your landlord can't kick you out?
- VLM 13y ago
  "This becomes a very disruptive life event for children." Between the ages of 6 and 12, maybe. Below that age they don't really notice or care, above that age the coverage area for middle and high schools is so immense that if you move out of the coverage area it was intentionally. There are eleven thousand household units in my kids high school. Seriously claiming I wouldn't be able to rent a single one? The worst case scenario would be kids around 10 and you live in an elementary district that has precisely one apartment building or perhaps only one (perhaps illegal?) private house rental. The long term effects of financial devastation to the family are probably worse than having to go to a different school "Well, you can't go to college because we don't have the money anymore to help because we stayed in our upside down house back when you were in 3rd grade; but on the bright side we didn't have to move to the apartment complex on the other side of the elementary school district" The argument is identical to if you rent an apartment while going to university, in theory you might have to drop out of that university and transfer to another if you need to move and no one will rent to you. Very few people indeed report this tragedy..
seuhong 13y ago
No time is a good time to buy a house, never buy.
creativestuff 13y ago
Considering the interest rate is lower than the inflation, what would be some other items to invest $100k to generate some guaranteed income? (except stock, where you could also lose money)
- karl_gluck 13y ago
  You make a pretty big assumption here: that anything you can invest in to earn money passively CAN be guaranteed. What you mean by "generate guaranteed income" is "to allow me to grow my investment". After all, investing $100k in a house that loses 10% of its value is worse than just keeping the $100k in dollar bills. In fact, if it is still worth $100k nominal down the line means you lost 2-3% per year on your investment. So after mortgage, property tax, maintenance, and everything else, your renters would have to cover about 7-9% of your home's value every year for you to make a 2-3% margin. What I've found is that the reward is always proportional to the risk--otherwise people invest in it until it isn't proportional anymore. Please investigate this for yourself, but personally, I take a two-way split-risk strategy to grow my investments: - Very high risk, very high reward investments that I thoroughly research and believe extremely strongly in, using money I can afford to entirely lose. - Very conservative investments in indexing ETFs that have rock-bottom annual fees and decent dividends. Here's an article you might find interesting: http://www.npr.org/2013/06/05/188306471/resisting-the-temptation-to-win-when-investing http://www.npr.org/2013/06/05/188306471/resisting-the-tempta...
- sadkingbilly 13y ago
  In order of risk: - Online savings @ 0.80% (Risk is loss of purchase power) - I-Bonds @ 1.18% (Risk is loss of purchase power) - CDs @ 2% (Risk is early withdrawal penalty + lock-in) - Bonds @ 3% (Risk is drop in value) - Stocks @ 4%+ (Risk is drop in value)
njharman 13y ago
I bought a duplex 4 years ago. With rent from other side my total (taxes, insurance, mortgage) has been ~$500 (1/2 to 1/3 of what I could rent for. PLUS I've gotten tax benefits, and $250/mo equity. When I buy a house shortly, the duplex will start making $500/mo + ever increasing equity amount. Until I decide to cash out. Property/land is one of the most available avenues to wealth. But, it's no silver bullet. If you are an idiot and/or and/or make poor choices you will probably loose. No different than any other business, endeavor or purchase. Property is so varied geographically, price bracket, types of property, condition of property, even seasonally, that blanket statements "Don't buy expensive house" lack any relevancy.
- r00fus 13y ago
  Are you factoring in maintenance? Depending on the age and quality of the construction, you might be looking at big issues lurking under the radar (ie, plumbing, roof, etc). When we bought our duplex, the house inspector didn't really go into an amazing depth of detail, I wish we'd had more focus on the foundation (sometimes acts like a sump - solution is a french drain estimated @ $5-10k).
  - mdip 13y ago
    I hear you on the house inspection. As a naive first-time buyer, I was told over and over again to get an inspection and I did. And, all-in-all, it was a waste of $300. The roof was more damaged than I was led to believe, and there were several huge "code" violations with the plumbing and electrical. Luckily, I have family handy-men who taught me how to correct these problems myself and on the cheap. If you decide to pay for a home inspection in the future, make sure you don't use one that is recommended by your realtor (facepalm). The "maintenance" issue is often misunderstood and the costs are different depending on if you live in the home or are renting it out to someone else. Case in point, my furnace started failing a few years ago. I could have fixed it on a Saturday afternoon for a hundred or so (it was made in 1986 -- they were not particularly sophisticated devices back then). If I wasn't living in the house, I would have gone this route. Instead, due to the $250/month heating bill to keep my house at a cool 65 in the winter coupled with the availability of generous tax credits, I upgraded the A/C and furnace. I now keep my home at 75 degrees and pay $80 in the coldest months of the winter. Most of the problems I've run into have a similar theme. I could have gotten another few years out of my roof with patch work ($~100), but I replaced it because I wanted a better looking (and functioning) roof ($3000). I had a water tank problem that, I discovered, wasn't even failing -- the temp was just set too high. ($0) Due to tax credits and a desire to run more than one device that consumes hot water, I replaced it. ($800) People who are afraid of the unpredictability of these costs can purchase insurance (read the fine print and no, it's usually not a good deal). And a lot of the really expensive repairs that you hear about have more to do with people failing to inspect their home regularly, themselves (get in the attic, watch the way the water drains when it rains, etc). It's a lot cheaper to fix a downspout/gutter that's imperfect than it is to solve a foundation issue that creeps up as a result of water affecting the stability of the ground around a basement. The article doesn't really apply to where I live. If you're renting out here, it's at a set of suburban-ish apartment complexes (900sq. ft. 2br, 1ba $800) or extremely low-end houses usually in undesirable neighborhoods vs a dearth of single family homes around 1400 sq. ft, 3br, 1.1 or 2 ba with basement space not included in the square footage. While there are homes in the million plus range, they're huge or have something that's highly unique about them (like a million dollar light house[1], supposedly the only one in Michigan that can be privately owned -- and even that's been sitting on the block for two years with the offering price dropped from 1.5 million). [1] http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-port-sanilac-michigan-1599000/ http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-por...
laurent123456 13y ago
Shouldn't the post be renamed "10 Reasons it is a Terrible Time to Buy an Expensive House, in the US"? It sounds like a general article but it's really only about the US.
- simonebrunozzi 13y ago
  This is true for most things on HN.
- VLM 13y ago
  If you research housing bubble related issues, its currently worse outside the US "in general". Canada, China, Europe, India especially, Dubai, Australia...
snowwrestler 13y ago
There's a lot of good technical advice here on pricing real estate, but it's colored by an absolute dislike/mistrust of debt. Ultimately you have to ask yourself whether you see debt as a form of slavery, or as a financial tool that you can use to your advantage. If it's the former, you probably should not buy a house. If it's the latter, it might make good sense to buy a house (even an expensive one) depending on the conditions.
kyllo 13y ago
So you're supposed to put at least 20% down on a house that costs no more than 3x your annual salary, and only buy when interest rates are high, home prices are low, and rents are high. Easier said than done!
nbuggia 13y ago
Most people don't buy a house for investment, they buy it because they have reached a point in their lives where they want to settle down and live someplace with their kids for 10+ years. In that world, I think you can simplify things quite a bit. First, buying a house is more of a hedge against inflation than an investment. The market goes up? You've got more equity to move somewhere else. The market goes down? Well, you lose money, but everything else is cheaper too. For the average person, I think the real lesson here is to make sure you can afford the house, put 20% down and it is within x2-3 your annual income. If you live in low-supply/high-demand markets like Seattle, SF, then you might end up paying more, and it is just a trade off you need to make.
encoderer 13y ago
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-buy/ 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.
taopao 13y ago
If you can pay off the mortgage quickly, the low interest rate discount works in your favor.
mdlevinson 13y ago
Prop 13 affects the baby boomer point in California. Even with huge amounts of equity tied up in their homes, older people can't afford to sell because their tax bill when they downsize will dwarf the gains they make by cashing out. Also, the fact that their kids can inherit their tax basis (a grossly unfair dynastic tax benefit that should be repealed) makes people do whatever they can to stay in their homes. The result: that much less supply, higher prices, and the young subsidize the old and rich with their property taxes.
codex 13y ago
It's a fantastic time to buy an expensive house. Interest rates are so low due to the Fed that money is essentially free. I will be keeping my 30 year mortgage for the next 30 years.
sAuronas 13y ago
Nice post...I wish you had talked about market disruption and the failure of cities as agencies of change. The realtors' lock on transactions and the lack of transparency in the marketplace is one issue. The antiquated and closed-source zoning standards are another. And the building industry in general, hindered by trade unions, et al, is yet another. Just like disrupting Hollywood would (might) get us better movies, disrupting the RE industry will (might) eliminate overbuilding (and under-building, where applicable) and stabilize prices.
pathikrit 13y ago
I bought a 1-bedroom condo for $500k in downtown SF and put 20% down payment. The monthly mortgage+HOA+tax is around $2500 and I am renting the place out for $2650. So you can say it is paying for itself and 15-years later I will own the place without paying anything but the down payment. Not bad?

