What to do about a house?

[Jayhawk]

I'm not sure where to park this post, so I will give this one a shot seeing it's the most popular.

I would love to find out what folks here have done with their houses in light of the coming hard times. I'm really looking for some insight on strategy. Are there some out there who have sold their primary residence and opted to rent a place? I bought fairly high in the bubble, but my particular area did not see the massive run up that other areas experienced. I'm in a great loan (5.624 30 Fixed) with 20% down in equity (for now:eek, but I work on my own and my business (executive recruiting) is based on companies hiring. (medical devices)

I've been thinking about seeing if I could sell & rent for a couple years to see what happens. Of course, we could be looking at much higher interest rates, etc. by that time vs. having my house payment fixed where it's at now.

I'm curious what other have done or are thinking of doing.

Thanks!:confused:

[c1ue]

Re: What to do about a house?

Jay,

As I've told several friends who bought houses last year - the financial decision is a bad one, but the personal decision is different.

One guy was buying because he felt his fiancee's parents wouldn't consider him a 'good' suitor if he didn't even have a house.

The other thought he was getting the best deal.

Time will tell which one made the right decision...actually, time already is telling :eek:

From a pure financial standpoint - I'd look at the free cash flow for staying into the house vs. renting - including all tax benefits.

Think of it like this: if rent went up 15%, and rates went up 15%, and housing went down 15%, are you better or worse off renting vs. buying?

Then change the numbers to 20%, 25%, 10% to get an idea.

If the difference is not 10% or more, I wouldn't bother.

If the difference is 30% or more - and a significant absolute amount of cash, I'd consider it based purely on numbers.

But, there are consequences.

Do you have kids? If so, can you rent in an area where your kids can keep up their schooling?

Do you have family/neighborhood ties? You'd be giving that up potentially.

What about your free cash? If you don't have the cash, it might be a bad idea to try and sell now as you could get hit with a cash draw in order to sell.

[BobinSFCA]

Re: What to do about a house?

I'm curious what other have done or are thinking of doing.

Thanks!:confused:

Jayhawk, we share a very similar situation (self employed, some home equity, LT fixed mortgage). I have been debating the same idea for about a year and even talked with a Realtor. I live in San Francisco, and so far our prices are holding up (but I'm sure it won't last forever).

When I compared the high costs of renting were I currently live to selling, staying put seems to win for the moment. I plan to live in the area for at least five more years, and the tools I have found seem to suggest it is cheaper to just stay put. This is especially true after paying real estate commissions, moving expenses, etc. Rents in my neighborhood are currently going for about the same as my mortgage payment for a similar property.

I think for a primary residence where you plan to stay for awhile, it may still make sense to stay put (depending on were you live). I figure even if my property drops by 40%, it would only approach what I paid for it, so I'd still be in reasonable shape (albeit loosing out on some investment income I could have enjoyed with the proceeds of a sale).

I would also be curious as to what others are doing with respect to their primary residence.

[Jay]

Re: What to do about a house?

I was living in a very expensive 1850 sq. ft. condo in Boston which I bought in April 2004 on a 5 year ARM at 4%. I got married, switched jobs and sold it in June 2006 to be closer to work and in the advent we had kids (we did and have a second on the way.) We got one of the last decent offers out there that summer and took it and ran gleefully. I was relieved as I had been reading this site after I bought and was getting nervous about what I had done. That mortgage would have been onerous but doable had we stayed once it reset.

We are now renting a house on the East Side in Providence and couldn't be happier. My wife still desperately wants to buy so we can have some stability for our family and I intend to do what I have been since the summer of 2006: stall, stall, and stall some more. I don't know how long I can hold out, but I'm doing my best! Wish me luck!

If we do buy, I would much rather buy a duplex in which we would stay in half of it for two years and the future rents once we leave will cover the mortgage, upkeep and taxes, but prices aren't there yet. Ideally we would get a return on the down payment of about 5-10%. I really like this plan as it would protect us from the very slight possibility of hyperinflation also. As a caveat, my work as a physician is depression protected so inflation is all I really worry about.

[BK]

Re: What to do about a house?

We sold early in the Bubble phase- late 2002- I'm a chicken. We had 55% equity in the home after two years, didn't love our neighborhood, and we knew it took our parents 15 years or longer to build a 50% equity position in their homes.

