http://morris.marginalq.com/DLM_fullpaper.pdf
http://www.realclearmarkets.com/HowFarWillHousingPricesFall.pdf

Different methods, same outcome – things are out of whack. Not sure it’ll answer your question directly, though the first one puts the historical average closer to 17:1 or 18:1 and not 15:1.

Could it actually be true that Eastsiders are less snotty than “crunchy” Seattlelites? It certainly seems that way to me. Wallingford-Fremont-Greenlake: the axis of ego. Anyways, good for you.

What would it cost to buy the place you are currently renting? Without the answer to that question, there’s no way to answer yours.

In this market, the rent vs. buying math is pretty overwhelming: renting almost always wins. With the possible exception of some of the overpriced rentals the big realtors are hawking.

You are right in that buying a home is something you do for the comfort and convience of your family…For the school system…for the extra room…for the status…..and after you buy you pour money into it…upkeep, taxes, additions, upgrading etc.

But you can’t excape the simple fact that it is also an investment…..You can but wisely and get all the things you want from your home and eventually get your money back out of it to buy an even better home…OR

You may be forced to sell because your employer has given you a huge promotion to Atlanta or you get laid off, or any number of other reasons. If you are under water on your house you will lose big-time….and be effected for years.

The bottom line is you can buy wisely or you can make a mistake that could haunt you for the rest of your life….

Rent for now…watch the prices and the economy and try to buy at the appropriate time.

Jcricket, you’re absolutely correct in your evaluation. It’s not as simple to say “always fund the XXX first”.

Take my situation. I’m married and firmly in the 33% tax bracket. I have a nice house, but it’s no mansion. In fact, my plan is to pay it off in under 15 years and move to a cheaper town, earn less money, have less stress, etc. In other words, it is my firm expectation that my future tax rate will be lower than my current tax rate.

Therefore, I am fully funding both 401Ks (31K a year) in order to bring my AGI down. Then, the home interest deduction adds up to enough to bring me below 33% and into the 28% bracket. The rest of my spare income is going towards paying down the mortgage at a higher rate than my 30 year payment.

Then when I move on and earn less money, I’ll do the Roth thing – I’m limited by my income right now. In fact, I believe that you can convert some IRA money to Roth IRA money starting in a certain year (2010?). Not sure of details. I’m considering taking a year or two off after the mortgage is paid off, and so those years would be excellent candidates to convert IRA money (from 401k) to Roth IRA money, with no contribution limits assuming the law doesn’t change. If I’m going to pay tax on my retirement contributions I’ll do it at a time when my tax rate is lower, and this is something I can plan for.

I don’t claim to have it all figured out, but just want to demonstrate that situations exist that require a little more than “always fund the Roth first” approaches.

A house is an investment because it is a place to live. You are making an investment when you spend money now to obtain a future benefit. The future benefit of owning a house, of course, is the value of the accommodation (market rent).

An investment is not something you buy just because you think you call sell it for more later. Many investments have no resale value at all.

“Just like consumers, who are insulating their windows and making fewer trips to the malls, we are adjusting our economic forecasts to the new high-oil-price reality, not to mention the latest round of trauma in the mortgage markets,” New York-based economists Sheryl King and Drew Matus wrote in a report.

The chart of the day shows the quarterly change in U.S. gross domestic product in green, with the annualized figure in red. Merrill now expects the economy to contract by 0.5 percent in 2009, after previously forecasting growth of 0.5 percent.

“We expect GDP to plummet 2.5 percent in the fourth quarter, and see a similar decline in the first quarter” of 2009, wrote King and Matus. “With the consumer likely to remain under duress into 2009 and inflation fears likely to abate, we continue to expect the Federal Reserve to cut interest rates early next year.”

To me, a house is not an investment. It is my home. It is the place I will live for as long as I wish, perhaps until I die.

