Wednesday, July 12, 2006

Federal Reserve Likely to Raise Rates

The Federal Reserve Board is meeting again on August 8 to decide what to do with short term interest rates. Currently, rates are standing at 5.25%.

Reasons to Raise
  • Fight inflation
  • Keep the dollar from tanking
  • Reload the 'gun' so can lower rates for upcoming economic downturn without significant risks.
Reasons to Lower or Pause
  • Economy is already slowing. Don't want to overshoot and cause a recession.
[In my humble opinion, a recession in the next year is almost inevitable]. So what will the Federal Reserve Board decide on August 8th?

They will very likely raise rates by 25bps (1/4). At the next meeting after August, the Fed's will likely pause.

71 comments:

  1. David -- I agree. I thought they would bump it .5% last time and I think that, as you say, .25% and pause will happen next. CD rates are up well over 5%, including some of the bigger banks like SunTrust that have been keeping them low-low-low until now. Cash-out CDs are now just about covering 100% of my rent.

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  2. $40,000 in a 1 year CD at 5% will produce $2,000 pre tax. That is $2000 per year.

    Rents are around $1200-$2500 per month.

    So you're going on a blog and telling the blogger that you've got around $300,000 in CDs? That is the minimum amount needed to produce $1200 per month to cover your rent.

    Would you like to clarify?

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  3. Vote: No rate hike Aug. 8

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  4. For those who recently sold their homes near the peak, having 200k-500k in CDs, bonds, or an income mutual fund is not so unbelievable.

    I'm in a situation where the intrest earned on the profits from my house cover most but not all of my rent, and I have greatly increased my financial mobility via liquidity accumulation, and reduced my risk of exposure to a housing downturn.

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  5. I'm betting that there will be enough evidence of an economic slowdown between now and August 8th to postpone the rate hike. Don't get me wrong, I too wish for a 50 basis point step last time. But one reason I read these blogs is that I will accept reality does not follow my wishes. ;)

    I wish to be proven wrong... but for now my vote is no rate hike.

    Neil

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  6. anonymous said:

    "So you're going on a blog and telling the blogger that you've got around $300,000 in CDs? That is the minimum amount needed to produce $1200 per month to cover your rent.

    Would you like to clarify?"

    What's to clarify? If I understood Chip's post, he said that he had money in cash-out CD's, which I take to mean that he sold his house and placed the proceeds in CDs.

    $300,000 in savings is likely on the low-end if the is the case.

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  7. I'm in the same boat as Chip, and many others like me who sold at the top here in San Diego and are now renting. The interest from the equity from my home I sold just about pays for my $1550 per month rent - and I'm living in a much better neighborhood now.

    By the way, if I were to buy the house I'm renting now, my monthly cost of ownership would be about $3200, and I would "own" a depreciating "asset" (that $3200 figure is based on what the home would have sold for last year, not now, as it would sell for significantly lower now, the SD market has turned rather sharply in the last two months).

    All of this is obviously the reason I sold my house to rent. Didn't take a genius to see what was happening...

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  8. As a bubble believer, I would not count on the Fed raising rates. I think the Fed will raise rates very slowly. I do not think the Fed wants to burst the bubble, and I believe it will do everything possible to try to get a "soft landing" where house prices go down somewhat, and then stay down for years while inflation catches up. I think that is what they want, but whether they will get it or not is another issue. Of course, I could be wrong.

    A Redskins fan

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  9. I will take a risk here and say the FED will continue to up the rates to at least 5.75%- even though the economy appears to be slowing- commoditiies such as gold and oil are still soaring.

    There seems to be more in the way of inflation that Wall Street wants to admit. Bernanke will have no choice- if rates hit 6% the so called 'soft landing' myth for housing will turn into a rout.

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  10. anon said:

    "I'm in a situation where the intrest earned on the profits from my house cover most but not all of my rent, and I have greatly increased my financial mobility via liquidity accumulation, and reduced my risk of exposure to a housing downturn."

    ... and in return, you have greatly increased your risk in respect to any inflationary period, general recession, or any other event that may erode the value of your "liquidity accumulation" ... and you have done so at the risk of also eventually finding yourself homeless since inflation would ensure rising rents at the same time you are experiencing lower purchasing power. Brilliant strategy on your part! And oh, did I mention that 30 years from now you'll still be paying rent? (assuming of course you have managed to survive the double whammy described above.)