185 points by huherto 13y ago

I read this on patrick.net years ago-- a lot of it is quite outdated now. Basically the housing market nationwide is quite strong. Whether it will last is another question. Just one example of the article's outdatedness-- the jumbo mortgage market is doing great now: http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-to-save-as-jumbo-mortgages-are-cheapest.html http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-t...

Semiphore 13y ago

Unless it's in NYC and you got the rates right when they were at the bottom. Article is very useful, but it's one of those that gives 'here are x reasons'. Yes, but come up with determining how to make a decision instead

BetaCygni 13y ago
Did you read the article? It actually has some nice rules of thumb on how to compare the price of a house to the rent.

tootie 13y ago

He kinda ignored supply and demand.

nilkn 13y ago
Point 6 in the article is about supply and demand.
kevjiang 13y ago
Rental prices are based on supply and demand, except for in a few cases (for example, rent control). That's why he suggests using rental prices as a way to check how reasonable a house price is.

badman_ting 13y ago

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.

minimax 13y ago
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.
- dxhdr 13y ago
  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, increased wages could help make up for the gap. Wages do not have to rise with interest rates (stagflation).
  - minimax 13y ago
    I understand the theory, but when I look at the data it looks like: http://research.stlouisfed.org/fred2/graph/?g=mth 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.
    - VLM 13y ago
      More like very early 80s. On the other hand, the price of everything more than doubled in the 70s due to stagflation.
- 13y ago

jpmattia 13y ago

It's worth noting that patrick was among the few active bloggers that noticed the housing bubble early. Ben at the thehousingbubbleblog, calculatedrisk were two others. Folks that were paying attention and shorted the banks made some money. But of course: this time is different, broken clock, and <insert your financial cliché here>, etc etc.

eloisant 13y ago
Also you can find people saying everything and its contrary. Retrospectively you'll always find people who "predicted" any up or down in the market. That doesn't mean they will get it right the next time. Or it would be too easy, just find the guy who got it right once and you can predict the future!
hackula1 13y ago
Sharpshooter fallacy is my favorite.
muzz 13y ago
The more salient part is the broken clock. CalculatedRisk changed his opinion as the facts changed (he is data-driven, and one of the best blogs out there). Patrick.net has essentially been a perma-bear on real estate. While that view was correct at one point in time, he never changed his view significantly when the facts completely changed.
- jpmattia 13y ago
  > CalculatedRisk changed his opinion as the facts changed (he is data-driven, and one of the best blogs out there). I should have emphasized this point myself. Also, the CR comment board used to be of HN quality, but for economics and housing. (Lately, not so much.) If you follow one econ blog, I'd heartily recommend CR: http://www.calculatedriskblog.com/ http://www.calculatedriskblog.com/ I will note though for the topic at hand: CR has commented that there is little correlation between interest rates and house prices[1]. I believe he has neglected that most of the data from which that statement is derived had interest rates (and borrowing standards) out of range compared to where we are now. [1] http://www.calculatedriskblog.com/2013/06/house-prices-and-mortgage-rates.html http://www.calculatedriskblog.com/2013/06/house-prices-and-m...

