I never thought I would read this in my own post, but - Thanks 100Meters
[quote]BostonBarrister wrote:
CA is the craziest of the crazy. Up and down the coast is simply insane. The Bay Area is somewhat insulated in that building restrictions cover it, so there just isn’t supply to meet its demand – but if there’s a lot of leveraged investment buying going on then it’s still vulnerable. Of course, it’s been crazy there since before my family moved away back in 1988, and it seems to just get crazier.[/quote]
Tell me about it. It’s completely normal for people here to spend $1million+ on a small house. Townhomes are in the $700k range. CONDOS are in the $400k range.
In all honesty, this bubble is not going to burst as long as we have people willing to burn all their income on a home, just so that their kids can have access to a decent high school. Our Governator might effectively push the market even further if he fails to inject a LOT more money into Public Schools, and making the “hot spots” – like Palo Alto and Cupertino – even hotter.
Now, the renting market could cool the owning market a lot, if it weren’t for the fact that landlords are complete morons; they do everything they can to desincentive tenants from staying too long. For example, I know a couple who moved to Cali 17 months ago. They managed to get an 18 month lease on a luxury 2 bedroom condo for $1700 a month; pretty good deal for the area. Now the landlord is asking for $2000 a month to renew, while they can easily move across the street and rent an indentical condo for the same $1700 a month. So they will move, because the $300 they save a month cover easily the hassle of moving; until another 18 months pass and they probably have to move again.
Besides, the incentive to buy is many-fold:
- the fact that you don’t have to worry about landlords raising your rent;
- the tax break, which is gigantic considering the huge California State Tax and the per-household income of the region which is upward of $150k;
- the fact that you can actually find nice houses/townhomes/condos to buy, in contrast to most of the ones to rent which are old, small and ugly;
- and the fact that you can customize a house you buy, rather than being stuck with ugly cabinets, old appliances and a carpet that somehow reminds you of a dog hair.
Fortunately we don’t have kids, so I was able to manage the situation pretty well since I do not require living in a “hot-spot”. I had plenty of leverage with sellers…
What I’m afraid of is that eventually the Bay Area will implode: the house prices require high salaries. Problem is that looking at my students I see there’s a clear decrease in quality in the grad student body (and this is Stanford – I imagine how it is back at Berkeley, SJS, SFS et al.) so I’m here wondering how long companies will be able to justify paying $100k+ salaries. Probably as long as venture capitalists stay around (because a lot of them live here and want to have some hands-on control), but I don’t know how long that will be. Most of my MBAs end up going East or North…
When the salaries go down, it will just be a question of time until the whole thing comes tumbling down and everybody moves North or East along with them.
In fact, I’ve been so disappointed lately (with my students) that I’m seriously considering accepting an invitation I got from Seattle University to teach there… I’ll go there next month to visit, and I might not come back.
[quote]jgvbl24 wrote:
The only time there was a housing bubble was at the time of the great depression when unemployement was 25%. Thats the only thing that would cause a “bubble”. The great appreciation in the housing market will slow down, but you probably won’t see a decrease in house values. Even a sharp increase in interest rates wouldn’t cause depreciation in value, just a slow down from the current 12-18% a year appreciation in many areas. [/quote]
There have definitely been local housing market depressions. Just look at LA and Southern CA in the early 90s, or Boston in the same time period. Texas after the oil boom in the 80s. Those are just the ones I remember off the top of my head.
Also, there hasn’t been appreciation like this since post WWII, when the returning GIs combined with the break of the Depression to really increase real demand.
[quote]hspder wrote:
Now, the renting market could cool the owning market a lot, if it weren’t for the fact that landlords are complete morons; they do everything they can to desincentive tenants from staying too long. For example, I know a couple who moved to Cali 17 months ago. They managed to get an 18 month lease on a luxury 2 bedroom condo for $1700 a month; pretty good deal for the area. Now the landlord is asking for $2000 a month to renew, while they can easily move across the street and rent an indentical condo for the same $1700 a month. So they will move, because the $300 they save a month cover easily the hassle of moving; until another 18 months pass and they probably have to move again.
