Objectivitiy – Thanks. They did use a picture, but I think I was having a bad hair day or something because my friends asked, “is that even you?”

Not studying charts and graphs leads to what my neighbors are experiencing due to taking on too much leverage and risk during the height of a period of mania not witnesed since the years leading up the Great Depression. They lay in bed all night unable to sleep stressed out of their minds praying to God to save them from the worst nightmare they’ve experienced in their entire lives. Their house will be auctioned at the court house steps in less than a month. I can only hope they don’t contract a serious stress-induced disease like cancer while going through this. I’m not sure where they will go and how they will survive. They are out of work, out of money, and out of luck. And their two wonderful kids, who have had nothing to do with the underinformed hasty decisions made by their parents will co-suffer in the destruction.

We’ve talked about fear and greed a lot around here, but what’s more important than either subject is keeping yourself physically and mentally healthy so that you can battle at your fullest ability during this terrible downturn coming upon us. My advice is to be extremely careful about how much leverage (risk) you expose yourself to at the front-edge of what is shaping up to be the most financially destructive storm in our lifetimes. Stay healthy, keen, and informed and only purchase a home when you are absolutely certain you can financially afford it.

The best medicine in an environment such as this is prevention. Thus, try to error on the side of caution. We have many years to go before we see the bottom of this nasty mess. There is plenty of time to make an informed well-researched decision on when the right time to buy your next home will be. If you look at the house-decline charts in areas ahead of Seattle, it becomes clear Seattle is nowhere near the bottom. People are going to suffer and bleed before this mess gets straightened out. That’s a certainty.

For example, lots of people like to buy brand new cars. Personally I would never do that because I think it’s a waste of money, I always buy used cars.. — Steve Tytler

Comparing buying a car vs. comparing buying a house is ludicrous. A car purchase is a loan you take with the expectation that the asset value WILL decline over time. The more expensive the car the higher the depreciation over the lifetime of the car. Every dang fool on the face of the earth knows this. (We are talking about consumer cars here, not collectibles. If you have a 100K classic mustang in your driveway in Medina and a couple of Bentley’s, you are batting in a different league.)

OTOH when buying a house, you are buying into a heavily leveraged loan with NO GUARANTEE of the asset value when you sell that asset. Add to this the fact that you cannot *take* that asset with you if you have to move unlike the car.

Rent vs. buy MUST be viewed by everyone as the most significant financial decision of their lives. When houses were appreciating it was the “best investment” you could make. Wasn’t that the mantra pitched by all those agents? Now that prices are tumbling it suddenly becomes “A place you buy that you call home, the price doesn’t matter”. You cant have it both ways.

Yes, a house is a place you call home, but every single thing you have comes at a certain price. Only a stupid person would buy in this current environment. Read the news, read the blogs, educate yourself. Just remember that if you are thinking of putting 10% down and prices drop another 10% in the next year (which I am sure they will) you have lost all that money. Real estate is going to stagnate for at least the next 10 years. If you plan to sell after 10 years accounting for inflation, you will most likely lose 10-15% of the price of the house (including transaction amounts). Consider that carefully before buying.

And oh yeah, Case Schiller will keep dropping between 10% and 15% for 2009 and 2010. After that between 5 and 10% for 2011 and 2012. I predict the “bottom-of-large-drops” in 2013 with no significant price changes thru 2018 (aside from inflation). Of course, if we get into a full blown deflationary cycle, all bets are off.

Many people know that it’s cheaper to rent than to own your own home, but they are willing to lose money in exchange for the pleasures of owning their own home. — Steve Tytler

Really? I’ve always heard the opposite. Anyone I’ve ever talked to has said that their homes were the best investments they’ve ever made (despite losing a bundle when forced to move due to job changes, etc). In fact, one of the common mythical arguments for owning a home is to “stop throwing money away on rent”. That hardly squares with your view, Steve.

I think you are confusing rent vs buy with attached vs detached, which most real estate boosters tend to do (not saying you are a real estate booster). The fairer comparison would be cheap 1 bedroom apartment vs cheap 1 bedroom condo, or renting a 4 bedroom 3 bath house with 3 car garage vs buying it.

There are real lifestyle differences between renting and buying. Why confuse things by comparing apples to oranges with the property type?

But most people do NOT look at their home primarily as an investment.

LOL.

Yeah….right. And the RE industry never “sold” it as one either, huh?

The housing market is collapsing! It’s collapsed a lot more in some areas but anyone who couldn’t predict home prices decling in Seattle as recently as 2 years ago is a fool!

The fact is not many people know much about finance or economics. They would rather read about what Angelina and Brad are doing then what the Federal Reserve is doing. They make emotional decisions to buy homes because they believe what they’re told and it’s what their parents did. They don’t think through the true cost of owning a home and they don’t consider what will happen if my spouse loses their job. Many people have no savings at all!