amanfredi 13y ago

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

envex 13y ago
Plus renting is basically flushing your money away each money opposed to building equity in something over time.
- minimax 13y ago
  This argument only makes sense when home prices stay flat or go up, which isn't always the case. I'd rather be "flushing my money away" each month than get stuck tens of thousands of dollars underwater on a mortgage.
- addflip 13y ago
  Actually if you read the article he argues otherwise. Don't fall into the banks mentality. > If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.
- huherto 13y ago
  Same thing happens when you pay interest. Either you rent the money or you rent the house.
  - mikeash 13y ago
    And in a lot of places, rent can actually be quite a bit cheaper than interest + taxes + whatever other costs borne by the owner. This was especially true at the height of the bubble. I was paying 6% interest on a place that would have rented for about what the interest alone cost me. So I was paying as much as rent would have cost in interest, plus taxes, plus condo fees, plus losing out on the ability to earn interest on the money I had put in for the down payment. On the other hand, I'm now paying ~3.4% interest on a place that would rent for, again, about 6% of the purchase price per year. Even including other costs, I'm coming out decently ahead. Of course there are other reasons to own rather than rent (or vice versa) aside from just which costs more, like stability, or freedom to move. But it is not a slam dunk easy decision as to which option costs less, even after accounting for the potential equity you build when owning with a mortgage.

jonnathanson 13y ago

Some very solid points about the market in general, but I wonder how several of these points (particularly the points about oversupply, baby boomers, etc.) apply to places like SF or Manhattan. SF, in particular, seems to be extremely young (though that could be observational bias on my part), well-monied, in sharp undersupply of housing, with rent matching or in some cases exceeding the cost of a mortgage. Historically, it's been a boom-and-bust sort of town as far as housing prices are concerned. And there are always places like the East Bay and the Peninsula to capture some of the demand. But it's not as if the Peninsula is cheap these days, so Oakland seems the more likely candidate to take on the burden (which then raises a thorny question of where all the low-income Oaklanders go when the gentrification accelerates). But it's conceivable that SF basically becomes the Mahattan of the Bay Area, a playground for the rich, while everyone else gets pushed into the outlying boroughs and beyond. In such a scenario, where money is little object to the buyers determined to own in SF, what happens to pricing? I don't know anyone who owns a home in SF right now who doesn't think the current prices are insane. (Anecdote: one friend just bought a condo in a new building, and three months later, the closing price for a lesser unit in the same building was $200k higher than what he'd paid for his). But are they actually going south anytime soon? Also: while mortgages and interest rates are great indicators for the housing market in general, SF seems to have an unusually large supply of cash buyers. In conclusion: I'm not disagreeing with the article, nor am I bullish on the local housing market. I don't fully understand why it's behaving the way it is, and that's never a great sign. But superficially, it seems to be the sort of "microclimate" that doesn't track the aggregate US market very closely. How many of these enclaves of wealth does the US have, or will it have, that seem to have a low to zero beta w/r/t the overall market? And if it's a significant amount, when will speaking in aggregate terms start to lose a bit of meaning? On a related note, I'd love to see a comparison of urban vs. rural vs. suburban areas across the US. I suspect that concentrated urban centers are obeying very different laws of physics, so to speak, than suburbs and semi-rurals with their huge tracts of overbuilt housing inventory. Example: I used to live in LA, and when the press spoke about how hard-hit LA was during the housing crash, they painted with a pretty big and sloppy brush. The surrounding areas (Inland Empire, etc.) got the plague, but housing in LA proper barely registered a slight cough.

cyanbane 13y ago

kfk 13y ago

As we are on the topic, which percentage of your salary going to pay up rent would you consider "sane"? Edit: I mean post tax. It's a cultural thing, in Italy we don't ever consider the gross salaries.

blencdr 13y ago
Mortgage is 34% post tax salary (for the couple). the interest for the loan is 3.05% (fix interest). Do you in Italy have more fix or moving interest rate ?
benjaminwootton 13y ago
0%. I saved up and bought the cheapest house I could for cash escape the high cost of rent around London. I can now save double quick for my longer term house. It's a short term pain living in a small flat with a long commute, but the strategy will hopefully pay off in the long run with all of the rent and mortgage interest avoided.
GotAnyMegadeth 13y ago
15% of my post-tax wages go towards rent EDIT: That's 11% of my pre-tax wage
- kfk 13y ago
  That is very low. In Munich most people are in the 30-50%. I was in the 17%, but that's just because most of my rent is paid out by the company I work for. Otherwise it would be around 30%.
  - caw 13y ago
    Where I live in the US I'm at 30% post-tax. I could probably get this down to about 20%, but I'd be adding on an hour or more of commute each way, and I'm in a pretty desirable part of the city.
  - hackula1 13y ago
    50% of a tech industry salary going to rent is pretty scary.

ajays 13y ago

"Because the housing bubble was not driven by supply and demand." .... except in San Francisco. Everyone wants to live here, and Facebook, Twitter, etc. are turning out paper millionaires by the bushel. Expect the house prices to tick up again once Twitter IPOs. There is some construction now[1] (just walk down Market street from the Castro), but I think the number of techie millionaires being minted seems to exceed the number of dwellings under construction. Plus: there is the externality of outside money. I've heard of buyers from PRC paying cash down, sight unseen, for properties in desirable neighborhoods [2] [3]. A lot of the analysis such as the one in this article assumes a somewhat closed market; but outside money flowing in can change the dynamics significantly. [1] http://sf.curbed.com/archives/2013/07/25/the_40_most_notable_new_developments_currently_under_construction.php http://sf.curbed.com/archives/2013/07/25/the_40_most_notable... [2] http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-spend-billions-on-american-real-estate/ http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-... [3] http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-buyers-flocking-to-peninsula/Content?oid=2184205 http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-b...

