Carrying your home during the downturn, and then selling it when the real estate market recovers.

NEW -> Contingent Buyer Assistance Program
[quote author="Stuff It" date=1219728100]Thanks for the input. Interesting how you compare housing purchases with gambling. I agree with your analogy. But so long as you are always looking to buy a bigger house and not retiring or leaving the housing market wouldn't these people want the housing market to decline? Suppose you lost 10% on a 600K home and you wanted to move upto a $1M home which had also lost 10%. You would only need 360K instead of the previous 400K</blockquote>


Investing <strong>is</strong> gambling. Make no mistake. There is much more to a home than just pure investment value, though, to be sure.



People do make the decision to buy less-expensive homes.



You're forgetting <strong>the matter of leveraging </strong>to come up with your scenario, which is involved for the majority of homes here.



If your home started at $600K and (typically) was 80% financed, you would have $120K into the home, <u>of your own money</u>. Debt (mortgage) would be $480K and you would have to prove your ability to finance that amount to the tune of ~ $3K/month. As prices go down 10%, the cost goes to the owner and not the bank, taking your equity position down to $60K, while the bank still gets their full amount owed, as you agreed to pay them in your contract. Selling costs would also eat into your cheese and at 5-7% total closing costs on your (now) $540K home, you're looking at a net position of about $27,600 to bring to your next home. (rhetorical question alert) If you were giving loans out, would you think it a wise investment to be financing your bargain home of $900K for someone coming in with that amount in? Remember that the buyer would have almost no skin in the game and be able to prove adequate resources to pay ~ $6K/month in debt service.



Contrarily, if the homes had come up 10% in pricing the net proceeds using the same scenarios would be $140,400 <u>after</u> closing costs (tax-free). The cost of the $960K loan for a now $1.1M home will be ~ $6500/month. Not a big change from the $6K/month in the former instance. The chief difference is that the buyer would now have a 10%+ stake instead of a 0.5% interest.



<em>The chicken is involved in breakfast but the pig is committed.</em>
 
[quote author="Stuff It" date=1219709930][quote author="optimusprime" date=1219704095][quote author="Stuff It" date=1219671747]I will probably be shot down for this, but here I go:



Unless you are one of the few who are willing to pull out of the real estate game and rent, does it matter (significantly) if house prices go up or down (lets ignore taxes and just look at the price of houses)? You will pay the difference between what you sell your house for and the house you are buying. Isn't everything just relative? Isn't the important number the price you pay for your house when you enter the game?



If you do exit from the game and rent, isn't that the same as starting from scratch again?</blockquote>


Starting from scratch if it meant you pocketed an extra $200-300k+ by selling in 2006 and renting until now...where do I sign up?</blockquote>


Basically you cannot compare the price of the house you sold relative to the price of the house you are buying since the market may have changed drastically inbetween.</blockquote>


Huh? Isn't that kinda the point? Sure you can compare. We sold our home in the summer of 2005. I don't know exactly when we will buy again, but it appears we will buy for alot less than we sold for, and you can bet your ___ I will compare.
 
Here are my two questions for the week.



1. Were real estate prices in other parts of the country with modest appreciation like the midwest and the south appreciating while the real estate market in OC/LA was heading a downward trend in 1990 - 1995? The reason i ask this is that i remember a friend in freshman year in college telling me that his parents just sold their 4000 square feet mansion in Ohio and bought a new home in OC in 1995. At that time, I didn't have a clue on the cycles of real estate, but now i think about it, it was a good arbritage move? I am wondering if the same opportunity exists today if one sells their home in a non-bubble area like Dallas, Texas or Raleigh, North Carolina, and buying a home in Irvine where property values will have drop 40% off the peak by 2010? Do you know of anyone who did something like this?



2. It seems that some of you timed the OC real estate market just perfectly (i.e. Awgee) by selling your home at the peak of the bubble in 2005/2006 time frame. With so called experts like Gary Watts, telling the herd that the OC real estate market will continue to appreciate 15% a year until 2018, how did you decide to go against the heard mentality? Was it luck or planned? Did you learn from your mistake from the last real estate down turn from 1990 - 1995? I also have a lot of respect for some of the fortunate people in this category. In 2020, I am sure that I will look back to this time.



Thanks.

