A Look At The Arguments For ‘Bubble-Proof’ Areas
Readers suggested a topic on areas immune from the housing bubble. “Let’s discuss and prove/debunk ‘bubble-proof’ areas. My hometown of Rochester, NY, for example, never historically appreciated more than 4% since the 80’s. The local news media has been saying Rochester is undervalued, prices will go up, and the bubble isn’t happening in there. It is different in Rochester!!”
“My dad bought a 4/2.5/2 in the burbs in 1982 for $180k and sold it in 2004 for $220k. His appreciation was easily absorbed by maintenance and inflation. My friend bought a 3/1.5 off Park Ave. in 2004 for $150k. The previous owner paid $89 in 1999. A house a few doors down just sold for $125k. No bubble, eh?”
“I hate to say it, because I am a firm bubble-believer: I think parts of NYC are more or less bubble-proof (or I should say crash-resistant). I’m saying let’s look at the arguments for ‘bubble-proof’ areas (NYC, SF) and areas where the bubble ‘never happened’ (Buffalo, Lawrence, KS and so on). I think that would give us all a historical perspective to help us understand - and make better choices - about buying in the future.”
A reply, “Maybe with the sidebar topic about how NYC’s allegedly ‘bubble proof’ status is bolstered by RE industry hedging and hiding of data, and how, since RE advertising is geared to the very rich, the press tends to adopt that skewed view that everything is ok (while foreclosures pile up rapidly in many boro neighborhoods).”
“The ratio of income/house prices here is one of the worst in the nation. I wouldn’t buy here (yet) unless I was prepared to see my home’s value decline by 20-30 percent or more over the next few years.”
“The Real Estate industry here is extremely powerful, and will use every means to persuade buyers that the party can’t end here, even as credit is getting tighter and boro prices are falling. You have to listen closely, but if you do, you can hear the slow hissing noise in NYC.”
Another said, “I can wait for the Toll bros. High rise condoze in Union Square to fail miserably. Agreed its a pretty good location, but I understand it has no parking…..none not even for guests.”
One pointed out, “You probably can’t afford to buy in the Village. Therefore, NYC does need a correction along with every other square inch of this country. I will agree that some people (myself excluded) would pay more to live in NYC than anywhere else, but that still does not make it bubble-proof.”
Another reply to the original poster, “I’d consider rolling back to 2000 prices a crash. We’re basically on the same page, you just frame it more positively because you really like NYC - and that’s ok.”
Finally, “What’s different about NYC now vs. before the boom??? NOTHING fundamental that will justify the price increase. Therefore, if it wasn’t worth it before, it certainly won’t be worth it after.”
The Democrat & Chronicle from New York. “House sales in the Monroe County region fell by 9.5 percent in June compared with a year ago. There were 1,220 house sale closings last month, compared with 1,348 during June of last year. The median price edged up 3.6 percent to $121,250, compared with $117,000 during June 2006, according to the Greater Rochester Association of Realtors.”
“‘We’ve lost one part of the market, that’s the credit risk buyers,’ said Armand D’Alfonso, president of Nothnagle Realtors. With banks unwilling to take risks on that market, ‘prices are bound to go up,’ D’Alfonso said.”
“The subprime mortgage market now is virtually nonexistent, said Joseph Rinaudo, broker owner of ReMax Gold in Rochester. ‘To get 100 percent financing right now is impossible without good credit,’ Rinaudo said.”
“While certain portions of the market are faring well, the Rochester real estate market has shifted to favor buyers, said Michael Haymes, president of ReMax Realty Group in Pittsford. ‘Buyers have many more choice than they did a year ago,’ Haymes said.”
The Canarsie Digest from New York. “An extremely high rate of foreclosures in Canarsie mirrors a high rate of subprime mortgages in the neighborhood.”
“In Brooklyn, a total of 2,514 foreclosure actions were filed in 2004, rising to 2,557 in 2005 and then to 3,307 in 2006. The problem is not unique to New York.”
From Newsday. “Bankruptcy trustee Marc A. Pergament is seeking 32 subpoenas of investors, bankers and mortgage companies involved with Hicksville real estate agent Nayana Shah over property deals they made on Long Island.”
“In a story last month, Newsday detailed how five men reported making real estate deals with Shah that ultimately went bad, leaving them with ruined credit, extensive debt or homes in foreclosure. The men documented racking up $3.1 million in mortgage loans.”
“Pergament said the Shah case exemplifies the current problems in mortgage lending. ‘This is going to keep happening, and I don’t know how to stop it … ,’ he said. ‘But the more we can prosecute civilly, it has to have an impact eventually.’”
“Pergament’s subpoenas included more than 15 mortgage bankers and brokers. ‘We’re also looking at whether these people submitted false financial applications to get these loans, who persuaded them to do that and why the banks just accepted it,’ he said.”
“Rajnikant Sanghvi said he wants the investigations’ conclusions to stop the foreclosure on the Hicksville house he bought through Shah, taking out two mortgages worth $430,000. ‘I don’t know when they are going to finish the investigations, and in the meantime, I am still losing sleep,’ Sanghvi said.”
