Where are your getting $1000/month savings off of 100k? Sounds like you are stretching. I am thinking $665.

As I said, I am using Bankrate.com’s mortgage calculator to compare a loan of $400,000 @ 6% (monthly payment $2,398) to a loan of $500,000 @ 7% (monthly payment $3,327).

You still have IGNORED the comparison of the major difference in credit availability and interest rates. Leveraging nothing, locking in at rates as low as 4.85%, paying lower closing costs, and keeping a 100k in your pocket with which you can earn interest is a far better deal.

I don’t see the point of comparing to the past. I can’t go back in time and get a loan a year and a half ago. If I’m buying a house today my choices are all in today’s credit environment.

Having to bring $90k to the table, pay 14% more in closing costs, with a 740+ FICO score to get an interest rate 1% higher than what would have been available last year with 0% – 3% down just doesn’t seem that this “buyers market” is much of a better deal than last year.

For those of us with $90k available down and a 740+ FICO it is looking like an ever better buyers market. I expect next year will look even better.

Where are your getting $1000/month savings off of 100k? Sounds like you are stretching. I am thinking $665.

You still have IGNORED the comparison of the major difference in credit availability and interest rates. Leveraging nothing, locking in at rates as low as 4.85%, paying lower closing costs, and keeping a 100k in your pocket with which you can earn interest is a far better deal.

Now you have to put 20% – 40% down (which few have), pay interest rates that are 1.75% higher than historic lows, and likely pay .25% – 3.00% premium on top of the prime rate if you do not have a credit score higher than 720 and/or a 25% down payment.

You can take the interest earned and make an extra payment or two each year and reduce your payments by at least 7 years and save $280k.

3% interests was extremely generous. What would your propose? You have many Bubble heads touting that they can make 8% easily off the stock market. Should we consider their figures?

“Labor Force” is not the same as “Employment.” It’s a measure of people, not jobs.

My calculation showed that given a set of numbers tilted in favor of 0% down (only a one-point interest rate hit), you save $234k over 30 years by putting 20% down.

Harley’s point was that you could save the $100k at 3% compound interest and after 30 years you would have gained $143k, for a total of $243k.

Since the difference between the two “back of the napkin” calculations was negligible, Harley is now trotting out higher interest rates on the $100k.

Of course, this ignores the fact that the person putting 20% down in our $500k home scenario would be cutting nearly $1,000 per month off their payment, thus saving an additional $360,000 over the course of the 30-year loan. That doesn’t even account for any interest earned on that extra $1,000 a month.

Put that $1,000 a month savings into an account at 3% annual interest and you’ve got $586,604 at the end of 30 years.

Something doesn’t add up.

You are forgetting about the interest earned off of the 100k versus no down payment.

In addition, you are not comparing the previous credit market with today’s credit market. Before 80/20 loans were easily available. Interest rates went as low as 4.85%. You had to pay less for closing costs.

Now FICO score based credit pricing is more prevalent, huge down payments (20% – 40%) are required to avoid additional interest charges, and closing costs are up.

Here are some other 100k down interest income numbers to chew on. And remember this is 20%, it get’s even uglier with increased down payments.

100k at 3% over 30 years = $242,726.25.
100k at 4% over 30 years = $324,339.75
100k at 5% over 30 years = $432,194.24
100k at 6% over 30 years = $574,349.12
100k at 7% over 30 years = $761,225.50

Seasonally Adjusted Labor Force


__________ Jul-08 Jun-08 Jul-07
Washington 3,452,600 3,449,700 3,415,000
Seattle 1,458,000 1,449,500 1,443,600


8,500 new jobs in Seattle in one month. Wow. At a time when the unemployment rate actually went up.

(source)

Click here a map of unemployment rates by county

20% down on $500,000 @ 6% = $463,352 in interest paid over 30 years.

Zero-down loans have a higher rate, so we’ll add one point (probably conservative):
0% down on $500,000 @ 7% = $697,544 in interest paid over 30 years.

Difference: $234,192

Assuming 100k @ 3% interest rate over 30 years you would have $242,726.25.

I beg someone to please explain how losing $142k over 30 years in interest income lost due to a down payments is better than 0 – 3% down payment????

Yes, you point out 20%, but where is 25%, 30%, 40% predictions? I have yet to see you use a 25%, 30%, or 40% down payment calculation in your posts to discuss how affordable housing will be in the future.

It might be interesting to see chart that incorporates the interest rate penalties associated with FICO score and down payment, with the current median cost of a home.

