Spring is the busiest season for real estate. "Indeed, April through July outpace the balance of the year in sales, historic data at the National Association of Realtors indicates. So there'll surely be more home inventory and variety then. But you better move fast, because that's just what other home hunters are doing (Bankrate)."
David 'the Shill' Lereah, is predicting a spring bounce, warning buyers to buy now or have to deal with less inventory (a spring bounce)
Faithful cheerleader, Blanche Evans, editor of Realty Times, wrote "home prices and sales expected to rise again in the spring. (Realty Times, Nov 3, 2006)" Alexis McGee, president of ForeclosureS.com said:
"Conditions for buyers have improved because sellers are flexible now and mortgage interest rates are near historic lows. The market promises to be more balanced between buyers and sellers by early spring, supporting future price growth"
“Although it’s impossible to know exactly when we hit the bottom on the price correction, I firmly believe that when the market heats up again this spring, we’ll look back at this winter season as our best buying opportunity in six years”Clearly some in the housing industry are hoping spring will reverse the current sales and price declines occurring in most bubble markets. They predict that with the spring season a large amount of buyers will swoop in, raise demand, and bid up prices. This will not happen.
Last year, some in the housing industry were promoting the spring boom. Realty Times Editor, Blanche Evans wrote:
"What about housing? There's a lot of positive news that suggests that housing may have had its "rest." Spring might catapult housing into another record year."As we now know, last spring's selling season was a bust and did not stem the tide of the housing decline. Mr. Lereah another housing cheerleader, who is predicting a strong spring season, has already called the bottom of the housing market three times.
This year we can expect a surge of inventory coming on the market as desperate sellers try again to sell housing units that have been delisted, foreclosures increase and recently built housing units are completed. In a research note titled: "Not So Fast" by Credit Suisse (hattip to Calculated Risk):
• Record new inventory could get worse: According to our channel checks, despite the soft markets, the pipeline for new communities remains full with an 11% median increase in community count expected for next year. In fact, 63% of respondents expect to increase the number of open projects. We are dubious that the increased supply won't heighten the need for incentives and aggressive pricing in the spring.Meanwhile, on the demand side the speculators will have a minimal impact as they have largely existed the market. There will be no spring bounce to rescue currently overpriced houses.
• Existing inventory could run up again in spring: With both real homeowners and forced investor sellers looking to the new year to test the market, we expect the pressure from resales to resurface in the first quarter.
The spring will bring out more buyers but also more sellers. Inventory will increase significantly in most bubble markets. In most bubble markets prices will likely remain flat or fall slightly in the bubble markets during the spring months. This year's spring selling season will be very disappointing for sellers expecting a spring bounce.
Posts
I agree with your prediction, David. A further drag on the demand side is the combination of high homeownership rates (those people no longer need a house) and impending foreclosures (they won't be able to apply for another mortgage). I posted a local Maryland forecast on my blog.
ReplyDeleteDavid,
ReplyDeleteIn addition, one further decline in the sales rate will be the reduction in the number of sub-prime loans. While for DC this isn't a huge fraction (according to the "Map of misery"), it will be enough to impact the market.
Kevin, the impact of foreclosures and ownership rates will definately be another drag. People forget what a huge fraction of the population just cannot qualify for a mortgage. (Ok, they did in 2005 and 2006, but that ends soon. Its a question of what quarter in 2007, not if.) More people will have to sell 2nd homes than could possibly qualify to buy them. Thus the 2nd home markets are going to drag down the whole credit industry.
But hey, nothing interesting happens until May. ;)
Neil
I am just waiting for the usual suspects to show up and try to explain why it is a great time to buy now now now!
ReplyDeleteWithout a doubt we will get one of two things from them:
A. The usual attempts to talk around the issue by setting up various strawman arguments.
B. The usual claim that we are in danger of missing the boat when anyone with a clue knows that the market will do nothing but drop or stagnate for the next several years.
C. The always popular attacks on renters in general... clearly if we knew as much as they did we would have graduated college 10 years earlier and bought in the mid-90s...
DC_Too said:
ReplyDelete"Anyone who thinks this is like the stock market, where prices can go down briefly before resuming the upward march, is kidding himself."
THIS you are right about. Unlike the stock market, house don't really "go down" ... even briefly ... at least not by the huge amounts that stock prices can go down. They can stagnate until demand catches up, but it's definitely like the stock market where shares MUST be sold for people to eat and house themselves. It's actually just the opposite, being an expense, people just hold on to what they have longer rather than selling and moving up. NOT a good thing for first time buyers, but no big deal for those already in their homes. Smart first time homebuyers will counter this by using creative financing. Dumb ones will just wait around getting left further and further behind from their goals of homeownership and lower longterm housing costs.
I don't agree w/this, but Kenneth R. Harney wrote in The Washington Post on Saturday that "The Tide Is Turning":
ReplyDelete"the 18-month market correction that followed the four-year housing boom has just about run its course."
