I thought it might be interesting to dig into a real life example of just how much money a bubble-believing home buyer would have lost by purchasing a home during the insanity of the housing bubble in Seattle. What better example to use than our favorite Ballard home that just sold?
Wherever possible I’ll be using actual numbers from King County records. When real numbers aren’t available I’ll let you know, and use reasonable estimates.
On the surface, it would seem that the owner of this home didn’t do all that bad. Bought pre-peak for $431,200, sold this month for $423,400. Hey, that’s only a loss of $7,800, right? Not quite… Let’s dig into the gory details to find out the real costs of owning this home.
Our Ballard bubble buddy initially purchased his abode on April 28, 2005 for $431,200. He put just $26,940 down (6.25%), and financed the rest in two loans: One for $344,960 (80% of the purchase price), and one for the remaining $59,300. We don’t know for sure what kind of interest rates he got on these loans, but let’s assume that he got the prevailing rate at the time of 5.86% on his primary loan, and a few points higher on his piggy-back mortgage at 7.50%.
Before we add on taxes and insurance, the total monthly payment on this 2005-purchased Ballard home is up to $2,452. I’ll assume insurance costs about what I’m paying, which is $45 a month. For property taxes, the King County website only goes back to 2009, so I took the average of the 2009-2011 tax bills for this home to arrive at an annual tax cost of $3,868 ($322.33 a month).
So we’re looking at a grand total monthly payment of $2,819 a month out of the gate.
| Year | Interest | Std. Ded | Tax Saved |
|---|---|---|---|
| 2005 | $18,424 | $10,000 | $4,319 |
| 2006 | $24,301 | $10,300 | $5,880 |
| 2007 | $23,984 | $10,700 | $5,680 |
| 2008 | $26,208 | $10,900 | $6,246 |
| 2009 | $23,967 | $11,400 | $5,479 |
| 2010 | $23,637 | $11,400 | $5,386 |
| 2011 | $23,287 | $11,600 | $5,232 |
Let’s figure out the income tax deduction. Let’s assume that our Ballard buddy had $7,000 in other deductable expenses and was in the 28% tax bracket ($139,351 – $212,300 for a married couple as of 2011) To figure out how much they saved, we need to add up their interest paid and other deductable expenses, then subtract each year’s standard deduction (since they would have gotten that deduction even if they were filthy renters), and multiply the total by their tax rate. The table at left shows how this savings breaks down each year.
Grand total tax savings: $38,222
In February 2008, the two loans were refinanced into a single loan with a new balance of $412,500. Since that sum is $23,383 more than what the balance of the two separate loans would have been by that time, I’ll assume the closing costs (and maybe a vacation?) were simply financed in. With interest rates at the time at 5.92% and the new, increased loan principal slightly offsetting the rate reduction on the piggy-back that was folded in, the monthly payment actually calculate out to be the same: $2,819.
I should also point out that for closing costs on the initial 2005 loans, my conservative estimate is $3,600—Bankrate’s average for a $200k loan in Washington State. They would most likely have been higher than that in reality.
| Item | (Cost) / Gain |
|---|---|
| Down Payment | ($26,940) |
| Closing Costs | ($3,600) |
| Principal | ($37,664) |
| Interest | ($165,847) |
| Property Taxes | ($26,431) |
| Insurance | ($3,690) |
| Income Tax Savings | $38,222 |
| 2012 Sale | $423,400 |
| Principal Payoff | ($389,979) |
| Buyer’s Agent | ($12,702) |
| Seller’s Agent | ($12,702) |
| Excise Tax | ($7,536) |
| Grand Total | ($225,469) |
The table at right shows all the costs and gains between April 2005 and February 2012 for owning this Ballard home, excluding maintenance and any possible buyer concessions at sale (e.g. seller-paid closing costs, misc. repairs, etc.), which there’s really no good way to estimate.
Note that even though the home was sold for just shy of its original purchase price ($7,800), the owner did not actually come that close to “break even.” Ignoring all the ongoing costs of ownership and just comparing the starting money (down payment plus closing costs = $30,540) to the ending money (sale proceeds minus loan payoff, agent commissions, and taxes = $481), we get a total loss on this home of $30,059.
But that’s not even the most interesting question to answer… $225,469 over 82 months comes out to a total monthly cost of $2,750. Let’s compare the monthly costs and total 82-month cost of buying this home to the alternative: renting.
I found three comparable three-bedroom homes currently for rent near this home in north Ballard, priced at $1,750 (mirror), $1,695 (mirror), and $1,725 (mirror). If we average those three together, we get a monthly rent of $1,725. Working backward from today using Seattle’s Rent CPI (series CUURA423SEHA), a rent of $1,725 today translates to a 2005 rent of $1,382. Between April 2005 and February 2012, the total rent paid would have been $131,735.
Bottom line costs on this “nearly break even” Ballard home between 2005 and 2012:
- Owning: $225,469
- Renting: $131,735
Advantage: Renting by $93,734.
Dang. That’s a lot of money to burn just for the “pride of ownership.”
+30
Awesome post The Tim. Quite the eye opener.
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Tim,
This is great work. It really puts things in perspective.
It also makes me wonder how the purchase/sale scenario would have needed to play out for it to be breakeven. For example, assume the purchase happened as it did, but instead of the refi in 2008 (with a potential cash out???) if the owner had refied today to a 30-yr 3.9% but maintained the same payments as the original loans. This would increase the principal reduction and lower the interest payment. My hunch is that it would still require a very long hold before the break even point.
