I know. I think some people get so fixated on the idea of lowering their tax bill that they don’t think things through thoroughly.

Same sort of deal when people advocate borrowing as much as possible for a house, or never paying off the mortgage, “for the tax break”. Well, in order to get any tax benefit, you need to pay OUT thousands of dollars (~5K for a single person, ~10K for a married couple) in mortgage interest first. That money is of course gone forever. What tax break you do get is based on how much you pay *above and beyond* those threshholds. Certainly isn’t bad to get a tax break, but it arises from pissing a lot of money away….*that’s* what really ought to be minimized!

That thinking hasn’t shaken loose yet. I just overheard some folks at work talking over the prospect of turning a residence into a rental. One guy said, “You want to charge less than your mortgage payment so you can get a break on your taxes.” Mmm, not really. That might work when prices are skyrocketing and you can make it up in appreciation, but in this day and age, not such a smart strategy.

All of these bailouts, programs, etc, have unintended consequences. The great part of the market is that it will seek proper value no matter these interventions because they are not sweeping enough to just remove the market all together. So things like massive subsidies will just devalue the dollar, forcing banks to rewrite loans will just contract credit further or shoot up interest rates, etc. And the fact we already have 11 trillion in debt with more each day will eventually limit them from being able to do anything at all. The bailouts will certainly prolong the process, but they cannot stop it from reverting without going to a soviet style assigned home.

That’s the term I’ve been looking for. Real Estate is over priced, and it will go down in price. The value will continue no matter what the price is.

The comparisons to rental income are very true, but in my opinion far from accurate. Rents went up when they should have gone down.

The units in Kirkland usually are only a part of the income averaging land lords do. I worked on a very crummy apartment the day before yesterday that rents for $750 and the woman is happy to pay. There is no up keep, management, or over sight. There are five units to the building that when it’s torn down will be a perfect building site for eight units.

As mortgages payments went up rents went up. Comparatively rents were cheaper. The price per unit went up because as condo conversions they could sell for more. In that regard as prices, mortgages, and no buyers for condos marches on rents will go down.

2k & Mike626,

No you can’t find a 2 bedroom apartment for 949 in a decent area and no, KC medium prices are not going to be 194k in 2012. Lower, but not that much lower…

I was renting out a 2br apartment in Juanita Village in Kirkland for 1600 USD per month. It was new property right by the lake with underground garage parking etc. For this much money those guys had to do maintanence, had to change carpeting etc. So normally you would think that they paid on average $400 to maintain the apartment and the staff over there.

So their real income was not 1600$ but more like 1200$. I am sure they had to pay some real estate taxes on top of this. Let’s assume they were able to rent out the apartment for say 11 months out of the year – so their profit was 13,200 USD per year.

Now – the same apartments – maybe only slightly upgraded were selling at that time for 500,000 USD. If they sold the apartment for 500,000 USD put the money into a CD for 5% annual yield – then they would have made – 25,000 USD.

So insted of running the whole rental company – they were better off by just selling the apartments and keeping the cash and just relaxing. Insted they decided to employ people, manage property, take the time to do it when they could be easily resting somewhere in Hawaii.

But still not all decisions are sane? Is that correct?

Is the rent multiplier assumption fundamentally sound? That just seems too easy.

Sorry Jon. I’m being touchy. :)

I’m just pointing out that raising taxes on one form of savings will cause people to seek other ways of saving and that historically investing in real estate has been a way that has been done.

What do you think? This is just my prespective.

Amarjit
[didn't read the comment policy]

Yeah, wouldn’t it be great if we republicans could borrow 2 trillion per year forever and never have a tax increase? Hey, while we’re at it, how about waving a magic wand and making me richer than Bill Gates?

The facts are, when you borrow 12 trillion dollars, sooner or later, your taxes are going up or you are going bankrupt. Maybe you can put it off for 4 more years, but then it’s really going to hit the fan. My suggestion is to curb your addiction to borrowing money you can’t afford to borrow, bite the bullet, and start paying back the money you owe!

Or of course, you can go with the status quo and borrow another couple of trillion over the next 4 years to service the interest on the debt you already owe and pretend you are a fiscal conservative in favor or lower taxes.