"smart shoppers should recognize that the game is changing, the spring buying season is just on the horizon and lobbing lowball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you had hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now."
"Shoppers also need to understand that today's prevailing mortgage rates -- a little above 6 percent for 30-year money, and the high-5 percent range for 15-year loans -- are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a low-cost mortgage adds up to a potentially great deal."
It's been awhile since I've heard the Post write "Buy now or be locked out forever" but here we go again.
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/05/AR2007010500839.html
I don't like to make short-term predictions, but I do not see how prices could go up this spring.
ReplyDeleteI suspect a lot of sellers will try not to sell, by putting their stuff out to rent. But there is already a glut of houses for rent in the area- at least it seems that way from driving around.
The real key will be when a larger fraction of sellers decides that they are losing too much holding on, so they will sell at a loss just to get out. I do not think we are there yet, so the fall could be another slow one. But I think housing bubbles usually unwind slowly.
A Redskins fan
"Smart first time homebuyers will counter this by using creative financing. Dumb ones will just wait around getting left further and further behind from their goals of homeownership and lower longterm housing costs. "
ReplyDelete...
B. The usual claim that we are in danger of missing the boat when anyone with a clue knows that the market will do nothing but drop or stagnate for the next several years.
lol
Lance said...
ReplyDelete“THIIS you are right about. Unlike the stock market, house don't really "go down" ... even briefly ... at least not by the huge amounts that stock prices can go down.”
http://www.bubblepic.com/displayimage.php?album=9&pos=4
And I guess the YOY median price declines are not real either?
http://www.mris.com/reports/stats/
ANON 10:41 SAID:
ReplyDelete"B. The usual claim that we are in danger of missing the boat when anyone with a clue knows that the market will do nothing but drop or stagnate for the next several years."
so ... someone with a clue is you, or David, or others whose only qualification for commenting is that someday you hope to be homeowners and you hope to do it at half the cost of all those who have bought before you. And those without a clue are such real estate experts as Kenneth Harney with his years of real estate experience and those at MIT who did the recently quoted study and all others who have successfully worked through the real estate market in the past. YEAH RIGHT ....
Hey we got our first bogus Realtor(R) shill pill by Lance.
ReplyDelete"Smart first time homebuyers will counter this by using creative financing. Dumb ones will just wait around getting left further and further behind from their goals of homeownership and lower longterm housing costs."
Did you really say that or were you just thinking it? "Smart" low income (non-traditionally-qualified) first-time buyers will get double mortgages, 125% financing, 1Yr ARMs etc. right Lance? The smart ones right?
Lance said:
ReplyDelete"house don't really "go down" ... even briefly ... at least not by the huge amounts that stock prices can go down. They can stagnate until demand catches up, but it's definitely like the stock market where shares MUST be sold for people to eat and house themselves. It's actually just the opposite, being an expense, people just hold on to what they have longer rather than selling and moving up."
Stop repeating nonsense and I am not talking about real estate prices being sticky downwards, which most agree with. The nonsense that is repeated is that real estate is not an investment, it is an expense.
1. All investments have costs and thus are expenses.
2. Homes are a store of value, in fact the single largest asset of most people.
3. If you are arguing that it is not a store of value, just an expense, then why ever would you suggest buying?
At least by understanding that it is an investment, asset, store of value, whatever you want to call it, your argument that you should buy makes sense.
And it makes sense to buy low and sell high. While prices are unreasonably high for the value like now, although prices may not decline much in nominal terms, they probably are not going up. That means in real terms, the value is declining due to inflation. If inflation is high the bubble correction will happen fast.
When real prices revert to the historical long-term average trendline or reasonably near it, I will be buying.
Looks like the subprime lenders are dropping like flys. Is lending getting tight, thats a yes.
ReplyDeleteRobert,
ReplyDeleteYour bubblepic graph and its single source has already been discredited for among other things, NOT taking into account the value of having a place to live. It is in one word "useless". And again, small fluctuations in price, like the one we experienced last year which didn't even amount to a fraction of the price increases in the last year alone of a multi-year price increase, aren't the "bursting bubble" price declines one finds in the stock market. You can sit around for ages and try justifying why you STILL haven't bought after renting for the last quarter century, but the fact is that you are afraid to make that commitment. Fine for you, but your rationalization for never committing to homeownership and responsbility isn't relevant to the twenty-somethings on here who DO want to eventually buy. If they were to listen to you and believe these skewed graphs you present, they too could end up bitter 40-something year old renters forever justifying not becoming homeowners. Looking back on my years of renting, I'd never want to do it again. There is nothing like the pride and freedom that comes with owning the roof over your head.
What will the explaination be if the market does rebound in the spring? Perhaps all the rah rah will drive some stooges to buy, thus jump starting the market. Mortgages are stupidly cheap too.
