Affordability Hits Record High on Low Rates & Price Drops

Here’s a headline from the Seattle Times that’s sure to get some attention: King County housing-affordability index best in 17 years

Thanks to declining prices and record-low interest rates, houses in King County are more affordable now than they’ve been in at least 17 years, a new score card says.

The county’s “housing affordability index” score, a measure devised by the Washington Center for Real Estate Research at Washington State University, hit a record high of 127 in the third quarter.

The median price for the third quarter this year was $350,000, the center’s latest score card says, down 10.3 percent from the same quarter last year.

Interest rates also hit new lows, said Glenn Crellin, the center’s director, and the county’s median family income — despite persistent high unemployment — remained relatively stable.

“You put those three together and you get greater affordability,” he said.

Sure enough, as far back as you can get median price info from the NWMLS, the affordability index for King County has never been higher. In the chart below I have plotted affordability by month rather than quarterly like the WCRER, which means I have also included October, when rates and home prices both went even lower, driving the affordability index higher still:

Affordability Index: Single Family Homes

It’s important to note what the Affordability Index is, and what it is not. In short, it’s simply a measure of the monthly expense of buying a median-priced home, relative to the median household income. A high affordability index doesn’t mean that every home is priced fairly, it just means that the monthly payment on homes are highly affordable relative to incomes. If you want the long version, hit this post: What the Heck is the Affordability Index, Anyway?

To get an idea of why the affordability index is at a record high, take a look at this view of two of the three components that go into the calculation:

SFH Median Price & Interest Rates

Interest rates are at an all-time low, while home prices are at early 2004 levels. When homes were cheaper pre-2004, interest rates were fifty to one hundred percent higher than they are today.

For those that are interested, I also calculate the affordability index for Snohomish and Pierce Counties, where I only have price data back through 2000:

Affordability Index: Single Family Homes

While homes are still quite expensive compared to most of the ’90s, today’s artificially-low interest rates make the payment on those homes more affordable than ever, which is why in the Seattle Times article linked above, I am quoted as saying that “It’s a great time to buy if you want to keep your monthly payments low.”

The qualification “if you want to keep your monthly payments low” is key. If you’re a monthly payment buyer, it is indisputably a better time to buy than it has been since at least 1993. The data doesn’t lie.

Does that mean it’s a great time for everyone to buy a home? Nope. As I pointed out later in the article, the moment you sign the closing documents on a home, you effectively lose ten percent of its value, since that’s about how much it will cost you to sell the home. Since home prices are likely to continue slipping for the next few years or at best remain flat, if you’re not planning on staying put for a good long time, it’s still a better idea to rent, regardless of high affordability.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

89 comments:

  1. 1
    Dweezil says:

    The two biggest reasons not to buy right now are continued price declines and employment uncertainty. Does the affordability index take into account the unemployed/underemployed? Or would those persons making $8k/year on unemployment or even $0/year be excluded from the median income formula?

    I realize that unemployed people are not in the homebuyer crowd, but am curious if the recession is reflected in the affordability because it sure doesn’t “feel” affordable right now.

  2. 2
    The Tim says:

    RE: Dweezil @ 1 – The index only takes three inputs: mortgage interest rates on a 30-year loan, median household income, and median home price.

    The median household income is presumably affected by unemployment, since a household with no income or a small unemployment benefit income is still a household, and the median is simply the number which half of households earn more than, and half less.

  3. 3
    MacroInvestor says:

    No, the biggest reason not to buy now is rates are at historical lows. Low rates ARE A TRAP. They suck in buyers (i.e. bag holders), then for each 1% increase your house will lose 10% of it’s value.

    The best time to buy a house is when rates are at HISTORICAL HIGHS. Then you have a very good chance of making money instead of losing. Such was the case from around 1982 until the bubble peak… rates going from the high teens (yes, teens) to current historical lows.

    Believe me I’d love to buy at some point. But I don’t want to lose the money I’ve worked so hard to save my whole life. Affordability only makes sense from a price standpoint.

  4. 4
    Teacher _Greg says:

    Macro,

    I understand exactly what you are talking about, but I think the major lesson I know I have learned from the past 10 years is the wisdom my dad imparted to me 15 years ago: a house is not an investment, it is a place to live. I also think the C-S index demonstrates this same idea really well with essentially a zero percent return over the long run.

    You have to live somewhere — and other than Nicklesville you will nearly always have to pay for the privilege (and even in Nicklesville there are many non-monetary costs).

    Another major lesson I’ve learned from this blog is that there are a lot of good reasons for buying a house in any market and there are a lot of terrible reasons for buying a house even in the best of times.

    In some ways I see buying now and locking in a fixed rate below 4% as sticking it to the banks come the inevitable inflation that will come from QE1, QE2 and the coming soon to a neighborhood near you QE3.

    Two final thoughts: no one makes it out alive and you can’t take it with you. Life is too short to not be able to paint a wall whatever color you wish.

    –Teacher Greg

  5. 5
    The Tim says:

    By MacroInvestor @ 3:

    No, the biggest reason not to buy now is rates are at historical lows. Low rates ARE A TRAP. They suck in buyers (i.e. bag holders), then for each 1% increase your house will lose 10% of it’s value.

    If we assume that is true (even though no such clear linear relationship has existed historically), my point still stands… If prices fall as rates go up, the monthly payment stays about the same. An example, assuming 20% down:

       Price   | Rate | Payment
    $320,000 | 4.0% | $1,222
    $304,000 | 4.5% | $1,232
    $288,800 | 5.0% | $1,240
    $274,360 | 5.5% | $1,246
    $260,642 | 6.0% | $1,250
    $247,610 | 6.5% | $1,252
    $235,229 | 7.0% | $1,252

    At 7% interest rates, you get the home for 26% cheaper, but your payment over the next 30 years is basically the same. For buyers that are mainly concerned with their monthly payment, it’s a wash.

    At the end of 30 years, the buyer who pays $320,000 at 4.0% has paid $440,000 to own their home. The buyer who pays $235,229 at 7.0% has paid $450,000.

  6. 6

    RE: Teacher _Greg @ 4RE: MacroInvestor @ 3 – Each of you make some good points.

    I would add that FHA and VA are assumable, and if rates rise your mortgage can actually have some value. Rhonda helped me with the numbers on this piece from a year ago.

    http://blog.seattlepi.com/realestate/2010/06/02/should-a-buyer-with-20-down-get-an-fha-loan/

  7. 7
    ChrisM says:

    RE: The Tim @ 5 – Also worth taking into consideration is the property tax difference between a 320k vs 235k house. Coming from a much lower property tax state, I’m appalled at what property taxes are here. And voters in both Oregon & Washington don’t seem to have problems voting for increases in property taxes!

    Consider what happens when you’re retired. Note that as counties & states get strapped for cash any senior discounts will go away – this is already happening in Oregon:

    http://www.oregonlive.com/politics/index.ssf/2011/08/changes_made_to_oregons_senior.html

    On a fixed income (where interest rates are effectively zero), assuming you’ve paid off the house, properties taxes remain a significant annual expense.

  8. 8
    The Tim says:

    By ChrisM @ 7:

    RE: The Tim @ 5 – Also worth taking into consideration is the property tax difference between a 320k vs 235k house.

    Here in Washington State, the property tax difference will likely be zero, assuming that all other homes around yours experience a similar decline in value. Your assessed value simply determines your share of the overall property taxes that will be paid to the county that year. That overall amount increases at 1% per year (capped by the legislature in response to an initiative that was thrown out by the courts).

    I really should write a post about how property taxes work in Washington, because it seems like very few people really understand that a big increase or decrease in your assessed value rarely translates into a corresponding increase or decrease in your property tax bill.

  9. 9

    Connecting up this thread, with some things Ardell has recently said in another thread, it is actually possible to buy a house at a price other than the median price! And it’s actually possible to buy a house at less than FMV!

    So while some of you have been denying the fact that REO properties sell for less than other similar properties, some buyers have been snapping those up. To the extent they paid less than FMV, and the risk factors worked out in their favor, they did even better than the figures above would indicate, even before those figures were out.

    It’s not just about timing. It’s also about negotiating a good deal and spotting a good deal. As to that point, the listing I mentioned a week or so ago in the Maple Valley/Covington area, I have since learned that it was priced were it was because the bank thinks it needs a new roof. I didn’t climb on the roof, but it probably needs $1,000 of repairs to the shake roof and then that should last probably another 10 years. I’ve seen that type of thing in the past, where the bank thinks a brand new composition roof needs replacement, because they saw stains on the ceiling.