I couldn’t agree with this more. Buy a house because you want a nice place to live, and make absolutely sure you can afford it. That is why I keep recommending the 50% rule: if you can’t afford to have your house depreciate 50% then you shouldn’t be buying.

If it turns out that a given person could NOT stomach a 50% price decline then it is also a sure-fire sign that they are buying more for investment reasons than just for quality of life issues.

1) Fund 401K to take full advantage of the company matching, 2) Fund ROTH IRA completely,

Which is different than fund the Roth first. And despite the 401k being “what your employer gives you”, you can always take it with you (roll into another 401k or into an IRA) whenever you leave – it’s never your company’s property. The only exception being that the company match might have to vest, but your contributions are always yours.

At any rate, many people do advise investing the way you say, but many do not. First of all, 401ks have no income limit. Second, the Roth is a hedge that your taxes will be higher in the future (which they may or may not). Third, 401ks have much higher limits than IRAs. And fourth there are now some employers offering Roth 401ks (further complicating the matter). The Roth, of course, has the advantage of allowing you to invest in anything, whereas your 401k choices are limited based on your employer’s plan… My point isn’t really to disagree fundamentally, but that it’s more complicated than “always invest in your 401k first” – it’s situational.

cricket, but unfortunately you won’t keep from commenting on others abilities when it comes to the markets, is there a chance they could do it better than you — heaven forbid.

It’s not “me” you’re claiming to do better than. It’s the market, and over time. I’d bet dollars to donuts that nearly all anonymous commenters on any Internet message board/forum who claim to regularly beat the market are simply lying, or choosing a very short time period where they are right. It’s like everyone who made a killing day trading during 1998 and 1999 (and then promptly lost their shirts in 2000 and 2001).

When you’re right over 15 or 20 years (btw, none of the currently cited permabears have been historically) then perhaps we can talk. I think Bill Gross and Warren Buffet (both buy and hold guys) are some of the few who can claim to have “beaten the market” for that length of time.

HA! I think that’s rationalisation no. 121 from the Delusional Realtors Handbook.
END QUOTE.

Disbielief, there is always rentals that are what you state. But 90% of them are kept as pure rentals which are cheap to build. When my partner built a 20 unit rental row in Edmonds his costs were 30% cheaper then if he was building them to sell. You could literally smell the carpet from outside it was so “fresh”.

So, anyway, buying stock wouldn’t have made a huge difference for, because I’d have been trying to make money there towards a house. I’d have more money that way when I was “ready” than I did, but houses still would have been so expensive that I would have said no.
And I am glad that I did. I am glad that I waited. Sometimes I think I should wait a little longer, to see if I could a similar house for a lower price, but I am also not one to pass up a reasonable opportunity when I feel like the time is right.

I’m not going to get into a pi$$ing contest here. And I don’t claim to have some kind of crystal ball – just some college-level econ, an internet connection and a sense of curiousity.

In 2003, I just found it really hard to swallow that I could get a $350k mortgage with 5% down. So I checked out John Talbott’s book, “The Coming Crash in the Real Estate Market.” It scared the hell out me (and that was in 2003, before things got really out-of-whack). Talbott makes an extremely well-reasoned argument for a crash in housing, predicts how it will start, and how it will play out. And he does it without being a gloom-and-doomer, without the hype.You might give it a read – his predictions about Fannie Mae, Freddie Mac, mortgage lenders, publicly-traded homebuilders, and the value of the dollar were absolutely dead-on.

And jcricket, I never said I rent a million dollar home for $1000/mo. I said that I pay $1300/mo for a house ‘valued’ at $715k on Zillow.

So I’ve made different choices than either of you. I see housing continuing its decline and Reagan-esque stagflation for years to come, and I’m trying to make the best of it.

And Mag44, to answer your question, the weather in Seattle tomorrow is going to be mostly cloudy with a high around 70F, with increasing darkness as evening progresses.