The talking heads are all babbling about what a small % subprime is of the total mortgage market. But what we don’t seem to be hearing is what % of sales & refi’s in 2004 - 2006 were subprime? What % of first time buyers were subprime during those years?
Considering the last few years had record numbers of sales & refi’s, I still think the problem is a whole lot bigger than the “experts” are willing to say….at least in public.
For 2004-2006, subprime was 16%, 18% and 20% of the mortgage market measured in dollars - likely much higher in terms of the number of loans. These numbers come from a study by the Housing (not Mortgage Finance) analyst at CS First Boston and the whole thing is packed with great info.
http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf
The slightly less poisonous alt-A accounted for 15%, 18% and 20% in those same years. Though the FICO scores were higher, all the other risk factors are worse than subprime. In 2005 and 2006 over a quarter of all alt-A loans were negative amortization; whereas almost nobody was willing to write those suicide notes to a subprime credit. In those years, 50% of subprime loans were fully documented; for alt-A those numbers were 26% in 2005 and 19% in 2006. Overwhelming preponderance of liar loans in alt-A. In those same years, piggyback second mortgages were written on 47% and 51% of subprime; here alt-A was only slightly worse, with 46% and 55%.
We’ve seen one alt-A lender declare bankruptcy. I doubt the big guys will get killed but the IndyMacs and Countrywides of the world are gonna get hurt bad.
We’ve had a nationwide credit bubble, not a localized one. To me, the fact that some areas haven’t seen huge price rises doesn’t automatically mean they haven’t been part of the bubble:- it could well be that loose credit has staved off even lower prices in those areas. Economically depressed areas in upstate NY are a good example of this, imo. I can well see prices up there continuing to decline as much percentagewise (if not more) as some of the more notorious bubble areas.
But a lack of huge price increases isn’t a big indicator, IMO. Many places should be going down in value. The are small towns in Texas that have lost the economic engine, and where older houses could be bought for $30k a few years ago that are now $50k.
Also, consider Arkansas. Way overbuilt and mostly in the $300k range, that few locals can afford. That to me is a result of the housing bubble. Same with the mcmansion thing.
I think ultimately it comes down to cash flow. If you can buy a house and pay the fully amitorized payment, taxes, and insurance for as much or less than renting, that is the price floor.
However, if we do end up in a depression and wages and rents fall, then even those home values could drop as well. There are always market risks.
That’s the reason these knife-catchers at those so-called auctions are screwed. They’re basing purchasing decisions on multiples of current rent, not figuring that rents will decline too.
This is VERY true in areas where bubble prices have led to alot of housing being constructed. All that extra supply won’t disappear when the speculative demand disappears.
“But a lack of huge price increases isn’t a big indicator, IMO. Many places should be going down in value. The are small towns in Texas that have lost the economic engine, and where older houses could be bought for $30k a few years ago that are now $50k.”
Exactly! I argue this with people all the time. There are countless small cities and towns across this county which should have seen price drops given the local economic conditions. Instead, they see flat prices to moderate increases.
Here’s an example from one poster:
“…areas where the bubble ‘never happened’ (Buffalo, Lawrence, KS and so on)…”
Buffalo has been speculation city over the course of the past few years. I don’t care what the median is, infestors have been swooping in and buying up multi-families as well as SFR’s, BIGTIME. The bubble is EVERYWHERE.
As far as Syracuse is concerned, I’m not sure the burbs where most people live is as overbuilt as some places you might compare it to. (Looking for a rental in my target town in consideration of moving once again, I find there are NONE available-No houses for rent, no 3 bedrooms unless I time things exactly right.) Forget the fact that I will lose money when I sell and then rent because rents are $500 more than my combined mortgage and taxes)
Also, there are some deep pocketed individuals in quite a few different towns that have worked hard at limiting growth. I originally thought they were motivated by self centered reasons. But at this point in time I’m thinking they’re brilliant.
Yes, we will see a reduction overall, but historically this place just doesn’t vacscillate like the “hot spots”.
That is exactly what I was thinking when I saw this topic on Friday. You can’t determine if an area has been effected by the bubble by looking at the price increases or at the amount of speculation.
If a significant number of people who would not have qualified for mortages, got mortages because of loose lending standards, then you are in a bubble area.
If a signifcant numer of people got mortgages for more money than they would have been able to qualify for in past using ARM’s, interest only, or piggy backs, then you are in a bubble area.
And if you are in an area that reasonably can be considered to be competing with an area that is subject to either of the above (like by being an extra 10 miles down the highway), then you are in a bubble area.
Someone in my office left and moved to Dallas to be able to afford to buy a house (the difference in the federal pay scales for the Dallas and DC areas is pretty small). She said that she knew it would be a good deal because a friend who lived there said his house hadn’t appreciated much in value in the 10 years he had been there. She was sure that she was jumping in right before the Dallas market took off - bought a smallish house in an area where lots of people who buy smallish houses do a tear down and build McMansions. I’m guessing that her “investment” will be on the way down eventually. I hadn’t found this blog at the time she moved. I wonder if she would have listened to me if I had?