talmand 13y ago
I would say the housing bubble was driven by supply and demand, just not traditional home-buying supply and demand. Houses were being treated as day-to-day commodities, which is bad for people who wish to actually live in houses and not make money off of them. I was in Vegas during the start of the housing bubble and all I saw were investors buying houses to flip immediately for big profit selling to other investors who thought the same. Anyone who actually wanted to buy a house to live in was required to get caught up in a risky mortgage option that left many of them in serious problems when their house was suddenly worth less than half of what they owed on it. We looked at a house at the start of the decline and offered $50,000 less than asking. They laughed at us and we stopped bothering to look. Less than a year later the same house was for sale for more than $100,000 less than our offer. The realtor who showed us houses later moved out-of-state so she could earn a living. Someone I knew told me about his friend that bought a house, did bare updates to it, and sold it within a month for nearly a $100,000 profit. He was gleeful at the idea you could do such a thing. I told him that was good for his friend but incredibly bad for everyone else in the city. About a year or so later I was shown to be correct beyond my worst doomsday predictions. I'm seeing the same things I saw in Vegas starting again.

untilHellbanned 13y ago

Think this is all true, but when will any of these points be recognized by the masses? Never? 5 years?

DamnYuppie 13y ago
Hopefully not until after my house sells ;)

debacle 13y ago

I hadn't considered the impact of #3, even though I knew it was a reality. Being in a position to buy a new house but not take advantage of low interest rates (because I don't want a long amortization on the mortgage), it actually makes little sense to buy right now except maybe if I planned to leverage a diminished equity in a different market. #6 seems somewhat tinfoil-hatty. Does anyone have some data to back up #7? > Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. ...and we went off the deep end. #9 is incredibly specious. Why would retired people sell? Where are they going to live? #10 is very true, however it's so difficult to trust a new home builder. Even if you know what bad construction looks like, it takes an immense amount of effort to ensure that everything is done properly and you'll probably be adding 20% onto your cost just to babysit the construction.

huherto 13y ago
#9 They will probably try to downsize. Or they can do a reverse mortgage, but I don't know how that would affect the market.
rhplus 13y ago
#9 is incredibly specious. Why would retired people sell? Where are they going to live? If a person is physically able, then a smart option is to move to a small apartment in a location close to services and shops. Downsizing reduces unnecessary energy costs, taxes, maintenance, yard work, etc. Based on my city, the equity in a median suburban home could easily pay 15 years of rent without investment, maybe 25 - 30 with really good investment. If there's physical support required, then an apartment in the massively booming "Retirement Living" industry might be a good choice. Here's an example that costs ~$4,500/month, meaning you could probably pay 10 - 15 years after good money management from the sale of a median suburban house in these markets: http://www.retirement.org/financial-info/home-cost-calculator/ http://www.retirement.org/financial-info/home-cost-calculato... The other option is to sell the house now to investors and use the equity to support living and healthcare costs. Then you simply move out at a more convenient later date (i.e. when you die): http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_comes_due_3 http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_...
13y ago

josefresco 13y ago

Point 8 is an important element of the last (or current depending on your outlook) housing bust. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald: "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize." Important to remember that for every homeowner over-stretching to buy their dream house is another home-seller making a healthy profit.

eloisant 13y ago

Rent vs buy really depends (1) what's your down payment and (2) how long you're going to stay in your house. If you have a high downpayment, and in the extreme case buy your house in cash, you don't have to pay any interest. You can take into account the revenue you could have got from your capital, but nowadays you can't get much without taking pretty big risks. Then there's the long term. If you end up staying 30 years in the same house, buying is cheaper. Depending on your local market, the number of years you need to stay in house to make up for the purchasing fees (interests, taxes, etc.) is different. It's this number you need to find out. Of course when the real estate price was going up fast, the increase in value made it up pretty quickly so buying was an easy choice. That's no longer the case, you need to do the math. So it's not whether it's universally better to buy or rent. It all depends on your local market, your downpayment, and how long you're willing to stay in your new house.

jonmb 13y ago
Right. This calculator is helpful: http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://www.nytimes.com/interactive/business/buy-rent-calcula...
- twoodfin 13y ago
  It's been said a few times in this thread, but you have to remember to make this calculation on equivalent properties. In a perfectly functioning market, there'd be no difference between "rental" inventory and "owner-occupied" inventory, but in practice there are often qualitative differences between the two, and if you value certain characteristics you will likely have to buy. EDIT: Also, don't forget to change the "marginal tax rate" option under "Advanced Settings...Other..." Mortgage interest deductibility is (rightly or, as I think, wrongly) a substantial ownership subsidy, particularly for high-earners.
  - fluidcruft 13y ago
    To add to your point, I live in a suburb/city that effectively bans rentals by making property taxes extremely expensive if the property is not both owner-occupied and a primary residence (homestead taxes). This is coupled with widespread HOA agreements that explicitly ban renting/subletting to not-close-relatives. The unsurprising effect is that higher income families live here and the cost of running the schools is consequently low. There are some other suburbs, but in that case you're committed to private schooling of your kids.

ambiate 13y ago

It is important to weigh in many factors. The easiest to grasp is debt to income ratio. (Debt/Income)100. Student loans, phone bills, internet, netflix, insurance, etc. Tally it all in. Divide it by your monthly income. For example: $650 student loans,$100 cellphones,$90 car insurance,$300 food,$250 gas,$150 electric (average over 12 months),$80 water/sewage/trash ---- $1620 ($1620/$4000) 100 = 40.5% recurring debt to credit ratio Note: Most lenders do not factor in utilities. You should. They will let you drown. It is always wise to take your Good Faith Estimate and refactor your d/c ratio. $1620 recurring,$350 mortgage,$120 home insurance,$150 taxes,$80 mortgage insurance ---- $2320 (2320/4000)*100=58% 42% of your income remains to be spent on fed taxes, benefits at work, non recurring debt, random quirks of life. I really think 2x Household salary is pushing the limit of what you can afford. Vehicles break, pipes bust, utilities are going to have fees/unexpected jumps, people get sick, etc, etc. Don't waste your life preparing for the unknown. Just don't dig yourself into a hole that you can't swim out of once the floods come.