  10. 10
    Scotsman says:

    This is a great example of the value Seattle Bubble offers its’ readers. On the surface it looks like a great time to buy with record affordability. But the reality is that a three input model doesn’t capture the big picture of a much more complicated market and decision process. Not only are there many more inputs that need to be considered, but there are trend directions as well. Is it a better time to buy than 4 years ago? Oh yes. Is it the best time to buy? Probably not, but it’s a decent time for many.

  11. 11

    By The Tim @ 8:

    I really should write a post about how property taxes work in Washington, because it seems like very few people really understand that a big increase or decrease in your assessed value rarely translates into a corresponding increase or decrease in your property tax bill.

    Good luck with that. Aubrey has described trying that as being like hitting your head against a wall, because people have a hard time understanding.

  12. 12

    RE: The Tim @ 2

    I’m Sure MSM Reported Housing Incomes Still TOTALLY Skew Affordability Allegations

    California’s Dr. Housing Bubble’s website sums it TOTALLY up for SWE, article:

    “…U.S. housing values will continue to decline largely because of weak income growth, a massive amount of distressed properties still stagnant in the pipeline, and the end of the great debt bubble of the last few decades. American housing values rose to stratospheric levels only because of a comically unchecked mortgage market and not because of sustainable income gains. This seemed to be lost on many and a large number of Americans battling with stagnant incomes could not resist the siren call of easy money in real estate. Instead of confronting the reality that incomes were shrinking because of global economic shifts and the pollution brought on by the unregulated financial sector many decided to jump into the mania and spend today what would be earned (hopefully) tomorrow. Instead of one income being able to afford a home with a reasonable 30 year fixed mortgage it was now necessary for two incomes and a toxic mortgage simply for a basic home. Home values will continue to go lower even below early bubble price levels because not only are we erasing the bubble era gains, we now have to contend with the lost decade of income gains….”

    http://www.doctorhousingbubble.com/debt-built-society-negative-real-household-income-gains-sharpest-rise-home-values-ever-debt-replaced-income-wage-growth/

    BTW, its clear to SWE and demographers too…without depopulation in the Seattle area and America increasing wages [and reducing job scarcity and U6 unemployment] this chronic downward spiral of home values has no end.

  13. 13

    Tim,

    If you do a blog on property taxes, don’t forget to include the senior discount information. There are two. One is a deferral that is paid back when the propery sells or the owner dies and the other is a low income reduction which is very substantial and doesn’t have to be paid back.

  14. 14
    ChrisM says:

    RE: Kary L. Krismer @ 6 – That’s quite an interesting article. I’ve kind of been wondering where all the assumable loans went, as I don’t see any mention of them in listings. The more I read the article, the more questions I have:

    Do listing agents promote the fact that the loans are assumable?

    Agents working for the buyer – how do you research if the seller is willing to let the buyer assume the loan? Are consumers able to tell this from the public part of a listing?

    How does one verify a FHA loan will be assumable (assuming one is purchasing a house w/ a new FHA loan, and not assuming an existing FHA loan)

    She states “My reason for doing this piece is that FHA loans are generally considered assumable loans.” – why the “generally considered” weasel words? Is there some legal discrepancy?

    Back in the 90’s assumable loans were really hot. As I said before, as a consumer I’m just not seeing them today.

    The article is incredibly interesting, because I expect that in five year’s time, interest rates will be significantly higher than today (I fully realize this is my own take) and this offers a way to take advantage of my perceived scenario.

    Kary, an interesting twist is, according the article the FHA requires five years of PMI, regardless of down payment. Given that, it would be “fun” to run the numbers on 20% down FHA vs 3% down FHA, if the buyer’s primary concern is to have the hedge of an assumable loan, coupled with the expectation of an early (say, less than 7 years) sale.

    She states: ” Given the fact that interest rates are relatively low right now, it is likely that interest rates will rise in the future. But that doesn’t mean they’ll rise to 10% or even 8%. No one knows with any certainty how high interest rates will rise, or even if they will rise.”

    My expectation is interest rates above 8%, but then again I distinctly remember the Carter years at 16%. This article presents a fascinating way to essentially write an option.

  15. 15
    ChrisM says:

    RE: The Tim @ 8 – I’m not sure I agree that I’m incorrect, but I certainly agree that the subject is filled with misunderstandings! I’ve actually spoken with the Clark county assessor about how they operate. Perhaps King county is different, but I will discuss how Clark operates.

    There’s at least a two year lag in when a property is purchased, and when the sales price will be reflected in one’s property taxes. Let’s assume a property has a comp for $320,000 sale, but interest rates magically skyrocket from 4% to 7% in less than a year, so that we then have a comparable sale for 235 at 7% (I’m remembering the good old days of 1979: http://mortgage-x.com/trends.htm). I’d be interested in what the property taxes would be for those two properties, purchased in the same year. I expect they would be significantly different.

    Also, for additional fun, Clark county as of about three months ago continued to exclude foreclosure and REO sales from allowed comps, since “they did not reflect a typical sale.” Hopefully this changes next year.

    I continue to believe that senior deferrals will be more difficult to get in the near future.

    In your proposed property tax article, I’d request that you somehow illustrate the idiocy of voters of approving massive bond issues and other increases during times of plenty. I suspect Clark county has the highest add-ons to the basic 1%. I know that Camas WA reached its legal increase in levies, and surprise, they’re now struggling to balance their budget. Also, two days ago, the Port of Vancouver (who they hell are they?) voted to approve a further increase in property taxes:
    http://www.columbian.com/news/2011/nov/08/port-of-vancouver-approves-budget-including-proper/
    which I *think* affects all of Clark county.

    Sorry to rant so much about Clark county, but I appeared before the county commissioners two years ago to suggest they walk away from their golf course loan gone really bad. Yes, we’re shutting down fire stations while continuing to support a golf course.

  16. 16
    ChrisM says:

    RE: ChrisM @ 15 – replying to my own quote… Peter Van Nortwick (http://www.co.clark.wa.us/assessor/) also stated that the larger businesses in Clark county routinely filed annual appeals of their property tax valuations.

    Next year one of my goals is to sit in on at least one of the valuation hearings. I doubt very few people ever contest their valuations, and I’m sure the majority who do walk in blind to the process.

    Good times!

  17. 17
    David Losh says:

    RE: The Tim @ 5

    You just made Macro’s point, and contridicted your own assumptions about payment buyers.

    I’ll leave the 20% BS for another time, you would have to be just itching to lose 20% of your saved dollars to give any bank, or credit union a gift like that.

    The higher the interest rate, the lower the price goes, the lower the interest rate, the higher the price goes. We just saw a huge bubble about that, macro economically speaking as well in housing unit pricing.

    Your article, and post, suggests people should wait, now you have to wait three years, for the Fed to let interest rates float.

  18. 18
    MichaelB says:

    Tim in Seattle Times, “”It’s a great time to buy if you want to keep your monthly payments low,” Ellis said.” Spoken like a true real estate spruiker. What a bunch of @#$%! The comments section is evidently more well informed than Tim and understands that low interest rates may lower your payments but not the amount of debt you are taking on in a market sure to go down more. Are monthly payments lower if you buy your home at significantly lower price next year with the same interest rate because the economy is sucking even more? Interest rates are going lower because…? Are Italy, Greece, Spain, etc… all O.K. now? Unemployment dropping? No? Adding 200,000 jobs per month? No? I feel sorry for anyone who follows Tim’s advice and takes on a huge amount of debt now just because their payments are going to be lower. It simply does not make any financial sense to take on huge debt to purchase an asset with very low likelyhood of increasing in value over the next several years in the midst of a gloabal financial crisis.

  19. 19

    By ChrisM @ 14:

    RE: Kary L. Krismer @ 6 – That’s quite an interesting article. I’ve kind of been wondering where all the assumable loans went, as I don’t see any mention of them in listings. The more I read the article, the more questions I have:

    Do listing agents promote the fact that the loans are assumable?

    Agents working for the buyer – how do you research if the seller is willing to let the buyer assume the loan? Are consumers able to tell this from the public part of a listing?

    There are two reasons you don’t see a lot of mention of assumable loans.