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  11. In reality I don't use the income generated from the reinvestment of the profits from selling my house to pay the rent. I use my salary for that. In I addition add more to my investments on a monthly basis.

    The money continues to pile up, and the total real value of these investments build, while I watch the real home values around me decline.

    Somehow, oddly enough, I feel like I did the right thing.

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  12. anon-
    I'm in the same boat as Chip, and many others like me who sold at the top here in San Diego and are now renting. The interest from the equity from my home I sold just about pays for my $1550 per month rent - and I'm living in a much better neighborhood now.


    "live for the moment, to h@ll with the future!" Hasn't it dawned on you that there are no free rides in life and that the reason you are paying less now is that you are only paying for the current rental value of your place and paying nothing to ensure your continued ability to stay in that place long term? (i.e., your landlord isn't subsidizing you like you think. the extra money the landlord has to pay for that mortgage is buying something of real value ... a house that will be paid for over time at a fixed dollar amount determined today. you are only paying for the right to live there today --- till the end of your lease, while retaining all the risks that can come with rising rents, rising house prices, inflation in general, and recession/depression or anything else that may affect both your purchasing power and what you will have to pay for housing in the unpredictable future. The landlord is paying a premium to lockin the future and make it predictable. You've said "to h@ll" with the future and are living as if there was no tomorrow. The chickens always come home to roost eventually. Rather than the bust all you bubbleheads are expecting, the much more likely event is inflation and/or recession, the likes of both that will put your living situation in jeapordy ... especially if you have "cashed" out of the real estate market in the naive belief that maybe you can "time" the market and go back in down the road and "make a profit" from having sold high and bought low. Good luck, it's a roof over your head that betting with.

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  13. I have no idea as what the Fed may be planning. The little shot in the arm that was given last session, seemed to stall mortage rates upward climb. So what!! With that being said, why's the market still flat as a pancake? Without buyer's no dice! The rate hike did not bring buyer's back to the table.

    All you housing heads know darn well as this winter comes along sales are going to plunge badly.

    Furthermore, interest only and variable rates are resetting daily, this is what's going to shoot that over night rate up sky high.
    A fool and their money part soon.

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  14. "Good luck, it's a roof over your head that betting with."

    The same can be said if you bought at the top of the market and are stuck with a depreciating asset.

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  15. Read the Comment and WHERE this man had his PREVIOUS experience.

    "I do believe there is a crisis," said Peter Lansing, president of Universal Lending, who served on a foreclosure task force during the late 1980s. "We do need to do something about it. It is all of our responsibility

    The Denver area situation is the tip of the iceburg indictitive of US economic future and Fed rates WILL have to rise, if not next month, shortly there after in attempt to Blunt the ramifications of an upcoming recession. Complete article is as follows;

    http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_4835191,00.html

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  16. lance-

    If you buy an overpriced home now, you end up losing money.

    If you rent now and save the difference, you have more for a down payment or complete purchase later, or just to set up a CD to pay the rent as above.

    IMHO, the latter strategy is better for the future than the former.

    A Redskins fan

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  17. Suicide loan borrowers are in Big Trouble when...

    They CAN'T Pay their Mortgages..

    They CAN'T Re-Fi their way out of DEBT..

    And they CAN'T Sell their Equity stripped over-valued House...

    SOMETHING HAS to BUST LOOSE in the next 6-18 months and IT will be ...one UGLY MESS!

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  18. Lance said...
    “……. Rather than the bust all you bubbleheads are expecting, the much more likely event is inflation and/or recession, the likes of both that will put your living situation in jeapordy ...”

    Sounds like doom and gloom. I thought that was for us “bubbleheads”.

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  19. Lance said...
    “……..while retaining all the risks that can come with rising rents, rising house prices, inflation in general…….”

    So, absolutely no risk in buying a house? That's right. Housing only goes up!

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  20. It's too bad about Lance and that house. It seems like he'd be a pretty cool guy otherwise.

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  21. Lance-

    No one individual can control whether the economy goes into recession or not.

    If it does, though, I would rather have the flexibility and lower monthly payments of renting, than face the prospect of trying to sell my house into the teeth of a downturn, while making payments without a job.

    A Redskins fan

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  22. Thierri, Bubble Head #8952July 12, 2006 9:55 AM

    The fed will double the rate to over 10%. Bitter home-debtors will default en masse. Savvy bubble heads will swoop in and buy the foreclosed homes for pennies on the dollar. Bitter foreclosed home-debtors will be forced to live in shanty-towns in the style of south america.