We've lived in two rental home (we moved for a job and a family crisis) and have enjoyed both rental homes.

Benefits of not being an Home Owner:
We spend no time or money on: mowing the lawn, shoveling the driveway, the land lord repairs or replaces appliances when they break down, painting, wallpapering, handles the property tax bill increases, and pays the Condo fee. No owning a home enhances your life - I'll admit my wife would love to own, but understands that we've made the best choice for our family and enjoys where we live.

When you are a Renter-if you need to move because of work or family - your only obligation is the balance of the lease. Talk to anyone who has cared for and tried to sell a house while living in another city.

We just have to pay our Monthly rent.

You need to make investments to keep inflation from eating into your Money (and minimize your potential for losses). Finding professional help has helped us keep pace with inflation (hopefully, control some of the down side risk). I found I wasn't taking enough risk managing the money on my own - but, we sought out an Advisor who has itulip like view of the economy.

One thing is for sure if you don't sell your home - your Real Estate will be worth a lot less in the coming 2-5 years.

Just my opinion.

[EJ]

Re: What to do about a house?

I was living in a very expensive 1850 sq. ft. condo in Boston which I bought in April 2004 on a 5 year ARM at 4%. I got married, switched jobs and sold it in June 2006 to be closer to work and in the advent we had kids (we did and have a second on the way.) We got one of the last decent offers out there that summer and took it and ran gleefully. I was relieved as I had been reading this site after I bought and was getting nervous about what I had done. That mortgage would have been onerous but doable had we stayed once it reset.

We are now renting a house on the East Side in Providence and couldn't be happier. My wife still desperately wants to buy so we can have some stability for our family and I intend to do what I have been since the summer of 2006: stall, stall, and stall some more. I don't know how long I can hold out, but I'm doing my best! Wish me luck!

If we do buy, I would much rather buy a duplex in which we would stay in half of it for two years and the future rents once we leave will cover the mortgage, upkeep and taxes, but prices aren't there yet. Ideally we would get a return on the down payment of about 5-10%. I really like this plan as it would protect us from the very slight possibility of hyperinflation also. As a caveat, my work as a physician is depression protected so inflation is all I really worry about.

Jay,

Glad our analysis has been helpful to you. We have many members tell us that they have made similar decisions based on our forecasts. It's not easy to buck the trend of the times, even when they are clearly at odds with common sense, so congratulations for having the fortitude to act on your good sense. One commonly held fallacious belief that was cause for much of the faulty decision making that occurred during the housing market during the 2001 to 2006 period is that a home is an investment. As I explained in early 2004, land can be an investment but the value of a building net of maintenance and tax expenses can only – best case – keep up with the rate of inflation. As home prices increased well above the rate of inflation between 2001 and 2006 they can be expected to regress to the mean and then overshoot, in the manner of all asset inflations.

It is reasonable to expect that interest rates may rise in the future and this expectation is motivating some to purchase homes now even though they know prices will likely be lower later. No one can say what interest rates on mortgages will be a year from now but it is clear that if the US ever wants the dollar to appreciate then interest rates must at some point rise and substantially. This event will of course increase the nominal monthly cost of a mortgage but will also tend to further depress home prices, although the decline in US home prices priced in euros and other currencies slow. (Try pricing the Case/Shiller home price index in euros and you're in for a shock.) No one can say exactly how this will come out in the future, especially if government interferes in market clearing with programs to reduce principle payments and extend the duration of mortgages. But given the extremes of over-pricing, it appears that renting is for the time being a safe decision while home prices correct.

I'll also add that the first home my current wife and I owned was a duplex in Newton, MA. We were lucky to pay a great price for the building at to bottom of the market in Boston in 1995. Our tenant paid most of the mortgage while we lived there. When the time comes I expect you will find this an effective solution to both your wife's desire to own and your desire for security in an uncertain real estate market.

Thank you for joining us and for sharing your experience.

Best Regards,

Eric

[BobinSFCA]

Re: What to do about a house?

I found I wasn't taking enough risk managing the money on my own - but, we sought out an Advisor who has itulip like view of the economy.

