Exactly….Feb. MLS shows King County appreciation at 14% YOY….that’s double what this article states as the min. appreciation required for buying to be better then renting.

Tim, thanks for pointing out so clearly why the smart $ has been on buying.

My, oh my…how things have changed in 18 months.

I miss ‘Shug. Those were good times.

The government has already instituted a plan to let people walk away from their homes without claiming any loss as additional income. This could be the fresh start that people need. The Mortgage Debt Relief Act of 2007 provides for this.

Previously, if a bank sold a foreclosed home for less than the mortgage balance, i.e. a short sale, then the borrower had to pay tax on the difference as if it were income. Now that is not the case.

This puts the problem on the banks, who made the loans in the first place.

The banks will of course, write off the losses, which means that the government is paying for it in the form of lost tax revenues already.

People tend to think of their homes as “their biggest investment” when it comes time to justify spending 40% or even 60% of their gross income on a home. They look back at home appreciation and view it as a “can’t lose” endeavor. When called on the foolishness of reaching beyond their grasp, they shift to how a home is a place to live, and they “have to live somewhere.”

Which is it?

If it is an investment, then treat it as such. The difference between a good home and a good investment is the price you paid for it. If you are paying peak prices at the end of an unprecedented runup in home appreciation, then you might want to look at other “investments” that were purchased “at the peak.” Look back to the stock market action in ‘00-02 and see how they performed.

The NAZ 100 (Big Cap Tech) was the “Seattle” of equity asset classes. As asset class after asset class lost value, people piled into the “safety” of the NAZ 100. Obviously, they “had to buy something” so they went for what was hot, or “special”, and never stopped to consider how they might be the last car in a massive 18 car pile-up.

I don’t know about you, but if I am watching my peers get clubbed, I’m likely to think that I am next, rather than immune. Call me a pessimist.

Look at SFH cap rates. Look at SFH rents. Look at the negative cash flow for landlords on SFH properties. Look at every other market in the country. Look at past bubbles and how they ended. Look at the finance mechanism for residential real estate (the banks are getting disemboweled on MBS issues). Look at the inventory and sales rates. Look at the foreclosures.

If you are buying a house for the purposes of living, then buy. You might want to rent and save a significant amount of money, but if you can’t look yourself in the mirror, then spend the extra 150% and buy. Just don’t be surprised to find that you owe a lot more than you have in equity and that your “biggest investment” is an illiquid, insolvent, expensive millstone that will hang around your neck.

Seattle isn’t special – just stupid and arrogant.

This is a real must have product for potetial home owners, especially in the current market climate.

You can download a 30 day free trial from the company web site. the product costs $9.

http://www.realorganized.com/realtyjuggler/calculator_info.html

I’m sorry to hear that you are getting pinched by the new lending standards. Hopefully, someone will fund this and you can get out.

Glad to hear you sold off your other properties. Hopefully, that was at a tidy profit.

I know what I saw when I was in the Navy, but did you see any of the same thing? My buddies in other squadrons all had the same stories to tell, so my guess is you did.

I think Kitsap is going to get gutted. There is no way that Silverdale can support those prices. Poulsbo, Bremerton, and Port Orchard are not any better.

It is nice to hear someone that has a mostly happy ending.

LT E

I’m the CPO that sold off all of my Kitsap properties….NONE were cash flowing (I had 12 houses). Anyway, my last home (personal residence) has been in limbo 3 weeks after the closing date was to have been. Reason is the lenders are canceling loan programs left and right with no notice. My buyer is an appraiser that did the appraisal on my last rental. She is on her 3rd lender, the first 2 canceled their programs.

Ready seller + ready buyer – lender crunch = no sale

I’m praying to God that this closes, I bought a used RV that I’ll be living in for a while until I find a good job. I haven’t found one yet, I am NOT commuting to Seattle again, I don’t care how much the salary is!

Currently I believe I will leave this wretchedly over price state for greener pastures.

Take care. Wish me luck in becoming a “new” renter.

Tony in Port Orchard

I’m not shocked that when you peek into someone’s finances, you see next to no savings. This is another reason that the impending credit bust/recession is going to be a real bitter pill for people and the nation as a whole.

Nobody has any reserves.

Here is an anecdote from me that many on SB have already heard:

Back in the day, I was the first stop a young enlisted man’s trip to the Commanding Officer’s office for a letter of indebtedness. It was usually related to the financing of a used car. If you go to just about any Navy town, you will find the worst elements of humanity all trying to put young military members into automobiles they can not afford. The salesmen know they can go to the service member’s commander and put additional pressure in that manner.

In Bremerton, I had some saleman think I was some country bumpkin looking for a car. He tried to finance a used Jeep at 38% interest. I’m not making that up. When I called him on it, and asked to speak to his manager, he disappeared in the back and didn’t come back out until I left the property.

When I was in my squadron, we had 78 officers at one point. 3 were making payments on a house.

Fast forward ten years…

Now, every mid-level enlisted man up through the Admiral is now buying real estate in Kitsap. These people transfer out quite often.