ReplyDeleteLance, You don't own anything, the carrier of your loan does.
ReplyDeleteLance said...
ReplyDelete“Your bubblepic graph and its single source has already been discredited for among other things, NOT taking into account the value of having a place to live. It is in one word "useless".”
Discredited? By whom? You? The “never a bad time to buy, data is irrelevant, buy now or forever be priced out guru?
Lance, you’ve asserted all along that you’re not part of the REI. And you know, I believe you. At this point, I think you’re one of David’s friends providing comic relief for his blog.
“And again, small fluctuations in price, like the one we experienced last year which didn't even amount to a fraction of the price increases in the last year alone of a multi-year price increase, aren't the "bursting bubble" price declines one finds in the stock market.”
Let’s see, let me check out MRIS for Decembers YOY numbers, yep, down again. No one is going to use comps from 12 months ago. Those are now outdated in this “fluctuating” market. (if the numbers are always down, is it still fluctuating?)
”You can sit around for ages and try justifying why you STILL haven't bought after renting for the last quarter century, but the fact is that you are afraid to make that commitment. Fine for you, but your rationalization for never committing to homeownership and responsbility isn't relevant to the twenty-somethings on here who DO want to eventually buy.”
Hey Lance, like I’ve said many times before, I sold in 05’. If that to you is a quarter century, you may want to brush up on you’re math skills. But hey, since data is irrelevant, why bother, right?
“If they were to listen to you and believe these skewed graphs you present, they too could end up bitter 40-something year old renters forever justifying not becoming homeowners. Looking back on my years of renting, I'd never want to do it again. There is nothing like the pride and freedom that comes with owning the roof over your head.”
And if they listened to you, they may well be just one of the 2.2 million sub primes likely to face foreclosure (some freedom). But hey, what to they know? But I’m sure you’re just about to post some relevant data on the subject…..go ahead……any time now………show us some of the graphs you’ve been tucking away…….
….someone wake me when Lance finally post some data.
Never mind, that may take some time.
ReplyDeleteHowever Lance, I would like to peruse any data that you’re willing to post. Care to give it a shot? Heck, if you were to list the ingredients for a can of tomato soup it would be more information than you’ve ever posted.
Here, I’ll even give you a hand:
Ingredients: Tom____
"so ... someone with a clue is you, or David, or others whose only qualification for commenting is that someday you hope to be homeowners and you hope to do it at half the cost of all those who have bought before you."
ReplyDeleteAh... nothing like a computer technician trying to play real estate expert huh lance? Funny that you should mention expertise...
Oh yeah, and as usual... few of us are predicting a 50% drop. Not that that will stop your straw man arguments.
"And those without a clue are such real estate experts as Kenneth Harney with his years of real estate experience and those at MIT who did the recently quoted study and all others who have successfully worked through the real estate market in the past. YEAH RIGHT .... "
Experts disagree lance. There are NUMEROUS experts who have been been discussing the real estate bubble for some time now. Clearly you are happy being spoon fed fairy tales along with the rest of the glassy eyed sheep. Works for you maybe, but it isn't my style. I am an analyst in a similar field and am more than equipped to recognize this market for what it is.
The RE market is predictable in certain respects. One of the most predictable is that its cycles move slowly. The correction started last year. That means it isn't anywhere NEAR climbing again. The absolute best case would be flat prices(at the already reduced levels) but even that is unlikely. No one here has anything to lose by waiting for the next year. Only when all the small time investors who convinced themselves they were geniuses during the run up have been pounded out of the market will the market begin to recover.
"Here, I’ll even give you a hand:
ReplyDeleteIngredients: Tom____ "
Remember all those posts from last year about: "where are the price drops? Inventory is up but prices are still climbing! There is no bubble, the market is just 'normalizing.' "
Now here we are not quite a year later with more than a handful of areas in the region already showing ~10% declines and all of a sudden Lance doesn't like to talk about prices...
It is funny... he goes on and on and on about how the prices are sticky, then he tries to argue that the bubble isn't popping because prices aren't dropping fast enough.
10% per year will feel fast as hell in a couple years when some poor guy gets transfered to another city after buying in early 2006 on Lance or some other clueless street preacher's advice.
robert,
ReplyDeleteI'm suprised you're still posting after humiliating yourself over the issue of who pays the realtor's commission.
"The banks own all the homes Lance not the buyers at least not until 30 years! So a 300,000 home with all the interest after 30 years costs about 1 million dollars+. "
ReplyDelete"Ownership" is not a legal concept. This is what's confusing you. Lance "owns" most of the rights to the house, the bank has a few. Lance owns quite a few more rights than a renter, and that's why it costs more to "own."
And it looks like you're the one who needs to learn some math.
"Interest is bad in many religions it is forbidden and for a good reason."