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  23. Anonymous said...
    ""Good luck, it's a roof over your head that betting with."

    The same can be said if you bought at the top of the market and are stuck with a depreciating asset."

    Just the opposite is true. When you buy you "lock in" your future monthly costs for the next 30 years. Regardless of whether the house goes up in value or down in value, your monthly housing costs stay the same. The is quite the opposite of gambling. You're paying a premium to let someone else (the lender in this case) do the gambling with where the value of money is going. Your scenario only applies to flippers investing in shortterm assets that they need to resell. You shouldn't be looking at your home as an asset to make or lose money on. You should be looking at it as a place to live. With that differentiation in mind, where dollars come into play, the goal is to make what will be coming out of your pocket as predictable as possible. As such what you can or might sell the property for in the future is totally irrelevant.

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  24. 25 basis points and then I'm playing Solitaire for the rest of the year.

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  25. Five months ago, I sold my house in SE Florida for $490K. I had almost 95% equity, having bought back in 1993 with a 15-yr fixed.

    I paid off the rest of my debts from the proceeds and now have $445K in a mix of investments netting about 5.4%.

    And I'm renting a nice townhouse, same size as the SFH I sold, for $1850.

    So it's indeed quite possible. By the way, my work income has never been over $75,000 per year.

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  26. Lance said...
    -Anonymous said...
    The same can be said if you bought at the top of the market and are stuck with a depreciating asset.-

    ”Just the opposite is true. When you buy you "lock in" your future monthly costs for the next 30 years….”

    “Locked in” to a depreciating asset is right on.

    Amy Crane
    bankrate.com
    -Although many people believe they'll remain in one house for years, the reality is that most won't. American adults average a move every five years, according to federal housing data.-

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  27. robert said:
    "Amy Crane
    bankrate.com
    -Although many people believe they'll remain in one house for years, the reality is that most won't. American adults average a move every five years, according to federal housing data.- "

    yes, I am sure all those renters constantly being forced to move from one place to another really do skew those averages.

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  28. "The money continues to pile up, and the total real value of these investments build, while I watch the real home values around me decline.

    Somehow, oddly enough, I feel like I did the right thing."

    I've felt the same way too. Sometimes I sell a stock at a 52 week high, and then watch it drop during the following weeks. I always pat my back for being smarter than the market.

    A few years later when I look back at the same stock and notice that it had rebounded and I missed several hundred percent gains by selling too early, I then feel like an idiot.

    Selling your house now for no reason but to cash out appreciation should make you feel good short term, but I expect that in a few years people who did this will look back and feel like an idiot for chasing short term gain by timing the market.

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  29. Redskins fan--

    "If you rent now and save the difference, you have more for a down payment or complete purchase later, or just to set up a CD to pay the rent as above.

    IMHO, the latter strategy is better for the future than the former."

    And this has been your strategy for how long??

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  30. Lance said...
    "yes, I am sure all those renters constantly being forced to move from one place to another really do skew those averages."

    Or is it the homebuyers being forced out by foreclosure that skew the averages?

    http://www.msnbc.msn.com/id/12975777/

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  31. "A few years later when I look back at the same stock and notice that it had rebounded and I missed several hundred percent gains by selling too early, I then feel like an idiot.

    Selling your house now for no reason but to cash out appreciation should make you feel good short term, but I expect that in a few years people who did this will look back and feel like an idiot for chasing short term gain by timing the market."


    Just remember that Warren Buffet says that he got rich by selling too soon. ;)

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  32. Exactly, real investors know that a 25% gain still beats the market and they are happy to get it. Waiting for that 100% gain is dangerous (and greedy).

    As the old saying goes, Bulls get rich. Bears get rich. Pigs Die.

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  33. Robert, are mortgage defaults the same as foreclosures? Are eggs the same as chickens?

    Please explain. Post links.

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  34. Lance,

    I'm the anonymous poster from 1:09. You've made many incorrect assumptions about me, but I'm not bothered by people's opinions. Also, you seem bitter and angry. Yes, there is risk in everything, from not buying a house, to selling a house, to staying on the sidelines and doing nothing. We research, learn, talk to others, look at past history, etc., weigh the options and then make our choices.

    You know where most of us stand on this board, some of us have sold at the peak and are waiting to get back in the market (that's me), some of us have put off buying because we refuse to pay overinflated prices, etc.

