With a $120K downpayment, and 120K/yr. salary, I could afford a $520K home. Right now, in many areas on the Eastside, that’s not going to buy you much.

Let’s say I buy a $520K home now, and sell it in 10 years, making back my $520K. In the meantime, I’ve been paying for a $400K mortgage over the 10 years and am required to live in a home worth $520K in 2008.

Instead, say I wait 18 months and again, but a $520K home, but now it’s equivalent to a $720K home now. Again, after 8.5 years it will return to its 2008 value of $720K. So, again I pay a mortgage of $400K over 8.5 years and rent a reasonable place for the first 18 months. The benefits are:

a) I get to live in a really nice home for 8.5 years vs. an OK home for 10 years.

b) I am $200K ahead when I decide to sell or move up to a better place at the end of 10 years.

The disadvantages are you have to rent for 18 months, and your property taxes will (eventually) be higher.

Lots of people on here and on other sites seem to think that as long as you can sell a home for what you bought it for, then you’re doing great. So as long as you’re going to live there 10-15 years you should be safe. But there really is much more to consider than that.

When you buy a home which will probably drop 25% in the short term, you’re literally throwing away the 25% no matter when you sell. Obviously, if the 25% drop is going to occur gradually over 15 years or more, then you have other considerations like cost of rent. But in our current state, I don’t think the drop is going to take very long at all.

Anyhow, that’s my thought process. Not an expert in economics here, though.

Thank you.

Sally

http://www5.kingcounty.gov/kcgisreports/property_report.aspx?PIN=8081020130

Also if you have that 100K now and even wait for a couple of years (while prices come down by say 50K), even at a measly 2% interest you should still have 104K waiting to be plunked down as a down payment.

Interestingly enough I saw some foreclosed homes in kirkland and near houghton on redfin yesterday (dont see them today though, odd). Never thought that would happen.

Currently we are at 3.5% – 4% inflation, but our economic data has a 2-month lag..

Tim, I think assuming $100,000 down payment across the board makes the scenario unrealistic. I think it is realistic although perhaps generous to assume a 20% down payment in any given scenario and plug in the formula. Many people can only put up 10% these days… if they can even qualify for a loan.

That would make your predictions look like this:
Home price: $500,000
Down payment: $100,000
Interest Rate: 6.0%
Monthly Payment: ~$2,400

Home price: $450,000
Down payment: $90,000
Interest Rate: 7.25%
Monthly Payment: ~$2455.83

Home price: $400,000
Down payment: $80,000
Interest Rate: 9.0%
Monthly Payment: ~$2574.79

Home price: $335,000
Down payment: $67,000
Interest Rate: 12.0%
Monthly Payment: ~$2756.68

Home price: $290,000
Down payment: $58,000
Interest Rate: 15.0%
Monthly Payment: ~$2933.51

Home price: $260,000
Down payment: $52,000
Interest Rate: 18.0%
Monthly Payment: ~$3134.74

I agree that you can refinance into a lower rate, if and when that rate becomes available. I guess that many of the other speculators had the same sentiments when they got ARMs. You have to remember that refinancing does cost you on two fronts; the charges to refinance and also it extends the life of your loan and exponentially effects your total loan cost.

I think we are all trying to find that perfect combination between cost and interest rate. In thirty years we will know who was right!

Thanks Tim. I truly appreciate your insights and what you do here. Please do not take my critique as a cheap shot. I am just trying to plug in some scenarios that would “seem” to be more in line with scenarios the everyday public would encounter.

Pretend I offer you an investment that pays $12000/year. How much would you pay for this investment? The answer depends on what other investment opportunities are available to you. If the best alternative investment you can find only returns 4% then you would be willing to pay up to $300k. Any more than that and you are better off putting your money in something else. If the best alternative investment you can find returns 18% then you would only be willing to pay $67k for that investment. Any more than that and you are better off putting your money in the other investment.

Let N by the rent multiplier to purchase. 12/N gives you the rate of return (for twelve months of rent). 12/150=8%. 12/67=18%. 12/300=4%

Apply this to housing. Housing generates utility. For a landlord it generates rent. For a residence it generates ‘income’ in the form of rent that you don’t have to pay. You want to put your money in the place that generates the most return. If you borrow money at 18% you do not want to get an 8% return on that money. You would be much better off financially renting.