    First, the Garn act make due on sale clauses legal, greatly reducing the amount of assumable loans. I wrote about that here: http://www.trulia.com/blog/kary_l_krismer/2008/09/is_it_time_to_repeal_the

    Second, for assumable to be a sales pitch you’d need an environment of rising interest rates. No one is going to want to assume a one year old 5% loan.

  20. 20
    ChrisM says:

    RE: MichaelB @ 18 – Wow, the first comment is excellent — I’ll copy the whole thing:

    Great, but affordability has still not been attained.

    On a $350,000 home presuming you put $35,000 down which is 10% (a lot of lenders are requiring 20%) the average priced home is going to cost about $1850-$1900 per month counting taxes and insurance. That’s also assuming you qualify for a sub-4% loan. Most do not.

    So you have to make about three times $1900 per month to afford that loan. That means your household income has to be upwards of $5600 per month or $67,000 per year.

    Average household income around here is about $45,000.

    When the monthly payment is less than or equal to 33% of income houses are affordable.

    A household making $45,000 per year can afford a $1250 a month payment which includes taxes and insurance.

    That means we’re in for about a 30% drop still and that is assuming the Fed can keep interest rates low. If they can’t – almost everyone with a mortgage will be so underwater they’ll be forced to walk away. That means almost everyone will be either living with relatives that paid off their homes or renting a foreclosure. The banks will be forced into renting because they’ll refuse to sell these homes for less than the price of a new car. They’ll be waiting for better times at that point. Fortunately rents for a 2200 sq ft home will be in the $400 range.

    It’s coming folks, some (Ron Paul) have been warning of this for years but all we did was spend, spend, spend.

  21. 21

    By ChrisM @ 15:

    Also, for additional fun, Clark county as of about three months ago continued to exclude foreclosure and REO sales from allowed comps, since “they did not reflect a typical sale.” Hopefully this changes next year..

    Tim’s point is that won’t matter, and probably especially in Clark County where the distressed properties are probably more evenly distributed than in King. If everyone’s values go down by 15% to account for short sales and REOs, their taxes will be exactly the same as if they didn’t all go down. (The exception is things like school and fire department charges based on a price per Thousand figure.)

  22. 22

    By ChrisM @ 16:

    RE: ChrisM @ 15 – replying to my own quote… Peter Van Nortwick (http://www.co.clark.wa.us/assessor/) also stated that the larger businesses in Clark county routinely filed annual appeals of their property tax valuations.

    I’ve mentioned this too. They have more at stake, so it’s worth it to them do incur the expense. The average home owner would likely save $1,000 at most.

    Also relevant is the burden of proof on the taxpayer is now less than what it was a few years ago.

    When you combine those two things it shifts more of the burden of real property taxes to homeowners.

  23. 23
    ChrisM says:

    RE: Kary L. Krismer @ 19 – Hmm..

    1. Seems like you contradicted yourself in post 6, because now you’re saying loans may be assumable but the lender can call the loan due? Am I misunderstanding?

    2. “Second, for assumable to be a sales pitch you’d need an environment of rising interest rates. No one is going to want to assume a one year old 5% loan.”

    Got it, assuming I have good credit, but wouldn’t someone with low credit be willing to assume a 5% loan? I’m honestly not aware of what the current scenarios are for people w/ bad credit.

  24. 24
    The Tim says:

    By ChrisM @ 20:

    RE: MichaelB @ 18 – Wow, the first comment is excellent — I’ll copy the whole thing:

    “On a $350,000 home presuming you put $35,000 down which is 10% (a lot of lenders are requiring 20%) the average priced home is going to cost about $1850-$1900 per month counting taxes and insurance. That’s also assuming you qualify for a sub-4% loan. Most do not.

    So you have to make about three times $1900 per month to afford that loan. That means your household income has to be upwards of $5600 per month or $67,000 per year.”

    Average household income around here is about $45,000.”

    Median household income (which is what is used in calculating the Affordability Index) for King County is $66,000 for 2011, according to the OFM. I can’t find a source for average, but I’m almost positive it would be higher, with the large number of millionaires we have around here.

  25. 25
    ChrisM says:

    RE: Kary L. Krismer @ 21 – I’m not doing a good job of explaining my position!

    Let’s assume we have two properties purchased in the same year, during a year of rapid interest rate increase. Two similar properties, one for 320, the other for 235. I believe the property taxes for the two properties will be significantly different because the appraiser will take the purchase price into account.

    Do you think they will in fact be identical?

  26. 26
    The Tim says:

    RE: ChrisM @ 25 – In Year 1 they may have very different assessments, but if the County Assessor is doing their job correctly, the $320k property will have its assessed value dropped to $235k in Year 2, and going forward they will be paying about the same as each other in property taxes.

  27. 27
    ChrisM says:

    RE: The Tim @ 24 – Oh, crap, I’ve been sucked into median household income! I can’t seem to escape Clark county in this board today! I cringe because HUD lumps numerous counties together for the PDX metro area, including Washington & Multnomah on the Oregon side, and Clark & Skamania on the Washington side.

    Well….. Skamania is the sticks – no population centers, I won’t go so far as to say Deliverance, but…. there’s no basis to lump Skamania in with Mult/Wash counties. Yet that is what HUD does when throwing out median household income.

    THAT SAID… I concede that King county is 65. What does that do the numbers? Well, it is still above the 67 in the example.

  28. 28

    By ChrisM @ 23:

    RE: Kary L. Krismer @ 19 – 1. Seems like you contradicted yourself in post 6, because now you’re saying loans may be assumable but the lender can call the loan due? Am I misunderstanding?t.

    Sorry for not being clear. Prior to the Garn Act you could buy a property “subject to” the existing debt. You wouldn’t formally assume it, because the deed of trust was “due on sale,” but you could agree with the seller to make the payments and be responsible for it. State law in many states would not allow the lender to enforce the due on sale clause. So it’s not that the loans were all assumable back then, it’s that to a large extent it didn’t matter.

    From the seller’s point of view formal assumption is better because I think that will act to release them from the debt. If the buyer defaults, it’s no longer their problem.

  29. 29
    ChrisM says:

    RE: The Tim @ 26 – “f the County Assessor is doing their job correctly”

    I feel like I’m turning into David Losh…

    I have numerous examples of bare land (10+ acres) in Clark county for sale in the MLS.

    Comparing the list price to the county’s assessed price indicates that, in fact, the County Assessor is *not* doing their job correctly…….

  30. 30

    By ChrisM @ 25:

    RE: Kary L. Krismer @ 21 – I’m not doing a good job of explaining my position!

    Let’s assume we have two properties purchased in the same year, during a year of rapid interest rate increase. Two similar properties, one for 320, the other for 235. I believe the property taxes for the two properties will be significantly different because the appraiser will take the purchase price into account.

    Do you think they will in fact be identical?

    I’m talking about something slightly different, but I’m not sure any assessor takes the actual sales price of the property into account for the assessment. I think they use only other comparable properties.

    The example I gave in the past is on my own property the assessor valued it at about 10% more than the sales price, even though the sale was in November, 2007, the valuation was supposed to be one of January 1, 2008, and the market had started declining before November. If they had taken the sales price into account, rather than comps, they wouldn’t have come up with that number.

    Edit: BTW, the assessor taking the sales price into account would be like an appraiser taking the contract sales price into account when the house is being purchased.

  31. 31
    David Losh says:

    RE: Teacher _Greg @ 4

    “I think the major lesson I know I have learned from the past 10 years is the wisdom my dad imparted to me 15 years ago: a house is not an investment, it is a place to live.”

    Baloney.

    If you want to live some place rent. Rents will be going down as time goes on, that debt will stay with you until you pay it off.

    That debt is securing your investment.

  32. 32

    RE: David Losh @ 31

    David, That’s the Most Pragmatic Blog I’ve Seen From You

    I totally agree. BTW, I agree with most of your other blogs too :-)

  33. 33

    By David Losh @ 31:

    If you want to live some place rent. Rents will be going down as time goes on, that debt will stay with you until you pay it off..

    So now you think you can predict what rents will be in 30 years? We know that the mortgage will be paid off, unless something stupid is done (e.g. refinance for another 30 and then another, etc.) Rent will be there until you die, unless you do something about it.