    What about you? So that we don't have to make assumptions about you, and so that we can all better understand why you have the views that you do about the housing market, please answer the following:

    1) Are you employed in the real estate profession?

    2) Will you be negatively impacted by a housing market correction? If so, how?

    3) Did you buy a home in the last couple of years in an overpriced bubble area?

    4) If you are a homeowner, what kind of mortgage do you have?

    5) If you have an adjustable rate loan, when will it reset, and when it does, do you know how much your monthly payments will increase, and will you be able to handle that increase?

    6) How much equity (ltv) do you presently have in your home?

    7) Are you trying to sell your home now? If so, how is that process going?

    8) Why are you so angry at those of us who believe that we are headed towards a housing market correction? In other words, what have we ever done to you?

    I'm sincerely interested in your responses, please answer honestly. Thanks for enlightening us!

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  35. Thierri said:

    "...in shanty-towns in the style of south america"

    Does anyone want to invest in my corrugated steel roof business?

    ReplyDelete
  36. Mother of Anony at 9:41July 12, 2006 12:58 PM

    Son, please get out of my basement, get a job, and stop using my phone line to surf the Internet. Thanks.

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  37. Anonymous said...
    “Robert, are mortgage defaults the same as foreclosures? Are eggs the same as chickens?

    Please explain. Post links.”

    Chickens and Eggs? Beavers and Ducks!
    http://www.askforeclosure.net/glossary.html

    Mortage default:
    A mortgage or deed of trust is said to be in default when the borrower does not make the payments as agreed upon in the original promissory note. Generally, if the payment is not received by thirty days after the due date, the mortgage is in default. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents and start the foreclosure process.


    Foreclosure
    A legal term that describes the forced sale of property pledged as security for a debt that is in default.

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  38. Comments making fun of bubbleheads will NOT be tolerated. You have all been warned!

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  39. " Son, please get out of my basement, get a job, and stop using my phone line to surf the Internet. Thanks."

    lol!

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  40. .25% again. The Fed continues to have its hands tied by the twin deficits.

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  41. anon 941,

    you can gleam just about all the information you ask by going back through back blogs ... in brief NO i am not a real estate agent (every bubbleheads fear/assumption ... which i've explained before make no sense since realtors try to get you to underprice and not overprice since they make more money with high volume) ... yes i bought in last 2 yrs, no no arm, have a 30 yr fixed loan at 5% and have between 40 -45% equity ... and bought the house at about $200K under market at the time. i have no plans to sell which you should have been able to glean from last several posts. i have no anger against someone like yourself who i feel is simply misguided ... but i do have anger against the supposed do gooders who are looking for the economy to crash and burn just so that they can buy the property they want for pennies on the dollar ... especially since some of these folks are doing it in the guise of "helping society" ... in my view they are hypocrits who are merely bitter that they either didn't buy before prices went up or just plain can't or don't want to buy now. any more questions?

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  42. Lance,

    Thanks for answering the questions. I do have a few more.

    Can you explain why your house was $200K under market in a hot market? Curious as to why. Are you counting that $200K as part of your 40-45% equity? Or is this equity that you achieved with mortgage payments?

    Did you buy 'as is' with repairs necessary? You mentioned earlier that you enjoy repairs and home maintanence. Did you buy a home that needs some work, assuming that by putting work into it, its value would increase?

    I think this will help clarify whether you are a homeowner, or a real estate speculator, (which is not meant as deragatory).

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  43. I did what Chip did. Cashed out. I bought after Sept 11th for $460/sft and closed 2 weeks ago for $862/sft. How can that be a mistake?

    Althought the buyer paid all cash for my place and thus got a bit of a premium, if it were a buyer taking 90% financing out the monthly expenses alone would be about $8400/mth. Trust me, I did the math. Yet, I got $3450/mth in rent a year ago from my tenant. Not that I didnt try for higher, I did, but it wouldnt rent because the market didnt demand the price I originally asked.

    Thats the thing, what you think your home is worth is meaningless until the market decides what its worth.

    I felt like I did the right move and took my profits all the table in a rising interest rate environment and now have some nice change to put away in 5.6% 1YR CD's! Whats wrong with that? I'll rent a 1BR for like $2300 or so, and get 5/8 that back in interest income.