But that assumes that rents don’t go up. Some people might claim that rents will rise with rates. I argue that rents rise with wages and asset prices change with rates.

Of course in an 18% return environment we will likely be seeing 10% inflation and rents, wages, and housing prices will go up. But adjusted for inflation they will all remain mostly constant.

Just read “Who’s Your City?” or either of Florida’s “Creative Class” books. The low-skilled, low-paying jobs are here BECAUSE of the high-skilled, high-paying jobs in software and medical technology (to name 2 of our world class industries). And a substantial number of these jobs are going to immigrants with H1B visas – our fallen dollar makes real estate here comparatively cheap for them.

Sorry – I don’t have an answer to “affordable housing”. But the lack of affordable housing hasn’t prevented growth – and rising property costs – in any major world city that I’m aware of. It’s just that the solution for workers in…say, New York, London, Singapore, wherever…is to put up with what you would consider “unacceptable” living conditions, or else commute from greater distances.

My question is based on the fact that I just want to learn, okay?

If I am understanding things correctly, it appears conventional wisdom indicates that house prices should be about 150X monthly rent, right? How do you come up with the sales prices being 66X monthly rent with an 18% interest rate? Run the numbers for us, please. I just want to understand your logic.

That would be around an 80% drop from todays prices (adjusting for inflation).

The reason interest rates were so high in 1980 and 1981 was that inflation was running at around 10% to 14%. I’m no economist, but if we ever see that kind of inflation again it’s a whole new ball game IMO. I am a firm believer of the old adage “inflation is a real estate owner’s friend”.

Yes, I’ve also considered that Seattle would have fallen much, much harder at the beginning of the decade if it hadn’t become so much easier to qualify for a home loan.

I’ll admit I was in disbelief when in 2003-2004 friends of mine that had been laid off repeatedly during the dot com crash were buying homes after only a few months of stable employment. I had no idea that in a few short years, not only wouldn’t employment history matter, but neither would current employment status!

And that, is the the foundation of today’s prices. I think if there was any time in Seattle’s history where it could have become a ultra expensive haven for the affluent, it would have been before 2001. Economically, the city has just been playing catch up since then. Income growth in the Puget Sound region has been among the worst of any major metro area since then. If your idea is that the area is so desirable that it is attracting more low paid workers willing to scrape by for their chance to live in a “special” area, I’m not sure what to say.

In fact, I predict that rates on 30 year fixed conforming loans will not rise all that much at all over the next 5 years, but we will still see a signficant drop (i.e. over 30%) in over-all Puget Sound real-estate prices. That said, rates might shoot up even higher for Alt-A, or any form of non-conforming loan. Increasing numbers of people just won’t be able to qualify for any loan whatsoever, which will further drain the pool of buyers.

I could have gone higher to show the home price needed to bring the payment in line with interest rates up to 20%, but I decided to stop at a number near the upper end of what most people think is likely to be seen in the next few years.

It’s certainly possible that interest rates could shoot up to 18% in the next couple years, but it seems awfully unlikely to me. Just for the sake of completeness though, here you go:

Home price: $335,000
Down payment: $100,000
Interest Rate: 12.0%
Monthly Payment: ~$2,400

Home price: $290,000
Down payment: $100,000
Interest Rate: 15.0%
Monthly Payment: ~$2,400

Home price: $260,000
Down payment: $100,000
Interest Rate: 18.0%
Monthly Payment: ~$2,400

Is 48% off the peak price likely? Probably not. Is it totally inconceivable? Probably no less likely than 18% interest rates. Heck, some homes in the Seattle area are already listing at 38% off last year’s peak sale (see MLS #28074628 per waitingforseattletocool @ 24 above).

Of course, if interest rates go up to 18% again, I think most people are going to have other concerns than how affordable home ownership is.

There is a slight problem with your interest rate assumptions. In 1980 and 1981 our interest rates went as high as 18.45% How does that work in your formulas?

Here is a link to the historical data: http://www.freddiemac.com/pmms/pmms30.htm

Further analysis has corrected my previously incorrect assertions, and leads me to conclude that there are in fact 10 types of people in the world.

-Those that understand binary.
-Those that don’t.

Um, that’s only 1 category.

FWIW, just like Hyperbola we closed on a house on Mercer Island a couple of weeks ago. The sale was through a re-lo company, and the price was very aggressive. And the property is truly unique, and perfect for us. And I’m quite familiar with the area – and local market – I grew up 4 blocks away.