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To be fair, this is a “Bought at the peak, sold in the trough” example. About as bad of timing as one could exhibit in the housing market.
Doesn’t mean renting always trumps buying. In this case, I think it must means that karma is a dog
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Great post. You need to also add the difference saved by the renter and give those funds some type of annual return on that money. Pretend the renter invested the difference in something safe….like a pool of mortgages that were rated AAA in 2005, 2006 and 2007. :)
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Erm…. what about opportunity cost?
That downpayment and monthly savings could have been used to max out a 401k.
Or just to buy t-bills if you want a risk-free comparison.
Even a 4% return on the $27k downpayment turns it into $35.5k after 7 years.
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RE: Pegasus @ 4 – LOL, but as I’ve mentioned before, if they’d done long term government bonds, they would have been golden.
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Dang that has to hurt……..93k in a bit under 7 years……
And it would appear The Tim that you’ve been conservative on your estimates of the cost since you have zero for maintenance and improvements done between purchase and sale dates.
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By deejayoh @ 3:
April 2005 was over two years before the peak in Seattle. Seattle’s Case-Shiller index rose an additional 31.5% between April 2005 and the peak in July 2007. It would have been a considerably worse picture had the purchase actually been at the peak.
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Even Zero Depreciation Makes Renting Cheaper
And if ya think that Ballard House sells for 21% less than 2005 prices to make up for the $93K saved in 7 years by renting…..there’s no buffoons left in the housing market.
The previous blog story about the Seattle Bubble guessing the $400K+ over priced home selling anyway blows that one out of the water.
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I commend the guy for sticking it out and paying his mortgage. He bought at a reasonable time and sold at a reasonable time…. this isn’t as interesting as the Eastside idiots who bought at the peak and got what they deserved for being stupid… You guys should switch it up and start talking about flips that have been working and righteous buys people are starting to make… The bubbles over… I just bought a 4600 sq ft house from the bank its on acreage with a killer view for $105/sqft… I dont care if the value goes up or down at this point… as long as I know I didn’t buy between 2003 and 2012 I’m considering myself golden and going fwd with you all really want which is a place to call your own…. renting sucks.
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Maintenance/improvements definitely has to be considered, at least with some conservative numbers. From what I’ve read, Shugy didn’t sound humble and frugal, so he probably didn’t let things decay.
What is the number people throw out for maintenance estimation? 1% of home value per year?
And yes, he could have done much, much worse…. easily.
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By J Hammy @ 10:
Hi, thanks for stopping by. Actually I have been making some posts lately about successful flips:
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RE: The Tim @ 12 – Ira and I will be able to point you to what will probably end up being a disaster flip. It sold almost 9 months ago and they’re still working on it.
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RE: J Hammy @ 10 –
What area did you get this price per sq foot?
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I live directly across the street and rent for $1365. Hope the new neighbors are nice…
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RE: Kary L. Krismer @ 13 –
The Fairwood Albatross?
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RE: Ira Sacharoff @ 16 – Yep. I’m feeling sorry for those guys. I think they may have bit off more than they could chew.
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RE: Kary L. Krismer @ 17 –
My clients made an offer on that house, at some point during it’s almost eternal stay on the market. It was rejected.Then it was off the market for a couple of weeks, and then back on for a very long stay. After it came back on at a much reduced price, my clients wanted it even more at the lower price. Went pending again, came back on the market at a new lower price, with the proviso that this needed to be an all cash offer. My clients didn’t have 185 thousand cash, or whatever it sold for. When it finally sold, I think it was for about 50 cents per square foot. And with a whole lot of money thrown at it, it could really be a very nice house. The architecture of those Fairwood Greens mid to late 60′s houses is impressive.
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RE: Ira Sacharoff @ 18 -
I agree. That’s why I live in a 1969 Fairwood Greens house. ;-)
I had a client that showed mild interest in that other house, but that was early on with way too high of a price for the condition. Back then it had a couple of big holes in the roof letting in water!
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Talking of albatrosses…
This one is still on the market
http://seattlebubble.com/blog/2011/12/23/40-off-and-counting-for-the-avondale-albatross/
http://www.redfin.com/WA/Woodinville/13425-Avondale-Rd-NE-98072/home/2083895
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Another Avondale albatross:
http://www.redfin.com/WA/Redmond/12040-Avondale-Pl-NE-98052/home/443332
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Great post. I see the property sold in “97 for 170k. A SFH which I know, sold for 220k late last year, sold in ’99 for 188k. It is admittedly a bit of a fixer (rentable as is) and approx. 16 miles north in Edmonds but it really points to 423k being too much for this particular home.
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By softwarengineer @ 9:
You do understand it is the same house in both posts, don’t you?
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Couldn’t help but laugh but I really want to cry. My house, which I bought in April of 2002, just shy of 10 years ago and lost to foreclosure in October due to divorce, recession, unemployment just sold yesterday for $381,000.00. I paid $365,000.00 for it, with 50K down, in 2002 and put a lot of my own money and borrowed money into it about 70K. There is no way to estimate what I lost in terms of the sweat equity. I will never buy another home. I feel sick at heart about it and have a lot of processing to do to come to a place of peace and acceptance about it,
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RE: DanW @ 20 – Jerry Seinfeld is the agent??