  34. 34
    MichaelB says:

    RE: The Tim @ 24

    Average or median wages are pretty much where they were in 1999 and likely going down. In this economy, the median home price should be 2.5 times the median wage – or about $200k. That would be affordable. Of course, supply of housing is much much greater than demand compared to 1999. Get ready for the next step down!

  35. 35
    MichaelB says:

    RE: ChrisM @ 20

    Thanks! You’ve got the right idea.

  36. 36
    David Losh says:

    RE: Kary L. Krismer @ 33

    Read the thread, go back to the comment by teacher greg, then my response, and then put it all together without taking something out of context.

    But yes, we all can predict where rents are going, they are going down.

  37. 37
    David Losh says:

    RE: Kary L. Krismer @ 33

    Actually it kind of bothers me that you can’t figure out Real Estate.

  38. 38

    By David Losh @ 36:

    RE: Kary L. Krismer @ 33

    Read the thread, go back to the comment by teacher greg, then my response, and then put it all together without taking something out of context.

    But yes, we all can predict where rents are going, they are going down.

    I’m not sure what the point of that exercise was. In any case you’re in complete denial if you even think you know where rents will be two years from now, let alone 5, 10 or 30.

  39. 39
    David Losh says:

    RE: Kary L. Krismer @ 38

    How could you not know what rents will be? How can you advise people about Real Estate without knowing what rents will be doing?

    And let me help you with the excercise of greg the teacher:

    RE: Teacher _Greg @ 4 –

    “I think the major lesson I know I have learned from the past 10 years is the wisdom my dad imparted to me 15 years ago: a house is not an investment, it is a place to live.”

    “Baloney.

    If you want to live some place rent. Rents will be going down as time goes on, that debt will stay with you until you pay it off.

    That debt is securing your investment.”

    In other words Real Estate is an investment. If you don’t want to invest, you can help pay for some one else’s investment.

  40. 40

    By David Losh @ 39:

    How could you not know what rents will be?

    Because it’s impossible and I don’t just pull facts out of my butt and tell people to act based on those made up facts. Is that your understanding of what real estate is? Pretending you know the future, based on absolutely nothing, and then trying to get people to follow you? Well, I don’t understand that–never will.

    How can you advise people about Real Estate without knowing what rents will be doing?

    You don’t even know what a real estate agent is supposed to do.

  41. 41
    David Losh says:

    RE: Kary L. Krismer @ 40

    There are no facts. You either know our you don’t. You don’t know.

  42. 42

    RE: David Losh @ 31
    ” A house is not an investment, it is a place to live.”
    When I think of investments, I think of things that are likely to increase in value. For most of my life, houses weren’t thought of as things that would increase in value. The value was supposed to keep up with inflation, and as you continued to live there over a long period of time you’d pay off the principal, so owning the house would be like a forced savings account.
    But things changed. Credit became too easy, and anybody with a pulse could qualify for a home loan. Home prices skyrocketed, and buyers stopped seeing houses as places they wanted to make homes out of, places they wanted to stay in for a long time. People started seeing houses as money machines, prodded on by greedy real estate agents and salivating lenders.
    Scotsman posted something about houses not having to be practical. If you can afford it and want a plaything, it’s just a more expensive toy like a Ferrari.
    Far be it from me to tell people how to flush their money down a toilet. If you want to buy a two million dollar house and don’t care whether it declines in value? It’s your money.
    But most people aren’t in that position, and aren’t convinced that rents are going to go down.
    Some people feel better when they own homes. They want the freedom to paint their walls purple or tear out the walls, or to pull out the lawn and plant thistle. For those people, and there are a lot of them , a house is more than just a place to live.
    So it’s less than an investment and more than just a place to live.
    But it just makes sense to be smart when you’re buying a house. Don’t buy a house thinking it’s going to appreciate in value. If it’s going to cost you an extra 1500 per month in order to own rather than rent the same house, you have to wonder just how much that “privilege” of owning is worth. For me personally, not a whole lot. If you can find a house for around what you’re paying in rent, have a secure job, and intend on staying in the house for 20 years, that’s another story altogether.Much smarter than paying that extra 1500 per month convinced that your home is going to appreciate in value. That’s either stupid or brainwashed.

  43. 43
    corncob says:

    By MacroInvestor @ 3:

    Believe me I’d love to buy at some point. But I don’t want to lose the money I’ve worked so hard to save my whole life. Affordability only makes sense from a price standpoint.

    Good luck with that strategy. We are in a liquidity trap and if Japan is any indication we can expect low rates for probably the next decade or so.

  44. 44
    Scotsman says:

    OK- reality check. I’m one of the biggest bears on this site when it comes to economics and the future, but the last several posts have shown people moving beyond bearish to just plain silly. Too many have forgotten that we all have to live somewhere, and we will be paying for it, investment or not.

    Let’s make some assumptions about today’s choices and the future, slanting all of them toward the bearish perspective. Let’s assume you can either rent a decent $180K house in Renton, etc.for $1500/mo. or buy it with a 3% down 15 year FHA loan for the same PITI payment. And let’s assume the economy continues to tank. Your income stays flat- a result of the trade-off between falling wages and your increasing experience. The rent drops by $50/mo every year so that at the end of 15 years you’re only paying $750. The house drops from $180K to $90K. That’s a pretty dire scenario. So who’s ahead at the end of 15 years?

    We can do a lot of fancy analysis filled with assumptions about rates of return, how much actually gets saved, what happens to property taxes, etc. In short, in a declinging economy positive rates of return are hard to find and taxes rarely go up for any period of time. But in month 181 our buyer is debt free and living payment free, able to bank $1500/mo for the next 15 years- or more. Our renter is getting ready to shell out $750. Was the house a “bad” investment? Yup, just like a whole life policy. But at least he has something in both cases. The renter probably has about $70K saved- not enough to buy the house. He might have more if he was very lucky.

    Change the assumptions, change the outcome. But remember, even with strongly negative assumptions about the future, at some price point buying makes sense because eventually your shelter is paid for.

  45. 45
    David Losh says:

    RE: Kary L. Krismer @ 33RE: Scotsman @ 44

    You and Kary are making the same point as Ira.

    Ira though makes the point that: “Credit became too easy, and anybody with a pulse could qualify for a home loan. Home prices skyrocketed, and buyers stopped seeing houses as places they wanted to make homes out of, places they wanted to stay in for a long time. People started seeing houses as money machines, prodded on by greedy real estate agents and salivating lenders.”

    Real Estate never changed. The principles of Real Estate never changed, the perseptions did, like the point about “affordability.”

    The value of the Real Estate never changes. It does track inflation. It’s tied to, but not a part of the Consumer Price Index.

    I could go on, and on, and on, but just because people paid more than properties were worth doesn’t change the core value. All we have done in the past ten years is add millions of housing units. Some of those housing units can accomodate multiple families. You may not like that, it may not fit into your home spun place to live American Dream, but we have a glut of housing with more rental units coming on line as fast as they can be built.

    You also need to look at the fact people will focus on making money as the economy shrinks. Those housing units of dear old dad’s era are just a place to sleep today.

    There is always a strategy, but Real Estate is hard work, and high risk.

  46. 46

    By Ira Sacharoff @ 42:

    Far be it from me to tell people how to flush their money down a toilet. If you want to buy a two million dollar house and don’t care whether it declines in value? It’s your money.
    But most people aren’t in that position, and aren’t convinced that rents are going to go down.

    There’s two important points in the last sentence.

    1. Different people are in different situations. What people here perceive as the situation of most people isn’t the situation of everyone. It’s sort of like the median house–not all houses are like the median house.

    2. Not everyone has the same view of the future. To some extent people buying that would otherwise rent are gambling that rents will go up. And in contrast, those not buying that could buy are to some extent gambling that rents will go down. And contrary to Losh’s claims, none of them really know whether rents will go up or down, but they’re placing their bets just like those who go to Emerald Downs.

  47. 47

    By Scotsman @ 44:

    But remember, even with strongly negative assumptions about the future, at some price point buying makes sense because eventually your shelter is paid for.

    Assuming you don’t do something stupid, like refinance 5 times for another 30 year period, or to buy some consumer goods, etc.

  48. 48
    David Losh says:

    RE: Kary L. Krismer @ 46

    At Emerald Downs there are guys outside who sell tip sheets. Some actually follow the horses, the training, trainers, and weather. There are good, and bad days.