ReplyDeleteBecauuusse . . . it makes investment and economic expansion possible?
Anonymous said...
ReplyDelete“robert,
I'm suprised you're still posting after humiliating yourself over the issue of who pays the realtor's commission.”
I’m not surprised that you still don’t understand who pays. Please, post some wise comments for the rest of the readers.
David,
ReplyDeleteCan you afford a townhouse yet?
"The banks own all the homes Lance not the buyers at least not until 30 years! "
ReplyDeleteYeah, the banks own the houses. Except that they can't go in them or anything. Oh wait, maybe they don't own them.
"Can you afford a townhouse yet?"
ReplyDeleteDepends on which neighborhood in the DC area and the size of the townhouse.
""Can you afford a townhouse yet?"
ReplyDeleteDepends on which neighborhood in the DC area and the size of the townhouse. "
Probably explains why you're still angry. Anyway, are any of your predictions based on evidence or just your gut instinct?
VA,
ReplyDelete"I thought at least 40% own free and clear?"
Show me up to date data that supports the above statement.
"One doesn't truly own until the mortgage is paid off. "
ReplyDeleteBy your logic, one can never truly own - the state has the right to seize the property at any time through its eminent domain powers and it can also make all manner of regulations regarding how you can use your property.
But that's not how most people think of ownership. Ownership is, in my world, the right to exclude all others from the premises absent a court order or exigent law enforcement or other emergency circumstances. People who buy have that right; people who rent do not. This is one of many rights a tenant does not have. That's why most people prefer to buy, despite the fact that the up-front costs are higher (though, in the long run, owning is cheaper too).
"
ReplyDeleteShow me up to date data that supports the above statement. "
Ah, a false burden-shifting argument. Brilliant. If you have data, show it. If you don't, be quiet.
ReplyDeleteNeil,
If 3 out of 4 of your friends are in serious mortgage trouble, I suggest you meet some more astute friends.
Their problem is they bought in the last 3 years. 75% of the people who bought in the last three years really cannot afford the mortgage they took out. Cest la vie.
anon said Anyway, are any of your predictions based on evidence or just your gut instinct?
What? We've been showing statistic after statistic on this blog, OCrenters, and others.
Any normal non-dimensionalized statistic says we're in trouble:
price to income
price to rent
mortgage payments to income
income growth (or lack of it...)
RE investment as a fraction of wealth
House inventory to monthly sales (NoVa, Florida, and Phoenix compete to be in the worst shape)
Fraction of mortgages that reset in 2007 and 2008 to 60%+ higher montly payments (and the refinancing options are constantly shrinking).
There is a reason that all of the statistics based real estate sites are bearish! Think about that. Please, show me one bullish real estate site with a variety of statistical charts normalized to the historically important non-dimensional numbers. Please! I promise I'll review it.
Fact is that the numbers are just plain ugly. Uglier than they have bene since the 1930's.
Florida is repeating 1926 in the next two years. Do you really think that won't impact DC home values? So-Cal is going to tank too.
The best part is I cannot lose holding off buying. If prices continue to go up, my company will relocate 10,000+ jobs (including mine) to a lower cost of living area. If home prices drop, I was smart to wait. :) Heck, 2,700 jobs in my industry are scheduled to leave my area in the next six months.
Its different this time... American's lack their traditional savings to ride out a decline. Cest la vie.
Neil
DC DECADE said...
ReplyDelete"One doesn't truly own until the mortgage is paid off."
Oops! I forgot to ask the bank if I could paint the walls ... or have a dog! ... No, wait, isn't that the kind of stuff your tenants have to do?
bollenger said...
ReplyDelete"VA,
"I thought at least 40% own free and clear?"
Show me up to date data that supports the above statement."
I have posted the link for this at least 3 or 4 times. I am not going to do it again. You can either check the archives or just do some googling for yourself. And btw, we also learned that 3/4 of all non-primary residences (i.e., second homes and houses/condo rented out) are owned free and clear. And THAT included the flipper properties that so many of you are so waiting in vain to see appear on the rental market.
Neil said:
ReplyDelete"The best part is I cannot lose holding off buying. If prices continue to go up, my company will relocate 10,000+ jobs (including mine) to a lower cost of living area."
Yeah, it sounds like you're working for a really good company. Costs of living goes up and what do they do? Move you to a less-desirable (and thus "cheap") place. It doesn't sound like you have much leverage with them if you'd be forced to leave behind everything and everybody you know just so that they don't have to increase your wages to match increasing prices. I bet they've increased their going prices/rates though to match what's going on out there. Actually, the more I think about it, the clearer it becomes that they are just using you. I bet the CEO won't be moving with you to that God-forsaken podunk they want to move you to. Yeah, he'll be here enjoying a nice 5 star restaurant meal (and the savings from moving you) while you are down there with the rednecks and pick up trucks eating lunch at a drive in!
