Time to buy a home is now?

[LargoWinch]

Re: Time to buy a home is now?

I just don't get this renting is better argument...

Let us say you are 30 years old. For the next 30 years you can pay rent and when you are 60, you will have.. umm... nothing.

Or, you can buy a house you can afford and pay the mortgage for 30 years. When you are sixty, you will own a house.

Even if you pay more by owning, you still end up owning a house as opposed to nothing. More than likely, inflation over 30 years will make owning a house a much better outcome than paying 30 years of rent and owning nothing.

The faster you pay the debt down, the more you will save compared to renting.

The key is buying a house/mortgage you can afford.

Real estate as an investment is a completely different equation than real estate as a place to live.

Hello aa; note that the "rent vs buy" argument is based in part on the principle that your mortgage payment and associated costs (maintenance, prop. taxes, insurance, agent fees, utilities etc.) are typically higher than the equivalent rent and that if you choose to rent, you will invest the difference.


Simplified example:

Joe:
- Buys a $500K house with a 30 mortgage and pays $4,000 / month in mortgage and assoc. costs.

- Provided the house double in value over 30 years, Joe ends up with a $1MM asset and no debt. So he is worth $1.0MM.


Jane:
- Jane rents the same house for $2,000 / month and invest the difference in say crude oil (so $2000/mo for rent and $2000 in crude oil as investment).

(Note that both Jane and Joe have an expense of $4K / mo, but one choose to "invest" in real estate the other in crude oil.)

- Now lets assume that crude goes up in value at an after-tax rate of 5% per year

- Jane would end up with an investment portfolio of $1.66MM and no debt (use a FV calc. for this - see google).

- Jane can now buy Joe's house for $1MM and she will be left with $660K to buy make-up, Grey Goose martini and Laura Secord chocolates.

Obviously, the net worth value of Jane and Joe varies according to many factors such as: costs of maintenance, prop. taxes over 30 years, future value of the house in 30 years and increase in the value of Jane's portfolio etc. As such, to assess what is best for you, I suggest using the following tool as a starter:
http://www.nytimes.com/2007/04/10/bu...et&oref=slogin

[Wild Style]

Re: Time to buy a home is now?

I lived in Poinsettia Heights just south of Wilton Manors during the last of my 10 years in South Florida, but sold in 2005 at the peak and moved my family to the outskirts of Tampa. I miss the ocean, canals, water-taxi, tourist traps and destination restaurants.

I have to say, for all the problems that Fort Lauderdale has and will have, I believe there is value to a town with such a leisure infrastructure.

I also underestimated how much I'd miss salt-air... Funny.

There are no real jobs here. it is all tourism, retail and a small banking/finance sectors (VERY small). I don't see this place doing so well in the long run.

[dbarberic]

Re: Time to buy a home is now?

Something tells me that the NYT's ad revenue from real estate and mortgage providers has fallen dramatically and needs a boost.

[WDCRob]

Re: Time to buy a home is now?

The NYT worksheet you give is pretty cool Largo, but I don't think it helps much really.

Changing home prices and rent assumptions just 1% each over 15 years swings the decision every time - and there's no way any of us can predict them that accurately.

I'll buy when the cash flow is about even and I can get into something I'm willing to stay in - without regard for what may or may not happen over the next 30 years.

[LargoWinch]

Re: Time to buy a home is now?

The NYT worksheet you give is pretty cool Largo, but I don't think it helps much really.

Changing home prices and rent assumptions just 1% each over 15 years swings the decision every time - and there's no way any of us can predict them that accurately.

I'll buy when the cash flow is about even and I can get into something I'm willing to stay in - without regard for what may or may not happen over the next 30 years.

WDCRob; agreed, a 1 percentage point swing on a 5% or so loan for 30 years has a major impact, but that is the whole point!

Like you, I have no idea what the actual figure will be over time. (If I knew, I would be a wealthy Largo).

The tool is helpfull, but you must come up with the assumptions. As they say: garbage in...garbage out...

[powersown]

Re: Time to buy a home is now?

BigLandbaron,
If you think you've got 6-9 months, you might want to wait a while before starting construction. It might save you quite a bit on materials costs as well as labor, which should be highly competitive next year. Might as well get a smaller mortgage while you are at it.

[Basil]

Re: Time to buy a home is now?

I finnd this basic tool usefull when assessing a "buy vs rent" scenario.

Simply input a negative annual home appreciation amount and see what happens...

http://www.nytimes.com/2007/04/10/bu...et&oref=slogin


I'm with RickBishop, Ash and al. on this: wait it out.

I am a currently a renter and plan to exchange 100oz of gold in the next decade for a median house in Toronto (mortgage free).

This tool is fantastic. Perhaps it is a sign of the times that someone has finally created a tool that allows one to figure in an annual decrease in home values.

[ggirod]

Re: Time to buy a home is now?

I composed a long reply to the question about building your own house, but iTulip went belly up when I submitted the reply and it was lost. This time you get a shorter reply.