I know this is off topic for this thread, so I apologize in advance. I am curious how you located an adviser with an itulip focus? I would love to find someone like that, but instead I just keep finding generic investor types at the big brokerages who keep saying "stay the course on the stock market, home sale, etc." Same bad advice I rec'd back in 2000 during the last "correction."

[jtabeb]

Re: What to do about a house?

I'm not sure where to park this post, so I will give this one a shot seeing it's the most popular.

I would love to find out what folks here have done with their houses in light of the coming hard times. I'm really looking for some insight on strategy. Are there some out there who have sold their primary residence and opted to rent a place? I bought fairly high in the bubble, but my particular area did not see the massive run up that other areas experienced. I'm in a great loan (5.624 30 Fixed) with 20% down in equity (for now:eek, but I work on my own and my business (executive recruiting) is based on companies hiring. (medical devices)

I've been thinking about seeing if I could sell & rent for a couple years to see what happens. Of course, we could be looking at much higher interest rates, etc. by that time vs. having my house payment fixed where it's at now.

I'm curious what other have done or are thinking of doing.

Thanks!:confused:

Sell the house.

Rent

Buy gold and silver.

Done

[krakknisse]

Re: What to do about a house?

Well, just my $0.02.

We sold our house (in a decidedly bubbly Northern European country) right at the top around a year ago, and are renting. Property is down some since, so that'll pay for a lot of the rent. I did the math with renting vs. buying. Very nervous decision then, feel better(ish) now. We're going break even vs. renting just on a cash flow basis - if you factor in maintenance. Many don't when they do the math. If you figure in the equity loss and the leverage, we're way ahead . But people over here think I'm crazy. And gold - don't even mention it. So don't expect a lot of support (except from the people here). Can't wait for the bubble to bust more. As it is, there is a huge amount of nervousness at every monthly house stats publication. Inventory is up, but sellers just don't want to sell at reduced prices. RE brokers are pushing every good sale as news items. Does this sound like the early phase of the US bust?

For me, it's a question of freedom as well. Do you want to spend your productive life with a millstone around your neck? Being in a house with substantially decreasing equity and increasing mortage expenses would require sacrifices with regards to a lot of other aspects. Not least - you're stuck in one town.

To sum it up: Sell. Rent. Buy gold. Batten down the hatches.

[grapejelly]

Re: What to do about a house?

Sell the house.

Rent

Buy gold and silver.

Done

Exactly.

That's what we did. Friends said, what, are you crazy?

We are crazy. And quite happy as a result.

[skurla2000]

Re: What to do about a house?

Finally... Something at iTulip I'm qualified to comment on! BTW- I love this place and agree with EJ's assessment of our future.

I own many rental properties acquired during the bubble, and my own home, and am confident in the long-term prospects of real estate. I do not dispute that prices will probably come down another 20% or more.

However, I believe, and continue to believe, that one of the best things to come out of this whole housing mess was easy to get, 30 year, low fixed rate financing. I was able to acquire $2MM in cash-flowing rental property for almost no money down, and with no "traditional" job (just good credit). That was then... and there is no way any bank right now would lend me another dollar. I haven't changed... but the credit market has!

I plan to hold the properties for 15 years or so and pay off the mortgages. Once I do, whatever they are worth is found money anyway, as is the huge cash-flow!

My point is, if you can afford your home, and have no plans to move, why give up a perfectly good fixed-rate mortgage, and a property that is shielding you from taxes and inflation? If inflation hits like we all believe it will, you'll be paying off that mortgage with more and more worthless dollars every year! In 10 years you'll forget all about a 20% drop in value in 2008 when your wheelbarrow of cash pays off the whole balance...

And who says in a few years you'll even qualify for a mortgage anymore? Or want one at 22%?

At the very least, if the rents in your area are "high", rent the property out at a profit and go lease yourself another place to live. Don't miss out on the best leveraged inflation play of the century!

Just my 2c...

[BK]

Re: What to do about a house- finding advisors with Itulip outlook

Reading Itulip will ultimately lead you to reading Prudent Bear, Safehaven, and Financialsense.com.

Advisors/Brokers who do not spew Modern Portfolio B/s...include:
Jim Puplava- Puplava securities, Peter Schiff- Euro Pacific, Delta Global advisors, and there are more- review the Authors who post stories to Financial sense- many are brokers/financial advisors.