Panda
 
<blockquote>. . . how did you decide to go against the heard mentality? Was it luck or planned? Was it learning from your mistake from the last real estate down turn from 1990 - 1995?</blockquote>


To us it was common sense. We saw people making less than $100k buying million dollar homes. We saw people making less than $40k driving Mercedes. We heard realtors telling us that real estate never goes down. We heard a lot of people buying homes with interest only. I could go on and on. But aside from the statistics, it was simple - people couldn't afford what they were buying. It was just a matter of time before reality slapped them in the face.
 
[quote author="PANDA" date=1219786676]Here are my two questions for the week.



1. Were real estate prices in other parts of the country with modest appreciation like the midwest and the south appreciating while the real estate market in OC/LA was heading a downward trend in 1990 - 1995? The reason i ask this is that i remember a friend in freshman year in college telling me that his parents just sold their 4000 square feet mansion in Ohio and bought a new home in OC in 1995. At that time, I didn't have a clue on the cycles of real estate, but now i think about it, it was a good arbritage move? I am wondering if the same opportunity exists today if one sells their home in a non-bubble area like Dallas, Texas or Raleigh, North Carolina, and buying a home in Irvine where property values will have drop 40% off the peak by 2010? Do you know of anyone who did something like this?



2. It seems that some of you timed the OC real estate market just perfectly (i.e. Awgee) by selling your home at the peak of the bubble in 2005/2006 time frame. With so called experts like Gary Watts, telling the herd that the OC real estate market will continue to appreciate 15% a year until 2018, how did you decide to go against the heard mentality? Was it luck or planned? Did you learn from your mistake from the last real estate down turn from 1990 - 1995? I also have a lot of respect for some of the fortunate people in this category. In 2020, I am sure that I will look back to this time.



Thanks.

Panda</blockquote>


Don't know about #1 as I was still in high school but #2 is easy...it's called Common Sense. A little tough when you see a pot of gold in the sky.
 
stuff it,



i believe what you're saying is: if you can afford it, why does it matter what you paid? like when you buy something and find it on sale later, no need to beat yourself up over it. you paid what you paid, just enjoy it, right?



unfortunately for a purchase as large as a home, the opportunity cost is huge. ask yourself whether or not you'd care that both you and your spouse need a high-paying job to afford a $700k home at peak prices, daycare, and save the hefty sum required for the down. your neighbor flanders moves in few yrs later, paying $500k for basically the same home which a much smaller downpayment. both you and flanders have essentially the same income except his wife doesn't have to work because his mortgage is manageable on one income. and if mrs flanders does happen to work, that's just more gravy for their family to play with.



very admirable if you can say you wouldn't be bothered by such a situation, although i think most people would for good reason, not just petty ones. it turns out the cost diff between you and flanders isn't just $200k. from a financial standpoint, $200k plus 30 yrs of interest is more like $400k. from your family's standpoint, it's the diff between extras like music lessons, private school, world travel, and anything else you'd want to do for your kids. from your spouse's standpoint, it could easily be the diff between 20 yrs of working a job or not!



pretty hefty opportunity costs if you ask me.
 
[quote author="PANDA" date=1219786676] Did you learn from your mistake from the last real estate down turn from 1990 - 1995? </blockquote>


Yes
 
"If you can afford it" doesn't work anymore for two main reasons.



1. What happens if "you can afford it" and then you have to move? The days of buying a house becuase you were ready to not move anymore are over. And that's a problem because.......



2. The next guy has to answer the same question "what happens if "you can afford it" and then you have to move?" . If interest rates increase, unemployment increases, credit continues to tighten............all that means you will realize a lower price. Why should he pay a premium when he might get stuck with the discount end when he does another job relocation



People have habitually accepted too much risk because they have assumed that property values will just continue to rise. If we get 6-8 years of pricing declines, people will no longer tolerate that exposure, banks will not loan with that sort of leverage, and punish prices accordingly. Think not?



Go look at the S&P;500 a decade ago, and look at it today. On a price to earnings ratio, it's half off. Banks and autos and electronics retailers aside, business hasn't looked this good since the end of World War II. Oh wait, we don't have that whole "new economy" .com mania anymore. CNBC did a piece this morning on how the "buy and hold" mentality has been made obsolete by market conditions, requiring winning stock market players to seek value and trade like crazy. You have to be very very smart and a little lucky to eek out small profits, unlike the '90s where you could make 25-30% with buy and hold.