However, if you feel that it would be the end of your world if the house you buy were to drop 50% in value in 5 or so years of purchase, then you really should stay away from the market. The reality is that real-estate prices have been known to have significant swings both up and down, and you have to be prepared to handle that. At this particular point in time a substantial swing to the downside is the greater probability (seeing as how we just experienced the swiftest, and longest period of price appreciation in US history).

So, just look at your own financial situation and ask yourself if a 50% price decline is something you can stomach.

In your price range Maple Valley looks like a good place to eventually buy. If it is not too long a commute . The builders seem to be sitting on lots of new construction that they need to move….beautiful house’s on smaller lots in the $350 to $450 range (big houses in the 2600 to 2900 Sq ft range)

Jcricket – first of all; it’s a ROTH IRA, you keep it even if you change jobs. 401K is what your employer gives you. Secondly, that’s the advice given by financial advisers to most Americans, because of the tax benefit. 1) Fund 401K to take full advantage of the company matching, 2) Fund ROTH IRA completely, 3) If you still have money left over for retirement accounts, go back and put more on the 401K.

Nothing is 100% sure. You just do your best.

And by the way, it’s “principal” not “principle”.

Plenty of Monday morning quarterbacks here to join the ranks with, many here cant lose and pick everything just right.

Yep – the certainty of the investment wisdom passed out here (I love the advice to “always” fund Roth 401ks first – as if that’s a 100% given) cracks me up. As you said, the markets are down 15-20% on the year. If your money is in a CD/money market it’s not losing principle, but is being eaten up by inflation and taxes. But of course everyone who’s a firm believer in the coming apocalypse bought on the dips, sold on the highs, invested in Gold in 1980 and held it until now (despite 28 years of 0% returns), etc. Oh, and they live in million dollar homes for $1000/month and never get kicked out or see their rental rates rise.

I suspect that outside the boards, the doom-and-gloomers are like most of us – in that their financial story is one of a combination of luck and smarts.

We max out our 401k and IRA, live in our in-city home that we bought in 2002 and enjoy our low fixed rate mortgage. We got somewhat lucky with some dot-com options back in 2000, but continue to have skills that provide us a couple of high paying jobs (for how long, who knows?). Oh, and we contribute a fair amount to our kids’ 529 plans most years and have 6 months or so of emergency savings. Despite doing “all the right things” I have no guarantee my money will grow in the market (all index funds), I won’t be laid off, we won’t have to sell our house in a down market, etc.

As much as this uncertainty and the steady drumbeat of bad news freaks me out like it would anyone, I resist the urge to try and time the market by selling my house, moving my money into gold, oil, cash, etc. – from everything I’ve read that’s a sucker’s game. I’ll just keep plugging away, and refrain from thinking of myself as some kind of all knowing market genius.

And the fumes are running out, with higher interest rates likely coming to a theater near you soon.

I read somewhere that even a 2% increase in the “old” 5.5.% rate makes mortgage payments go up something like 50%; but I’m sure you bubble heads can rattle off the amortization formula exact % increase on a 30 year fixed for instance. Bear in mind, even the 5.5% “old” rate bearly kept the Seattle camp fire embers from fizzling out with $300-600K SFHs.

Down payments? 20% down has been like a carrot that keeps running from almost all the market [remember -5% savings rates just a year ago], by the time a small minority of potential 1st time buyers can save the like $100k; it now takes $120K, etc, etc…..why do you think they came up with 50 Yr fixed, zero down jumbos, ARM increases and/or interest only loans….and other subprime preditor traps? But don’t smirk now that home prices are adjusting downward, if you have the down payment cash; banks have tightened lending requirements, raised interest rates and if your money’s in a bank like Indy Mac [let's not go there]. But you may declare, “I’m different, I saved a bundle or inherited from Grandma”, etc, etc….doesn’t matter, the majority of the potential 1st time home owners, that can’t save enough in today’s tight money world, still dictate a continuing Seattle price decrease, irrespective of your minority status.