I know for a FACT that their homes do not cash-flow when they rent them out. Once this market turns on its head, there will be LOIs flying all over the place.

One of the quickest way for a service member, especially an officer, to lose his security clearance is to get into too much debt.

Can you imagine being the Weapons Officer on a Trident sub and losing your security clearance?

Same story…different financial trap…same ending…

Come back and see us. It was fun blogging with you.

E

Rhonda, you crack me up. Yes, I do see the 6% the majority of the time, but not 100% of the time.

Sellers listing their home typically do not budget for commission variations like 3.5/1.75 or 2.5 or 3.0/1.5 or 1.0–unless it is a very high end home. They budget for 6% straight. That number is in their brains to work from(the industry has done a good job of making it stick.)

The last home I sold in Edmonds I asked the listing agents we interviewed from Windermere, JLS, CBB and MacPherson’s if the commission was negotiable. All said yes–with the proverbial, weeelllll technically speaking, yes. I asked if they would sell the house for less than 6%. All said no.

Wreckingbull…thanks so much! I was bit relunctant to do the post…because the numbers can be toyed with from either side. And it has to be near impossible to create something that would factor possible apprecation/depreciation with homes and gains/losses of investments in the FUTURE…not to mention all of the “what if” this cost and factor in “that cost”…there are many variables. I did try to be fair to both sides and I did use an actual rental property and listing of similary values/qualities.

We’re all making our best, hopefully educated, guesses. If someone creates a guaranteed crystal ball…please let me know!

For the spreadsheet and the tables at the end, 6% RE fees + 1.78% Excise tax was used. If there are additional fees on the seller associated with closing, those were not factored in.

You could however download the spreadsheet and adjust the “Sales Fees” figure to higher than 6%.

To answer your question, the “home value” figures in the post are the sum of [appreciation] + [principal paid] + [down payment] – [capital gains tax (where applicable)] – [RE sales fees] – [excise tax].

So yes, the portion of the monthly mortgage payments that paid down principal is factored in.

For example: Excise tax is 1.78% of the sales price in most municipalities, 6% brokerage fees, title insurance, escrow fees, recording fees, reconveyance fees etc…it all adds up.

I would also like to say that Rhonda, you are a class act. I think both you and E are correct about the intoxicated parties in this mess. Mr. Greenspan has been the bartender. Now it is time for the hangover.

Baby Shug, your contributions to this blog are absolutely priceless. I hope they never stop, just like your 14%.

First, I should apologize for using the tax info from the listing. It must have been an error on the Realtors part or perhaps the property is receiving a senior discount…regardless, it’s not an accurate figure. I typically use 1.25% of the sales price to estimate taxes for potential buyers. That would increase the tax benefit to the home buyer shown in my example.

Q: Are you factoring in the equity the home owner is receiving from their monthly mortgage payments (gasp–savings plan)? Or is this just based off of appreciation?

I would also disagree with 7% agent brokerage fee…that is just as negotiable as the rent.

Lending while intoxicated…IMHO it’s not so much the lending industy who has scraped the bottom of barrel…more so it is Wall Street greed making huge returns off of risky loans. Yes, there are predatory loan originators…you’ll see them now advertising to get people out of their long term fix period ARMs smelling a chance to have a refi boom. I’m not that LO.

Also, I’m not sure why Ameican’s don’t save. I really enjoy reading how much the “bubble bloggers” save…honestly, before blogging, I have not met a lot of so-called savers. I see more bank statements and credit reports full of CRAP. So if a person can be “responsible” (key word)with having a mortgage…and now they think about “the American Dream” instead investing in more “beanie babies” or what ever floats (sinks) their boat, then it’s beneficial and it is a savings plan.
Before you bite my head off, I’m sure this does not apply to you. I’m totally speaking from what I see when I have to roll up my sleeves and go to work in the morning.

I guess my last question I’d like to ask…(since I’ve gone through the steps to create a eblogger account just to post this comment)…your information on saving money is great…why don’t more people do that?

Another one, look at this home on Zillow: 763 Vashon Pl NE WA 98059. This empty house has been on the market for one year, and yet somehow the DOM was never shown above 90 days. It is currently asked for 550K, the SAME price as last year!

And yet these are anecdotes during a banner year. Wait until the wave comes…

No wonder why study after study shows that over the long term, housing appreciation is just about inflation, give or take a few points depending on location/timing.

Forget history. We are on new plateau! Never mind that after about 5 years of 14% home price appreciation vs. 2% income increases there will be 5 people left in the country that can buy a house… Shuggy is rich!

Exactly….Feb. MLS shows King County appreciation at 14% YOY….that’s double what this article states as the min. appreciation required for buying to be better then renting.

Tim, thanks for pointing out so clearly why the smart $ has been on buying.

Great post!

A well-reasoned, objective, even-handed and thorough discussion of the topic that both bubble-believers AND perma-bulls should be able to understand.

Required reading for anybody visiting this site.