A wise man told me early in my career "Buy things that appreciate, RENT things that depreciate". Oh, and go long on shrimp paste.
 
"A wise man told me early in my career ?Buy things that appreciate, RENT things that depreciate?."



That wise man was spouting nonsense. Do you rent or lease your home furnishings/furniture? How about any fine jewelry? Your TV? The wheels on your car? These are all things that are easily available for rent, and some people have reasons to do so, but there is virtually no example in which it would be cost efficient. Nearly everything we possess will depreciate; anything that doesn't could be labeled as an investment. But we rent very little, and in most cases, we rent only when we cannot afford to buy. There are only three exceptions to this. A home is such a large expenditure to the average person that trying to time the market can produce large differences in price and make it worthwhile to rent. Cars can be cheaper to lease given the right circumstances (own your own business, don't drive cars until they're dead, etc). Finally, stocks.



Course, if we all knew when to rent stocks, we'd be burning $100 bills for fun in the Bahamas.
 
I think Doc and I have a misunderstanding, not a disagreemet.



[quote author="Irvine Allergy Dr" date=1219794793]"A wise man told me early in my career ?Buy things that appreciate, RENT things that depreciate?."



That wise man was spouting nonsense..</blockquote>


No, no he wasn't.



<blockquote> Do you rent or lease your home furnishings/furniture? How about any fine jewelry? Your TV? The wheels on your car?.</blockquote>


Those aren't necessities. Those are luxuries. Last time I checked, you didn't need any of those things. I expect luxuries to depreciate quickly.



Home ownership is also a luxury. Securing shelter is not. If we are talking apples to apples.



<blockquote>These are all things that are easily available for rent, and some people have reasons to do so, but there is virtually no example in which it would be cost efficient..</blockquote>


I would argue folks aren't really 'renting' these items if what you are refering to is those "rent to own" deals. And these people are (for the most part) idiots. Still, excelent point. Nobody in these RTO deals is renting these items at rates lower than thier cost of ownership.



<blockquote>Nearly everything we possess will depreciate; anything that doesn't could be labeled as an investment. But we rent very little, and in most cases, we rent only when we cannot afford to buy. There are only three exceptions to this. A home is such a large expenditure to the average person that trying to time the market can produce large differences in price and make it worthwhile to rent. Cars can be cheaper to lease given the right circumstances (own your own business, don't drive cars until they're dead, etc). .</blockquote>


If I could rent you the same car you own now at 1/2 the cost, would you do it? Of course you would, but nobody would be dumb enough to do so. Cars depreciate. Nobody ever made any money buying new cars and renting them at half ownership costs.



How about a piece of industrial equipment you absolutely had to have use of twice a year for 200 hours, with a fixed cost of $80K, that you could rent for $35 an hour including maintance ($7000 a year)? Industrail equipment depreciates. (But the guy renting the piece has figured out how to pool his customers and rent the piece for 2000 hours a year).



How about the home I rent for $1800 a month? I could buy it for $350K. Two years ago it would of sold closer to $650K. At half off it's still not a bargan. What do I care who owns this pile of bricks? I just want to USE it. At the lowest cost basis possible. If that means buying it great. But to pay a premium and suffer the potential reinvestment risk means I either have money to burn (luxury) or I'm mathamaticlly challenged, or I'm just a moron.



Or is my landlord a moron for trading $300K in depreciation in exchange for about $40K in rent?



<blockquote>Finally, stocks.



Course, if we all knew when to rent stocks, we'd be burning $100 bills for fun in the Bahamas.</blockquote>


I don't understand how owning a fraction of a company to get a shot at it's operating revenues without buying it should be rented. Companies I invest in are profitable. Owing shares in them gives me a shot at thier profits, with limited liability if they go busto. If a company is profitable, it tends to appreciate, or at a minimum, pay you a return for bringing your money to the table.



For years the market churned along sideways. The arrival of the 401K "hot money" in the late 1980's fueled the '90s stock boom. Then the dumb money traders jumped in. Then this "internet" thing happened. Then it colapsed. Where are we again?



I can own my house for about $3K a month or I can rent it for $1800. My utility doesn't change. Only the price.



I am confused as to how highly depreciable items you don't need (like tvs and 22" chrome wheels) is the same as renting something you need (like the house I live in) that is way over market. If you want to buy a home for lifestyle reasons and can afford it, be my guest. Just be aware you are paying too much for the utilitiy you recieve.