[/quote]
THat is so funny, because that is essentially the exact same situation I’m going to face in September, right down to the numbers – except mine is an apartment. I really don’t know what the difference is, but I’m sure it means something to someone.
If they won’t give me the exact same rent, I’ll move. It’s not like they have close to 100% occupancy here, so I think I’ll have some bargaining power – we’ll see though.
Here’s an interesting connundrum. From what I understand, if you get hit with the AMT you no longer get the mortgage or property-tax deductions. Firstly, is that true? Secondly, with the expanding reach of the AMT, wouldn’t that absolutely eviscerate the real estate market?
Even now, the cost of renting, even including those deductions (remember, a deduction isn’t worth a dollar – it’s worth whatever your tax bracket is equal to as a percentage of a dollar) the cost of renting is less than buying if you’re not getting impressive returns on your property.
[quote]hspder wrote:
Besides, the incentive to buy is many-fold:
- the fact that you don’t have to worry about landlords raising your rent;
- the tax break, which is gigantic considering the huge California State Tax and the per-household income of the region which is upward of $150k;
- the fact that you can actually find nice houses/townhomes/condos to buy, in contrast to most of the ones to rent which are old, small and ugly;
- and the fact that you can customize a house you buy, rather than being stuck with ugly cabinets, old appliances and a carpet that somehow reminds you of a dog hair.
[/quote]
Actually, on the East Coast I would say it’s generally the opposite, unless you’re buying in a brand-new development. A lot of the housing stock around here is old, whereas a lot of the apartments are new and well appointed.
Well, actually, in Boston everything was old and shoddy except for a few newer apartments. People were completely unimpressed by things like mice, 50-year-old wiring and lack of dishwashers. Here in DC there are new developments and nice apartments.
BTW, good luck with Seattle. If you can stand the lack of sunshine, it’s a nice city – I’ve got a lot of family up there. It’s kind of like a smaller version of the Bay Area, with snow.
[quote]BostonBarrister wrote:
the cost of renting is less than buying if you’re not getting impressive returns on your property.[/quote]
The cost of renting isn’t the only issue. Even if you are paying slightly less to rent, you aren’t getting as much for your money. Your mortgage payment gives you equity, and also insulates you from huge real estate price fluctuations. If you’re paying $1500 a month rent now, but rents shoot up to $2500 next year, there’s nothing you can do but move. If my mortgage is $1500 a month, it will remain so for the next 30 years (less if I pay additional principal every month). When I go to buy another home, mine will have appreciated at or near the same rate (hopefully) as the areas in which I will want to buy, and I will be somewhat insulated in that regard as well, unless I decide to rent it.
Here’s another point a lot of people don’t consider: if you’re making enough to buy a house, and you can pay additional principal every month, within 10-15 years you could eliminate monthly rent/mortgage for the rest of your life. That is DEFINITELY worth it.
[quote]BostonBarrister wrote:
Here’s an interesting connundrum. From what I understand, if you get hit with the AMT you no longer get the mortgage or property-tax deductions. Firstly, is that true? Secondly, with the expanding reach of the AMT, wouldn’t that absolutely eviscerate the real estate market?[/quote]
When the AMT kicks in, which is a function of AGI and the amount of itemized deductions you take on the Sched A, there is a formula you go by to figure out what your AMT will be. Basically, you start losing a percentage of your deductions. There is a phase out AGI in which, if you make enough money, you even begin to lose your standard deduction. (I am at home right now, and I don’t have the specific numbers, so I hope you can glean something from my ramblings).
If you are investing in real estate that is not your principal residence, it is treated more, or less as an investment - i.e. cap gains.
If you are ‘investing’ in your principal residence - there are holding periods, and tests that you must meet in oreder to claim the unified credit for the sale of your home. I don’t know right off hand how the AMT is affects the credit, but unless you make like 1.5 million in gain on the sale of your house - the entire sale is a nontaxable event.
