As some of you have already surmised, last week I attended a real estate round table hosted by the Sacrament Bee.
A quick caveat before I make some observations, the investor/bottom caller dropped out with the flu (probably not a bad thing as he was likely to get beat up). I was on the verge of dropping out, having come down with a mutant form of Strep on Monday. But I washed my hands thoroughly and pressed on, in a heavily drugged state (antibiotics, Advil, and decongestant). So needless to say I am not sure my arguments were coherent, let alone cohesive.
Overall, it was a very civil, and lively discussion, with each person bringing a unique viewpoint to the table (an agent, a broker/credit, a building consultant, me, and several from the Bee). Without divulging the details, the story is supposed to run in next Sunday's paper, I wanted to make a couple of observations.
This group has hindsight clearly in their favor. Back in late 2006/early 2007 I couldn't find a RE agent (and we looked hard) that would tell me a home was overpriced, nor could I find a broker who would only give me a quote for a 30yr fixed loan (2 other quotes that lowered my monthly payment always seemed to come with it). So its interesting to see how history gets revised. Of course I didn't know these particular individuals at the time, so I can't say for certain.
Early in the conversation the effect of lower interest rates came up (and whether it would stimulate more demand). So I threw out a somewhat standard line, that a smart buyer would wait till prices decreased further, thus paying taxes on lower principle, because they can always refinance when interest rates move lower. Idea being, you can always lower your interest rate, but not your principle. This idea went over like a lead balloon. Perhaps I didn't phrase it properly?
At one point in the conversation the mortgage/credit guy, Michael, suggested I was throwing away money by renting since there are tax benefits to owning. We have discussed this before, and basically agreed that tax benefits merely defray some of the many additional costs associated with owning a home (insurance, property taxes, HOA, Mello-Roos, maintenance). I include the tax benefits in my rent/buy calculations, at current prices, we are way still better off renting than purchasing a comparable home.
When I let on that I had 20% as a down payment, realtor Ruben, seemed to think the world was my oyster. Unfortunately, this has not been our experience. 20% down, and no contingency (no home to sell first), doesn't seem to make a lick of difference when we present our offers to a bank or builder.
Of course, the "when is bottom" question came up. And while I did give an answer (over a year away with no appreciation for some time...but the price declines will moderate considerably as we approach bottom) there was no time to get into the discussion of how different areas of the city will bottom at different times. This is a finer point, but one that I like to emphasize since it is important for buyers.
In all it was an enjoyable discussion (and that's not just the drugs talking), and as an added bonus we were led on a tour of the newsroom. I'm a bit anxious about reading the comments when the piece comes out, some of the people who comment on Sac Bee stories are super angry mean. So much for "love thy neighbor."
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15 comments:
BT--
There seems to be some special stupid pill in the water that keeps people from understanding that the price is more important than the interest rate. I've heard that even at the US Treasury they don't understand that. And you'd think that, given what has happened over the past year, everyone would have gotten it. There's no hope--let it go.
And I've mostly given up on the Bee comments. Not only are they mean, but they're stupid mean. Not worth the trouble.
You know... people whose personal interest it is to make you buy even if it's not in your best interest are out in full force... again. Last summer they were drumming how it was the "best time to buy." Now they are doing the same thing. Hogwash. There is a video on Youtube of a shrill RE screaming at Peter Schiff how this is the "best time to buy" and he is just saying no - whenever he can get a word in edge wise. When Peter Schiff says it's a good time to buy, that's when it is a good time to buy.
Several months ago, the Bee asked for people to tell them how the economy was affecting them. Long story short, my decidedly un-glamorous self ended up being the sacrificial photo op for this story. I really wonder why they didn't choose the Realtor/Mortgage broker couple (as I recall...) or one of the other people who answered their questions.
The reporter only twisted one response I made to a direct question "Do you feel like you're struggling?" into a statement to this effect that seemed to have been offered up without that prompt in the article.
I did not read the reader comments, because yeah -- Bee blog denizens make Housing blog denizens seem restrained and non-judgemental.
cmyst,
I remembered reading that article at the time it was published, don't worry, there were no comments at all on the article.
I also remembered being astonished that anyone could have that high of an income and have no fall back savings. It was frightening.
My unsolicitated opinion? If this is the article you were referring to, I would be very hesistant to pursue a home purchase at this time. http://www.sacbee.com/739/story/1128796.html
I know you've owned in the past, but honestly, I can't imagine buying a house without any savings and already feeling like you're two paychecks away from disaster.
No offense intended, so I will apologize in advance. Clearly, the article made an impression on me and you nudged that recollection into the forefront of my brain.
Best wishes to all.
-C
I don't want to give the impression we disagreed on everything. There was quite a bit we did agree on, but of course there are always some RE dogma/myths that refuse to die.