eloisant 13y ago
I don't know, if shit hits the fan you can change your utilities budget. Change your cellphone plan to a prepaid, take the bus instead of your car, eat ramen everyday instead of going to the restaurant... But when you have debt, you can't just decide not to pay this month or you really get in trouble.

vermontdevil 13y ago

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.

fluidcruft 13y ago
Rent pays property tax, too. It's indirect, but it gets paid.
- umsm 13y ago
  The problem is that it's a bit disproportionate. A 1000 sq ft apartment will not have the same amount of taxes as a 1000 sq ft home.
- VLM 13y ago
  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.
  - fluidcruft 13y ago
    In every state I have lived, school retirement and health plans were handled at the state level. Hoping districts isn't going to shield you from your state government. The school districts pay into state plans as directed by the state legislature. It's the state legislature that's on the hook for the unfunded liabilities, not the school districts. School districts only make the equivalent of social security payments. And it's not like the employees aren't playing into the system the same way that private sector employees pay into Social Security. Many/most state employees are excluded from participating in Social Security--the States in their infinite wisdom decided long ago that they would rather roll their own rather than submit to the tyranny of federal control.

chrismealy 13y ago

He's mostly right about low interest rates, but you can wait decades for interest rates to do what you want them to do.

samstave 13y ago

0) I have no money.

webwright 13y ago

This is missing something that I think is (literally) the most important change since the baby boomers: job tenure. People used to stay at their jobs for decades or their entire lives. Nowadays, what's the average job tenure? 2 years or less in tech, a touch more outside of it. So how much do you want to constrain your next job search to a commute-radius of your home (hint: research the relationship between commute distance and happiness before you answer)? People are more mobile nowadays. My rule of thumb with real estate is "If I can't rent it out for more than the mortgage + 1% of purchase price (avg. maintenance), I will not buy a house". (disclosure: I own two homes with mother-in-law apartments-- both are currently rented and profitable while I travel the world for bit)

mberning 13y ago

Or 10 reasons why it is a great time to buy a cheap house. I bought a roughly ~$100k home back in 09 which I could now rent for about $800-900 per month. There is a nice little house on a smaller lot right around the corner listed for only $65k. For somebody like me that has a decent income and decent credit the opportunities to buy nice little rental properties and make a tidy rental income have never been better it seems.

codex_irl 13y ago
What part of the country do you live in? I bet it is not in the SF bay area ;-)
- virmundi 13y ago
  Probably not, but not everything is the Bay. I'm moving to Florida. I plan to buy a house that is 30k. Small bungelow. Just me, the wife, the dogs and a cat. At the same time I plan on buying a 55k fixer-upper. The first I should be able to pay in cash. The second, won't get bought until my current home sells. However, that second house, once improved (by us: we do flooring, plumbing, painting and simple eletrical) should value at 160k. Once we move to the fixed house, we'll rent the other for 500 a month. Should be doable since my wife is currently in FLA in a 300 sq/ft studio at 500 a month. I purposely didn't want to go to the Bay for this reason. I avoid California at all cost for this reason. My long term plan is to startup a tech firm, hire college grads, train them and try to keep them with the company for 5+ years. Hard, but doable. The nice thing is they can get 45k a year, and get a pretty nice home/environment that would be hard to beat. So we'll see, but again the Bay really matters in the HN echo chamber.
olalonde 13y ago
Wow, my apartment in China is only 800$/month but it's worth 370,000$. I really wonder why people keep buying real estate in China. I guess they are hoping to make money from the increasing value of properties rather than the rent.
- twoodfin 13y ago

bradleyland 13y ago

When I read this, I can feel the pull of confirmation bias pushing me to nod my head in agreement, but my skeptical side longs for more citation. The author makes many claims of fact in this article, but offers no citations to back them up. For example: > Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. Aren't there statistics available that show housing inventory levels over time? I can't refute the claim, because I don't know where to find those statistics, but I'm skeptical of claims provided without citation. The entire thing seems very rational, but I'm reminded of the quote, "The market can remain irrational longer than you can remain solvent." I wish there were more citations to back up the facts. Maybe I'll do some of the footwork myself.

twoodfin 13y ago
Agree. And where are the indications that interest rates will rise substantially any time soon? I'm not saying that's impossible, but this piece seems to take it as an article of faith that we're in a period of unsustainably low rates.
- dxhdr 13y ago
  http://mortgage-x.com/images/graph/fhfb_contract_rate.gif http://mortgage-x.com/images/graph/fhfb_contract_rate.gif We are in unprecedented territory here, interest rates have never been this low. Is it sustainable? Who knows. Given history I'd be more inclined to believe it's not.
  - twoodfin 13y ago
    Doesn't that chart contradict the article? Home prices didn't decline from 1960 to 1980, as interest rates climbed dramatically: http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/ http://www.multpl.com/case-shiller-home-price-index-inflatio... There's obviously some relationship there, but it's not as clear cut as this article makes it out to be.
- wonnage 13y ago

icefox 13y ago

If there was ever an article that needed a [citation needed] this would be it. There are so many statements that are either flat out wrong, but something people like to believe to things that are only right in some locations. bla, flagged

prawks 13y ago
Care to list a few of the things that are flat out wrong for those not as knowledgeable?
- notahacker 13y ago
  Fairly early on he states that where rents are typically 3% of house prices and interest is typically 4% of a house price "it costs more to borrow the money as it does to borrow the house". Except that interest is 4% of the house price in $YEAR_PURCHASED per annum, and the rental rate is 3% of the house's value in $CURRENT_YEAR per annum so the comparison isn't very meaningful except in the short term: the mortgage payment is a fixed cost whereas the rental rate is a variable that will tend to rise over the course of a 25 year mortgage unless there's something very strange going on with the regional housing market or US inflation and economic growth. Even at modest rates of inflation the total cost of interest paid over the course of a mortgage will tend to be lower than the total cost of renting over the same period (even without accounting for nominal appreciation in house values); whether the additional cost of renting is a reasonable premium for not incurring the risks of owning that home is another matter
  - prawks 13y ago
    Makes a lot of sense, thanks!

adaml_623 13y ago

I don't know the US housing market very well but I think anybody discussing the national market as a whole is talking through their hat. Different areas are massively different and are going to react differently to stimuli like rate changes.