    As for fed rates, I too think 5.75% is a very real possibility and even 6%. Although, Im beginning to feel that a PAUSE might separate the moves, as I interpret a PAUSE as just that, a PAUSE! Why can't Bernanke raise to 5.5%, pause, and then raise again by 25 or 50 bps if need be 6-10 months later? He can!

    Everyone thinks a PAUSE means he's done and then he starts lowering, not necessarily so. I say another 1/4 point, a pause, and then another 1/4-1/2 point after that. We still are yet to feel the effects of Above $70/oil which has been around for what seems like forever now.

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  44. Many people have been able to trade up their homes in the last decade, largely due to rising appreciation. I think that is great, but mostly lucky. Very few did an overview of the market, accurately predicted a real estate boom and reacted accordingly by buying all they could. If you did this, than you have every right to make fun of renters and lord your financial acumen over everyone.

    However, if you did not do this, please be intellectually honest and acknowledge that superior gains were made mainly because you happened to buy at a pivotal point in history, largely due to luck or personal circumstances that prompted you to buy at that time. You are still allowed to feel good about your gains, of course, but please don't act like it was due to your incredible ability to predict the next financial trend.

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  45. I did an overview of the market and guessed correctly. YOu did not. I am a winner. You are a loser. Have a nice day!

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  46. Anonymous 8:26 PM -- I have $350,000 in CDs and my rent is $1,900/mo. My place sold for more than a half mil. The math works well, in my case.

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  47. " " Son, please get out of my basement, ..."

    Although I'm on the skewered side of that one, it was REALLY funny. Great one.

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  48. Same here.. sold my town home 04/06 (bought it 02/03) in SoCal, have more than 200K in CDs and MM, and happily renting. I think it’s lot more common than people would think, but if you think that RE never goes down you wouldn’t waste you time reading blogs like these… just my 2c.

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  49. [Re; cashing out and renting] "...it’s lot more common than people would think..."

    I think that is true for a good and easy-to-understand reason. There is nothing to be gained by bragging about having cashed out, because your audience will just be pissed off -- you would have implied that they were not smart for failing to consider the same option. That is why, I believe, you do not see housing bears bothering to troll on housing bull blogs. I'm in this for financial security and want the best possible paid-off house I can buy, once the bust that I believe will occur has run most or all of its course. In the meantime, I'm paying rent at less than half the cost of owning if I had bought when I leased. Either side of the argument is betting that the other side will lose -- exactly as with term life insurance, where the company bets you won't die and you bet you will.

    If people ask me why I sold out, I tell them. If they are interested further, I will point them to these blogs. But I'm not an evangelist about it.

    May the best side win.

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  50. “May the best side win” true, but it’s kinda sucks when your GF (I mean girlfriend) and your friends are on the other side too…..

    As for the FED, I don’t have the slightest idea, but if they raise, good time to buy some more GLD and SLV, and if they pause same for DOG, and PSQ. IMHO

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  51. Anon 11:01 So, now what do you think will happen next in the market? You have reason to be confident in your opinion so don't hold back.

    And have you cashed out yet?

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  52. anon,

    "Can you explain why your house was $200K under market in a hot market? Curious as to why. Are you counting that $200K as part of your 40-45% equity?"

    Because it wasn't on the market. I checked tax records and just approached people. Squeezing out the real estate of course helped, and the person being able to carry the loan helped too (i.e., his CDs weren't going to pay him 5%.)

    No I am not really counting that as part of equity ... I am comparing with houses of similar sq footage that have since sold in the adjoining streets in similar condition ... which incidentally was "good" ... i.e., no problems, but could use updating of kitchen, baths, etc. As for asking if that equity is from making payments over the less than two years I have owned it ... Your asking the question indicates you are not understanding "time value of money" and how payment of principal is not what gets you any real equity in your property. It is simply time and the fact that as time goes by the gap between nominal dollars and real dollars grows and grows such that what was a $40,000 house 30 years ago is now a $400,000 house and yes you could say the person who stayed there "made payments" that got them the equity equal to the original loan ($32,000?), but who really cares since in today's dollars, it is the other $360,000 in equity that we care about!