I haven’t heard any good reasons given for why anyone should buy a home now versus in a year or two when prices have shown signs of stabilizing. The only reasons given to buy now are the same ones used during the bubble runup, “buy now or you’ll miss an opportunity to own a home because prices will increase”. “Buy no because interest rates will increase”.

These are the same reasons given 6 months ago and now prices and interest rates are both lower! So why should anyone believe that prices and interest rates won’t be even lower 6 months from now?

mikal // Jan 11, 2009 at 5:54 pm

I have been drinking all day and was really hoping from a comment from Matthew when I came home.

why do I find this so funny?

I think you missed the point of my post.

As I said, if you want to wait for the bottom of the market to get the absolute best deal on a home, more power to you!

That’s a perfectly legitimate way to buy a home to get maximum return on your investment.

But most people do NOT look at their home primarily as an investment. They look at it as a place to live and they get enjoyment out of it that is not measured by ROI.

If everybody waited for the “bottom of the market’ to buy a home, they would only be able to buy a house once every 7 to 10 years, which is the length of the typical real estate cycle.

The average person is not going to say, “Honey we need a bigger house, but the next real estate bottom is 4-5 years from now, we’ll just have to wait for prices to bottom out.”

You get the best price you can get at the time you buy, that’s all you can do.

I gurantee you that there are plenty of people who bought their homes at the peak of the market who are perfectly happy with their decision because they plan to live there for the next 10-20 years.

They are not sitting around studying graphs and stats worrying about the equity they have lost. Sure, they are not happy but their home values have gone down, but if they are not selling, so what?

Living in a cheap one bedroom apartment is obviously a more efficient use of your money than buying a 4 bedroom 3 bath house with a 3 car garage on a quarter acre lot … but which is a better lifestyle?

There is no right or wrong answer.

Money isn’t everything and lifestyle choices are just as important as ROI and I think too many of you number cruchers on this site fail to see that.

For example, lots of people like to buy brand new cars. Personally I would never do that because I think it’s a waste of money, I always buy used cars.

Most people who buy new cars know it would be cheaper to buy a used car but they enjoy owning a brand new car and they’re willing to take the financial loss
that comes along with it.

If eveybody had my attitude about cars, the car business would come to a crashing halt (which it sort of is right now).

Many people know that it’s cheaper to rent than to own your own home, but they are willing to lose money in exchange for the pleasures of owning their own home.

If everybody in the real estate market had the attitudes of the “wait until the bottom” buyers on this blog, the housing market would totally collapse.

Now, I know that’s exactly what a lot of you are hoping for, but it’s not going to happen. Because as I said, most people buy a home for the lifestyle not for the investment return.

You may think they are “stupid” for doing that, but that’s not going to change reality.

OK, I see.

As for buying now, It’s just my opinion, but I’m of the mindset that what you buy should be somewhat in line with historical fundamentals despite whether what you buy is personally affordable to you or not.

But the other side of the coin is that you are alive right now, and if you are extremely uncomfortable in your current living situation and would do better owning, then perhaps it’s worth it to buy. Life is for living. So I guess one has to contemplate the life reward points of the two separate pathways (buy now or wait) to see which one you believe will bring the most reward (personal fullfillment) over the course of your entire life. You could gain some good life now, but it could cost you in the long run. Somewhere there is a balance.

Personally, I have to see prices at least level off before I’ll jump in. Others are no doubt in a much different situation from myself and might benefit from buying sooner.

…inflation is on the near horizon.

You had me until there.

If its anything like the other new condos around that area, HOA will run about ~$700/month. And judging from building standards the last few years, I wouldn’t be surprised if you had a decent assessment to fix something major in the building within 10 years. Since you are unsure of the HOA do you even know if its going to be allowed for you to rent it out?

It worked great for his parents 35 years ago. Unfortunately, it didn’t work so well for my neighbor. His house will be auctioned at the court house steps in Feb.

Chances are, his parents paid a historically affordable percentage of their income for the house–unlike what the people he recommends to buy now will have to pay.

The stimulus program will not work for several reasons. First, it’s too small and too short term to really have an effect relative to the wealth that has already been lost. Second, the required deficits and related tax increases will kill any positives over time as the emphasis shifts from spending the stimulus to paying for it. Lastly, government spending never creates the right kind of jobs- jobs associated with innovation and long term growth prospects. Stimulus programs are band-aids, not cures. They only push the problems down the road, into the future.

There won’t be any significant inflation for a decade or more. The current level of debt must be worked down, the U.S, economy must be completely rebuilt along with a manufacturing base that produces real wealth and value, not just fees from financial transactions. Wage increases from productivity gains and low unemployment are the only way to drive inflation over the long term. None of those are even close to being a reality at this time, or in the foreseeable future. And “printing” without the associated debt is illegal unless the constitution is changed, so that’s not going to happen either. Inflation just isn’t going to happen.