You'll need to talk to several of them and decide which ones style you are most comfortable - because there is ALWAYs the RISK of Losing money when investing.

Good Luck.

[quigleydoor]

Re: What to do about a house- finding advisors with Itulip outlook

. . . spew Modern Portfolio B/s . . .

Um, what's the B/s? I think the theory is pretty solid. You just have to keep finding new asset classes that are not correlated to all the ones that are overpriced now.

[World Traveler]

Important advice: RENT

A major housing bust can go on a lot longer than most people expect.

The 10 year Houston housing bust had some features in common with what is going on today. In late '70's and 1980-1982, because the local economy was doing well, a lot of people bought homes with the very high interest rates of the Volcker period. They were not concerned, because housing values/prices were also going up signficantly at the same time. Plus the local economy was good.

When Houston went bust, there were really 3 incentives to walk away: 1. job loss 2. stuck with high interest rate on depreciating asset 3. heavy foreclosures caused prices to plummet even more.

I wish to heck I had been renting at the time.

We bought at the peak (1982) and were stuck in that house for 10 years, because sales price for most of '80's was 60-75% of what we paid for it. When we unloaded in 1992, we finally sold it for 90% of our original purchase price. In inflation-adjusted dollars we lost even more.

I have always thought, from an investment standpoint, we really "rented" that house from the bank for 10 years.

And we couldn't move out or get away from the house without the major hassle of selling our "nominal ownership".

In this market place, especially with the U.S. economy in such woobly condition, I would rent, until it becomes clearer where the bottom is.

[quigleydoor]

Re: What to do about a house?

To all the pro-rent people out there: One problem nobody has mentioned is that renting exposes you to all kinds of risks related to your landlord's situation. Your life will be disrupted by his arbitrary decisions. Depending on your own tolerance for chaos and your resilience, this might not matter. I found it to be a pain in the ass.

This is my real estate story.

My wife and I moved to Boston in 1999 and bought a cheap condo in an outer ward of the city proper, a neighborhood full of decrepit brick buildings suitable for college students. We watched as prices in our neighborhood literally doubled between then and 2003. (The guy we bought it from was not a good investor . . . He bought it 1989 suffered through the 90s bubble, and sold it only when he was able to part with it at a break-even price!) It was in a 60-unit, 70-year-old brick building, only 20% owner-occupied. Most of the units were owned by a few career landlords, who were accustomed to extracting revenue from their property without adequately maintaining it. Quality of life kind of sucked. But I know if we had opted to rent instead of buying all we could afford, we never would have entered the propertied class.

We sold it in 2003 for exactly twice our purchase price. I had been researching the monetary system on my own (unaware of internet contrarian thinkers), and was already convinced of the housing bubble. But I did not have the acumen to predict the timing of it.

Actually, with the events of 2000-2003 I was toying with the idea of leaving the country, or at least leaving Boston. The undemocratic turn and war-mongering bozo leadership made me very anxious. The local job market was dry. Given all the uncertainty in our lives, we rented an apartment in a large complex.

The property manager lied to us about some of their rules, changed rules arbitrarily, and did not maintain common spaces of the property. Later on the REIT which owned the building dumped this manager for another company, which made new rules, and then jacked up the rent. With each lease renewal, we saw our rent increasing faster than inflation, as the new management company tried to compensate for the old one's incompetence.

So, in 2006, even though the bubble was just topping out, we started looking for another condo just for the stability and a little more space. After some very diligent searching, we located a relatively underpriced opportunity with very high value for our personal needs: 21st century construction, 2 miles from my office, walking distance to commuter rail and shopping, and near public parks. On a 30-year fixed mortgage, our monthly payment is the same as our 2006 rent was, and we have twice the square footage. Plus we are very well protected from transportation cost inflation. If gas goes to $10/gallon, I'll walk or bike to work. We are spending most of our disposable income on efficiency, ventilation, and comfort enhancements. In fact we view these things as alternative investments, which will probably pay off better (and make us happier) than any financial moves we could make right now.

Given the good value (utility) we are deriving from owning this place, it seems like the right choice for us. We're prepared to ride out a monetary disruption, ka-poom or whatnot.