We went from 0 – 3% down payment and generously low interest rates to 20% – 40% down with much higher interest rates 6.5% – 9%+.

Maybe we should have a poll asking how many people have 100k+ to put down on a house right now.

Please explain how having to put 20% – 40% down on a house with higher interest rate is a better deal than putting 0% – 3% with a lower interest rate assuming that you are not selling the house.

How much interest income could I earn off of my 100k – 200k if I did not have to put it down on a house? Conservatively $3000 – $6000 per year.

Given rent increases in the past year, is likely that rents are now back in line with income levels. Rent increases of ~5% per year are probably to be expected – vs. 2.8% for the first six years of this century. Expecting rent increases that vastly exceed income growth is probably wishful thinking (or paranoia, depending on whether you are writing or receiving checks) as rents have only been greater than +/- 5% of the income-predicted trend line for 2 of 21 years, and then only to the low side (under 8.3% in 1985 and by 6.2% in 1986).

Vacancy rates be "golly"ed.

I wasn’t here in 2005, and began to wonder if the prediction of 20%+ off were true in 2005.

Turns out they are.. see the archive here:
http://seattlebubble.com/blog/2005/12/20/housing-predicted-to-cool-off-in-2006/#more-110

biliruben made that prediction back in Dec of 2005. There may be more, I stopped looking once I found one…

I find it humorous that you make the claim that people were making predictions of 20% – 40% down payments, yet do not back it up with proof.

It took me about three minutes to find an example of exactly that.

How about this one from long-time Seattle Bubble regular biliruben in January 2006:

Just keep saving, because I have a feeling lending rules will be significantly tighter, and that 20% down may just be mandatory.

I’m sure I could find more if I cared to spend time searching, but I don’t.

You can dream about all the future rental coming online, but you cannot have it both ways. People selling houses still need some place to live. In the end, we have skyrocketing inventory and a still have a 2.9% vacancy rate.

Sure, people selling their homes (or being foreclosed upon) need a place to live: they can move into Mom’s basement.

I completely agree that we haven’t seen a fall in Puget Sound rental prices recently (quite the contrary, in fact). However, we haven’t really seen much of a real-estate downturn yet either. Our foreclosure, and REO, rates are still pretty low compared to most other places in the country. San Diego saw the SAME thing when their downturn first started. Rents rose for a while even as inventory was growing. It was only after foreclosures really started kicking into high gear that rents started falling.

If you want to know where new rental inventory is going to come from, just take a look at all the cranes over the downtown Bellevue skyline. There is a whole mess of condos being constructed around the Puget Sound that will more than likely wind up as rental units.

You yourself stated in a previous post that rents have been flat for 6 years. Is the fact that we have 2.9% vacancy rate BS and inapplicable too?

Sorry for the inconvenient truth.

I find it humorous that you make the claim that people were making predictions of 20% – 40% down payments, yet do not back it up with proof. It is also amazing how many bubbleheads can easily reach in their pockets and pull out 100K to put down on a house… because that is the norm.

Correct me if I am wrong, but didn’t we just experience a 5.6% inflation last year without incomes rising? We are in a global market and incomes have risen throughout the world. Have you ever heard of China or India?

Rents are currently 10 – 15 % below where they should be based on median incomes. We also have a 2.9% vacancy rate. You just tried to give me a lesson on demand “To drive inflation, you need money in peoples’ pockets to drive it from the demand side.”. Well you have high demand and rents are not in line based on median income… does this not apply for renters???? How convenient!

Loss is not realized until time of sale. I know of several people who have moved from Seattle and rent their houses/condos. Unless your are absolutely forced to sell your home, then why would you?

and the fact that rents are currently 10% – 15% below what they should be based on the median incomes.

Harley, that is a BS stat. It is based on the D-S analysis that uses an assumption that rents should be 25% of incomes. I went back and checked. Using their own data, rents have not been 25% of incomes in Seattle for over 20 years. So why is 25% some magic number?

I am not saying rents are going to go down – I am just saying there is zero evidence that we are grossly underpriced. And that the stat you keep parroting is BS.

I just love it how for some reason that same mentality does not apply for rents. With a 2.9% vacancy rate and the fact that rents are currently 10% – 15% below what they should be based on the median incomes.

You can talk about skyrocketing inventory, but isn’t it already here? Where are all those extra rental houses you are talking about???? Do you not think that builders might hold off on building more condos and even more will not be funded? You can dream about all the future rental coming online, but you cannot have it both ways. People selling houses still need some place to live. In the end, we have skyrocketing inventory and a still have a 2.9% vacancy rate.