So, while I expect some more declines, I doubt we will see what the CEPR suggests. Because of the intervention in the markets, the return to the natural historical level will probably never happen. But hopefully once we reach this artificially inflated “bottom”, my hope is we will progress forward from there more reasonably, especially if we have more normal lending standards.

Sorry, but the numbers simply cannot be correct. The ARMs that reset in Seattle and Portland in 2009, 2010, 2011 would all default if the calculations were even close.

No, it is all fiction.

Anyway 15x rental income would be great! That would definately make housing affordable for families like ours.

We are currently renting an older, remodelled house in the east side. We pay $2k/mo. 15x rents values the house at $360k which I would consider reasonable.

However the house was appraised at almost $700k and almost all the houses in our neighborhood have equal lot sizes and are selling for over $1M. The house next to ours is vacant and asking $2M. There are a LOT of homes on the market — not selling.

So 15x rental prices would be a huge drop in our neighborhood. Much more than a $100k loss.

Good for future buyers; terrible for recent buyers.

http://www.usnews.com/blogs/capital-commerce/2008/10/23/would-obama-dems-kill-401k-plans.html

Eliminating that deduction is a backdoor way of increasing taxes.

Not a penny more.

Isn’t it interesting that as the elite [federal government bullies] buy their picks on bank stocks with our federal money, there’s a mild sucker’s market surge going on in the stock market. Yet the banks are not lowering interest rates on home loans to free up credit and automobiles are getting hard to finance too.

The stocks aren’t worth a penny more until they’re sold either, so if you’re one of those buy low, sell high stock market gamblers; how in Hades do you time the peak when to sell in this witches brew roller coaster economy?

Homes are no different, in fact the longterm health of real estate follows the stock market’s longterm trends.

The good news during this credit mess: if you’re going to college with cash, perhaps loans for the masses will dry up and the classes will get smaller and less crowded. Probably less inflation on tuition too.

Jon -

Democrats wipe out 401k’s? Put down the bong, Jon.

Dave

That would be 201K, at this point

Some could argue that it is currently twice what it should be. Nobody actually knows how overpriced it is – that is like asking what the true price of a stock is.

It sounds like the methodology is to compare rents to prices. This is sound because rents are tied to income and long term houses are too.

The median 2BR is probably median for all of Seattle. I bet that you could find a cheap 2BR in White City or Northgate. The median price in Belltown is probably higher, and the house prices will be too.

From my interpretation, if someone were to purchase a residence at 75% of the Median SFH price in the Seattle Metro at a 6% interest rate, and then sold that home in 2012, they would realize an approximate $117,000 loss.

The median price of a single-family house sold in King County is approximately $415,000. The CEPR report takes 75% of that or $311,000. A 117k Loss over the next four years would mean a 38% loss of equity, or a 9.3% annual loss. This projection along with the already realized slide in housing prices would mean that by 2012 housing in the Seattle metro would have lost 45-55% of its value from 2007.

I realize that housing is overpriced, but is it currently twice what it should be? Am I interpreting this data incorrectly? (By the way, they also show the median 2 BR apartment rental price as $987. If that means an in suite w/d with an easy commute to downtown, sign me up. I can’t find anything that fits that description under $1200.

Democrats wipe out 401k’s? Put down the bong, Jon.

Dave

My guess is their house price data does not take into account the varying fraction of high income people who are buying newer, larger houses. Houses that get rented are generally ones that are older and the seller is avoiding taking a capital gains hit by renting it out.

The Democrat’s plan to wipe out 401Ks will have an interesting effect, because people will be looking for new ways to shelter income. Buying houses in currently depressed growth areas would be a reasonable strategy, and that may account for the high sales being seen in California.

The only metropolitan areas outside California predicted to have a larger amount of negative equity than Seattle are Honolulu Hawaii and Bridgeport Connecticut.

Hurray! We’re #…4?

or does the CEPR not consider the impacts of macro forces like interest rates and global economic slumps?

if anyone cares, 30 yr fixed interest rates are back up to nearly the highest they’ve been in at least 5 yrs at 6.35%.