    The point I have been trying to make all along is simply that

    (1) real estate should NOT be viewed as an investment ... it is your roof over your head. Yes, at first glance you think if I am talking dollars, then "what's the difference?" the difference is that my end goal is not to make (or lose) money but rather to ensure that I have monthly payments that are affordable and just as importantly predictable well out into the future so that I can rest easy at night knowing that come what may, I will have a roof over my head as long as I am healthy enough to work ... and hopefully when the time comes that I am not, then that I will have enough equity in the house to be able to downsize to something small that is completely paid off. That means I am not concerned about price fluxations. If they happen and it happens to be that they are UP fluctuations, and I can do another "move up" or whatever that leaves me in at least as good of shape financially, then so be it. If not, I just stay put.
    and (2) that irrespective of whatever the market conditions are, a smart buyer putting in due diligence can buy for an affordable and predictable monthly payment provided they are realistic in their expectations. I mean we all may want that big manse in Great Falls, but we all can't afford it.

    Good luck to you. I hope this was helpful.

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  53. How did you approach someone and pay $200,000 under market? It sounds like you took advantage of someone's ignorance or found a very, very, very special circumstance...

    My $0.02.

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  54. anon,
    "Very few did an overview of the market, accurately predicted a real estate boom and reacted accordingly by buying all they could."

    I did ... when I bought that first condo 10 years ago. It was really evident to me that DC, our nation's capital, was well undervalued compared to what things were selling for in the 'burbs. (Remember, I believe all real estate markets are "local", so I wasn't concerning myself with the "national" real estate market ... which I don't believe really exists.) So, in any case, I bought full well knowing that things couldn't get worse ... DC was in bankrupcty that year, the mayor had had all his powers stripped from him by Congress (except for Parks and Rec) and the District had just gone through a period of no garbage pickups and no snow plowing during a major storm that shut it down for almost 1 week.) To me this was the nation's capital and obvious that Congress would have an interst to fix things ... which they subsequently have been working on in various means including the Control Board. Obviously, not everyone saw this since the place I bought had been on the market 2 years and had been reduced in price by something like 18% the day before I saw it in the listings my realtor was providing me. Going forward to 1999. The market had gone up a little then and the 2 bedroom I'd wanted had already gotten to the point where I didn't think I could afford it ... so my first reaction was to think "I'll wait till prices come down". Then I happened to be at a local (ANC) meeting where a developer in our neighborhood was trying to get a variance, and prices came up in the discussion. He explained that his clients were a Dutch company that had been doing a lot of work in NYC and that they wanted to start work in DC because it was so comparatively undervalued. He said they'd done studies and determined that condos in my neighborhood would be going for $400 per sq ft by the time their project was completed in a couple year. At that time they were going for $200 per sq ft ... I thought to myself "this is someone who knows what he is saying, if I expect to ever get that 2 bedroom condo, I am going to have to buy it now ... even if it means really stretching myself." ... it took nearly a year, but I got that condo and I got it for something like $170 sq foot (absentee owner who had moved back to Europe 10 years prior)... and at the same time an identical unit 2 floors up sold for $230 per sq ft ... I sold this unit last year for $585 per square foot ... so that I could by the house that had always been my dream.

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  55. my2cents asked:

    "How did you approach someone and pay $200,000 under market? It sounds like you took advantage of someone's ignorance or found a very, very, very special circumstance..."

    They set the price, I didn't. Considering they had paid $20,000 for the house, they made out pretty well. Incidentally, we're talking about a Dupont row house here ... I.e., $200K wasn't half the value (or anywhere near there ...) Also, he had no real estate agent to pay. My agent wasn't happy, but 'oh well' after several months and several offers (and a change of agents along the way) I still hadn't won a house in a the bidding wars, so I just took matters into my own hands. Which is all I advocate here for the bubbleheads rather than relying on a bursting bubble that may or may not happen (and which I personally think IF it happens won't mean the 50% reductions that are being bantered around.)

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  56. "Payment of principal is not what gets you any real equity in your property. It is simply time and the fact that as time goes by the gap between nominal dollars and real dollars grows and grows such that what was a $40,000 house 30 years ago is now a $400,000 house"

    Wow. This only works if the house appreciates faster than inflation. (And over time, they don't). SO even if you sell for $400K that will only buy what $40K would have bought 30 years ago. See how that works? How exaclty have you come out ahead here.

    If all you want is to "ensure that I have monthly payments that are affordable" how can you advocate people that people buy now? You yourself admitted that you could barely afford your first home. So how 'unaffordable' should it be initially? Should it be a tight sqeeze for 1 year? 5 years? 10 years?

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  57. Obviously the whole story is not being told here.