    Now you could have chosen roulette as an example. That has more of a chance element. Even at roulette there is a mathimatical formula, that taken over a course of time, will give you probabilities.

  49. 49
    David Losh says:

    RE: Kary L. Krismer @ 47

    Refinancing has nothing to do with the choice to pay off. It’s all a matter of income to cover the debt. That’s what leveraging is about. It’s dollars in, dollars out. It’s cash flow.

  50. 50

    By David Losh @ 45:

    The value of the Real Estate never changes. It does track inflation. It’s tied to, but not a part of the Consumer Price Index.

    Wow, and you claim I don’t understand real estate.

    Why don’t you explain to us all how the heirs someone who bought and held 10 acres of land in Black Diamond in 1910 ended up in exactly same situation as the heirs of someone who bought and held 10 acres of land in Seattle in 1910. Not all land is the same, and that’s demonstrated every month when the NWMLS releases its area stats.

    Actually, I just updated my piece on how different properties have performed during the peak. 1 to 1.5 bathroom houses in Skyway are now only about 35% of the peak pricing! In contrast, “smaller” houses in Clyde Hill are at about 78% of peak pricing. (Both numbers based on median, and the figures are from NWMLS sources but not compiled or guaranteed by the NWMLS.) So even for a shorter period of time, your statement doesn’t show any understanding of real estate.

    http://www.trulia.com/blog/kary_l_krismer/2011/11/how_much_have_prices_really_declined–an_update

  51. 51

    RE: David Losh @ 48 – You’re stating the point, while at the same time missing it. Roulette is more of a mathematical game. I’m not even sure the house has much of a mathematical advantage compared to other games. If not, they rely more on people making bad decisions, using bad strategies, etc. But in roulette if you play long enough (e.g. 1,000 bets), placing the exact same bet every time, you could calculate about where you’d come out.

    Horse racing on the other hand has a lot more variables. If you place 1,000 bets all on horses that go off at 4 to 1, you won’t be able to calculate where you will be at the end. Also note that the house’s take in horse racing is set in stone based on the total amount bet on each race. Quite different than roulette.

    The economy is more like horse racing than roulette. There are a lot more variables. You can’t use a mathematical formula to know where you’ll be in 5 or 10 years with a certain choice.

  52. 52

    By David Losh @ 49:

    RE: Kary L. Krismer @ 47

    Refinancing has nothing to do with the choice to pay off. It’s all a matter of income to cover the debt. That’s what leveraging is about. It’s dollars in, dollars out. It’s cash flow.

    It is if you refinance for 30 years each time, which is what I stated the scenario was.

    If you have 20 years left and refinance for 15 years, that would be entirely different.

  53. 53
    David Losh says:

    RE: Kary L. Krismer @ 52

    Geez, do the math. Just because you have a 30 mortgage doesn’t mean you can only pay it off over a 30 year period. No one should be taking a 15 year mortgage unless the rate is a bargain compared to 30 years.

  54. 54
    David Losh says:

    RE: Kary L. Krismer @ 52RE: Kary L. Krismer @ 51RE: Kary L. Krismer @ 50

    Your 2000 Trulia posts is also a concern we should all share.

    Tied to CPI, but not a part of.

    Geez

  55. 55

    By David Losh @ 53:

    RE: Kary L. Krismer @ 52

    Geez, do the math. Just because you have a 30 mortgage doesn’t mean you can only pay it off over a 30 year period. No one should be taking a 15 year mortgage unless the rate is a bargain compared to 30 years.

    I would agree, but why do you think people go with 15 year loans? Is it not the lower interest rate?

  56. 56

    RE: MichaelB @ 34

    Actually, Wiki Has Average Household Income at $45K

    Let’s round it up to $50K in the Seattle area [we have more professionals]….and if you still think that’s way too low, eliminate the Gate’s and millionaires’ skewing affect on the avg incomes, then the avg 1.2 workers per household times the avg per capita $30K income starts to make a bit more sense….albeit, IMO, even $50K is still way to high for the Seattle area.

    $50K x 2.5= $125K homes in the Seattle area.

  57. 57

    RE: David Losh @ 36

    If the Building of New Contruction is the Proof

    You’re totally right, almost all of it is apartments now. This increases rental supply, more people living/sharing in each housing unit, simultaneosuly will reduce rents….supply and demand.

    Add the condos and repossessed homes converting to rentals in droves at a theater near you, and rent going down just hasta happen…

  58. 58
    Azucar says:

    By softwarengineer @ 57:

    RE: David Losh @ 36

    … and rent going down just hasta happen…

    What your “analysis” totally ignores is the possibility of inflation. I’m not saying that inflation is definitely coming, but you seem to be saying that it definitely isn’t. I don’t think anyone knows for sure…

  59. 59
    Teacher_Greg says:

    RE: David Losh @ 39

    For people who buy rental property that is an investment, but I imagine that only .01% of landlords are homeless… in my opinion buying a primary residence and rental property are not the same thing. I am not a landlord, but I am willing to bet that most owners of commercial real estate are not laughing all the way to the bank based on the resale value of their property. The value comes from having the monthly cash flow which is hopefully more than the cost of financing/maintaining the building.

    In my mind there is a big difference between buying a primary residence with the intention of living in it for X number of years and buying rental property with the goal of generating monthly case flow.

    My main point was that if one is buying their primary residence with the hope of turning around and selling it for a profit they are bound to end up disappointed. Are there dozens of exceptions and caveats to this rule, indeed there are. That doesn’t change the fact that for the vast majority of home buyers their future “earnings” will have a hard time beating the price increase due to inflation.

  60. 60
    David Losh says:

    RE: Teacher_Greg @ 59RE: Azucar @ 58

    You both brought up “inflation” which was addressed heavily here, some years ago. The conclusion that I drew is that we have had a false sense of inflation due to rising oil prices, and lowering the interest rates. It actually came down to commodity speculation.

    All of that is a discussion that goes on forever without resolution. The bottom line is that the global economy has had an infusion of trillions of government dollars, and the price of Real Estate is still declining.

    My only point is that all Real Estate is an investment. You get a return. It’s a hard earned return, but you still deserve to hold an asset of value. You do that by buying well. You can’t figure on inflation, you can only figure on the amortization schedule. Is this a property you want to own? and for how long. You make your business plan accordingly.

  61. 61
    ricklind says:

    RE: Kary L. Krismer @ 51
    Gary, while I am not a gambler, I think roulette odds are the best for the house, Craps are best odds the gambler can find, but everything favors the house.
    Rick

  62. 62
    Mee says:

    RE: The Tim @ 5

    Yes at the lower price I most likely would buy cash down or put down a larger down payment

  63. 63
    Cheap South says:

    softwarengineer @ 56

    Call me when home prices go down to $120K.

  64. 64

    By ricklind @ 61:

    RE: Kary L. Krismer @ 51
    Gary, while I am not a gambler, I think roulette odds are the best for the house, Craps are best odds the gambler can find, but everything favors the house.
    Rick

    Could be. I tried to figure it out several years ago, but I might not have done it right. Also, I was doing it from the individual’s side. With more players, the house does better, assuming different bets which don’t pay off.

  65. 65
    John Bailo says:

    I think another way to look at is…do you have to buy a house?

    Having to buy means, that if you don’t, then you will lose out relative to your peers. Sort of like if you did not buy DOW stocks from 1989 to 2007 you would have lost buying power.

    I would say, for houses, at this point no.

  66. 66
    David Losh says:

    RE: John Bailo @ 65

    Another way to look at it,”Is this a price I am willing to pay for this property?”

  67. 67
    Macro Investor says:

    RE: Scotsman @ 44

    Reality check improvements.

    1. The $180k house in Renton rents for $900-1200.
    2. The buyer pays for maintenance. The renter doesn’t
    3. The renter can move. The buyer is stuck the moment his equity is gone.

    Sorry, Scotty… it’s not even close.

  68. 68
    Macro Investor says:

    RE: The Tim @ 5

    Tim, that’s interesting, but not very relevant. Nobody wants to be under water for 28 of those 30 years. Ask some of the wanna be sellers out there if they’re happy being stuck in place, and with an anvil hanging over head.

    All of my friends are depressed. They can afford their payments, but want to move for varying reasons. Some changed jobs and their commute sucks. Others don’t like the neighbors. Kids came and they found the “highly rated” school really stinks, and they’re busing the kid halfway across the county to a private school. Or they’re just bored stuck out in the burbs with nothing to do.