"Yeah, it sounds like you're working for a really good company. Costs of living goes up and what do they do? Move you to a less-desirable (and thus "cheap") place. It doesn't sound like you have much leverage with them if you'd be forced to leave behind everything and everybody you know just so that they don't have to increase your wages to match increasing prices. I bet they've increased their going prices/rates though to match what's going on out there. Actually, the more I think about it, the clearer it becomes that they are just using you. I bet the CEO won't be moving with you to that God-forsaken podunk they want to move you to. Yeah, he'll be here enjoying a nice 5 star restaurant meal (and the savings from moving you) while you are down there with the rednecks and pick up trucks eating lunch at a drive in! "
ReplyDeleteWow lance... that is easily one of the stupidest posts I have seen you put up in a long while, and that is saying something.
You think everywhere without a real estate bubble is a "god forsaken podunk"?
What do you think DC was 5 years ago?
Keep on believing believing your own BS... seriously... but I can tell you for sure that my friends who live in a half dozen lovely mid sized cities across the country that have no interest at all in living where you do.
"One doesn't truly own until the mortgage is paid off. This is true. Aferall, who seizes the home when you stop paying mortgage? The bank. Once you own you stop paying mortgage and the bank."
ReplyDeleteRight, but even after that if you stop paying taxes, the state takes the house. So by your logic, there is no ownership. Which is silly. I can exclude any person, including your landlord, from my home. You don't have that luxury because you live in somebody else's house.
In any event, I'm not going to stop paying what I agreed to pay for the place, so your fantasy of my eviction never comes to pass. If, by contrast, your landlord decides he doesn't want you there anymore, you're out. Now, which of us has a home and which of us is living by the good grace of others?
Amazing..Lance is RIGHT!
ReplyDelete"Thirty-two percent of all vacation-home owners and 24 percent of investment owners paid cash for their property. Combined with mortgages that have been paid-off, 82 percent of vacation homes and 75 percent of investment properties are owned free and clear."
from NRA and Govt Sources
AMAZING...
The guys at Contraryinvestor.com hear us in the hallway, laughing and talking about this housing thing, and they came out of their office just as I was wondering if, and how soon, mortgage equity withdrawal would start up again so that consumers could increase their spending again. While they did not actually say “In your dreams, you stupid Mogambo butthead (SMB)”, they said the same thing by noting that using “housing starts” as a proxy for the mortgage market/real estate sector, “The average cyclical peak-to-trough decline in starts historically spanned a 46-month time frame. The shortest contraction on record over the past 45 years was twenty-eight months. Can it really be that the current down cycle is done after only eleven months? We think not.
ReplyDeleteThe Mogambo Guru
ReplyDeleteYeah, it sounds like you're working for a really good company.
Actually, its a great company. Its not the upper management who wants to move. Its the rank and file who want off the crazy tredmill. And not everyone will have to. They are trying to predict how many wish to move out of state. If they don't offer enough transfers... those left behind are resentfull. If they move too many, they get the situation you describe. Since the moving package is quite generous...
Its impossible to raise rates fast enough to match the cost of living increase. No customer would accept the price increase. While the CEO would stay put... its the division President who is driving the studies on moving. He has to go with us.
So yes... I cannot lose. :)
As to using me? I'm not sure what you implied by that. I've worked in three states so far pursuing better employment. If my employer ever really "used" me, I'd switch companies.
Let's face it, entire industries have been priced out of San Jose, Long Island, New York City, Los Angeles, etc. Its probably just time for DC, LA, Boston, and many other cities to accept that home prices have locked out some of the old industries. Cest la vie.
Oh, I've heard a partial list of the areas under consideration. All have 4 star restaurants/hotels at a minimum. All would be attractive for educated professionals. We'll do ok. :) This wouldn't be the first corporate move I participated in. :( The last time I moved with the job, served my two years (to retain the transfer bonus) and then left. Since I was a renter, no muss and fuss. Also, it was an easy clean exit on exceptionally good terms (with the old company).
Neil
"Oh, I've heard a partial list of the areas under consideration. All have 4 star restaurants/hotels at a minimum. All would be attractive for educated professionals."
ReplyDeleteSo why don't you just go now and shut up?