Bubbleheads your numbers don’t pan out and you cannot have it both ways.

I clearly stated “assuming equal risk of unemployment and other facts of life.”. I am not sure what your are talking about.

what a buyer can are are willing to pay that sets the price on an existing home/land, not replacement cost.

If anything the “replacement” costs will follow over-all price trends, not the other way around (i.e. with prices rising as replacement costs increase). Just look at how construction and material costs are already dropping in areas that are further along in price depreciation? Builders are sumarily cutting sub-contractor rates, and the growing pools of unemployment tradesmen are driving down wages. Some materials, like lumber, are also starting to see big price reductions.

Give it a few more years and those replacement costs will be MUCH lower than they are today.

A $650K house becomes a $325K house because nobody wants to spend the extra money to play in the REIC casino.

Any predictions of price drops below actual replacement cost (building material + labor + land) would require massive inventory build-up beyond what we have seen so far. And we are not just talking about inventory of homes for sale with people in them but homes for sales without people living in them

No, it is definitely possible to have massive price drops WITHOUT a large increase of inventory. Just look at towns that have seen a major plant cose down: their home prices collapse even though there may not have been a significant increase in new housing units. Also, keep in mind that over-all economic conditions can lead people to re-adjust their housing needs.

When people are concerned about the economy (and keeping their jobs) they can decide to consume less housing by having the kids double-up in rooms, living with parents, or seeking shared housing options.

There are plenty of examples where prices crashed WITHOUT the sake a major building boom.

Lastly, it’s not as if the Seattle area hasn’t seen a building boom. There has been a tremendous amount of building going on with condos (see downtown Bellevue), planned communities (e.g. Snoqualmie Ridge, Issaquah Highlands, etc), as well as a fevered rate of back-fill in existing urban centers (e.g. old homes on large lots torn down, replaced by 4 small town-homes).

A house do not appreciate it only depreciate, land can go both ways, up or down. It’s currently going down.

Why is that? If a buy a car and drive it for 20 years can the value never drop below replacement cost of a new one? The home has the land value as a replacement cost and that’s it. No more no less. Land will fall in value together with housing. A house do appreciate it only depreciate, land can go both ways up or down. It’s currently going down.

I don’t think the Tim or anyone here ever predicted a 20% – 40% down payment on houses or as severe of an increase in interest rates based on both credit score and loan value from the prime rate. For some, they are looking at interest rates of 9%+ right now. While the best case scenario gives you 6.5% with 100k down.

I know for a FACT this was being said in the early days of SB. It was dismissed as a paraniod, delusional rant – just like the eventual bursting of the Housing Bubble.

It is not inconceivable that interest rates for some will easily exceed all time highs for interest rates (18.1%). Would it not make sense that a super bubble in home prices might be followed by a super bubble in interest rates?

Yes, although I would not refer to that as a bubble. It is the result of a bursting bubble (bond market bubble).

The question is will you have the money to put down on the house during a time of inflation, joblessness, high interest rates, increasing rents, and higher closing costs?

Delusional. How do you get higher rents with high joblessness? How does inflation rage when people are in a recession/depression and scrambling for money to meet the basics? To drive inflation, you need money in peoples’ pockets to drive it from the demand side. How does the money get there if we have joblessness?

In the end those who bought previously leveraged little, at historically low interest rates, with less of a cost, and are hedged well against inflation. Even if the properties go down, losses are never realized until time of sale… whenever that will be. Remember 99.99% of the houses in King County are not in foreclosure.

You might be hedged against inflation, but how are you hedged against deflation? I’m not sure I’m going to be happy if my home has a market value that is 40% of what I owe on it, even if I don’t have to take the loss until I sell. If we have a 20 year deflationary spiral in real estate, your low interest rates won’t help much.

As rents increase due to both the currently deflated rental prices and a tighter rental market, this will increase the cash reserves of landlords and make some unprofitable properties, cash flow.

Nonsense. How do you drive rents north with falling incomes and increasing inventory (both owner-occ and rentals)? How much of the Seattle economy is in the REIC and absolutely linked to ever-rising home prices? A lot. Too much. Properties purchased within the past few years are not going to cash flow until they drop by 50%, or more. You will have a change of ownership by that time.

Homeowners who are in a fixed rate mortgage and can currently afford their homes are in a much better position than renters assuming equal risk of unemployment and other facts of life.

Delusional. How is this so? In the past 12 months, my landlord has lost almost $40K in cash-flow, plus another $95K in capital destruction. I have lost nothing. I can’t imagine that I am unique in this regard. Owning a leveraged asset on the back side of a historic bubble is ALWAYS, AND WITHOUT EXCEPTION, a bad financial move.