    1st People buy a Dupont Row house for $20K (in ummm, 1955)

    2nd Lance approaches people in 2003 and says 'name your price'. (Other homes in area are going for $800K+)

    3rd These people name a price $200K under market (and have no agent either to advocate for them)

    4th Lance buys it and says 'I'm a real estate genius!'

    Sounds shaaaaaaaaaaaaaaady, like someone took advantage of the elderly

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  58. Anon,

    "Wow. This only works if the house appreciates faster than inflation. (And over time, they don't)."

    No, you're wrong. Evidently you've missed all the previous discussion yesterday where bubbleheads argued at length that real estate over time appreciates at about 1% above inflation. There were multiple links posted, supporting this.


    "SO even if you sell for $400K that will only buy what $40K would have bought 30 years ago."

    You can start by thinking where else would you have been living during those 30 years, and think about how much your rents would have increased over 30 years. Bubbleheads don't give this much thought. But, assuming you rent a shoebox apartment in DC now for only $1500, historic inflation rates indicates that in 30 years your rent will be in excess of $5000. And this will be for the same shoebox.

    Lance, on the other hand, will be paying the same mortgage in 30 years as he is now. And its most likely that his mortgage will be less than your rent.

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  59. Lance said...
    “... and bought the house at about $200K under market at the time….”

    “Because it wasn't on the market. I checked tax records and just approached people. Squeezing out the real estate of course helped, and the person being able to carry the loan helped too (i.e., his CDs weren't going to pay him 5%.)

    So, forget the listings, days on market, inventory, FSBO’s, forclousures, just check tax records (for what Lance?) for homes you’d like and just drop by and ask the owner to sell (-$200K of course). Sounds like some very good Carlton Sheets bird dogging there lance. Especially to find such a deal on a $2Mil home!

    “…..after several months and several offers (and a change of agents along the way) I still hadn't won a house in a the bidding wars, so I just took matters into my own hands. Which is all I advocate here for the bubbleheads rather than relying on a bursting bubble that..”

    What the hell do you think we’re doing? We (bubbleheads) have said no to the $300k-$400K+ 50 year old 2 bedroom shit boxes and taken matters in our own hands. As the inventory doubles for those $300K-$400K+ shit boxes, sales are starting to slooooow.

    Just one more thing. You did not purchase a home “$200K under market”. You, as a buyer, set the market value for the home. Oh, and made a nice comp for any other perspective buyer in the neighborhood. Thanks!

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  60. And also, I should point out that on the 31st year Lance will be paying NO mortgage.

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  61. I've not seen any evidence of bubbleheads taking matter into their own hands. All I see is bitterness, complaining, and finger pointing.

    This past weekend I checked out a 2 bd. condo in Adams Morgan. Its for sale, but not widely listed. In other words, you wouldn't find it if you only spend your time complaining on blogs.

    Anyway, the place is for sale at big discount to comps. It could be rented immediately, at break even to mortgage, taxes, insurance. If I make a 20% downpayment, it would rent for nearly $300 a month positive cash flow.

    I'm seriously considering to buy and rent it. Its just a matter of calculating how much I expect condo prices to fall vs. how much interest rates will increase vs. how rents will respond. I'll be honest, I'm not sure whether I'll pull the trigger.

    I've previously found properties like this. It takes a little more work than what most people do, but, as Lance knows, doing a little extra can pay big dividends.

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  62. I would agree that one more rate increase is likely followed by a pause (and the resulting positive over-reaction), but then I read this and again am thrown in the darkness and dispair:

    http://tinyurl.com/ntrax

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  63. That's the ticket! There is a secret real estate market where all the cheap houses are for sale!

    Lance appears to have taken advantage of someone. Please don't hold him up an example.

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  64. That's the ticket! There is a secret real estate market where all the cheap houses are for sale! If only we had known...

    Lance appears to have taken advantage of the elderly and cheated them out of $200K. Please don't hold him up as an example.

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  65. Anonymous said...
    I've not seen any evidence of bubbleheads taking matter into their own hands. All I see is bitterness, complaining, and finger pointing.

    This past weekend I checked out a 2 bd. condo in Adams Morgan. Its for sale, but not widely listed. In other words, you wouldn't find it if you only spend your time complaining on blogs.

    Anyway, the place is for sale at big discount to comps. It could be rented immediately, at break even to mortgage, taxes, insurance. If I make a 20% downpayment, it would rent for nearly $300 a month positive cash flow.