Either my rent is fixing to skyrocket (it's not) or my landlord is going to lose another $125K in capital appreciation in exchange for another $40K in rent (he is). Wah. Cry me a river.
 
"Those aren?t necessities. Those are luxuries. Last time I checked, you didn?t need any of those things. I expect luxuries to depreciate quickly. "



Um, how do you define luxuries? You don't need anything but the most basic shelter, water, and food. Do you stay in a 2 or 3 bedroom apartment/home? Why? You could make do in a studio! You could even stay in homeless shelters and save all rent! Why do you need a car when you can walk/bike/scooter/bus/carpool? Everyone has a different definition of what is a luxury and what is necessary or reasonable. Besides, as I previously stated, nearly everything depreciates, not luxuries in particular. Some "luxuries" depreciate at a faster rate, but many actually depreciate at a lower relative rate than a "non-luxury" item.



"If I could rent you the same car you own now at 1/2 the cost, would you do it? Of course you would, but nobody would be dumb enough to do so. Cars depreciate. Nobody ever made any money buying new cars and renting them at half ownership costs."



This is not true. Many car manufacturers heavily subsidized their leasing programs (most notably, BMW and MB) and the cost of leasing was actually lower than purchasing due to artificially raised residual values. This, however, with the tanking economy, is coming to an end. In my case, I could actually lease cars for less than owning them due to my ownership of a business. However, I chose to purchase my recent cars with cash; I just get more psychological satisfaction from doing that. Also, I mod some of my cars.



"How about a piece of industrial equipment you absolutely had to have use of twice a year for 200 hours, with a fixed cost of $80K, that you could rent for $35 an hour including maintance ($7000 a year)? Industrail equipment depreciates. (But the guy renting the piece has figured out how to pool his customers and rent the piece for 2000 hours a year)."



This is not a situation an average person encounters (which is what I was talking about in my previous post). Capital equipment expenditures can indeed be cheaper to rent/lease than own, but it depends heavily on the situation. What if you needed to use the equipment around the clock 365 days a year?



"I don?t understand how owning a fraction of a company to get a shot at it?s operating revenues without buying it should be rented."



You didn't understand my reference. By "renting" stock I meant shorting them. Again, perhaps not what the average person does in any case.



"What do I care who owns this pile of bricks?"



There is value in ownership. There is stability in your living expenses and a hedge against inflation. There is the opportunity for equity growth. Of course, I'm not arguing that you buy "at any price". You buy at a reasonable price and don't attempt to time the bottom precisely. Also, you would not buy if your income is not relatively steady or you think you'll need to move soon.



"I am confused as to how highly depreciable items you don?t need (like tvs and 22? chrome wheels) is the same as renting something you need (like the house I live in) that is way over market."



It is the same because you made the statement that generalized all items into buy or rent depending on whether or not they depreciate.



"Either my rent is fixing to skyrocket (it?s not) or my landlord is going to lose another $125K in capital appreciation in exchange for another $40K in rent (he is)."



Unlikely that your property will drop that much more in value. If it is currently worth $350k, it is already within the GRM 160-200 rental parity that has been discussed on this board.



"I can own my house for about $3K a month or I can rent it for $1800. My utility doesn?t change. Only the price."



Calculations cannot be correct. At $350k, you are at what I would consider buying/rental parity. So the buying cost must be close to $1800/month, when principle/tax benefits are taken into consideration, unless you 1) Don't have 20% downpayment or 2) Have exorbitant HOA dues that the landlord is paying. The question really is whether or not you think the home will depreciate significantly more in value and whether it will ever get down to the point where you are comfortable owning. That comfort point is different for everyone.
 
We could nit over the numbers, but as I suspected, we really don't disagree. When you wrote:



"You don?t need anything but the most basic shelter, water, and food."



you said it all. Everything outside of that isn't really necessary.



BTW, 160GRMx$1800 = $288K. We're still overpriced. Plus, there's not a doubt in my mind we're going to overshoot today's metrics because (and this is just my guess from looking at all the incentive signs I see around) rents got in front of affordablity, and are going down.



I still contend that the "owners premium" is on there because people expect homes to appreciate, so they get a little extra over rents for the privlidge. We'll see what happens in another two years when the kneecaps are knocked out of the nice neighborhoods.
 
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