300bps 13y ago
Different areas are massively different and are going to react differently to stimuli like rate changes. I agree with the first half of your sentence and disagree strongly with the second half. In many ways, a house works like a bond. The price moves inversely with the interest rate. This is because, for most people, what determines affordability is the monthly payment. There are two factors involved in monthly payment: 1. Amount borrowed 2. Interest rate Consider someone that can afford a monthly payment of $2,000 per month. That means that they can afford: $541,097 borrowed @ 2.00% $474,328 borrowed @ 3.00% $418,922 borrowed @ 4.00% $372,563 borrowed @ 5.00% $333,583 borrowed @ 6.00% $300,615 borrowed @ 7.00% $272,566 borrowed @ 8.00% You can see how the price of the house someone can afford is pushed down as interest rates go up. And here's the thing - the affordability population is a bell curve. Once you get above a certain payment per month, there aren't enough people above to replace the people disappearing below. That is, there are fewer people that can afford a $3,000 per month payment than can afford a $2,000 per month payment. The bottom line? The article is spot on. You don't buy a house when interest rates are low and expected to go up.
- kjackson2012 13y ago
  You likely won't get high interest rates like 8% unless you have higher inflation rates. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased.
  - 300bps 13y ago
    I happen to be an expert on this topic (i.e. I work as the technology person on a fixed income trading desk managing $28 billion of assets including a few billion in mortgage backed securities). You likely won't get high interest rates like 8% unless you have higher inflation rates This is completely wrong. The only thing preserving low interest rates is the Fed purchasing mortgage backed securities (see http://www.newyorkfed.org/markets/mbs_faq.html http://www.newyorkfed.org/markets/mbs_faq.html). When that stops, interest rates will go up dramatically. You could argue that the Fed will only stop doing that once inflation kicks in but that is not true. The Fed is on extremely thin ice as it is now. They're only supposed to purchase and sell Treasuries for their open market operations (http://www.federalreserve.gov/monetarypolicy/openmarket.htm http://www.federalreserve.gov/monetarypolicy/openmarket.htm) and manipulating the mortgage market is significantly outside of their charter. So someone who makes 2000/month right now, by the time the Interest rates increase to 8%, their salary would have Also increased. There are literally millions of possibilities that could happen that don't fit your theory. Never heard of stagflation? My goal is not to write a dissertation in an HN comment so that's enough for me.

corresation 13y ago

There are a perilous lack of actual facts backing this up (and some red flags disclaimers like "in expensive areas". What does that even mean from a statistical perspective). For instance I would instant call bullshit on the rent versus owning notion based on basic economics (when rents are less than the price of the mortgage, people don't rent out houses. The notion makes absolutely no sense). Even more indicting is the description of the nationwide market as a singular, when there are enormously different realities across the nation.

AnIrishDuck 13y ago
> when rents are less than the price of the mortgage, people don't rent out houses. The notion makes absolutely no sense So they're just going to let the house sit empty? Buying/selling a house is a long term proposition because of transaction costs. Partially covering a mortgage payment temporarily is better than not recovering it at all. If the rent payments can't cover the mortgage, they're probably going to take a hefty loss on sale, if they can sell the house at all.
- corresation 13y ago
  Awesome, so show me (I don't literally demand that you do, but rather mean anyone) actual data of rents that are lower than corresponding mortgages. Anecdotal evidence is very, very much to the contrary.
  - huherto 13y ago
    It would be useful to be able to compare the rental market with sales market to get a good idea if the houses are good to buy or not. But I have no idea how to monetize such a thing.
  - AnIrishDuck 13y ago
    Examples are rare, because they require a perfect storm of market conditions. I'm not challenging that, just the notion that it "makes no sense". If you don't have enough equity to cover your loss on a sale, it absolutely can make sense to take a small hit on recurring mortgage payments.

toddmorey 13y ago

I think the madness won't end until we stop looking at housing as an investment vehicle. Housing is an expense. We're all renters to some extent. Even when I own my home "in the clear," I'll continue to have tax and maintenance obligations forever. There's also a very real lifestyle component. If it's a purely fiscal decision, we should all be renting in Dayton, Ohio. That's why these sorts of articles drive me nuts. He's assuming equal inventory across renting vs. leasing. There are six people in my family, and the local home rental market doesn't support those numbers, at least not in the area where we want to live. In other markets, our only sane options would be renting. EDIT: I should clarify that I mean owner-occupied housing. You can certainly make money in real estate that you can leverage; properties that you can rent or sale. (Still, as an investor, I have yet to add any real estate.)

rtpg 13y ago
I've always been confused about the housing as investment idea. We don't consider cars to be an investment either do we? I feel like the idea can only help to drive the prices up further.
- snowwrestler 13y ago
  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.
  - rtpg 13y ago
    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
    - snowwrestler 13y ago
      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.

jpadkins 13y ago

a low probability, high impact tidal wave could be the switch to remote working. If remote working catches on in corporate america, it will wipe out the value of a lot of homes in higher priced areas.