I've been struggling with this issue for a few months. After waiting for prices to come down for 4 years, I want to build my dream home in 2009. I own the lot, I'm virtually debt free, have the cash in hand to build it, but that will leave me less liquid than I'd like to be going into 2009 and beyond. Life is short, it's time for me to build this house one way or another. With last week's talk of 4.5% rates for home purchases in 2009, I think it will be wise for me to drink deeply from this well of cheap money, to save my cash so I can take advantage of future situations as opportunities arise. I'm 49, currently 5% phys gold, 25% cash and 70% semi-illiquid RE. I'd like to be way lighter in RE if I had a choice, but this is my hand.

I don't expect noticeable inflation in 2009, I do expect a stream of deflationary events with a leveling off later in 2009), but I'm inclined to believe we will see inflations effects before 2011.

Here is my advice ...

If I wait 5 years or more before I pay off this new house, I should be paying back dollars with 50% or less purchasing power compared to today's dollar. In the meantime ... I'd hope my use of cash to hedge against inflation pays off.

You are making 2 assumptions here, neither of which may be justified. The first is that your salary or income will keep up with inflation. I lived through the 70s and I can say my income did NOT keep up with inflation. In fact, I think it is likely incomes will stay stagnant or, at best, partially keep up with inflation. Second, you are assuming you can invest your cash in some form that will keep ahead of inflation. I think the 70s proved that was also impossible in most cases. So, my analysis of your situation is that you should not plan to have your current money keep up with inflation or your salary to do so either. As a result, borrowing money even at low rates is not a wise choice. Instead, you risk losing the dream house you so desire.

My advice instead, is to look to the future, maybe considering the changes to society that will happen in the next decade or two, plan your lifestyle accordingly, and build your dream house to fit. Maybe you can scale back your appetites to require a bit less money. If you are building the house you want to live in for the rest of your life, then you should just go ahead and do it, but do it in such a way that you own it. If you are building a dream house with "investment potential", forget it. Plan to live in it til you die, or forget it. Houses will not have investment potential in our lifetimes ever again.

I am typing this from a house I built over the last years, cash. I bought the land in 2002 when I realized that what was happening was not sustainable and had to crash eventually, then I developed the land over the next few years out of cash, and then, finally, I built the house cash. Every morning I awake in the house I really want to live in, and I am happy. There is nothing to compare with that outcome. Had I mortgaged it, planning to make lots of money, the investments I would have made would have tanked and i would be facing foreclosure. Nuff said. Of all my investments, having a paid off house is by far the best. At your age, an affordable house you own is a safe haven from which you can plan a reasonable life for the next decades.

Now, quit calculating interest and other costs, look at what is happening in the world and what is coming in the economy, decide what you want to do when you grow up, and build a house and a life to match.

[BigLandbaron]

Re: Time to buy a home is now?

powersown -

Yes, I agree demand destruction may help to reduce my materials costs by some percentage in 2009. If the local contractors are a little more desperate for work, the labor costs may be a bit lower too. But, it takes 6-9 months to build a custom stick-built home in my state so I don't want to delay construction beyond 2009. I need to start building in the first half of 2009 such that the house will be completed enough to secure a mortgage in the last few months of 2009 (a gov't sponsored 4.5% or less rate would be very nice!).

I'm afraid we will be in "poom" and US mortgages will have "poom" adjusted rates in 2010.

Another thought I have is that Obama's "great stimulus" of 2009 may suck up local contractors and inadvertently jack up my construction costs - I may be competing with the State and FED for local resources and materials. They may be rebuilding roads, bridges and refurbishing the old inefficient town and state buildings in my area. That's cement, asphalt, insulation, windows, sheathing ... and the contractors to work the materials.

BLB

[Basil]

Re: Time to buy a home is now?

Hello aa; note that the "rent vs buy" argument is based in part on the principle that your mortgage payment and associated costs (maintenance, prop. taxes, insurance, agent fees, utilities etc.) are typically higher than the equivalent rent and that if you choose to rent, you will invest the difference.


Simplified example:

Joe:
- Buys a $500K house with a 30 mortgage and pays $4,000 / month in mortgage and assoc. costs.

- Provided the house double in value over 30 years, Joe ends up with a $1MM asset and no debt. So he is worth $1.0MM.


Jane:
- Jane rents the same house for $2,000 / month and invest the difference in say crude oil (so $2000/mo for rent and $2000 in crude oil as investment).

(Note that both Jane and Joe have an expense of $4K / mo, but one choose to "invest" in real estate the other in crude oil.)

- Now lets assume that crude goes up in value at an after-tax rate of 5% per year

- Jane would end up with an investment portfolio of $1.66MM and no debt (use a FV calc. for this - see google).

- Jane can now buy Joe's house for $1MM and she will be left with $660K to buy make-up, Grey Goose martini and Laura Secord chocolates.