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RE: Kayce Taylor @ 24 – If you still have your health, you still have everything you need. Fortune comes and goes, I have been there too, but I always took health for granted until this year, when I had a bit of a scare. Never again will I take it for granted.
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RE: Kayce Taylor @ 24 – You need to get back on that horse and ride, cowboy, ride. Nothing is better therapy then beating the horse that broke your back. Oh wait….Einstein said “Insanity is doing the same thing, over and over again, but expecting different results.” I am so confused…..The good thing is like when your dog dies you get to buy a new puppy…..there is a pony somewhere buried in that pile of chocolate…..everything happens for a reason……laugh and the world laughs with you; Weep and you weep alone. Actually wreckingbull put it best….you have lost nothing until you have lost your health. Everything else is minor in comparison and surmountable.
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This kind of analysis is only useful if you can do it in a way that is predictive. And… right now you couldn’t rent that house for $1700… but you probably could in 2005 – so its fair.
So here is a fun game — how will the people who bought that house now do against renting over the next 7 years? I like their chances. Rents are sharply up in Seattle and the rent/own fundamentals are upside down from where they were in 2005.
Your affordability index points to that… and your affordability index doesn’t show that Seattle (and Ballard in particular) has become a more desirable place to live over that time. Seattle is #3 on US residents list of “where would you live if you couldn’t live where you are.” The prices should have gone up more rapidly here than in say… Spokane.
Guess on current rental price for that house by the way? $2200. You can get a chocolatehole with the same number of bedrooms for $1700.
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Ninety-three thousand dollars lost. Anyone who bought a home 7 years ago is an utter fool.
Thank you, Tim, for exposing the fool.
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What happened to a home isn’t an investment?
These people did better than a lot of others who bought in 2006, 2007. $2700 per month? not good, but not bad. It’s a much better purchase than say Everett.
You’re going to have to let this one go. The listing agent did a great job, the buyer’s agent did a great job, so you should let it lie.
Looking at redfin listings as a comparison would be interesting, because some buyers pulled out massive wads of cash to make impulse purchases on internet listings. That place I referred to over by Wallingford, but closer to the U District, for a whopping $480K, and over list price is a good comparison. It must have been a bidding war!
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OK, I’ll stir the pot a little. One thing about owning a house that elegant financial analysis can miss – most Americans are not very sophisitcated when it comes to understanding finances, or for that matter, just about anything. So that monthly mortgage payment plowed into the house functions as a savings account, although lately one that is leaking, and that has a negative rate of return. Nonethless, that mortgage payment tucked away into the home cannot be spent on Mariah Carey front row seats, vacations to Vegas, liposuction, or that 30 foot mobile home. So when the homeowner sells the home after 30 years, he gets to crack that piggy bank. Or his/her heirs do. The renter has more money to spend along the way, but if spent unwisely, nothing to show for the lower monthly payments.
30 years out, the homeowner gets his/her approximatley $423,000 back, or whatever the market will bear, upon sale of the home. Or he/she can stay and just worry about taxes and maintenance. The 70 year old renter continues to rent, and hopefully has saved the difffential of the lower monthly payments. The renter has thrown 30 years of monthly rent payments out the window, and hopefully has saved the $360,000 cumulated differential, although perhaps it may have been spent on consumables. Actually, over 30 years, the fixed costs of homebuying are averaged out even moreso than the seven year period that the Tim proposes. Further, from a financial perspective, the homeowner also has purchased an option, which itself has value.
So for many Americans, perhaps owning can make more sense over the long run. For the sophisticated investor, perhaps renting makes more sense.
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By David Losh @ 30:
It’s not. But does that mean it was a good idea to flush nearly $100k down the toilet on a commodity that could have been acquired for 42% less?
Not sure what point you’re trying to make here. My payment in Everett is $1,250 a month for a far larger and nice house than this (and yes, I did go see it on one of the open houses, so I can make that comparison), and my downside risk is significantly smaller since my purchase price was so much lower.
The listing agent definitely did a good job, since the house sold, and at a much higher price than most people here thought it would. I don’t think any of us can really say whether the buyer’s agent did a good job or not without knowing what the buyers were really looking for.
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Renting one house from the bank for 30 years has never been the norm in America, even once 30 year mortgages became popular, so the Tim’s 7 year thought experiment does a perfectly fine job of reflecting typical numbers for a home buyer in this overpriced region.
And I have found plenty of nicer 3bd or so rental homes on the Eastside (Bellevue, Redmond, Kirkland) for 1700/month. Yeah, we out here on the Eastside aren’t Ballard, but we have some of those fancy city amenities too.
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By Keith @ 28:
The more these people move here, the less desirable this place is to me. There are areas on the Eastside that I just avoid, because it is painful to see what has / is being paved over and covered up with rabbit hutch houses and strip malls in the 20+ years that I have lived in and around Seattle (off and on). To me, the available quality of life has diminished. Many people move here to enjoy nature, but the suburban sprawl continues. A little heartbreaking.
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This was a good solid transaction, done by Real Estate agents who seem to have done things correctly.
You got caught on this one. You were making fun of the agent, but the property sold.
When you saw the property you must have noted it is on the upside of the street with south west exposure. The neighborhood is kid friendly, and the location is close enough to amenities. It’s $423K. There is no comparison to Everett.