varelse 13y ago

This looks like the same set of points Patrick has been making since before the bubble burst. They're all great rules of thumb. And all bubbles pop eventually, but the problem is that it's very hard to predict exactly what pops them and when it will happen. So in retrospect, it would have been a terrific idea to buy a house in SF in mid-2009 and then sell it now. But if you followed Patrick's advice, there's no way you would even consider doing so. And bluntly, if you're a hacker, you probably should follow Patrick's advice. SF is the land of perma-renters. Paying too much rent now and moving when the current bubble pops and/or sticking around long enough for the Ellis Act to make your apartment a bargain both seem like better strategies than speculating to me. Focus on what you're good at to pay the rent in the short term. It's the people whose brains are wired into local and national real estate markets who stand a decent chance of knowing when to buy or sell, many, not all, of them realtors. Now if you can give people a better finger on the pulse of this market, go for it. Zillow, Trulia, and Redfin need not apply - their attempts at property valuations are wacko.

hackula1 13y ago
Buy when people around you say the market sucks. Sell when people say it is awesome. This goes for real estate and basically anything else.
- varelse 13y ago
  And that's just it, Patrick is mostly a perma-bear. So trotting out his recommendations when the market is stupid up makes him seem more sagely than I personally think he is. When I used to participate in his online forum, it seemed to me that his main objective was to eliminate the mortgage interest and property tax deduction immediately so it would trigger an immediate crash in the market and allow anyone with cash on the side to clean up. Whatever floats your boat of course, but that seemed a pretty reckless plan to me. That said, reforming said deductions gradually is probably sensible, just not all at apocalyptically once.

penguat 13y ago

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, they can buy outright in 20 years. Is a typical mortgage 40 years?

karl_gluck 13y ago
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.
- penguat 13y ago
  I don't make any assumptions about that 8% - I used the figure and the assumptions from the original article. If you rent, and put the difference into a savings account, then using the assumptions from the article, you'll be able to buy a house outright in 20 years. I think you're pretty much agreeing with that..? I am of course assuming that interest rates (or other return on investment), house prices, inflation and salary increases are all sensible, going in the same direction at the same rate, or near enough. If you put your money in a pure tracker (e.g. tracking the Dow Jones, FTSE 100, or similar index), then you'll probably be better off in the long term, perhaps able to buy outright in a little less time.

nsxwolf 13y ago

If you have a family, there are benefits to setting down roots and buying a house. When you rent, you never know what the future holds. The owner might want to sell the property at some point and not renew your lease. This becomes a very disruptive life event for children. Homeowners of course do relocate for other reasons, but it tends to be on their own terms and not someone else's.

sailfast 13y ago
This changes quite quickly if the homeowner is living in a home worth less than their mortgage (underwater - can't move) or if they can no longer afford to pay their mortgage (have to move / declare bankruptcy). Having to shift to another rental property is a relatively small jump by comparison unless you have to shift school districts due to lack of inventory. How much risk would you take on to ensure your landlord can't kick you out?
VLM 13y ago
"This becomes a very disruptive life event for children." Between the ages of 6 and 12, maybe. Below that age they don't really notice or care, above that age the coverage area for middle and high schools is so immense that if you move out of the coverage area it was intentionally. There are eleven thousand household units in my kids high school. Seriously claiming I wouldn't be able to rent a single one? The worst case scenario would be kids around 10 and you live in an elementary district that has precisely one apartment building or perhaps only one (perhaps illegal?) private house rental. The long term effects of financial devastation to the family are probably worse than having to go to a different school "Well, you can't go to college because we don't have the money anymore to help because we stayed in our upside down house back when you were in 3rd grade; but on the bright side we didn't have to move to the apartment complex on the other side of the elementary school district" The argument is identical to if you rent an apartment while going to university, in theory you might have to drop out of that university and transfer to another if you need to move and no one will rent to you. Very few people indeed report this tragedy..

seuhong 13y ago

No time is a good time to buy a house, never buy.

creativestuff 13y ago

Considering the interest rate is lower than the inflation, what would be some other items to invest $100k to generate some guaranteed income? (except stock, where you could also lose money)

karl_gluck 13y ago
You make a pretty big assumption here: that anything you can invest in to earn money passively CAN be guaranteed. What you mean by "generate guaranteed income" is "to allow me to grow my investment". After all, investing $100k in a house that loses 10% of its value is worse than just keeping the $100k in dollar bills. In fact, if it is still worth $100k nominal down the line means you lost 2-3% per year on your investment. So after mortgage, property tax, maintenance, and everything else, your renters would have to cover about 7-9% of your home's value every year for you to make a 2-3% margin. What I've found is that the reward is always proportional to the risk--otherwise people invest in it until it isn't proportional anymore. Please investigate this for yourself, but personally, I take a two-way split-risk strategy to grow my investments: - Very high risk, very high reward investments that I thoroughly research and believe extremely strongly in, using money I can afford to entirely lose. - Very conservative investments in indexing ETFs that have rock-bottom annual fees and decent dividends. Here's an article you might find interesting: http://www.npr.org/2013/06/05/188306471/resisting-the-temptation-to-win-when-investing http://www.npr.org/2013/06/05/188306471/resisting-the-tempta...
sadkingbilly 13y ago
In order of risk: - Online savings @ 0.80% (Risk is loss of purchase power) - I-Bonds @ 1.18% (Risk is loss of purchase power) - CDs @ 2% (Risk is early withdrawal penalty + lock-in) - Bonds @ 3% (Risk is drop in value) - Stocks @ 4%+ (Risk is drop in value)

njharman 13y ago

I bought a duplex 4 years ago. With rent from other side my total (taxes, insurance, mortgage) has been ~$500 (1/2 to 1/3 of what I could rent for. PLUS I've gotten tax benefits, and $250/mo equity. When I buy a house shortly, the duplex will start making $500/mo + ever increasing equity amount. Until I decide to cash out. Property/land is one of the most available avenues to wealth. But, it's no silver bullet. If you are an idiot and/or and/or make poor choices you will probably loose. No different than any other business, endeavor or purchase. Property is so varied geographically, price bracket, types of property, condition of property, even seasonally, that blanket statements "Don't buy expensive house" lack any relevancy.