    The truth is, they all bought because they thought the market bottomed and they were gonna make a bundle on the investment. Show me an owner who bought for any other reason, and I’ll show you someone in denial.

  69. 69
    Lisa says:

    Last year, I was looking for a way to lock in my low rent forever without buying a house. I couldn’t find a way. My income went up 10%, rent went up 20%, while equivalent condo prices dropped 10% and interest rate for 15 yr fixed hit 3.5%, so I bought a condo to lock in my rent for 10 years. If I ever need to move, I will rent it out, because my monthly mortgage interest + tax + maintenance is 35% less than comparable rent and is only about 10% of my income, and principle payment is another 10%. In my case, the math just made sense, regardless of whether we are at the bottom.

  70. 70
    Lisa says:

    I should add that while I am paying 20% of my income towards housing, I have a 10 yr fixed mortgage, so most of my monthly payment goes towards principle. After paying off the mortgage in 10 years, assuming no other changes, I will only be paying 6% of my income for maintenance and taxes. Just 10 years ago, my parents, who are poor immigrants, were paying over 60% of their income in rent. Cheers to the American Dream!

  71. 71
    Azucar says:

    By Lisa @ 69:

    …because my monthly mortgage interest + tax + maintenance is 35% less than comparable rent and is only about 10% of my income, and principle payment is another 10%. In my case, the math just made sense, regardless of whether we are at the bottom.

    That’s the argument that the people who are totally bearish seem to be ignoring… if you buy someplace, in addition to it being and “investment” (be it a good or a bad one), it also gives you a place to live at a mostly pre-determined price (you know the mortgage payments and can roughly guess what the taxes will be… the biggest wildcard with a condo would be “special assessments” or other unexpected increases in home owner association fees) for the rest of the time that you own it… forever if you retire in it. And after it’s paid off, the monthly amount goes down drastically. Now if you’re expecting that the bottom will continue to fall out of the housing market, then makes sense to continue to rent for a while and buy at a discount when it bottoms out… but if the rent/buy comparison works out in favor of buying NOW and buying is also right for other reasons (i.e. family needs/stability, etc.) and you’ll be ok with the payments if the market does continue down, then there’s not a huge argument against it – especially considering that no one knows for sure when/where the bottom will be.

    The other analogy that seems to kind of fit with the discussion of whether or not it might be starting to be a good time to consider buying a house is with cars. I’ve always thought that a rule of major acquisitions should be that you buy things that appreciate and rent things that depreciate. With a car, it’s obvious that the “investment” is going to depreciate. But since it’s more something that you buy to use rather than buy as an “investment”, it usually makes sense to buy the depreciating asset (the car)… which is contrary to the normal rule of thumb. But after 4 years of probably slightly higher payments compared to leasing… or one big payment at the front… you own it outright. From there on out the equation shifts – and the longer you own it the better the purchase option looks. The house pricing situation is similar. Depending upon how much you expect housing prices to deteriorate in the near future, it might be a good idea to wait a bit… or it might be time to find one that is priced where you’re comfortable that it won’t depreciate that much more (like buying a 2 year old car where much of the depreciation has already occurred). It really depends upon how much further the market ends up going down, and for how long it’s down. But no one knows for sure what the answer to that question is… even if they give advice as if they do.

  72. 72
    Jonness says:

    It’s true monthly payments for homes and mortgage interest is much lower than in recent times. But I’m curious whether the affordability index factors in the higher taxes you have to pay due to house prices being relatively high compared to incomes? This makes a significant difference to actual payments made.

    On another note, looking at the American Housing Survey for Seattle, the median house price compared to the median income of homeowners was 2.88x in 1996. In 2004 it was 3.87x, and in 2009 it was 3.81x. It’s quite obvious that anybody who buys now will be trapped in the home a LONG time, especially if we continue to head down to 2.88x or lower. We can roughly estimate the current price:income ratio by looking at 2009 incomes and 2004 prices, or 3.36x .Given the nature of housing bubbles tending to overcorrect, it’s not that difficult to imagine median house prices going back to 1996 levels compared to the median household incomes of homeowners, especially if the RE bulls turn out to be correct and rates begin to head up. (Note: Forget about comparing average incomes to median house prices. It’s apples to oranges. If you truly want to factor out renters, use the median incomes of Seattle area homeowners.)

    In the relatively minor housing bubble correction of the 90’s, which occurred in CA, San Francisco prices went sideways for about 6 years after having reached the bottom. If it takes another 3 years to reach bottom and 6 years to bounce along the bottom in the current correction, and prices head 15% lower than today, those who buy now will effectively be trapped in their homes without equity seemingly forever. This won’t necessarily occur, but the probability of it occurring is uncomfortably high.

    http://housingcorrection.com/images/sanfranciscoCS.jpg

    Most people who get suckered into the “low payment, buy now or be priced out forever” mentality are doing themselves a great disservice. A hoard of people thought they were getting good deals in 2008, 2009, and 2010. Yet, I see an alarming number of these homes have come back on the market as REO’s and short sales.

    At a minimum, buying in the current environment amounts to taking a high-risk gamble. This situation would not be that big of deal if the government was not pressuring to cut fiscal expenditures, and there wasn’t a high risk of Europe having a disorderly collapse.

    Then again, for some people, buying now makes sense. Just make certain you can afford an unforeseen shock to your income, you desire to stay put for a very long time, and the thought of losing lots of money doesn’t bother you.

    The Seattle housing survey reveals that the disparity between median household incomes of renters and home owners is rather large. This means too many people were allowed to buy homes who could not afford them and instead should be renting somewhere. As the homeownership rate continues to decline to levels that match incomes and unemployment, house prices will continue to decline.

    Invest when a very good economy is within reach and prices are heading up. Attempting to pick the absolute bottom is the classic mistake made by many amateur investors who have ended up getting burned. Instead of working for your money, learn how to make your money work for you.

  73. 73
    Lisa says:

    By Jonness @ 72:

    On another note, looking at the American Housing Survey for Seattle, the median house price compared to the median income of homeowners was 2.88x in 1996. In 2004 it was 3.87x, and in 2009 it was 3.81x. It’s quite obvious that anybody who buys now will be trapped in the home a LONG time, especially if we continue to head down to 2.88x or lower. We can roughly estimate the current price:income ratio by looking at 2009 incomes and 2004 prices, or 3.36x .Given the nature of housing bubbles tending to overcorrect, it’s not that difficult to imagine median house prices going back to 1996 levels compared to the median household incomes of homeowners, especially if the RE bulls turn out to be correct and rates begin to head up.

    Why won’t people believe that interest rate matters? Let me show you why the affordability index makes much more sense than a simple house price to income ratio. In ’94, mortgage rate was 8%, now it’s much lower. If, in ’94, I can pay 10% of my income towards the mortgage and pay it off in 15 years, now, I can do it with 9% of my income. That’s what the affordability index means.

    I think it’s pretty funny how overly pessimistic people are these days. I have faith in the Fed’s ability to print money and fan inflation. We won’t repeat Japan, but that’s not necessarily a good thing, Japan has lower unemployment and poverty rates.

  74. 74
    Jonness says:

    In another thread, Scotsman said what matters is house prices compared to rents. I believe here is some truth in this. However, in the current environment, it’s much less of a factor to what matters than during better times. This is because, if you buy a house and can’t sell it for what you paid for it, you are trapped.

    Part of the American dream of homeownership is to be able to sell the house at a profit and move up to a nicer house. The opposite of the American dream of homeownership is to be trapped owning a home worth less than you paid for it and not be able to move because you owe too much on it.

    What matters the most when deciding whether to buy in the current environment is the difference between what it takes you to live and what you earn. We are witnessing an unprecedented opportunity to save up a down payment. Prices have increased over the last 30 years at over 5% per year. Thus, if you spent 5 years saving up 20% down to buy a house, buy the time you bought the house, the price had increased more than what you saved. Since the price kept on going up, it wasn’t as big a deal as it seemed, but it must have been rather disconcerting to many savers none-the-less.

    To the contrary, we’ve recently experienced 4 years of house prices going lower, and they will most likely continue to go down for a while longer. Once they reach bottom, they will most likely bounce along the bottom for a period of years. Thus, if you take 5 years to save up a down payment, you will actually save up a down payment. Then when you jump in, prices can begin to move higher and take you up the ladder.