----
Thanks for sharing Cymst (and the link too Curious). Speaking of sharing, saw your landlord's plight on Lander's blog, what a huge bummer. Let me know if there is anything I can do to help (like look up the sale date in my foreclosure service).
BT, I know you are in finance/economics, so I was wondering if you could give a detailed outline of your rent/buy calculations and tax savings.
A couple of things I have seen many people leave out of their calculations are income deduction beyond just mortgage interest. For example, have enough deduction to push you past the standard deduction allows one to write even more income off. Suddenly charitable donations come into play, state and local income taxes can be deducted as well as real estate and personal property taxes. Unless you make a very large amount of money and your state taxes push you over the threshold of the standard deduction, you will never be able to realize these savings as a renter.
The other big issue I see in rent/buy calculations is people looking at principal reductions on their loan as an expense. This is not an expense, only the actual interest expense should be used in the calculation.
Finally, how much lower do you think your target homes will fall? 15-30%? Then it might make more sense to rent.
I personally feel a 4.5% interest rate and flat home prices are appealing. My thought is to wait until rates hit the magic targeted number then pull the trigger. If we have high inflation in the future as a result of massive issuance of liquidity (as many believe we will), then I would much rather be locked in at a 4.5% rate than trying to buy the same house for the same price at 12%.
I know so many of you discount cash flow as irrelevant with price being the only factor, but I can see many pitfalls in this argument.
cymst will also attest to the cost of having a landlord fall into foreclosure. Moving expenses can be quite high, both monetarily and emotionally--especially for children.
Cmyst--
You have plenty of time. Check to see whether or not a Notice of Default has been filed, or if the landlord expects that the NOD will be filed in February. Once the NOD is filed, it will be at least 3 months before the Notice of Trustee Sale. After the foreclosure sale you have at least 60 days before you have to move. So if the NOD has already been filed and the Trustee Sale is in February, you have until at least April. If the NOD is filed in February, you have until at least July.
And if the loan is owned by Freddie Mac, you may not be evicted anyway. Freddie is not evicting any tenants--even those in single family houses.
And if you want to read even more, you can go to my blog. BT has a link.
"I personally feel a 4.5% interest rate and flat home prices are appealing."
Me too!....I would jump on that in a heart beat!! But unfortunately, I think we have at least another 15% to fall where we are looking.
RV6Flyer you raise some good points about taxes. My rent/buy calculation is not very sophisticated. I really want to buy, so I take the max possible deduction to give me a best case scenario (our tax rate applied to property tax, mello-roos, and first 12 months interest).
Its a monthly figure that I can compare with my rent (and down payment interest). It's not a go/no-go tool like the NYT has.
I do include principle, but I don't include any buy/sell transaction/closing fees either.
While my spreadsheet is not perfect, it gives me a ballpark when trying to figure in the effect of all the extras that come with the homes around here (HOA & Mello-Roos, district fees etc).
Curious -- no offense taken. Yes, that is the article, BTW. If things went totally to pieces, I could live on my savings for about 5 to 6 months. I'd have to move to a small apartment and budget even more carefully -- that was my hyperbolic notion of "disaster", since I could only pay the rent and associated utilities where I am for about 2 or 3 months off my savings.
Things have gotten much worse since that article appeared, but I actually feel more optimistic.
I'm really seeing things from both sides of the fence, now. Houses are too expensive, yes. They will continue to lose value, I agree.
OTOH, and this is difficult to fathom maybe, you are much more vulnerable as a renter than an "owner". I could never refuse to pay my rent and stay in a rental for months, or expect to rent a decent place with a bad credit history.
At some point, the gains offset the very likely further decline in values. That point is very subjective.
cymst,
I was very sorry to hear about your landlord. If by chance Fannie or Freddie has the loan, I read on Calculated Risk this morning that they may sign new deals with renters. Something to check out, I suppose, if you really don't want to move.
Anyone else catch 60 Minutes last night on the next wave of defaults? Not news to any of us, to be sure, but it is interesting to finally see this information hit the mainstream. I don't think there are many people out there who think that 2009 and 2010 could be WORSE than 2008, but here we are....
What I find fascinating now is the vast emptiness of commercial real estate. It's become like those games you play as a kid while traveling, when you try to tally up license plates, etc. Everywhere I drive, I count the empty storefronts -- especially in brand-new, higher end strip malls.
Michael, suggested I was throwing away money by renting since there are tax benefits to owning
And I'm sure Michael gave a careful desription of how those renting costs and tax benefits offset -30% or whatever it is YOY appreciation?
Good on'ya for going sick.
PR -
To be fair, at the end, he acknowledged that I made a smart move by renting the last two years (as opposed to buying in Fall 2006 when we moved here).
He has been in the business a long time, so in "normal home appreciation times" his point is well taken.
When you are in a bubble of epic proportions, tax deductions don't make much of a dent in helping an overpriced home become affordable.
At this point it probably makes as much sense to run the Landlord's credit as the tenant's credit.
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