r00fus 13y ago
Are you factoring in maintenance? Depending on the age and quality of the construction, you might be looking at big issues lurking under the radar (ie, plumbing, roof, etc). When we bought our duplex, the house inspector didn't really go into an amazing depth of detail, I wish we'd had more focus on the foundation (sometimes acts like a sump - solution is a french drain estimated @ $5-10k).
- mdip 13y ago
  I hear you on the house inspection. As a naive first-time buyer, I was told over and over again to get an inspection and I did. And, all-in-all, it was a waste of $300. The roof was more damaged than I was led to believe, and there were several huge "code" violations with the plumbing and electrical. Luckily, I have family handy-men who taught me how to correct these problems myself and on the cheap. If you decide to pay for a home inspection in the future, make sure you don't use one that is recommended by your realtor (facepalm). The "maintenance" issue is often misunderstood and the costs are different depending on if you live in the home or are renting it out to someone else. Case in point, my furnace started failing a few years ago. I could have fixed it on a Saturday afternoon for a hundred or so (it was made in 1986 -- they were not particularly sophisticated devices back then). If I wasn't living in the house, I would have gone this route. Instead, due to the $250/month heating bill to keep my house at a cool 65 in the winter coupled with the availability of generous tax credits, I upgraded the A/C and furnace. I now keep my home at 75 degrees and pay $80 in the coldest months of the winter. Most of the problems I've run into have a similar theme. I could have gotten another few years out of my roof with patch work ($~100), but I replaced it because I wanted a better looking (and functioning) roof ($3000). I had a water tank problem that, I discovered, wasn't even failing -- the temp was just set too high. ($0) Due to tax credits and a desire to run more than one device that consumes hot water, I replaced it. ($800) People who are afraid of the unpredictability of these costs can purchase insurance (read the fine print and no, it's usually not a good deal). And a lot of the really expensive repairs that you hear about have more to do with people failing to inspect their home regularly, themselves (get in the attic, watch the way the water drains when it rains, etc). It's a lot cheaper to fix a downspout/gutter that's imperfect than it is to solve a foundation issue that creeps up as a result of water affecting the stability of the ground around a basement. The article doesn't really apply to where I live. If you're renting out here, it's at a set of suburban-ish apartment complexes (900sq. ft. 2br, 1ba $800) or extremely low-end houses usually in undesirable neighborhoods vs a dearth of single family homes around 1400 sq. ft, 3br, 1.1 or 2 ba with basement space not included in the square footage. While there are homes in the million plus range, they're huge or have something that's highly unique about them (like a million dollar light house[1], supposedly the only one in Michigan that can be privately owned -- and even that's been sitting on the block for two years with the offering price dropped from 1.5 million). [1] http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-port-sanilac-michigan-1599000/ http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-por...

laurent123456 13y ago

Shouldn't the post be renamed "10 Reasons it is a Terrible Time to Buy an Expensive House, in the US"? It sounds like a general article but it's really only about the US.

simonebrunozzi 13y ago
This is true for most things on HN.
VLM 13y ago
If you research housing bubble related issues, its currently worse outside the US "in general". Canada, China, Europe, India especially, Dubai, Australia...

snowwrestler 13y ago

There's a lot of good technical advice here on pricing real estate, but it's colored by an absolute dislike/mistrust of debt. Ultimately you have to ask yourself whether you see debt as a form of slavery, or as a financial tool that you can use to your advantage. If it's the former, you probably should not buy a house. If it's the latter, it might make good sense to buy a house (even an expensive one) depending on the conditions.

kyllo 13y ago

So you're supposed to put at least 20% down on a house that costs no more than 3x your annual salary, and only buy when interest rates are high, home prices are low, and rents are high. Easier said than done!

nbuggia 13y ago

Most people don't buy a house for investment, they buy it because they have reached a point in their lives where they want to settle down and live someplace with their kids for 10+ years. In that world, I think you can simplify things quite a bit. First, buying a house is more of a hedge against inflation than an investment. The market goes up? You've got more equity to move somewhere else. The market goes down? Well, you lose money, but everything else is cheaper too. For the average person, I think the real lesson here is to make sure you can afford the house, put 20% down and it is within x2-3 your annual income. If you live in low-supply/high-demand markets like Seattle, SF, then you might end up paying more, and it is just a trade off you need to make.

encoderer 13y ago

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-buy/ 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.

taopao 13y ago

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

mdlevinson 13y ago

Prop 13 affects the baby boomer point in California. Even with huge amounts of equity tied up in their homes, older people can't afford to sell because their tax bill when they downsize will dwarf the gains they make by cashing out. Also, the fact that their kids can inherit their tax basis (a grossly unfair dynastic tax benefit that should be repealed) makes people do whatever they can to stay in their homes. The result: that much less supply, higher prices, and the young subsidize the old and rich with their property taxes.

codex 13y ago

It's a fantastic time to buy an expensive house. Interest rates are so low due to the Fed that money is essentially free. I will be keeping my 30 year mortgage for the next 30 years.

sAuronas 13y ago

Nice post...I wish you had talked about market disruption and the failure of cities as agencies of change. The realtors' lock on transactions and the lack of transparency in the marketplace is one issue. The antiquated and closed-source zoning standards are another. And the building industry in general, hindered by trade unions, et al, is yet another. Just like disrupting Hollywood would (might) get us better movies, disrupting the RE industry will (might) eliminate overbuilding (and under-building, where applicable) and stabilize prices.

pathikrit 13y ago

I bought a 1-bedroom condo for $500k in downtown SF and put 20% down payment. The monthly mortgage+HOA+tax is around $2500 and I am renting the place out for $2650. So you can say it is paying for itself and 15-years later I will own the place without paying anything but the down payment. Not bad?