    It’s a great time to not buy a house and instead live frugally while saving a down payment.

  75. 75
    Jonness says:

    By Lisa @ 73:

    Why won’t people believe that interest rate matters just as much as price? The affordability index makes much more sense than a simple house price to income ratio. In ’94, mortgage rate was 8%, now it’s much lower. Whether I bought in 94 or today, I can make the same monthly payments relative to my income for x years and have the house fully paid off in the same amount of time. That’s what the affordability index means.

    And what do you suppose happens to the average sucker who moves every 7 years after being suckered into buying an overpriced home because of low rates?

    Your logic worked excellent in Japan as well as it did the U.S. That is, right up until they had a massive housing bubble collapse, and prices spent the next 20 years going lower and lower. The people who bought at the wrong time are locked into those same payments 20 years later while the ones who waited have much lower payments and mountains of cash from saving instead of wasting money on a house that’s not worth what they paid for it.

    Unfortunately, you cannot understand what is occurring around you because you have spent your entire lifetime on a massive inflationary ride. Thus, you are only capable of perceiving one way of life. The last 4 years should have told you that more than one possible direction exists. But you have ignored the writing on the wall while your 401K took a hit, and your house price headed lower. Your retirement is looking bleaker and bleaker, but you are not concerned because you have paid plenty of money into social security and medicare. But unfortunately, there is nothing left in the coffers for you but worthless IOU’s.

    It’s important that people wake up and take steps to protect themselves and their families from what is occurring around them. Ask yourself when is the last time you saw a 9% unemployment rate 4 years after the recession began? This is not your average 1994 house buying scenario.

    Back in the good ol’ days, you could mindlessly invest in just about anything and get rich. These days, the tides have turned, and one must move carefully or, as many will attest to, lose your home.

    But Ben Bernanke is on your side. He is determined to inflate the U.S. out of this mess. So far, he and the government have fired all of their weapons at it and came up short. But who knows, you might get lucky. Flip a coin, heads you are rich, and tales you are poor. Which side do you choose? I choose to carefully invest money as opposed to flipping coins over my future.

    There’s an old investment saying, “don’t try to catch a falling knife.” In the current environment, it has paid handsomely to heed this advice. BTW, many people tried to convince me of your exact same argument back in 2008, 2009, 2010, and 2011. It has paid me handsomely to ignore such irrational reasoning and instead concentrate on the big picture.

  76. 76
    David Losh says:

    And you’re all forgetting the interest payments.

    The only way it’s an asset, if it truly is worth having, is if you own it. The mortgage is only holding the asset, like on lay away, until you decide to purchase it, which I mean, pay it off.

    The interest rate changes the price, or has historically. Higher interest rate, lower price, all do to this “Afford ability Index.” Lower interest rates, from what I have read lead to much higher prices, like the prices we have today.

    The only question is if the property is worth owning, how much are you willing to pay? and remember the interest payments traditionally double that price.

    The last part is about inflation, which I think has kind of settled into an across the board price increase in the cost of goods. Wages on the other hand have stagnated, and there are plenty of people willing to work.

    In my opinion, you’re stuck with the price you pay, and you’ll pay it in real dollars, rather than inflated dollars.

  77. 77
    Jonness says:

    By David Losh @ 76:

    And you’re all forgetting the interest payments.

    Exactly!

    When I was a kid I asked my dad how come everyone is so rich? He looked perplexed and asked me what I meant? I said, “look at all the new cars and fancy houses people own.” He smiled and explained that most people don’t own these things. The bank owns the stuff, and the people spend the rest of their lives as slaves paying the banks to use its possessions. It was a wake-up call for me at the time.

    Over the last 4 years of holding off and waiting for prices to correct while I’ve lived frugally, I have saved over 15 years of equity (working a 9 to 5 like everyone else). If I so choose, I could save up the other 15 years of equity in another 4 years and buy a very nice home with cash (Actually, I could just about buy the same homes I was look at then now with cash despite having splurged on a truck, a boat, and an RV all with cash last summer). Meanwhile, the person who bought an overpriced home with low rates is making the bankers rich. While I enjoy owning my home free and clear and banking the massive interest rates others give to the banks, my “low interest” paying friends will be enjoying being “locked in” to another 22 years of “affordable” payments.

  78. 78
    Azucar says:

    By David Losh @ 76:

    The only way it’s an asset, if it truly is worth having, is if you own it. The mortgage is only holding the asset, like on lay away, until you decide to purchase it, which I mean, pay it off.

    The interest rate changes the price, or has historically. Higher interest rate, lower price, all do to this “Afford ability Index.” Lower interest rates, from what I have read lead to much higher prices, like the prices we have today.

    So are you saying that when you buy a house, you’re not allowed to move in until you’ve paid off the mortgage? Because that’s what it sounds like you’re trying to say… or when you put something on lay away do they let you take it home and use it?

    And the argument about the interest rate changing prices “historically”, although it seems logical, isn’t really true. The Tim posted a link to a recent post of his analyzing of that theory, and it showed some correlation but not really extreme or even linear. It’s not like houses go down 50% when mortgage rates go from 4 to 8 percent, or vice versa.

  79. 79
    Scotsman says:

    RE: Jonness @ 75

    Curious how your current rent stacks up against a potential payment were you to buy the house you rent.

  80. 80
    Scotsman says:

    A couple of comments with regard to the last several posts. It’s worth taking some time to “color in” your picture of exactly what the future looks like. Put some specifics on future unemployment rates, try to establish a range for what your future earnings might be over the next ten years, look at what industries will grow and what will fail, etc. How secure is your job? What alternate skills do you have? These are questions we all should have answers to before jumping in and buying a house.

    I personally think we’ve reached an equilibrium of sorts- the economy is growing (albeit slowly), unemployment has stabilized, the U.S. is probably in a stronger economic position- if only by sheer size- than much of the world, and what change is happening is moving at a snail’s pace. I think the main damper on future growth is globalization. It will constrain wages and job growth here at home, but adjustments will take place over decades, not years.

    Two larger issues are rising interest rates and cuts to government spending. Europe’s coming collapse could impact rates, but I doubt they will shoot too high. After all, high rates kill growth in a self regulating cycle so I doubt we will see rates much above 5% on the ten year. The federal goverment currently borrows 8% of gdp a year. That will have to stop, and when it does government will be cut by some similar amount. You can’t tax your way to prosperity any more than you can borrow your way out of debt. The combined result of these two factors will be another bump down in employment, wage reductions, houses down by maybe 20% and decades of low growth. But the world won’t end, I doubt the government will fall, and life will go on.

  81. 81
    David Losh says:

    RE: Azucar @ 78

    The “Affordability Index” is very real. Banks use it to make loans. They lend on the ability to pay. That’s how we are in this mess. The ability to pay, or the broader rational of the ability to pay, is how banks make money. Banks are trading the debt. Banks generate the paper work, then sell it based on a probability that some one will pay, over the course of time. The interest payments are all income. It’s all done with small per cents that add up over the course of time.

    The asset is what the property is worth. We are now getting closer to banks lending on the actual value of a property because they are holding so many properties. Banks, and the government, are asking for that 20% down to get the loan amount closer to value. The Real Estate market is contracting.

    What I’m saying is that when you buy you should buy what has a value that you are willing to pay. If you want a house close to a good school, and you trust that value, then pick the price that makes sense to you.

    You don’t own it until it’s paid for. The bank owns it. The only question is if that is a price you are willing to pay. You could look at it as a question of rent payment, or mortgage payments, but the mortgage payment is for 30 years, 15 years until it starts to amortize. Is that worth it to you?

    If it’s worth it, then buy it. If you look at the price, and say, “I would pay that,” then buy it. Then it’s up to the bank to tell you yes, or no.

  82. 82
    Lisa says:

    By Jonness @ 75:

    But Ben Bernanke is on your side. He is determined to inflate the U.S. out of this mess.

    Good luck fighting the Fed when they consider 3.9% inflation perfectly reasonable. I lived in Japan after the bust, and it was awesome. People were employed, retirees had enough to live on, poverty was virtually non-existent, people didn’t use credit and had tons of cash. Unfortunately, U.S. is not Japan, and Bernanke will probably overshoot to avoid being Japan.