[quote]
Even now, the cost of renting, even including those deductions (remember, a deduction isn’t worth a dollar – it’s worth whatever your tax bracket is equal to as a percentage of a dollar) the cost of renting is less than buying if you’re not getting impressive returns on your property. [/quote]
This is just my opinion, and I am most probably wrong, given my complete inexperience in appreciating real estate markets - But, buying beats renting everytime.
Renting adds nothing to your net worth, while every house payment increases it.
The deciding factor in wealth creation should never be tax implications. This is not to minimize the importance of wise tax decisions, but in my hayseed opinion, should not be a deciding factor.
It could be argued that a “Housing Bubble” is occurring in the majority of the Western world at the moment. Here in the land of Oz, houses in many parts of the country have doubled in the last 3 years. In 2002, I bought a nice single story in suburia for $150,000 and sold it 14 months later for $270,000. Similar situation in England. Its not happening as much in the rest of Europe (as I understand) due to the fact that home ownership isn’t as high a priority.
As long as the conditions that lead to the “bubble” remain, I would suggest that housing prices will stay high, if not continue to increase. These conditions would be low interest rates combined with high levels of disposable income.
Can anyone add from the other side of the spectrum? I am about to jump into this game, albeit late. Gettin’ cold feet now.
BB i am PM’ing you for that spreadsheet.
My home FL has jumped 27% in 12 months. How can’t we get into this market? Can we safely say it strictly depends on the location? Not interest rates?
[quote]rainjack wrote:
30K…Single…Lucky!!!
Geez - try living in the Texas panhandle, in a very small rural town. We paid 20K (that’s 20,000) for a 1500 sq.ft. starter. I won’t be able to get 15 for it.
We are in the process of purchasing the last house we will ever live in, 3200sq. ft. 4 BR, 3 Bath, 3 car garage, for under 70K.
So tell me again how you make money in real estate?[/quote]
See, I’m not feeling any sympathy here… the house you are buying would probably cost over 400K in a decent community in this area. One of the reasons people have to look at real estate as an investment is that it costs too much not to!
rainjack and nephorm:
I realize you’re adding equity with your payments (assuming you didn’t sign up for an all-interest mortgage, in which case you’re not, at least in the beginning), but if the absolute value of the house actually falls, you’re losing money while you’re building equity.
Granted, it may eventually recover, but if you own something worth less than what you paid for it – or even worth precisely what you paid for it, given inflation (historical rate of return on houses overall is approximately 1% on average nationwide), you’d be better off putting the difference in costs between renting and buying in the bank.
[quote]Massif wrote:
It could be argued that a “Housing Bubble” is occurring in the majority of the Western world at the moment. Here in the land of Oz, houses in many parts of the country have doubled in the last 3 years. In 2002, I bought a nice single story in suburia for $150,000 and sold it 14 months later for $270,000. Similar situation in England. Its not happening as much in the rest of Europe (as I understand) due to the fact that home ownership isn’t as high a priority.
As long as the conditions that lead to the “bubble” remain, I would suggest that housing prices will stay high, if not continue to increase. These conditions would be low interest rates combined with high levels of disposable income.[/quote]
Worldwide, I don’t know – However, from the Economist article I posted above, it seems that it’s at least prevalent in GB, Australia and the U.S. Though it seems to be coming into (at least) localized problems in GB and Australia. Add an environment of rising interest rates and we’ll see what happens.
[quote]rainjack wrote:
30K…Single…Lucky!!!
[/quote]
Oh, and single isn’t necessarily lucky. Just so you know.
[quote]BostonBarrister wrote:
rainjack and nephorm:
I realize you’re adding equity with your payments (assuming you didn’t sign up for an all-interest mortgage, in which case you’re not, at least in the beginning), but if the absolute value of the house actually falls, you’re losing money while you’re building equity.