Now if you want to make that post, of comparing in city Seattle to in city Everett, great.
The point is we all do what we do for our own reasons.
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RE: Sweet Pea @ 34 – High density housing is the opposite of sprawl, believe it or not.
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RE: whee @ 33 – A 30 year mortgage is no way equivalent to renting a house for 30 years. Rent money goes out the window. Mortgage payments go towards owning an asset.
With regards to length of home ownership, the Tim may have some excellent sources. Here is one that I found:
“According to data from the most recent (2007) ACS, a little over 22 percent of single family home owners have been in their homes 10 to 19 years, 12 percent have been in their homes 20 to 29 years, and a little over 15 percent have been in their homes at least 30 years.[1] Added together, this comes to roughly half of all single family home owners having lived in their homes for at least 10 years. There has been very little change in this percentage since 2003.”
http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=110770&channelID=311
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By David Losh @ 35:
Sorry David, you’re reading things that simply aren’t on the page. Nowhere in any of the posts about this home have I made fun of the agent. My comments were all about the house and its seller, not the agent.
You’re the only one here that brought up Everett, even though it has nothing to do with this house. I still don’t see what point you’re trying to make. But then, that’s usually the case.
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RE: Feedback @ 29 – And anyone who makes such sweeping generalizations based on anectodal information is a moron. I bought in 2004. I put zero down, as I had great credit, but no savings. I’ve done the math. I’ve paid out about $20k more in owning than I would have paid for a similar rental (yes, taking all the factors into consideration). If I sold right now, I’d take a bath. BUT– have no intentions of selling. Due to the once-in-a-lifetime interest rates, I refi’d a couple of years ago. Now, I’m 13 years away from owning outright, then no rent again–ever. And that’s what’s going to allow me to retire comfortably, instead of renting–and having to work to make that extra money– forever. And if I’d rented those 8 years, that $20k in savings wouldn’t allow me to buy squat with a 15 year mortgage. So, now, when I thought I’d never be able to afford a home, I’m just a few years away from owning one outright.
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By doggril @ 39:
He’s being sarcastic, as his shtick is to give mock support for my points in an attempt to point out what a dope I am (or something).
Just guessing here, but I bet you also didn’t visit bubble sites almost daily during the boom years just to crow about how much more your home was worth on Zillow this week or how hot your neighborhood was and how foolish all the renters were for not jumping into the market right this very second. Like… some… people did.
Sounds to me like you’re doing it right. I wish more people bought homes in order to actually own them instead of just to hold it for a few years before “trading up” to a more expensive model.
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By Blurtman @ 36:
I’ve come to believe that high density housing in the ‘burbs is a bill of goods sold to people under the guise of “green” living, in order to further maximize profits for developers. “Planned” communities’ planning is changed along the way to suit the developers and the tax collectors. I’m not aware of a local planned community that has actually followed through wit attracting new local employment centers. Just more people commuting into the real employment centers.
High density housing should mean smaller footprints for construction, not just large swaths of lots with unnecessarily large homes built out to the edges of each property line, some drainage ponds, and pavement covering the ground in between. The boundaries of these developments just continue to creep outward. While we’re at it, maybe we could do a better job of restricting the use of large surface parking lots which seem perfectly acceptable in these “high density” areas. That should apply to schools, churches, hospitals, shopping centers, and mega-apartment complexes, etc.
In Seattle, in the city proper, and in Bellevue, “high density” housing is largely focused on the luxury end of the market, which in itself is another problem.
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RE: Sweet Pea @ 41 – I’m with you. I think high density housing in suburbia is sprawl. And ditto the ersatz eco features marketing gimmicks.
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OK, let’s try this thought experiment. Two 30 year olds, Mr. A and Mr. B, each will live in a single family home until age 70, after that it’s off to the assisted living facility. Mr. A buys the home The Tim featured, and takes out a 15 year mortgage. Mr. B rents. For the first 15 years, Mr. B comes out ahead of Mr. A. by $184,500 (assuming a monthly rent payment of $1725.). Hopefully he saves it. For the next 25 years until Mr. A and Mr. B enter the assisted living facility, Mr. B continues to pay rent. Over this 25 year period Mr. B pays $517,500. Mr. A pays taxes on his mortgage free home, and maintenance costs. So who comes out ahead?
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RE: Blurtman @ 43 – Who are you arguing with here? I’ve consistently said that buying a home and actually paying off the mortgage and keeping it is a winning strategy. It’s the strategy I’m employing myself.
According to the data you quoted above, less than half of home owners have been in their homes more than ten years, which implies that most people are more interested in “moving up the equity ladder” or some such nonsense than actually owning a home.
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By The Tim @ 44:<blockquote…According to the data you quoted above, less than half of home owners have been in their homes more than ten years, which implies that most people are more interested in "moving up the equity ladder" or some such nonsense than actually owning a home.
Tim, you are young, so you may be unaware of some of the “some such nonsense” that happens in life. For example, people lose their jobs, want to send their children to better schools, want to get out of crappy neighborhoods, their parents get sick and they want to be close, get promotions and higher paying jobs and want better homes / neighborhoods, get divorced, die, etc… You talk a good game for someone who has only been in his home for 2 years. Let’s see where you are living in 10 years..then you can lecture everyone regarding their “some such nonsense” life decisions… Furthermore, there is not necessarily a direct correlation between moving house and home ownership. For example, a person could downsize and go from having debt on a more expensive house to owning outright.