    As a side note, ever heard of a cash flow positive property? They disappeared during the bubble years but they’re making a comeback. No one knows when we’ll hit a bottom, but if a property gives you money every month (or cost less than renting), and inflation keeps rent up, then I’d say you’re in a better position than holding cash, which Bernanke is determined to devalue.

  83. 83
    Scotsman says:

    RE: Lisa @ 82

    That’s not inflation you’re feeling- it’s the dollar devaluing and commodity price increases. It’s an important difference.

    Japan has had a shrinking work force and aging population for some time now- it helps keep unemployment artificially low. The trend is expected to continue through 2050. We don’t share that “benefit.”

    Just because something cash flows positive now with today’s equivilent rents doesn’t mean it will 5 years from now if/when wages and rents fall. That’s the hidden trap. I doubt we’ll ever see significant inflation. It would bankrupt the federal government through higher interest rates on debt owed and inflation indexed entitlements- social security, pensions, etc.

  84. 84
    Jonness says:

    By Scotsman @ 79:

    RE: Jonness @ 75

    Curious how your current rent stacks up against a potential payment were you to buy the house you rent.

    My current rent is $0, so it stacks up rather well over what it would cost me to buy. Truthfully, I own this place outright, but don’t let that throw you, I have plenty of friends who don’t own that have managed to find reasonable shelter for next to nothing. It all comes down to how much of a sacrifice you want to make and for how long you want to make it before taking your massive cash wad and living the good life.

    It requires discipline to save for a rainy day, but once you become accustomed to it and build an initial nest egg, it’s off to the races. The key to getting there is getting to the point where you don’t have a house payment or rent, other than taxes and insurance. It’s impossible to get ahead when 50% of what you make is given to the banks in the form of interest on crazy loans for overpriced houses and cheap junk manufactured overseas that breaks or wears out within a year.

    But it is important to understand, in the wonderful world of investing, saving for a rainy day doesn’t always work. In fact, it usually doesn’t. We are currently living in the exception. The following chart from my website demonstrates this:

    http://housingcorrection.com/images/seattlevsinterest.jpg

    Since 1985, Seattle house prices went on a tear compounding over 6% appreciation per year. If we were in normal times, and you wanted to buy a $400K house, you would have to save $24,000 the first year and $25,540 the second year just to stay even. It would take over $135,000 to keep pace with price appreciation after 5 years. This makes it really difficult to save a down payment in such an environment. Thus, people are compelled to jump in with little down just to try to catch a piece of the rising tide. The problem with that is, initially, interest on their debt offsets the rise in prices. Then before the loan matures and alleviates the interest payment factor, people move and start the whole “make the bankers rich” shenanigans all over again. How on earth do they ever expect to get ahead when they continually fall into this trap?

    So that is why I continue to talk about what an unprecedented opportunity we are in for saving a down payment on a house. This type of opportunity only happens perhaps once in a lifetime, so people need to take advantage of it. Think about it, if you had spent the last 5 years saving 6% (compounded) of a $400,000 house, instead of $135,000 in normal price appreciation being against you would have $135,000 in cash plus interest paid to you plus another $120,000 saved due to price depreciation. $255,000+ is a good chunk of change to save in 5 years for having done nothing other than ignore hype from those who make their living selling houses.

    But saving 6% of your income is not anywhere close to what I’m talking about. I mean, why simply dip your toes in the water? You only live once. Why not take this brief deviation from our normal economy to live frugally, save as much as possible, and set yourself up in style for the rest of your life?

    What has been occurring these last 8 years or so has been an absolute boon to astute house buyers who have refused to listen to all the BS about “affordability and low interest payments) and instead used their brains and took advantage of the massive opportunity that we’ve all been presented.

    Make no mistake, this unprecedented opportunity is going to end someday. I definitely perceive inflation in our future, and you do not want to be sitting in cash when this occurs. The U.S. government is in a global war with every other country on earth to devalue their currency (save maybe Germany and a few others). Americans don’t want to design policies that allow us to grow out of this mess. So we will take the easy way out through destroying the dollar. This will allow us to bypass our debt obligations to bond holders, and it will boost our export market. It’s what nations do who lack the ability to grit their teeth and design legitimate plans for growth, and it never ends on a good note (unless you foresee it and make plans to exploit it).

    So yes, eventually, houses will start shooting up in price again. But that is a long ways off. In the meantime, we are caught in liquidity trap, which, along with extend and pretend policies, keeps the banks excess reserves off of main street and holds interest rates low. So instead of listening to the RE agents, it makes sense to live as frugally as possible and save up that down payment. For those who absolutely must buy, they should buy a frugal rental and live in it while continuing to save as much cash as possible. When you see signs of a legitimate bottom or light at the end of the tunnel, buy a nicer house (prior to rates moving up). Then let your renters make a sizable portion of your house payments for you. As prices start raging on the upside, leverage into more and more rentals. Instead of paying interest to banks, let other people pay interest to you.

    There is a time to buy and a time to save. The last 8 years have represented the time to save. We have several more years of this wonderful opportunity, and then everything could change. Knowing when to save, when to get in, and when to get out is 99% of the game. I’ve heard for the last decade how great a time it is to buy due to low interest rates. At some point, people have got to wake up to what it occurring. It’s been a great time to be living frugally and saving a down payment while allowing the money to appreciate through wise investment strategies.

    Liquidity traps are not a sign to leverage your life savings into depreciating asset classes. They are a sign of unprecedented opportunity to build up your excess reserves. Once the government gets a handle on the liquidity trap, then it’s time to think about adopting a new strategy based on the then new signs of the times.

  85. 85
    Jonness says:

    “But saving 6% of your income is not anywhere close to what I’m talking about.”

    Sorry, that should be 6% of the house price.

    Also, while I say I perceive inflation in the distant future, don’t go banking on it and jumping into housing early. We might not ever get out of this mess. The important thing is to only move when the signs are flashing a change in the economy. Right now, they aren’t. It’s still much too risky to change positions at this point in the game.

  86. 86
    Jonness says:

    By Lisa @ 82:

    Good luck fighting the Fed when they consider 3.9% inflation perfectly reasonable.

    Well, I keep hearing people making tall claims about what a great job Bernanke is doing. But last time I checked, the government and Bernanke flooded record amounts of cash onto the economy; yet, house prices are still collapsing, the unemployment rate is still phenomenally high, and real wages are still falling. The following video tells me everything I need to know about Bernanke’s economic insightfulness. Be sure to pay attention to the part about “low interest rates.”

    http://www.youtube.com/watch?v=9QpD64GUoXw

    Well, I think we can safely put the Bernanke to the rescue argument to rest.

    As far as, Japan, I agree it is different from the U.S.. They have tried everything in their power to devalue their currency and have failed for the last 20 years. I trust the U.S. will have an easier time destroying its currency. However, I don’t think it will occur in the short time frame many people are predicting.

    But the history of Japan does provide us insight into our current situation. Leverage into depreciating asset classes when your economy is stuck in a liquidity quagmire at your own risk. In Japan, house prices have fell for 20 years. Apparently, low interest rate environments aren’t always everything that RE salespeople make them out to be.

  87. 87
    David Losh says:

    RE: Jonness @ 86

    I think you missed what she said, which is true. People in Japan have cash.

    Cash also means an under ground economy. That’s the other part no one sees, or wants to look at. You’re thinking money in a 401(k) or savings account. The Japanese float the money, from the matress, to relatives, to other ventures.

    The example I used about a family from Japan who bought a house down the street from me. For seven years you saw very few people come in or out, just to sleep. They paid it off in seven years, sold, and I guess moved to a better place.

    They all worked at McDonalds, and the goal was to own a franchise.

    If you watch, say anywhere in the Asian community, you see cash. Cash isn’t spent on luxury, though it can be, it’s always being invested in another venture, another gamble, another way to make more cash. Businesses, investments within the community, owning property that also produces cash, the money is always working.

  88. 88
    Jonness says:

    RE: David Losh @ 87 – OK, thanks for pointing that out.

    What you are saying is exactly what I’m talking about. There is a big fork in the road, and if you take the fork that teaches you to think like an investor, you will end up worrying a whole lot less about the monthly food, gas, and utility bills.

  89. 89

    […] I’ve always heard it as 30% of gross annual income, which is the number I used for my Simple Affordability Calculator, and the number I use when calculating the Affordability Index. […]

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