Some of the impassioned viewpoints on this blog appear similar to the “religions” in the stock market. You have “chartists” who examine minute changes in (admittedly poor) aggregate statistics. You have “fundamentals” folks who look at the historical price / rent relationship, and so on. And you have “sheep” who are basically looking for someone else to lead them (e.g. NAR or Housing Panic types). I find it ammusing that – while I think EVERYONE understands that “all real estate is local” – many folks on this blog like to correlate Atlanta, Las Vegas, Florida, or wherever to the Seattle area.

I’m curious – has anyone else on this blog read Richard Florida’s books? In my view, we in “Cascadia” are clearly living in a “spike” that has quite a few factors going for it that NONE of those other areas do. Here’s a thought for you – perhaps the Seattle area HAS fallen dramatically compared to where it WOULD have been if the national economic picture hadn’t changed! Of course, since nobody knows what prices would have been under that scenario, you’re not going to see any snappy graphics. The only way we’re going to know if this situation occured is to look back at prices in – say – another 5 years.

Or consider the stock market. As someone just pointed out, treasury bills have outshone the stock market if you merely compare the last 10-year period. But over the last 70 years the market has more than tripled the returns of bonds. Your money invested in bonds wouldn’t even keep up with inflation. Don’t forget that the comparison relies on you only investing all your money exactly at the beginning of the 10 year period, which was the height of the dot-com boom, not averaging your investments out over 10 years. But I suppose that’s too complex to make a point :-)

I wish I could remember who it was, but some investment banking guy said something like “I’ve been around this game for 30+ years, and done really well. But if I had a crystal ball I would have invested all my money in TIPS back in the late 70s when they were returning 10-15% and just rode that out forever.” His point being no one has a crystal ball and moves that look brilliant are usually only so obvious in hindsight.

Just like a full 75% of actively managed funds fail to beat the market consistently, most stock pickers, day traders and “I’ve shifted my funds to pork bellies) commentators will be wrong far more often than not when you look at their actual records, especially over any actual long-term period (10 years is the beginning of long-term, not the end of it) record. Not to mention trading costs and tax consequences.

Yes, there are no guarantees, but usually hiding your money on the sidelines or being overly invested in anything (bonds, golds, real estate) is how you either get burned or simply miss out on the long-term gains the overall market has historically returned. There was a stat bandied about recently that missing the 5 or 10 best days of the market (b/c you had all your money out on the sidelines) you forfeited a huge portion of the potential long-term gains of an investor who simply stayed invested during that time.

> How else do you propose we classify people into the only two categories that
> exist:

> 1) Idiots.
> 2) People that makes the same decisions as me.

That was hilarious :-)

I can’t brag that I have a HELOC. And it would seem silly to even talk about the concept and freedom that no debt provides on this forum.

Not to mention that if in 2 years you get transferred to Mobile, AL; no matter how much the value of your house goes down, it will still be 4 times the price of buying down South!!!!

Don’t laugh, it happened to me!!

At some point nearly all bubbleheads will take the plunge, and a different time will be the right time for each of us. It’s still too early for most of us, but the time will come.

> 1) Idiots.
> 2) People that makes the same decisions as me

There are only two kinds of people:
1. those who divide people into two kinds
2. those who don’t

How else do you propose we classify people into the only two categories that exist:

1) Idiots.
2) People that makes the same decisions as me.

I also find it funny how the people focusing on the coming home-pacalypse don’t want to talk about how bad the stock market would likely be in that scenario as well. Or how they’ll probably be out of a job too if all the Great Depression 2.0 scenarios turn out to be true. If it’s that bad everyone except the “perma-bears” who are almost always shorting the stock market (and have been wrong nearly all the time in the past) will be hosed. Who knows, maybe the bears will be hosed too because their stock market gains will be wiped out when they try and collect from bankrupt investment firms.