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Blurtman is obviously young. My father-in-law is 92, currently lives by himself in his home which he purchased cash in1955. My father was 89 when he died, lived in his own home which he purchased cash in 1969.
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Great post.
74 degrees and sunny here in Palo Alto. What a concept.
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what I really like about my house is the fact that the $4,500 I’m clearing every month from my previous real estate investments pays for my mortgage and my heat and my beer tab and it’s guys like the guys on this site that think renting is better that are working to make my life better. Sure my property values have gone down but that has essentially had only one effect…. which is lower property taxes and more money for me… I don’t intend to sell.
Ironically, at the same time I was moving into my 4,600 sq ft house, I was evicting a guy from one of my properties. He’s now living in the motel 8. If you rent you can get evicted rather quickly… If he had a home he could’ve been a squatter for a year or two rent free.. or better yet he may have owned his home free and clear… Right now he has nothing. I even took his TV.
Yep… definitely sucks to be a renter…
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In the long term there is only one solution for the USA for our national debt problem and that will be inflation… In 30 years from now these fluctuations in prices will seem trivial. You guys will be in two camps if you live that long. Those who made good purchases at this time and those who will wish they did. Also, it doesn’t matter if you sell a home at a loss if you turn around and buy something else that’s even better for a good deal, As long as you stay in the game you’re only out the transaction cost.
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RE: Blurtman @ 43 -
So who comes out ahead?
**************************************
Whoever dies first?
Wait, is this a trick question?
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RE: J Hammy @ 49 –
“As long as you stay in the game you’re only out the transaction cost.”
I’ve know “players” who approach real estate in exactly the way you describe. These guys like “action” – deals and risks and money on the table – confident that they are smarter than the poor suckers they are playing. You sound like ‘that guy’.
Keep at it, playa – you got to keep the deals flowing and the two or three balls in the air at the same time to get ahead, never mind offset those pesky little transactions costs, which are 10% of the cost of every one of your deals. But you’re much smarter than that now, right?
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RE: Blurtman @ 31 – Good post.
It reminds me of 1988, when I was sitting in the Ford dealership negotiating the purchase of a 1989 Ranger. The salesman in the next cubicle was try to sell the customer on leasing, because it was cheaper. The customer kept telling the saleman: “What about when the lease runs out? I’ll still need to be paying for a car.” The saleman kept pushing, but it didn’t do any good.
You can make the case that renting is cheaper over certain periods of time. That’s especially easy after the economy has gone through a major recession/depression. What renting is clearly is less risky. You know what you’re getting into. But absent saving and investing whatever money is saved, renting has no end game. On the other hand, buying and using your house as an ATM, that also has no end game. The goal should always be to pay off the house as soon as you comfortably can do so.
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By Blurtman @ 31:
One of the biggest understatements of all times. ;-)
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The “elephant in the room” in these numbers is clearly the interest.
Your numbers:
Owning: $225,469
Renting: $131,735
However of that owning cost:
Interest ($165,847)
Subtract the interest paid to the bank for the “use of” the money and operational cost of owning the home is:
$59,622
The “savings” over renting would be:
$72,113
So…basically, if you think of this as a general investment, the “stock” was bought on margin using house money. That money carried a rate of interest that — in retrospect — was far too high for the risk involved.
If, for example, the person had bought the house outright with his own money, instead of renting, he would have saved $72K.
This has real relevance on today’s situation, especially if the general stock market stays lackluster and salaries remain static, then there are few alternatives for cash to go to to get high returns.
Therefore the problem is that interest rates, as low as they are, are still too high. In fact you could say it’s the interest rates that also are keeping rental properties so high as well.
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By Blurtman @ 37:
On my little cul de sac, at 4+ years I am the third shortest period resident. The shortest is a the only tenant, and they are renting from someone who just moved south after owning the place for over 40 years. Counting the renter, only people 5 of 12 houses have lived here less than 10 years. The mean period of ownership (excludes the renter since the owner still owns) is 16 years.
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By Sweet Pea @ 41:
To some extent you’re both right. I’ve seen densities out in the middle of no where which make little sense. Clearly a developer trying to maximize their profits off of a larger piece of land. And apparently people bought into it.
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By John Bailo @ 54:
In the example at issue the time period is when the interest payments would be the highest, especially since they refinanced once.
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RE: Kary L. Krismer @ 57 –
It’s tricky, because I’ve always been told you have to stay in the house a certain amount of time to realize the gains.
However, that was before a declining market.
If “getting out” before an expected even bigger fall in prices essentially forces the person to sell in 7 years, then there is no other rational strategy.
However, that goes back then to the argument that the “culprit” (and beneficiary) in this case was the bank who received sky high interest payments of $165,000 for use of $400,000 over the course of 7 years. Now, of course, you could also say the interest was too low — if you consider that the bank (or home owner) could have put that same amount of money into AAPL stock which at 2005 prices would have returned 10x in value.
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RE: The Tim @ 38 –
Did you really make me search the archives? http://seattlebubble.com/blog/2012/01/19/guess-the-price-round-3-update-13-open-houses-later/
You were making fun of the Open House strategy because redfin uses the list ‘em, and leave ‘em strategy of listing property. Redfin tells people to put up pretty pictures on the internet, and of course price it right so gets the commission dollars quickly, and the property will sell. That’s all you have to do?