I was reading in Money magazine about an American household making $100K+ a year and sitting on a $300K home loan with $15K in their 401K; they were middle aged. Forget the house equity or depreciation, “how has that family prepared for retirement”? If you sink your last dollar in real estate and the Titanic sinks; let’s hope you have Civil Servant’s retirement plan……a million dollars in a 401K at 2-3% before taxes won’t pay the $300K noose loan.

Get the picture, you’ll never retire until you’re dead. Doing contract work and jumping from job to job chasing a few short term dollars won’t help, “you can’t save fast enough”.

Wachovia says it lost $8.86 billion in the second quarter, hurt by a big goodwill charge and an increase in reserves for bad loans as mortgage defaults soar.”

One banking expert had them on the banking “endangered list” last weekend.

Fantastic!!!! Just sit tight and keep saving aggressively for that down payment. Just think that, who knows, in 24-36 months you might be able to write a check for the full value of a house.

One piece of advice – Always fund ROTH IRAs first, then your 401K.

Best of luck!!

Greg Perry recently commented: “Value is more a feeling of satisfaction for the exchange of goods and services in relation to the $$ exchanged. Value is hard to quantify, but the consumer knows when they receive good value and when they don’t.”

We all perceive value differently. What is worth half your salary to you might only be worth a quarter of my salary to me, and vice versa. This big question around here is “when is the right time to buy a house?” The answer to this question depends on how you personally perceive value.

What do you really want out of life? Write it down on a piece of paper. Then figure out the house buying strategy that best fits your desires.

Buying a house right now with my limited down payment and income does not make sense relative to my ultimate desires. I should continue to save a down payment until next Spring and then re-assess the situation. For now, by waiting I’m able to continue saving for a down payment at the rate of $50k/yr. In addition, house prices will continue to fall between now and my next assessment period.

So make your own list, take your own test, and see where you land. I’m personally opposed to the concept of living well by borrowing large sums of money, thus paying the majority of my salary toward interest. I would much rather live frugally for a spell, save money, and buy with as much cash as possible. For me, it is not about how much a house costs per month. It is about how much I will earn over my lifetime and how much of that I will have to pay for a house. IOW, overall cost of ownership. YMMV

Maybe I’m totally off base here. I am from the east coast and even God I’m Old years later, it still weirds me out how casually forthcoming people are out here about this kind of personal financial data. I am often dubious that it helps anyone or that it serves a necessary rhetorical function. But I may be wrong! I may be a prude! Also, a friend of mine, a very young single schoolteacher, will be in the market for a condo as soon as the market settles down. In the meantime she’s doing research because she too is smart and thoughtful and disciplined, and I’d hate for her to feel like this site is not for her because her down payment doesn’t rate, that she is of lower caste.

Whats the weather going to be tomorrow dogwood?

Did you happen to be heavy financials last week? Let me guess you rode oil down from $150?

lmfao

Plenty of Monday morning quarterbacks here to join the ranks with, many here cant lose and pick everything just right. We all know every renter here invests the difference and it all goes into (whatever happens to be up, god forbid a renter claimed he is down 10% due to his allocation in the various sectors it would never happen).

Guess what we have a mortgage payment, the 401k’s are down about 12.5 % and dumping $$ into home improvements. The sun will rise tomorrow and it does not hurt to tell the truth.

Remember that landlords need to make a profit so in normal times the total loaded costs of owning will be cheaper than equivalent rent. I would say a back-of-the-envelope buy-vs-rent calculation should include another 5% fudge or so in additional expenses involved in owning. After factoring in the true costs, owning should normally be a few % cheaper than renting on a monthly basis. (i.e. a condo that rents for $1800 to a good stable tenant should cost an owner (interest, taxes, repairs, transaction costs, etc.) about $1700).

“IMHO a lot of people don’t want to rent is because rentals are typically not as spiffied up and with as many comforts as a property that has a live in owner. Even homes that are rentals and were built for that are just horrid.”