    I'm seriously considering to buy and rent it. Its just a matter of calculating how much I expect condo prices to fall vs. how much interest rates will increase vs. how rents will respond. I'll be honest, I'm not sure whether I'll pull the trigger.

    I've previously found properties like this. It takes a little more work than what most people do, but, as Lance knows, doing a little extra can pay big dividends.


    Wow, you must be a big time investor. $300/month positive cash flow... what's the capitalization rate? My bet is that it is very low, like 1% or less.

    But, that's okay, we need people like you who are satisfied with $300/month per rental income to buy the glut of overpriced condos, townhomes, and homes.

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  66. It is tough to make money initially by renting out.

    Once you consider the property tax, the maintenance, the property management fees (or the cost of your time), the additional tax issues which may neccesitate hiring an accountant at tax time,
    the fact that it could sit empty (isn't the standard assumption 25%), you might make money eventually but up front it is a drain.

    If you will be making $300, be sure you have considered all the added costs and not just the mortage versus rental rate. TGhe mortgage doesn't come close to equaling your actual costs.

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  67. anon said:
    "Wow, you must be a big time investor. $300/month positive cash flow... what's the capitalization rate? My bet is that it is very low, like 1% or less."

    Another person who can't see the forest for the trees. This person could be having to shell out money each and every month, and this might still be a good investment if he believed it was going to go up in value along the way. In any case, his point seemed to be that the whiners who are saying there are no bargains to be had out there, don't know what they are talking about. Here is someone who has gone out and found a place that not only covers his mortgage ... i.e., pays off the place, but provides him with an immediate $300/mo cashflow in, AND will provide depreciation deduction for years to come. This is a smart individual who is able to see the forest for the trees. He is looking longterm. Yes, it's easy to live high on the hog for a while by either living off your equity from a house sale or just from not ever making that house purchase, but eventually the chickens come home to roost ... and it is time to pay the pieper. Honestly, do you really want to have to worry about making rent payments when you are 72 and with no income coming in? (And don't count on your "savings" between rent and mortgage to do the trick 'cause (1) most people never end up really saving that savings ... they live high on the hog ... and (2) while the homeowner's payment stays steady for 30 years, the renter's will increase over and over again during that time period ... quickly eating away at whatever savings you have managed to actually put away. This guy here is smart in making the investment he did.

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  68. 'Most' renters probably don't put away those funds...but those on this board do. So assumming the lowest common denominator is poor form. (Sort of like people who eschew credit cards because they themselves don't have the discipline to pay them off each month.)

    I have yet to hear one person on this board advocate lifelong renting. I would bet that almost everyone here plans to be a homeowner someday. But not now. Not when rents are that much cheaper. Not when there is a possibility that prices could decline. Not when renting makes real investing possible.

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  69. "But, that's okay, we need people like you who are satisfied with $300/month per rental income to buy the glut of overpriced condos, townhomes, and homes."

    That was probably the most idiotic post I've ever read on this blog, which means a whole lot.

    Lets see, buy a condo with zero down and generate $300 immediate positive cash flow.

    Don't need to have an MBA to see the upside there. Someone else pays the entire mortgage, tax bill, etc. Plus there's tax depreciation (a concept, of course most bubbleheads don't understand since they don't own their own house, and definatly not an investment property), $3600 positive cash flow a year (not factoring tax benefits).

    Compare this to a bubblehead's CD return. A bubblehead would need about $150k in the a CD to achieve $3600 after tax income.

    This housing buyer is looking at a zero down purchase (i.e., about 5k in closing costs), and about $3000 a year in after tax income (factoring depreciation).

    So, housing buyer spends 5k out of pocket to produce the same income as what a bubblehead needs 150k to produce.

    Plus, the renter will be paying off housing buyer's mortgage, and housing buyer will be owning an appreciating property.

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  70. anon said,

    "Once you consider the property tax, the maintenance, the property management fees (or the cost of your time), the additional tax issues which may neccesitate hiring an accountant at tax time,
    the fact that it could sit empty (isn't the standard assumption 25%), you might make money eventually but up front it is a drain."

    Are you speaking from experience? I'd really like to know. Do you think 25% vacancy is accurate? The $300 cash flow is after taxes and hoa. It doesn't include manintenance or accounting (if that would be necessary, I'm not sure).

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  71. 25% is just the industry standard typically used when evaluating real estate.

    This is a good article to get you started.

    http://www.landlord.com/buying_pitfalls.htm

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