Granted, it may eventually recover, but if you own something worth less than what you paid for it – or even worth precisely what you paid for it, given inflation (historical rate of return on houses overall is approximately 1% on average nationwide), you’d be better off putting the difference in costs between renting and buying in the bank.[/quote]
I was pretty much just talking about tax implications and a steady to rising market. If your concern is about the bubble bursting the day after you close, that’s a whole other can of worms. How long are you planning on living in the house you buy? Long enough to ride out a market adjustment? Are you only worried about absolute loss?
I’m a lot more static wrt my future, so I’m not looking at my home as an investment. My value comes from paying off the mortgage, and having a ‘free’ place to live.
[quote]nephorm wrote:
Oh, and single isn’t necessarily lucky. Just so you know.
[/quote]
Just a bad attempt at a play on a Napoleon Dynamite line.
Man, take a couple of days off and BB comes out with one of the most solid threads in a while. No bitching about Bush - just good ol’ economics.
Well, honestly, I kind of like the idea of a housing bubble. Let it burst in the next 9 months. Please God, I’ve been a good kid, please let it burst in the next 9 months.
At first, I was going to say that I didn’t think there was a major bubble, but the more I thought about it, the more I think there probably is. With more and more people having access to mortgages (thanks to greater streams of available capital), it is easier to get a house. Of course, this creates a vacuum in the rental market. So, the question is going to be who suffers in the bursting - the homeowner, the landlord, or both.
Personally, I would suspect that it would be the landlord. There is something American about owning your own home. It’s the old “American Dream.” I think that it also gives people a sense of security they would not have otherwise had. If the world turns over, you always have your equity. Of course, the response would be rent for cheap and put the money aside in an investment as a proxy for equity, but Americans are terrible at saving, so I don’t see that as a popular option. Also, you don’t have homestead exemption over a portfolio.
At the same time I say that, there are more and more new housing projects being built in downtown Minneapolis. A new highrise just opened up recently and they are developing all new areas that were once run down. Of course, you could say that fear of high gas prices and a long commute are driving people back into the city, but the fringes are still growing as well.
So where are the people coming from? Well, aparenty the Texas panhandle (where a fellow poster lost money on his home) and western Minnesota, where the towns are watching the youth run for the city. I would suspect that the same is true in other cities as well, espeically in areas like Indianapolis, which is surrounded by farmland and where you can get a 5,000 sq. ft. house for under $400,000.
And let’s throw another wrench into the equation. In a couple of years, the babyboomers will reach retirement. In a little over a decade, they will reach their average life span. This is going to open up a huge number of existing homes - many in prime communities. How is this going to effect the market?
I think the scariest part is the number of people with “investment” homes. I got to believe that this could be a bad idea soon. If that bubble starts to turn, it could get ugly quick. I mean, isn’t that what really hurt the tech market? A bunch of people buy .com stocks, the price drives upward, people realize that they have overvalued, everyone sells, and the bottom drops out.
As one of my professors said about the stock market: Stocks grow at 12% per year. Always have, always will. So when you have a short run where it grows at a much higher rate, that means one of two things. Either the laws of investing have changed (not likely) or it’s going to come down. Do you think 100 years of stocks are wrong?
I have to believe the same is true about the housing market. Sure, you’ll get a bumb due to the ease of mortgages, but how much of a bump can it be.
[quote]BostonBarrister wrote:
Actually, on the East Coast I would say it’s generally the opposite, unless you’re buying in a brand-new development. A lot of the housing stock around here is old, whereas a lot of the apartments are new and well appointed. [/quote]
Even though many people keep complaining about the “limitations in construction” here, there’s plenty of brand new condos, townhomes and houses around. Even the second hand stuff is pretty new. Guess that’s the advantage of living in a region that was essentially a large desert less than 30 years ago…
BTW, a condo is essentially an appartment, except that a condo is in a closed community (a “condominium”) where you have access to some shared perks with your neighbors, like a swimming pool, a “club house”, a large recreation area, etc.