HA! I think that’s rationalisation no. 121 from the Delusional Realtors Handbook.

#122 btw, is flower beds cultivated by an owner are allways more fragrant than those tended by renters who simply don’t put any love into them.

Oh, and I live in a rental that was refurbished for the express purpose of being a rental, and it constantly turns heads and gets comments on both the outside and inside/furnishings.

David losh- you are delusional. How can this be the bottom if ” dirt is plentiful and getting cheaper.” By your own admission, this is not the bottom.

We pay 11% of our pre-tax income for housing. Friends tell us we’re foolish for forgoing the great ‘tax benefit’, but paying so little for housing allows us to fund our 401ks for the maximum deduction ($31,000/year). We also invest (short ETFs, gold, and energy) and stash money for kids’ education (don’t have kids yet). We own our cars (but mostly walk and bus), take nice vacations, have no debt (credit card, student loans, etc.). We take nice vacations and have saved over $150k for a downpayment on a house when the time is right.

All our neighbors know (or want to know) about us is that we are renters. We’ve lived here for 4 years. Only a handful of our neighbors know our names. (One actually introduced us to a visiting friend as just “the renters”. ) The fact that we live well (despite being part of the dreaded renter underclass) has convinced at least one neighbor that we’re growing pot in the basement (we’re not).

I would be silently smug if it weren’t so "golly" sad. Is this what the “American Dream” does to people? It’s just gross.

If I was 23 and had some play money and could let it ride for 5 or 7 years I would be looking at finacials they have been beaten down badly and guess what there is not much risk left since our fearless govt. will never let them fail — see the free market isn’t so free.

Here’s a tid-bit with some local flavor: the Barrier Auto Group, i.e. Barrier Mercedes, Audi, Porsche, Volvo etc. will no longer accept your personal check for parts, service, or purchases. Credit cards, cash, and cashiers checks only please. And you thought all that money in Bellevue was real……….

I’m looking at houses in my neighborhood that, (based on the square foot asking prices of new construction) are probably worth half of what people hope to sell them for. How blind do you have to be, to not look down the street and see what your neighbor is asking (and not selling), then price your old crap even higher?

So much wisdom and so little trolling.

I especially like Sorin’s point. The costs to sell your real estate mean that you lose 10% of the value the day you take the keys. For many people, that wipes out their entire down payment equity on day 1.

http://money.cnn.com/2008/07/07/real_estate/price_to_rent.moneymag/index.htm?postversion=2008071604

I would never short any stock for fear of getting my head ripped off the next day.

As Mark Cuban stated……………..” Never place any money in the market until you become an insider.”‘ Since I have yet to be an insider I continue to swing trade in/out of EGHT, CHTR, BSQR, Q, FFIV, INSP, and about 20 others. Just for fun…

I will leave the real trading to you. I will stick with what I know. Good Lord! WB will be nailed tomorrow…ouch…AXP…ouch!…SOLD has more cash on the books then its pps…So many GEMS in the stock mkt its scary!

I don’t need to listen to an AMEX conference call to know that the debt stricken American consumer is screwed.

Aren’t you the same guy that chastised me for saying the economy was facing severe stagflation?? What a difference a few months makes doesn’t it Ray?! Turning bearish on us now? Little late to the short game though, you could have been making big money on the short side with me, but that’s ok, there’s still some meat on the bone. Give up hunting for gems and join the dark side Ray.

Ray Pepper
http://www.500Realty.net

And so when doing the rent vs. buy calculation, I have to include the imputed cost of being stuck in the same location for years because of my house. In a best case scenario, it means lost pay increases from switching jobs. In a worst case scenario, it could be devastating if I lose my job.

Basically, anytime I do the rent vs. buy calculation at places like hotpads.com, I include that “cost of staying put” in the maintenance fee of home ownership, and I can never come out ahead.

The benefits, or perhaps necessity, of having the flexibility to move around are simply too important to give up.

I can wait, though.