Short the dollar (UUP)…Obama will kill it. (because he has to)”

How is killing the dollar not inflationary? High unemployment can stop inflation, but only if the unemployment affects most skill areas. The new spending is specifically targeted to give jobs to as many people as possible. That is exactly what they would do if they wanted to start inflation.

Renting feels a bit like spinning our wheels. I want to get involved in my community but I know we are not likely to buy in this neighborhood, so I don’t. It’s a weird kind of limbo. Still waiting for anything in our target area to become a gem — so many properties just sitting for months with no movement, so many unrealistic prices from sellers who bought at the peak and have no equity to buffer a price drop. And I’ve yet to talk to anyone in Seattle (outside of this community) who doesn’t think it’s a great time to buy, even as they tell you about how many people they know who are out of work.

We do plan to buy but have yet to see anything that we want to live in for 10+ years, at least not at the prices that are out there right now. So we’ll keep renting…it’s definitely cheaper!

I am in a presale contract to buy a condo down town, ( yes, I know it seems crazy in this environment, I put a deposit down 3 years ago ) at the price I am getting it for, I could rent it out and probably cover most of the mortgage based on downtown rental rates ( +/-$200 ) I am not an investor, and I am planning to live in it at least 5 to 10 years. Isnt that what some of you refer to as a GEM? or am I crazy to close at this point?

Sniglet has been right on for months…we are in a deflationary period that will under cut how our country operates.

Short the dollar (UUP)…Obama will kill it. (because he has to)

Amy, could you afford to get into a rental house? It seems like it would be worth it for you. You might not do much maintenance and improvements, but you could garden and get the privacy you seek.

It reminds me of all the friends who suggest I purchase a condo since I’m not willing to pull the trigger on a house right now. And how would that improve my situation? Apartment-like living but with debt and depreciation!

I think housing is preinflated. If we have inflation, then prices/salaries are going to catch up to housing, but housing isn’t going to go up as much.

Of course, that is assuming we don’t see hyper-inflation.

I think large scale payouts of FDIC is the biggest risk for inflation. In the absense of that, we will continue to see the credit unwind and continued deflation.

Of course, we had some investments that took a dive with the market crash. But still on a net basis, we are ahead of where we would be with our money tied up in real estate.

We still have parties (just threw a big one last night), plant flowers, and enjoy life in our rental. In fact, we have an organic veggie garden to grow our own salads all summer long. But that’s not to say I don’t miss some aspects of home ownership, many of the things you mentioned.

The thing I don’t miss is the disproportionate amount of time we spent slaving away maintaining our house, in the yard, etc. I never would have had time to write my book in the house that we owned, because I always felt compelled to take on just one more project. Renting gave me the mental break and time to pursue other creative endeavors.

We do plan on buying a home again, just not right away. We view real estate as an expense, not an asset or ‘investment’. But a roof over your head is a necessary expense. The cost of that expense is coming down, and I believe Seattle real estate will return to 1999 prices. We’ll probably pay cash for our next house. We just don’t like being in debt, even mortgage debt.

Great post discussing both ends of the spectrum

Jill,

Assets appreciating 8-20%…. what and where? If you guys have that going on pick up the phone and call the white house, they could use you. There is no such thing.

I think all of the “bubbleheads” here want to own too. If we didn’t we wouldn’t keep coming back to this site.

And to those thinking/hoping that inflation will soon be back on the horizon, erasing past mistakes and restoring a false sense of prosperity, don’t hold your breath. The government can’t print money fast enough to make up for the wealth that has been lost, and will be lost over the coming years, somewhere around $20 trillion in the U.S. alone. Plus, there are other constraints:

http://www.tickerforum.org/cgi-ticker/akcs-www?post=78203

Such comments are meaningless. You might as well say “hey, Steve Ballmer went to work for some small company in the 80’s. A lot of other people did too and got laid off, but he is a billionaire now. Is he a jerk??”. The fact is you and I have no idea what housing will look like in 30 years from now, but hindsight is 20:20. The only way to make this kind of decision is to look at things on the short term horizon, is it going to be cheaper to buy today or next year? That we can answer with more confidence, but nothing is ever perfect.

The CBO is predicting somewhere in the range of 3.5% deflation for the coming year. The Fed right now is just trying to pump so much money into the system we end up at 0-1% inflation. The only way we don’t end up with deflation or zero at this point is some magical 2009 V-shaped incredible recovery that takes everyone by surprise. I would put the odds of that at 1:100 myself. Remember, cash is king in deflation and tying your free cash into something already depreciating (and which is easy to lose if you get laid off) is probably the worst financial decision you can make.