Lance and those who think it won't go down,
ReplyDeleteTo me it's just simple math and adding up expenses. We will use ball park numbers to keep things easy. Let's take an avg. income in Prince William County, which is roughly 73,796 --families w/ children from www.homefinders.com We will be generous and boost that to 80k. So that is roughly 4333 a month in take home, we'll be generous again and boost that to 4500 a month. So let's add up some normal expenses and see what we get. Car payment: most likely 350 range, we'll say 300. Vehicle expenses, cost of gas wear and tear on vehicle, drive 25 miles to work-say 1500 miles a month say 24 mpg *~$2.5 a gallon, roughly 160 in gas, plus wear and tear roughly 200 in other auto expenses. This is one car mind you, but if you have a fam. you prob. have 2 so we'll say one vehicle is paid off so prob. another 100 in car expense a month. So that's 500 in auto. Say this is a good christian family and they tithe, that's 450 a month ~ prob. closer to 500 with charity etc. Food: for 2 people it will cost roughly 300-so we will keep it simple at 300-that's if you don't eat out. If you have any financial sense at all you will be saving money so say %10 savings, another 450. Bills: phone, electric, gas, internet, cable-roughly 200. If you had smarts you prob. went to school and are still paying back student loans do not pass go add another 250. Alright that's:
Auto: 500
Bills: 200
Student Loans: 250
Saving: 450
Tithe/Charity/Misc: 450
Food: 300
So before you can spit you've spent 2150.
Now I realize that a lot of people don't tithe so I won't through in Misc expense-I'll say that will take place of little johnny needs a new pair of shoes, school supplies, etc. etc. So from my 4500-2150 the MAX I can pay a month is 2350. That means the most I could get on a mortgage is roughly 350k. Using the recent MRIS stats, the Avg. price was 404k and the Median was 370k. You say that's close . . . yeah right. That's just what it costs to live. We haven't calculated in any additional cost like daycare, spending nights out, going to movies, oh and big one furniture appliances, etc. You are living on the edge. One bad slip, and fuiste (gone in spanish). Remember most people prob. don't save but spend that 10% on misc. expenses mentioned. It doesn't make sense. Why would anyone want to live here med. income family 73k avg. home 400k, when I can go to Forsyth Co. GA (suburb of ATL) med. income family 74k avg. home 200k. Oh but DC is better b/c b/c . . . . . traffic. Sooner or later something has to change. The only thing that holds me here is that I really love my job, but the more out of whack things become, the less that matters-that or I'll find a transfer somewhere else.
Anon,
ReplyDeleteGood analysis, 'cept you didn't take into account tax savings due to deductibility of all mortgage interest and property taxes. To get a ballpark idea of that just multiply your total mortgage interest and property taxes by your incremental federal AND state tax rates. For example, it might be that you are in the 25% bracket for the feds and the 8% bracket for Virginia (these are the percentage upon which your highest bucket of pay is taxed. Why that and not the lowest? ... Because it is that one which will be removed from your liability as you reduce your liability with deductible expenses.) So, in our example, that is 33% OFF of the interest part of your mortgage interest. For the first 20 years or so of your payment, it is mainly interest. Let's assume you start off with 90% interest on average for the first 5 years ... That means that $2,115 is interest and $698 is your tax benefit ... leaving you a payment of $1,652. And you can take the tax benefit now (i.e., not wait till the end of the year to get it back) just by changing your exemption form to reflect the new anticipated deductions. I don't know if that $700 makes a difference or not to you ... but it's a lot. Also, if you are a young family (and so it seems from the relatively low family income you are quoting), you can expect to have your income increase significantly in the next 5 years ... Why not consider a 5 year interest only which will allow you to either lower the payments or buy more house ... Personally though, I wouldn't advise using this to buy more than you need. However, if it will get you into a house that really does meet your needs, and you are in a position to know with a fair amount of certainty that you will be earning more within 5 years, there is absolutely nothing wrong with following this route. Alternatively, you can just wait and see if the "1 - 12% addition declines" that David is predicting will materialize ... IMHO, that small and very unsure "discount" wouldn't much influence me. I'd know that just by thoroughly searching and good negotiating that I could find myself a "1 - 12" discount without depending on the varaies of the market and "timing it right."
Anon:7:08 PM,
ReplyDeleteYour comment is very true. People need to open their eyes before buying homes beyond their means.
Lance said... "Why not consider a 5 year interest only which will allow you to either lower the payments or buy more house..."
ReplyDeleteYour exotic arm advice is terrible. Many good people are losing there homes due to advice like yours. You had mentioned before, you father was a real estate agent, sounds like you learned the trade well.
I call BS on that. You see you explained the problem. 5 years ago you COULD buy a place on the 75k salary. Take the GS scale (since most things are tied to the gov. here). A GS12-10 made 84559 in 06, in 01 they made 69,099. An increase of 15k or an increase of 22%. So a GS12 salary increased 22%, yet you're main expense (i.e. your home) increase over 100%, Whiskey Tango Foxtrot. Sure I'd be fine if I moved here in 01 bought a home no prob. cuz then the increased equity, increase housing prices, etc. But what allowed me to get in the market in the first place . . . something I could afford. And note in 01 I wouldn't have had to use crazy financing, I could have easily gotten a fixed 30 year no prob-- without stretching my budget. That same GS12 now can't get into the market unless he does something crazy like an interest-only. You say a young family, yes I am, but I quoted you med. income What about have the joe schmos who are below the med. They are in a worst bind. And a 5 year interest only, that's about the dumbest idea I've heard in a while. So I'm not putting any equity into the house, I'm borrowing money from the bank, hoping and praying that my house will increase in price or that I will earn more in the future.