Obviously, the net worth value of Jane and Joe varies according to many factors such as: costs of maintenance, prop. taxes over 30 years, future value of the house in 30 years and increase in the value of Jane's portfolio etc. As such, to assess what is best for you, I suggest using the following tool as a starter:
http://www.nytimes.com/2007/04/10/bu...et&oref=slogin

The big factor that is usually forgotten in these calculations is the lost investment opportunity on the down payment. If Jane is also getting 5% on her 100K, she has about 430K, at 7% she is over 750k, and Joe just has his house. Almost every rent vs. own calculator is rigged to make the sheople want to buy and thus leaves out this important factor. And what if Jane is putting this money into a Roth IRA, while Joe is slaving away to pay of his mortgage and repair the roof, etc.?

Calculate in the fact that we have just had the steepest rise in RE prices in the history of the US and the choice seem clear. I sold all my RE for a modest gain which was then lost by an idiot money manager (still my fault for choosing him), and I now rent. I plan to hold out for another two years or so and, like LW, buy a place for 100ozs of gold.

[DaveBrown42]

Re: Time to buy a home is now?

I'm glad to see this thread as I've been struggling with the idea of buying a house (with a large mortgage) purely to trade the Poom.

I think almost everyone here is in agreement that home prices are likely to continue to decline in real terms. However, if Poom happens (say the 5-year 100% inflation scenario), won't home prices increase, at least in nominal terms? Or is that not considered likely?

It seems to me that if we're heading for high inflation, and I can use a house as a way to lock in a historically low-interest fixed rate mortgage (ideally as close to 100% LTV as the best rates will allow), then there is an opportunity for profit there. Is the general feeling in this thread that Poom is not likely enough to take this risk, or that housing prices will continue to decrease or level off in nominal terms, even during a Poom?

[c1ue]

Re: Time to buy a home is now?

Dave,

There have been a lot of threads talking about various options and various scenarios.

To add to them, think on this:

Let's say we do have 100% inflation over 5 years as the iTulip thesis states.

Theoretically the mortgage on your new house will only have to be repaid with 50% deflated dollars.

But, you are assuming

1) Your wages keep up with inflation. If it doesn't, then you aren't paying with deflated dollars!
2) Your costs for maintenance, utilities, etc don't rise dramatically.
3) Your property tax or other tax burden doesn't rise significantly
4) Your property's value holds up - i.e. schools don't deteriorate due to tax revenue shortfalls. roads don't deteriorate for similar reason. unemployment doesn't escalate into a 'job flight' situation. Your neighborhood doesn't get a low income housing project inserted. etc etc.

The point isn't that any of these (or all of these) will happen, the point is that your view of the situation needs to take into account more factors than: 1) house price now 2) inflation later

[BigLandbaron]

Re: Time to buy a home is now?

Future Salary - No assumptions on my future salary, I'm unemployed and want to stay that way! "Semi-retired" sounds better. I've assumed $0 annual wages in my future estimates.

Not having a job to suck 60 hours a week from one's life, no dictator boss, annoying coworkers, bumper-to-bumper commuting ... no stress. Living reasonably well and doing what you want to do every day ... PRICELESS.

I've structured the life I wanted for my future, this missing dream home is where I want to live the next 5-10 years. My income stream is from RE sales, I'm an ex-semiconductor engineer/successful newbie land developer in 2004. While sales were good 2004-2007, I paid off debt, bought more land, bought gold and stashed cash ... awaiting the inevitable bust. Sales are slow, but I'm in a great position with most of my lots sold and no business debt.

Bottom line, my income stream is really variable in the new economy, but I'm not overly concerned as long as I maintain a cash cushion. The gov't is just starting to work the mortgage side of it now, 2009 could be a banner year for sales (but I'm not counting on it). I should get a sales bump out of Obama's 4.5% deal ... and/or the next deal ... and/or the next deal ...

The opportunity to invest that cash into something that gives a return larger than 4.5% (or assume 3.0% with post tax writeoff) during the "poom" should be quite fruitful ... vs the same cash buried in a house that may continue losing "value" through asset deflation and fiat inflation. I guarantee I can find a way to make more than 3% on that money.

Keeping ahead of inflation - Gold, if you want to sleep at night. The "poom" phase will make holders of gold richer (in fiat money) and historically protects wealth in troubling times.

[BigLandbaron]

Re: Time to buy a home is now?

If you bought gold with your "mortgage money" and gold goes 3X in 3 years, you could cash in and nearly pay off your house after the 35% FED tax on your gain.

It's a big IF, but sure seems like a safe bet as the printing presses around the world are now coming to life and there's a whole lot of stimulating going on. You know it's coming. Even if gold only gets to 2x when you unload, you just took a huge bite out of paying for your house off in a few short years.

[LargoWinch]

Re: Time to buy a home is now?

The gov't is just starting to work the mortgage side of it now, 2009 could be a banner year for sales (but I'm not counting on it).

Chances of that happening: 0.0%