You can either compare median income to median property prices (apples to apples) or go for density and desirability, etc, etc. When inventory is high, prices are impacted negatively regardless of density and desirability.

Brilliant post. Your comments described exactly how I feel too. While renting is a better financial decision for me right now, there is something missing.

We relocated here 18 mo. ago and sold our house for top dollar. Of course, coming from the Midwest, that won’t buy much here, even as prices are falling.

I don’t miss the cleaning, but I do love a home and we are trying to save. I do miss the tax deduction. I just wrote a check to the gov’t for another $6,000. We’re one of the few couples actually maxing out our 401k so our home was helpful in keeping our taxes lower. Plus, we had state tax too so we got additional deductions for the home.

I don’t miss the $495/mo heating bill for that big old brick house in the winter. I pay only about $100 mo total for all of my electric. Water/Sewer/Gas/Trash is together about $50/mo to the condo complex where we rent.

There’s no real option for satellite because of the complex so I’m stuck with cable prices. We do bundle our services and get free long distance plus a land line with voice mail. I have a work phone too so I don’t use a cell. Hubby has one and that’ s more than enough.

So, there are trade-offs. Yes I’m saving money but at the paltry 2% I’m getting now in money markets and additional tax I have to pay for the priveledge of saving, it’s getting old. True, if I’d risked my equity in the stock market instead of tucking it away for the next house I’d be down 40% now but there’s not a lot performing right now in terms of assets. We did make another small real estate investment overseas and hopefully that will be wrapped up soon, but that’s a small sum and a longer term thing.

In terms of lifestyle it has allowed us to pay cash for the adoption of our child. Although the process is very long so even that seems distant. We also paid cash for a car. Our old one died. Renting has allowed us the freedom to decide to stay here or go somewhere else next summer. (Winters are hard here.) We’ve had the chance to travel, which has been awesome because I have wanderlust, especially since I have no home anymore. I’m in gypsy mode. We’ve been able to give more to our church and the other causes we care about at a time when many non-profits are suffering.

I think the biggest thing I don’t like about renting is that there is no “goal”. With a house, if you love it you are motivated to do things with it, pay it off, have people over, mark the seasons with planning and plantings. It can be a treasured oasis. It can provide a sense of permanence and calm in a very unsettling world. That’s what my house back home did for me. It was a sanctuary. It was a great outward expression of myself.

I’ve done the best I can with where we’re at but renting is always temporary. You don’t want to improve someone else’s home or make changes only to have to put it back the way it was in a year. I’m very goal oriented so that’s been hard. I don’t regret renting, I just want to get off the tread mill. There’s no sense of progress.

It’s also hard working full time and feeling like there’s nothing I’m working toward.
Saving is easy if you do it right but it’s not exactly something to can see and touch like a home. I worked my butt off for my house back home and I appreciated it so much. I know I’ll feel that way again when I have another house.

Having said that I’ve no wish to pay $3,500 a month for some crappy rambler that looks like a glorified mobile home. The ugly split 70s homes do nothing for me either. If I buy anything here it would really have to knock my sock off. I’m not looking for a home just to say I have one. I’ve seen people in rat traps before. You can’t make a silk purse out of a sow’s ear. Period. Someday you’ve got to unload this thing and it better be worth it.

I like Ray’s word GEM. My old house was. It was a 2 story brick on a corner lot in a great neighborhood in the shadow of a big city. I was meticulous about maintenance. We had a new roof and copper gutters on the house before it was put on the market. (Insurance paid for it due to hail damage.) It sold in 4 hours for full asking price in a chilly real estate market. The appraiser had to come back twice just to make sure he could get the numbers to work so we knew we were right at the line.

I wouldn’t buy a house unless I found a GEM I just couldn’t live without.

That may or may not be here. But if you’ve got a real GEM, then you know what you’ve got. It’s rare and no matter what the broader market does, you’ve got something really special. I hope I have another someday.

Anyway, I wanted to address appreciation of Real Estate. The most common comment I have heard over my thirty year association with the Real Estate business is that you are paying off a property with “future dollars.”

When you buy a home and start paying today your dollar goes so far. In time your dollar buys less and less but in terms of your mortgage payment it is paying more and more. Future dollars are inflated in most cases and I think we’ll see a period of rapid inflation in the near future.

Your rent however is tied to what the land lord can get by supply and demand. If your theories are correct there will be massive demand for rentals. The supply will increase, rents will come down and once things settle out inflation will continue on it’s relentless march. If you own the mortgage stays the same, rents go up over a ten year cycle.

The only silver lining in home ownership that I can see, is that with the gov’t bailout, inflation is on the near horizon. People that have huge mortgages will see their debt get inflated away. That’s convenient, if they still have a job and can continue to pay their mortgage.