[quote]BostonBarrister wrote:
Well, actually, in Boston everything was old and shoddy except for a few newer apartments. People were completely unimpressed by things like mice, 50-year-old wiring and lack of dishwashers.[/quote]
Sounds like The Netherlands. Well, that’s what you get when you live in place with actual History. 
[quote]BostonBarrister wrote:
BTW, good luck with Seattle. If you can stand the lack of sunshine, it’s a nice city – I’ve got a lot of family up there. It’s kind of like a smaller version of the Bay Area, with snow.[/quote]
I heard something like that. Yes, I’d miss the sunshine. I know how it feels from my 3 years in Europe. My wife (she’s from Brazil), would miss it even more. It’s just that it’s end of the quarter (Spring Break is next week) and grading the essays and exams this year is leaving me very depressed. I’m just wondering where all the brilliant students that made me want to be a professor went.
Or maybe I haven’t realized yet this is a very different Bay Area from the one I grew up in… and just need to get over it.
But I think I’ll always miss having students that taught me as much as I taught them. Hope that doesn’t make me selfish…
A timely article from WSJ on the rent vs buy topic:
In the Hottest Markets,
Renting Is the Real Bargain
Cost Gap of Being a Tenant
Vs. Owning Hits Widest Level
In More Than a Decade
By RUTH SIMON and RAY A. SMITH
Staff Reporters of THE WALL STREET JOURNAL
March 22, 2005; Page D1
Potential home buyers increasingly are facing a difficult economic and emotional quandary: Soaring housing prices in many parts of the country have made renting a bargain.
In the past, home prices and rents tended to move in alignment. But the relationship between the cost of renting and owning has broken down as low interest rates and an array of new mortgage products have helped turn many renters into homeowners. That has helped propel home prices upward – and, in turn, has weakened the rental market, prompting landlords to cut rents or at least raise them less aggressively.
THE GAP WIDENS
0
The monthly cost of renting an apartment and the monthly cost of buying a home has widened nationally since 2001. See a chart of how the ratio between the two has changed0 from 2001 to 2004, in 21 major markets.
RENT OR BUY?
Check out a rent vs. buy worksheet1, and other home-buying calculators,
The result is a widening of the gap between the cost of renting and the cost of buying in some of the nation’s hottest housing markets – a gap now at its biggest since at least 1994, according to Torto Wheaton Research in Boston, and by some accounts at its biggest since the 1970s. The data suggest the economic case for renting, at least in the short term, has grown significantly in these markets.
Since 1999 and 2000, the relationship between rents and home prices has “broken down,” says Mark Zandi, chief economist of Economy.com. With interest rates falling, it’s “not surprising that the relationship has changed,” Mr. Zandi adds. “What is surprising is that it has changed so much.”
In San Francisco, the monthly cost of renting an apartment is just 45% of the monthly cost of buying a home, down from 67% in 2001, according to an analysis of 21 key markets prepared for The Wall Street Journal by Torto Wheaton. In Washington, D.C., rental costs are now just 59% of the cost of owning, down from 82% in 2001. In Miami, rental costs are 63% of the cost of homeownership, down from 89% in 2001.
In San Francisco, the monthly cost of renting is just 45% of the cost of buying.
The potential cost savings for renters could well be even larger, given that the analysis doesn’t factor in property taxes and other expenses associated with homeownership. Mitigating that is the fact that mortgage interest and property taxes typically are deductible from federal income taxes. Homeowners often can deduct interest and real-estate taxes on their state and local tax returns, too. And many borrowers have opted to lower their current monthly payments by using an adjustable-rate or interest-only mortgage. (The 21-city analysis compared average-price apartments and median-price homes and assumes that a home buyer takes out a 30-year mortgage. Those properties may not be directly comparable, but the analysis shows how the relationship between renting and owning has changed over time.)
Despite the lower comparative cost of renting, the enduring tug toward homeownership – coupled with the fear of missing out on further price appreciation and even being shut out of the market for good – still is driving many people to buy. The rate of homeownership in the U.S. was 69.2% in the fourth quarter of 2004, compared with 67.5% in 2000.