ReplyDeleteSo I am gambling on my future. If I put no equity into the home and then lose my job and sell it I'm out unless housing prices go up. If I bought last year, I'm down 5-10% already, on a 400k that's already 40k I'm out, and b/c I'm so highly leveraged, that's 40k I'm really in the hole. So if it averages 5% a year increases that takes me two years to break even. That's three years, so I get transferred now w/ selling costs etc. I'm still in the hole. At 7% increase in 2 years I'd just be breaking even in money terms not real value since inflation eats away at least 3-4% a year (if you can believe the gov.) So now 3 years later, I'm stuck.
You talk about tax savings of 700 a month. Hmm, I can rent for 1k/month. 2350-1000=1350>700. Besides the fact that I'm NOT highly leveraged. I'm socking that 1350 away to save up for a nice down-payment so I don't have to be highly leveraged. What did you people do . . . fail algebra in HS? Shoot I'll give you the 700/month in tax savings. Now don't forget since I own a home, I have taxes-on 350k that's an additional 3.5k a year- wow so that's approx. 300 a month in taxes 700-300=400 in my pocket. But now since I own the place don't forget housing expenses to repair the place, etc. Oh yeah let's tac on another 150-200 for HOA/Condo fees, so now I'm only getting 200 more a month. Hmm yeap 1350>200.
There was a GOOD reason that for a good 50+ years the rule of thumb was to pay no more than 2-3x your income on a house, let’s take 2.5x --hmm 80kx2.5=200k or in 01 2.5x70=175k—oh my goodness med. home value in (prince William) 2001~150-175k, wwwwwoooooowwwwww, that's something that one could actually afford, not be a slave and pay 50% income to a house, and have plenty left over for vacation, extra stuff etc--hmm, people actually knew how to do math 10 years ago.
Buying something on what I think I can afford in the future is the DUMBEST idea. Buying on what I CAN afford now is the smart way. Just like I never use a credit card unless I can pay it off right now. Credit is nice b/c you get added benefits for returns and warrenty etc. but if I can't take from my savings and pay it now, I ain't buying it. A car and house are different, b/c at least I can sell it if I get in a bind. But again I buy what I can afford now not later.
You explained tax benefits, but with simple math I showed how that is just bunk. 1350>200. I take that extra 1150, put it in the bank, we shall play it on the extreme safe side and just put it in a saving account and not invest in a money market etc. I can get 5% savings rate. Hmm, 5% guaranteed, or take the money and put it for a house that might get 5% over the next 2 years. But now if I do like you suggest and get an IO, hmm oh yeah I'm not investing any money I'm just renting from the bank. If I'm smart, I take the money I save instead of buying now leveraging myself to the hilt.
Oh and don't think I'm risk adverse, I take a small amount each month and invest/play/study in the commodities market. But as my wise dad says you don't play/risk money you're not afraid to lose. The small amount in commodities (all mini's--I don't play with the big boys) is something I’m not worried about, it I lose it fine, if not fine. I'm sorry I'm not going to gamble my future on the biggest expense of my life.
I would LOVE to buy a house-not much else material wise- I really care for at this point-everything else is just peachy. But it just doesn't make financial sense. The ONLY way I can afford to buy is if my wife also works full-time. Sure for right now that's fine, but with kids . . . put kids in a day-care-sorry not the life I want to live--why have kids if I loan them to someone else for them to take care of. Remember I quoted med. FAMILY income, I as a young family, do better than the med. how does the fam. who makes 60k/year do it. Is everyone an engineer/lawyer/real estate. What about the manager of the quickimart, the bookstore, the clothing store, etc,..
I will buy when either my earning power has increased or prices have gone down enough for me to justify the expense and for it to make sense-when I don't have to pay %50 of my income to be a slave to a house, when I can buy at 2-3x my income. Why it's got to come down, b/c I'm the avg. or above the avg. and I CANT get my foot in the door, unless I gamble on my future.
"I call BS on that. You see you explained the problem. 5 years ago you COULD buy a place on the 75k salary. Take the GS scale (since most things are tied to the gov. here). A GS12-10 made 84559 in 06, in 01 they made 69,099. An increase of 15k or an increase of 22%. So a GS12 salary increased 22%, yet you're main expense (i.e. your home) increase over 100%, Whiskey Tango Foxtrot. "
ReplyDeleteWell said Anonymous...
I am in a very similar situation. I am in my mid 20's and about to get promoted to a GS-12. My wife is a brand new CPA and is making good money...
We have been married almost a year and are coming up on the end of our lease... but we aren't going to buy.