Let me apologize to you for pointing out the obvious that you bought in Everett Washingtonm for a quarter of a million dollars. It’s an urban area, kind of similar to Ballard, but in my opinion Ballard is worth twice the price of Everett. You seem to be defensive about that, but it’s a pretty simple leap.
The people who bought, or sold this property probably have some opinions about having thier home purchase or sale aired on the internet by a Real Estate blogger.
They didn’t choose this discussion. They made a purchase, or sale based on personal reasons.
If you really want to open up some discussion let’s look at some purchases of those people doing the leg work themselves, and buying through redfin.
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RE: John Bailo @ 54
“Therefore the problem is that interest rates, as low as they are, are still too high. In fact you could say it’s the interest rates that also are keeping rental properties so high as well.”
Interesting argument. But the first sentence is false. At today’s interest rates, nearly every single investment property deal that I look at is a smokin’ deal. Low interest rates are holding prices up.
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By David Losh @ 59:
Open houses might be low percentage operations, but for the owner they don’t care. If the open house brings them the buyer, that’s a good thing even if maybe only 5% of houses sell through that method.
Of course Everett is worth less than Ballard. Not sure what your point is there. Tim probably wouldn’t have spent the money to live in Ballard, and/or he might prefer to not live within the city limits of Seattle.
Good point on the people involved. For all we know they were in some sort of distress type situation, not related to mortgage amount, and marketed the house to sell quickly.
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By David Losh @ 59:
I just checked, and to buy a house on a private golf course in Seattle would cost over 4x what I paid. I’d be defensive about that, but it’s apparently a high crime area! ;-)
http://www.komonews.com/news/local/Seattle-officer-assaulted-inside-private-gated-community-140421633.html
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RE: Blurtman @ 43 – Correction: The 15 year mortgage payment in said thought experiment should be higher than for the 30 year mortgage payment, but I still think this type of analysis holds.
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RE: The Tim @ 44 – Tim, the elegant analysis you provided does show that the serial home owner is disadvantaged especially in a down market, In the bubble, he is looking like a genius, until the last purchase, I guess. But as you say, if your goal is ownership and paying off the home, then maintenance costs plus taxes over the long run may tip the balance towards ownership versus continually renting. I think this is the motive for the USG’s perhaps flawed policies. For most folks, the home becomes the piggy bank, for their sunset years, and for their heirs.
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By Blurtman @ 64:
If only that were true. I think it was more common that it became an ATM, but I haven’t seen stats on that. Hopefully you’re right.
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The people that have moved to Seattle proper have made it a better place to live. Cap Hill, Ballard, Belltown were all dingy and a bit sketchy when i moved here is 94′. I agree with you about sprawl – i never go anywhere on the Eastside. A lot more people will move to this region over the next 30 years – if we add them to the urban neighborhoods of Seattle rather than sprawling even more – it will be to the great benefit of both Seattle itself and the nature you seek to protect. RE: Sweet Pea @ 34 – RE: Sweet Pea @ 34 -
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I really wish the comparison wasn’t between renting from the bank for 30 years and renting for 30 years. I mean, I am hoping to buy cash or a very quick payoff (5-7years), and if everyone felt that way, home prices would be priced for that as a norm, even given the larger income averages in this region.
There appears to be no room to consider the case of someone to save for 5/10/15 years and buy cash and then live in that home/condo/trailer on 10 acres by the river (hehe).
I would like to believe that we are moving away from the buying-a-house-payment thing and towards the ‘get to taxes and insurance only asap’ thing.
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RE: Keith @ 66 – The Highlands. The Horror. The Horror.
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Couple of comments on the assumptions.
Seller of this property would have to be the biggest mutt in the world to pay anything remotely close to $26,000 for a refinance. He could have paid nothing out of pocket, or more likely $4-5,000. I was stunned by reading this after years of “housing as ATM” complaints. Overstated cost that really went into his pocket: $21,000.
Also, this fellow could well have used ARM financing which has consistently run about 2% cheaper than your assumed rates. I know because I did this with a rental purchased in ’04. I keep meaning to do the right thing (and it’s probably time), but it’s hard to give up 3.125% on non-owner occupied. 2% of $400,000 for 6 years is $48,000.
Your assumed tax deduction seems low in my experience, but I’ll allow that it is set off by lack of maintenance costs.
This guy had bad timing, and he comes out behind for sure. But no need to gild the lilly. I’d guess he is down about $30,000 versus your renting scenario. If he’d gone Fizbo, he’d be close to even.
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RE: Kary L. Krismer @ 56
That High Density development out in the countryside that you refer to is a result of Public Policy…. It is called “clustering”. The idea is that portions of a piece of land are restricted from development, say 60% of a parcel, to leave behind a greenbelt for wildlife habitant or Elk migration. In exchange a developer is given the ability to create extra lots when they are clustered on the remaining unrestricted land.
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By whee @ 67:
Um, it’s not. The comparison is this specific case, in which the buyer held the home for approximately seven years.
Saving until you can pay cash and buying outright is an awesome plan.
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I meant some of the following comments, which implied there were only those two options to pick from regarding property ownership.
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RE: whee @ 72 – Ahh. Well then yeah, I agree. I don’t get why some people want to make it into an all-or-nothing choice like that.