Many buyers who have done the math are betting that rents eventually will rise and that any savings from renting will be more than offset by rapid gains in home prices – a pattern that has been true in recent years as prices have moved up at above-average rates. Still, many economists say those outsize gains are likely to become a thing of the past as interest rates move higher.
“People have formed expectations for future price increases based on past price increases,” says Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania. “Their expectations may not play out the way they thought they would…They may in fact find that they are buying in at the top of the market.”
Some would-be buyers are having second thoughts. Tanvir Mangat, a management consultant in Washington, D.C., has been looking for a condominium or a townhouse off and on for the past year. “Unless we can get a good price for what we want, we’re going to continue to rent,” says Mr. Mangat, who has had trouble finding something in the $600,000 to $750,000 price range that meets his needs. “The only thing we’re losing [by renting] is we’re not building equity right now.”
The fact that the cost advantage of renting has widened in many areas is even more remarkable given that apartment rents have begun to edge upward. Those modest rent increases were more than offset by strong gains in home prices in many parts of the country.
Average home prices climbed 8.3% last year and 7.5% in 2003, according to data compiled by M/PF YieldStar, with many markets posting double-digit gains. Rents, meanwhile, inched up 1.7% last year, after falling 1.6% in 2003.
Because housing and rental markets depend on local circumstances, the relationship between home prices and rentals varies significantly around the country. The median home price in metropolitan Las Vegas is $266,400, which works out to $1,274 a month, assuming a buyer puts 20% down and takes out a 30-year fixed-rate mortgage, according to HSH Associates. The average rent for a two-bedroom apartment there is $860. In the San Diego metro area, the median home price is $551,600, which works out to about $2,686 a month, while the rent on a two-bedroom apartment is $1,625.
The national apartment market was hurt severely by the economic downturn. In Phoenix, a one-bedroom apartment that fetched $700 a month a year or two ago now can be had for $550, says Lisa Sampson, a broker with All Star Apartment Rentals. Meanwhile, “the same house you could have bought for $150,000 last year is now $250,000.”
Whether renting or buying is the best move depends on a variety of factors, of course. These include how long you expect to stay in the home and whether what is on the market to buy or rent meets your needs. Michael Dubis, a financial planner in Madison, Wis., says he also advises clients to consider what their money could earn elsewhere.
The longstanding rule of thumb has been that buyers need to stay put for five to seven years to justify the closing costs and other outlays involved. But in the hottest markets, says Raphael Bostic, director of the real-estate development program at the University of Southern California, that length of time has shrunk, in part because home prices have moved up so rapidly.
“I see a lot of people who are choosing not to stay very long and are still buying,” says Lauren Goloboy, a sales associate with Coldwell Banker in Brookline, Mass., a suburb of Boston. Ms. Goloboy says she is frequently asked how long you have to own a home to receive favorable tax treatment on capital gains. (The answer: more than one year to qualify for the 15% rate.)
Mara Schonberg, an attending physician, bought a two-bedroom condo in the Boston area last summer for about $295,000, even though she may move in three to five years. “I would probably spend less per month on a rental,” she says. But, she adds, “I’d rather take a risk on the real-estate market. I’m tired of having landlords.”
The rental bargains aren’t limited to the nation’s hottest housing markets. Steve Hendry of Re/Max Associates of Dallas says he recently found a tenant for a home in Plano that had been vacant for four months by agreeing to a lease that runs for six months instead of a year. “I’ve reduced the price on probably all of the listings I have at least once to create more activity,” adds Mr. Hendry, who recently dropped the price on a home in Allen to $1,200 a month from $1,295.
“For the near term, it’s pretty clear that rents are a bargain in many places relative to the cost of buying the same unit,” says Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies.
[quote]rainjack wrote:
Just a bad attempt at a play on a Napoleon Dynamite line.
[/quote]
Uh, oh, yeah… um, so was mine.
Gosh!