I make good money. She makes good money. Together we are making well over six figures... and we can barely pay for(not afford) the cheapest starter homes in the area.
That, along with the economic fundamentals, is what makes me confident prices will come down. If we can't afford to buy a house here than the core of DC's population can't afford to either.
Sure... if you happened to get into the market 5 years ago you are fine... but no new buyers can enter the market anymore.
The other people my age or younger are generally coming to the same conclusion I have. We can't get priced out of the market, we ARE the market.
We have hit the ceiling... and are starting to sink again. We are going to keep an eye on things and plan on buying in 12-18 months, assuming prices have stopped the rapid drops.
Anon 6:26,
ReplyDeleteLife is ALWAYS a gamble. And not buying is in my opinion a much larger gamble than buying. Put in the most simplest and briefest of terms. It's far more financially conservative to lock in a known and determined amount today than to take a chance that monthly costs will be lower in the future. It's your choice, but you are without doubt taking the riskier course. NO ONE has a crystal ball to tell what either prices or interest rates will do in the future. Your gambling may pay off ... and it may not. As for your fears of unemployment etc., those same concerns would be there irrespective of house prices, interest rates, etc. Those are the same fears all homeowners --- even those 10 years ago --- have always faced. You need to weigh these fears against the unknown which you are apparently not fearing ... but really have more of a reason to fear. The chances of your being unemployed for an extended period of time are far less than the chances of housing prices going up over time. There was an article in the Post the other day about how something like the birdflu really scares people and gets their attention, but the fact of the matter is that people should be far more afraid of getting cancer or other "mundane" diseases which kill far more people and are far more likely to strike. Yes, the birdflu is far more dramatic and thus scarrier, but it's also far less likely to happen ... As is your being longterm unemployed. Good luck whatever you decide to do.
Glad to finally find a DC-area blog...
ReplyDeleteMy wife and are renting and want to buy a house inside the beltway. We make just shy of 200k, and NO creative financing *could* comfortably afford a 550k "starter" home. TONS of houses around this price are streaming onto the market every day now...
Whether its winter for spring - what first time buyers can rationalize buying a 550k starter home? I don't get it...
Lance,
ReplyDeleteYou're absolutely right life IS a gamble, but you'd better gamble when the odds are in your favor. That's why casino gambling is dumb, the house is always favored even if it's only .51 they are always favored. Calculate your risk/reward ratio and then let the chips fall where they may. I gave you gobs of stats and #s why the house is favored now. All you give me is fear-mongering. I give you real life situations and you just tell me that I need to gamble.
I'm sorry but I win right now. Sure I don't live in the nicest place, sure rent could go up at lease renewal time, sure they could sell, sure I would LOVE to buy a place.
But I win right now, b/c I have something that the vast majority of recent homeowners do not have. I have peace-of-mind. I know that if my wife quits working, I don't worry about where are next payment will come from. I am living sufficiently below my income to save loads of cash. My rent is low enough and I've saved(ing)/investing enough that I could quit work and be fine for a year. I have peace-of-mind that when I have kids, my wife will be able to quit work and spend good quality-time help raising the kids-and we won't have to worry about the shoes, the payment, etc. Why is that . . . b/c I could do it right now if I so chose. And I have peace-of-mind that when I do buy (and believe me I WILL buy a house), it will be something I can afford, put %20 down, 30 year fixed, pay for it with my 1 income and have money left over for the family.
How many people out there live paycheck to paycheck, have their credit cards maxed or always carry a balance-use IO loans, buy more than they can afford, absolutely must have 2 incomes to afford their lifestyle?
Sure price can go up, but if they do they go up for everyone. The only way to capitalize is to move out of the area, either that or speculate. Not every homeowner wants or needs to be a speculator. When did buying a house go from buying a house to speculating on a house. I will buy when it makes financial sense and its the right time, no sooner no later, if it never makes financial sense , well oh well big flipping deal. Life ISNT about money.
I'm a patient man and buying a house while favorable isn't the end all be-all of life, some of the happiest people I've ever met in my entire life lived within their means in tiny little wooden or cinder block shacks in Argentina. I have found that in life I am the happiest when I live without worries.
Right now I live without worry socking money away preparing for bigger things, if I bought a house right now I couldn't do that.
Again I quote actual stats and values, all I get back is fear-mongering.
anon 6:23
ReplyDeleteWell said. Please consider getting a user name so we can tell who is posting (too many anon's are fear-mongers).
I'm in your situation, almost to a T. When I get married, if we lose either income, we're ok. Heck, we're effectively saving the larger income (so we can get a house when prices are more sane).
And there is that one odd thing... homeowners cannot save. In fact, there is a reason their savings rate is negative while renters have a positive savings rate.
But some will have no choice but to depart their areas. Too many companies are doing relocation plans. I know mine is... Would I say no? I don't know.
Again, well said,
Neil