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RE: The Tim @ 71 –
“Saving until you can pay cash and buying outright is an awesome plan.”
Yes. And let’s look at this specific home. If we could bring ourselves to believe that the 7 year renting differential would be $94,000, and we know that one had $26,000 for an initial downpayment, then we could do a front end analysis to see that one need rent for only 29.5 years to accumulate the cash to buy this $423,000 home. I just hope nothing changes for 29 years.
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RE: whatsmyname @ 74 – That’s a fair criticism, because after all I did say that saving until you can pay cash is the right plan for all people in all circumstances.
Oh wait, no. I didn’t.
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RE: whee @ 72 –
The choice is to hold the property, or not. We have grown accustom to holding a property with a mortgage. Prices are so high that it makes sense to use the banks mortgage money. You have options of ARMs, or interest only, 30 year fixed, or 15 year fixed.
The mortgage industry has insinuated itself so completely into the Real Estate industry most people forget it’s kind of a new concept.
When our parents bought houses it was possible to pay cash, or finance with the idea of paying off quickly, if some one chose to. As prices rose that was less, and less of a choice. By the 1980s you could still buy for cash with idea you were trading up. In the late 1990s that became less of an option. In the 2000s the system collapsed. Nothing has changed, nothing is fixed, and prices are still high.
The only choice today is to deleverage, and that is the elephant in the room.
What this post points out is that interest payments cost $93K in seven years, if you just look at the assumptions presented. No one can afford that in home ownership, or as an investor. Some thing will have to give to get the banks out of the way.
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RE: The Tim @ 75 –
Sorry. Thought you said you were talking about this specific case in context of the mortgage or not to mortgage question.
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If you all think the Eastside is sprawl, you havent been to Denver. An unlimited vast empty wasteland to the Kansas border.. Sure there instances, Issaquah Highlands, Redmond Ridge, Snoqualmie Ridge come to mind, but for the most part the Eastside (Kenmore, parts of Bothell & Woodinville, Kirkland, Redmond, Bellevue) are probably going to get denser faster than Seattle neighborhoods.
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Kirkland and Bothell are densifying in terms of development, but nobody’s buying those shiny new ‘estates’ where 4-6 ugly homes are crammed onto 1/4 acre.
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By David Losh @ 76:
I think your recollection is false. Yes people could pay cash, as they can today. I just don’t think it was that common.
BTW, tax policy back then drove the move up behavior. It was either move up or pay tax (unless you were over 65).
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Ballard alone has building in process to add 10% to its population and permits for another 5%. The downturn is having a pro-density effect because people are not moving to places they don’t actually want to live in order to “get in” like during the boom. I tend to think Seattle will see most of the apartment/dense growth. I have trouble understanding the point (or the attraction to) of density in pockets in the middle of the suburbs… it seems to have all the downsides of density without the upsides… but its still better than more sprawl, I suppose. RE: Howard @ 78 -
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RE: Keith @ 81 – It’s apparently been going on since the 60s. Out by Covington there are the Timberlane and Cherokee Bay developments. I understand the latter was more of a recreational place when developed, but the former was purely residential. And in the 60s that must have been out in the middle of nowhere, but some of the lots are only about 5,000 square feet, which back then would have been very small for being so far out.
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RE: Kary L. Krismer @ 80 –
2 bedroom 1 bath $52K, 1 bed 1 bth $36K, good neighborhood 3 bed, 1,75 bth $65K, that was a duplex, all properties are in the Greenwood areas, the good parts. My recollection is fine, and it makes no difference what the motive was for moving up, it was a transfer of cash, or diversion of cash. More individuals had cash.
The credit craze of every one having credit cards, equity loans, and massive mortgages were in the late 1990s, and early 2000s.
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RE: David Losh @ 83 – When was that, and what condition? My recollection is that in 1978 prices for most decent houses in Seattle went above $50k, and they went higher in the 80s.
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RE: Kary L. Krismer @ 84 –
1984 to 1986, don’t forget 17% interest rates.
The fact still remains there was more cash in the Real Estate market than there is today, even with idiots saving a 20% down payment, of earned income.
Wait a minute, how could you forget 17% interest rates?
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RE: David Losh @ 85 – Probably because he wasn’t selling real estate, or wasn’t trying to buy a house with a mortgage or he was clueless to reality as always. Pick one.
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RE: Kary L. Krismer @ 84 –
In 1979, my landlord told me has was going to sell the house, but we could have first dibs on it before he put it on the market. It was a minor fixer, on 17th Avenue East right behind Group Health hospital. He wanted 36 thousand. I told him that he was crazy, that nobody would ever give him that much for it :)
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By Pegasus @ 86:
Actually yet another instance where you are wrong. I was in the market to buy a house with a mortgage, but got priced out between 1977 and 1978. I ended up buying a condo instead in 1978. But nice try. Someday you’ll be right about something. Keep trying.
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RE: Ira Sacharoff @ 87 – Ira, That’s amazing. That is a really nice neighborhood, depending on which side of Thomas you are talking about. I was 1 in 1979 so I had to do a little inflation conversion thanks to an online inflation calculator. $36,000 1979 dollars in 2012 = $112,395.87. If you assume a 15% interest rate the monthly payment would be $1,136. That’s insane. I have no register for a SFH, mild fixer, on Capitol Hill at that price. What happened and how can we get back to that kind of income:price ratio?