Owners are hurting. Renters are not.

Don’t think you won just beacuse you were right and the bubble was real and is now bursting and prices will come down

No, I don’t feel as if I have won by being “right”. However, I am pleased that my family has managed to keep out of all debt (including a mortgage), in attempt to minimize the pain we might feel from falling asset prices and job uncertainty. Hey, I am sure my friend who had to wait 10 years before he could sell his home in San Jose (he bought in the late ’80s) before it was above water again wished he had rented for a while longer too. Avoiding that purchase that became an albatross around his neck (which he complained about ALL the time) wouldn’t have made him a “winner” but it would have given him a lot more piece of mind.

It’s not about hoping for the appocalypse. You can have massive property price depreciations WITHOUT a general end of the universe, and civilization as we know it. I fully expect that life will go on quite nicely for most people during the coming global recession. However, we will all wind up re-adjusting our priorities to things that truly are important. I am DEFINITELY looking forward to this!

The question is will you have the money to put down on the house during a time of inflation, joblessness, high interest rates, increasing rents, and higher closing costs?

There you go with your “you won’t have a job argument.

You make it sound like the only people out there that will have jobs are homeowners. Doesn’t make sense.

Will you have a job? Will your tenant down in AZ have a job?

You make it sound like you are the only one who will survive a downturn yet renters wont…

Unless of course they run out and buy a house and lock in on those low interest rates.

Whatever.

This chronic out-of-control conundrum of force feeding real estate into buyers that cannot afford it, with the bottom 90% of household incomes tanking since 1999, seemed like a great pyramid scheme if you bought early.

Its a horrifying debt crisis for America and makes even saving money in a bank an anomalous risk today, let alone trying to retire on an interest income with food on the table and a half a million in the bank earning 2% interest.

As far as rent, cars, planes, etc going up in price; I can only point at the Great Depression’s rent, cars, houses historical price collapse….the banks failed then too. I know FDIC will save us, did you bloggers know that IndyMac sucked 25% of the $60B FDIC has for bailouts and there’s 100s of banks in far more dire straits than Indy [Indymac wasn't even identified as a bank in trouble, it failed "out of the blue"].

Cash cans and mattresses are looking better and better lately.

can we start looking at reasonable predictions of when the downturn will slow down? How long will things stay flat post downturn?

This has already been discussed on seattlebubble at some length. I feel confident in saying that we have a LONG way to go before hitting bottom. The downturn has barely even started in the Seattle area, and will likely last for 4 or 5 years before hitting bottom. The real-estate decline in Japan lasted for over a decade, with prices continuing to decline throughout the whole period. I don’t see why a similar thing can’t happen here.

I predict we will see a minimum of 50% price drops from peak prices (in nominal terms), and possibly up to 80%. When we do finally hit bottom, we will drag along for well over a year without seeing either any substantial declines or increases in prices.

I don’t think the Tim or anyone here ever predicted a 20% – 40% down payment on houses

Ummm, I have. Before this real-estate downturn is through I expect it to be darn near impossible to buy a home without a 20% down payment, and HELOCs will be virtually non-existant.

On the other hand, I don’t expect mortgage interest rates to rise all that much. During deflation, interest rates fall, credit tightens (i.e. it becomes increasingly harder to borrow money), and asset values fall. Energy and commodity prices should also fall due to demand destruction as the entire world slips into a recession sometime towards the end of 2009.

Don’t worry, the buyers market is coming. It will will begin when the 2008-2010 recession ends.

We’ve just started so see the roll-off from the top. Prices will come down, hard. Loans will be hard to get, expect for people like me with almost zero dept and CASH down.

What the heck do you think The Tim has been trying to do for the past few years? He’s been giving people solid information and real analysis. This is much more than what the REIC had been doing; they were helping to get people into the mess. The Tim, via this site, was trying to tell people it’s not a great idea to buy something you can’t afford and which will likely lose value in the near-term

THAT WAS/IS AN EARNEST AND ONGOING ATTEMPT TO HELP!

The problem with your outlook is that there is a huge amount of home supply, and even more is coming on line. If interest rates skyrocket, credit availability plummets and a deep recession takes hold, do you think somehow there are going to be even less homes on the market? Or more demand for them? The scenario you describe is not bad for the people who can still buy, which will be those who luckily kept their job (even in a bad recession this will be 80-90% of people) and did not extend themselves with ruinous credit during the bubble.