The world of economy is clearly pretty complex, and from everything I’ve read and learned it appears the best strategy is to keep investing, especially during the down-turns, because that’s when you get to “buy on the cheap”. That’s where my money is. I keep maxing out my 401k and IRAs, following the same asset allocation strategy I have for the past 5 years or so. I have 6 months of liquid savings and a “empty” HELOC as a cushion. I own a house we bought in 2002 for below the asking price that is well within our means (mortgage is fixed rate, PITI is <25% of income). That’s about all I can do. We take vacations instead of stock-piling cash. We aren’t shifting our 401ks to funds that short the market. I’m not taking our cash savings and moving them into Euros. We didn’t sell our house in 2007 at the “height of the market” and start renting. There are a million things you can do if the economy’s gonna collapse, but I’ll bet you’re wrong (or wrong about how it will impact people, including yourself) and so you’ll make the wrong move. And then who’s hurting?

Note that none of this means I think it’s a good or bad time to buy a house right now. As Hyperbola’s situation points out, the decision is a complex one that shouldn’t be boiled down into a “yes/no” decision from outsiders.

There is always room for debate.

I am guessing the ten year returns on the dow jones are why bubble commenters have quit telling people there money is better off in stocks.

http://www.djindexes.com/mdsidx/index.cfm?event=showavgstats

First, they can’t continue to lower interest rates. Have you noticed the price of oil?
Second, bailout legislation won’t change the risk to the banks.
Third, because risk has increased for the banks, exotic lending on real estate loans is history.

Nope, the most you can hope for is flat prices for five to ten years. What do you think will turn the tide for the worst hit areas? Speculation, again? Federal bailouts for people with no money? Banks taking risks again?

No it doesn’t, because rent is gross revenue, not earnings. You have to subtract expenses, i.e. taxes, insurance, maintenance, to get earnings.

That takes you down to below 6% earnings yield or above 16 p/e which is the absolute rock bottom for any investment which consists of renting capital.

but maybe 4% is the new standard

Kind of like the new paradigm? How did that work out?

.

If we had these things now, would you buy now?
You have 30 years to think about it.

I can only guess they had to get out for some reason. They may have seriously overpaid, but $1mm homes take on average 3-6 months to sell in almost any market so pulling the rip cord in 30 days makes no sense.

The sharp drop won’t happen because the government won’t permit it. They’re pulling out all the stops to prop up the real estate prices and soften the landing:

* Devaluing the dollar; allowing inflation to rise
* Dropping interest rates to the floor
* Federal bailouts for distressed owners, developers, and lenders
* Providing loan guarantees for riskier buyers than ever

Instead of a sharp correction, we will have a prolonged period of below-average performance in real estate prices. This means you can still lose money, and it will take a long, long time before your new home starts to look like a good investment. It’s a miserable time to be a buyer. I wish they’d just let it correct so we can buy at a fair market price.

* A home I know in West Seattle just went STI. The couple is going to lose at least $150k on it. Bought for $1,150,000 two years ago, listed now at $998k. These days, you CAN pay too much in Seattle. (MLS #28062008)

* I agree with Tim about his interest rate comment. If rates rise, prices will drop to compensate. If rates later drop, then you can refinance to the lower rate. In an environment where rates are rising, buyers should wait to let them have the price-dropping impact. (probably a few months) They will benefit.

Not for offering a “differing opinion”…more for entertainments sake.

He’s like our old pal Meshugy…but juiced up ad with an “edge”.

I knew that this site would eventually attract a bunch of pissed off “wanna be” homesellers who are sitting on investment property. What else are they going to say when their potential buyers are here at SB, collectively laughing in their faces at their dream prices and paltry reductions, while smugly wishing them “Best of luck” on their sale. (Not you Biliruben)

Biliruben was able to sell his house. What’s your excuse Mr. Rentersarelosers? Oh…yeah…you’re not just gonna *give* it away.

These comments have been getting GREAT lately!

That’s really funny Ira. I never had heard that one before. Yogi Berra had a way with words.

Grth,

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…………………………….

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he seems to bring only idiocy and aggression to the table.

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04/2007: 59,616
04/2008: 62,965

Despite the huge impact of the crash, the inventory numbers haven’t moved much in the past 12 months. That has to be due to optimism. People are under pressure, but just HAVE to believe that the market will turn around. That the losses CAN’T exceed 25 percent off median. All they have to do is hold on a bit more, and things will look brighter. Unfortunately for them, I just don’t see any economic force that will turn the tide. I think we are going to see much larger losses than most people predict over the next 18 months. Followed by steady double digit inflation. Simply because there is nothing stopping the ship. Having a warm fuzzy feeling about their home equity won’t do a "golly" thing.