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By The Tim @ 32:
From the surface level, the seller’s agent appears to have taken a lot of interest in selling this home and put forth a lot of effort. The end result was excellent. The buyer’s agent appears to have screwed the clients to tears. The end result was horrific.
The story could change when you drill down into the details. But at that price, for that house, it really seems to me somebody did not perform due diligence on the house or the agent prior to signing the contract. I suspect this to be more of a rule than an exception.
Sorry, I skimmed the post and didn’t see it. Does the $7K in “other” expenses include the property tax?
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RE: Kary L. Krismer @ 88 – Ah.. David asked how could you forget 17 percent mortgage rates that did not occur in 1977 or 1978 like you are now pretending they did. I don’t care what you did when mortgage rates were not anywhere near 17 percent. You lose again. What a maroon.
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Actually, 17% rates didn’t occur in 1984-1986 when David claimed they did in comment #85, or in 1978 or whatever year Kary bought his condo according to comment #88 (although I don’t think he said rates were 17% then). They occurred in 1981-1982 according to FreddieMac.
http://www.freddiemac.com/pmms/pmms30.htm
But unless the point of carrying on this discussion is to mercilessly rain fecal matter on other participants in some absurd pseudo-intellectual feud or perhaps inflate ones own ego, as opposed to, say, contributing to the pursuit of knowledge or the welfare of humanity, I guess that’s just another craptoid I should just keep to myself and smeared on the walls of my own sick mind as opposed to flinging at other contributors.
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RE: One Eyed Man @ 92 – I referred to the 17 percent rate which was not in 1978 that David asked if Kary remembered. I also knew David’s 1984-86 was not when they were 17 percent although they were very high. Those rates whether 17 or 13 did slow the real estate market, mortgages were harder to qualify for and cash was king. The cash purchases today are not the same as they mainly are real estate investors buying distressed properties looking to flip to traditional buyers who are able to qualify for mortgages to buy the properties. Today’s market is far different then when rates were 17 percent. I certainly remember 17 percent mortgage rates and I was not buying a home, selling real estate or just clueless as Kary was. Kary refutes saying he was in the market in 1977 and 78. Using 1978 to refute which had nothing to do with 17 percent rates. It seems you can’t avoid trying to defend your fellow clown lawyer Kary or the kleptocracy at any chance you get especially when it is I that is pointing out the fallacies of Kary’s arguments that are usually without facts, pointless and endless. You only point is to rain fecal matter yourself, twisting the facts, while attempting to join some absurd pseudo-intellectual feud.
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By Pegasus @ 91:
First, the I had to ask David what years he was talking about in his example. In his response he indicated the years and then mentioned the interest rates during the period of time. Just because Dave mentions something for the first time in a post, doesn’t mean I forgot it. I’m going to now mention that Nixon was president. You haven’t said anything about Nixon here, so by your logic, you’re totally ignorant about the fact that there was once a President Nixon.
Second, again you somehow think I’ve forgotten about high interest rates? When I bought in 1978 my rate was 10.25, and that was considered horrible. Soon though it became a great rate, and it was years before I could refinance. I lived through those rates. I’m not likely to have forgotten about them.
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My comment was about cash in the Real Estate market place. I never put a time on 17% interest. It was only to make the point those interest rates lowered the market prices between 1978 to the 1984 to 1986 range of the prices I quoted, those were personal deals I was involved in.
It’s always the same. Kary comes out of left field with some claim, then hilarity ensues.
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By One Eyed Man @ 92:
Yes, as I mentioned, I paid 10.25, plus .25 for PMI (90% LTV). Condo rate were higher rates back then. It looks like rates didn’t drop below that for any significant period of time until 1991. I didn’t refinance until 1992, in part because I started my solo practice in 1991 and needed some proof of income. Banks were very busy refinancing back then.
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By David Losh @ 95:
What? The claim that I was priced out of houses between 1977 and 1978? Check out the median prices. They were skyrocketing at that time, and then started falling in 1979. Tim is showing a YOY increase at one point of over 33%! That’s over twice the rate of anytime this century.
http://seattlebubble.com/blog/2008/02/19/king-county-home-prices-1946-2007/
Clearly you don’t understand real estate. ;-)
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RE: Jonness @ 90 –
Wait a minute. The buyer’s agent doesn’t determine what the buyer offers. Sometimes a buyer likes a house so much they know they want to come in at full price or very close to it to ensure that they get the house. It’s hard to imagine that going on with that chocolate box in Ballard, but people are strange. Sometimes buyers get tired of looking. They just want to get the house, and are willing to pay more than what their agent recommends.
Yeah, I’m sure the opposite is true in a lot of cases, where the agent ‘persuades” the buyer to offer more. It’s a tough call. I feel strongly that I’m supposed to work in the buyer’s best interest. But is the buyer’s best interest what they feel is their best interest or what I feel is their best interest? If someone wants to pay too much for a house, what should I do? Fire them as a client? I always discuss with them what they should offer, and what I estimate it will likely sell for. It’s up to them if they want to take my advice. Sometimes they’ve offered less than what I thought it would take, and sometimes more.
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RE: Ira Sacharoff @ 98 – I have always said that holding back some buyers can be very tough. This market probably makes that a bit worse than normal, because the inventory is so bad.
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By The Tim @ 38:
+1,000,000
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