I thought this area where we live now was bubble-proof. But small, local builders began to buy up available lots and build spec homes at a record pace for this area. Now those homes are nearing completion or are finished and standing vacant. How long can a small builder hold a finished house, before he runs out of cash and has to give it to the bank?
From the recent AP news story quoting Ben on the health of the Northwest real estate market:
“Nationwide house prices, based on sales and refinancing data, rose only 0.5 percent the first quarter of this year above the fourth quarter of last year — the lowest rate in the past decade, according to the federal study. Meanwhile, Oregon had 10.77 percent growth in home price appreciation over the past year.”
“‘Our corner of the world has really held up pretty well,’ said John Mitchell, an economist for U.S. Bancorp, based in Portland. ‘We’ve got very strong population growth, we’ve got good employment growth and we didn’t have the kind of speculation you saw elsewhere.’”
In Lake Oswego, one of the wealthiest suburbs of Portland - I’ve seen at least 2 houses for sale that say right in the listing “seller has not seen the property.” These are single-family homes in nice neighborhoods. One is listed for $600,000, last sold on 07/20/2006 for $762,000; the other is listed for $499,000, last sold on 01/25/2006 $767,000. Some how not having seen the house you bought is different from the kind of speculation seen elsewhere… And prices have appreciated, huh?
Gee, you would think instead of taking a loss they would just rent it out and hold on to the sweet accruing equity. These people make me sick.
There are way more rentals than people that want to rent in Lake O. Let alone people that would risk renting from an FB/GF. That and the going rates can’t cover anything. For example, there is a lakefront house for rent for $1850/mo (available for 2+ months) - the buyers paid $927,500.
Wow that is either a good rental deal or that house is really only worth $350k tops!
basically any market where the median house is going for less than 4 times median income and the economic base is solid should be considered safe.
I would say that is pretty safe math. Similarly, I believe we can predict future prices using the same formula. Thus for example San Diego - Current Median Price $490K - Household income $65K = resting point of apprioximately 260K, which also matches the rent ratio oddly enough and the approximate point at which the bubble took off in a big way. I would venture this works no matter where you are.
Not to give credence to the “it’s different here” argument, there are certain places where prices are intrinsically higher.
The historic average in San Diego of the ratio of median price to income is about 5, but in the Midwest it is closer to 2.5. Better weather and job opportunities due add some to the cost, but it is nowhere near the 10-12 ratios that we have seen over the past few years.
Just my $.02.
Agreed. Prices should generally return to historical ratios.
However, IMO those areas with historically higher ratios (LA, SD, SF, NYC, etc.) will drop significantly below. Why? Because the equity that has been traded up throughout past decades will no longer be there. They’ll still be more expensive overall, just not as dramatically so as in the past.
I agree. Even though houses are 5x median income, there is enough people who make much more than median that can afford those houses. The others rent with roomates or relocate.
I always believed my town - Alexandria, Va., would be fairly resistant to steep losses — even as I doubted the sustainability of the steep price climbs here since 2000. The main reason I felt it was “resistant” was due to the lack of land available for new single family housing developments. For the most part, new housing here is infill, small townhouse developments, and, lately, condos.
Nonetheless — looking at the prices of some of the nicer type properties around — townhouses in Old Town, bungalows in Del Ray, and really nice SFH stock in Rosemont, Beverly Hills, Seminary Ridge, etc — I definitley see a lot of asking prices off 10 to 20 percent in a lot of cases from 2005 top-of-market pricing (this is the stuff that has a chance at selling. I also see a some folks that still ask for 2005 “wishing” prices — those are the signs that stay up for long periods).
I think this area has some natural advantages over the outlying suburbs and exurbs or Loudon, Prince William and even Western Fairfax counties — and, happily, a lot less new house developments to compete against. But, the bubble realities are definitely an issue here — at least for folks who stretched to buy an $800,000 3/2 nice-but-not-fabulous townhouse, expeting to sell it in 3 years for $950,000. Instead, if they need to move, or Mr. Arm Reset is knocking at the door, they’re in a $730,000 property.
Again, “lack of available land” was not something that occurred *during* the bubble, so it shouldn’t be a factor.
No idea if you’re from Alexandria/NOVA or are familiar with the area, but we do have a shortage of land as a result of 1) being mashed up against DC/Maryland (access is only by Metro or a handful of bridges) and 2) being isolated from the rest of VA (for commuting purposes) by horribly overburdened roadways.
1) is nothing new, but 2) is partially the result of the housing bubble, when tens of thousands of new homes were built in Woodbridge, Manassas, Reston, Leesburg, so on and so on, and these people drive into Alexandria or through to DC/MD. These folks are a bulk of the subprime fiasco in NOVA, and if they’re slaves to their homes, they’re not going to quit going to work just because their mortgage payment went up. They’re going to continue commuting regardless of the housing market.
So, actually, part of what I would include in the “land shortage” argument for Alexandria WAS caused, in part, by the bubble, and it’s not something that is going to go away with declining housing prices.
I’d love to be proven wrong about this. For my part, I’ll be authorized to work from home over the internet before the housing fiasco is sorted out. I’d rather catch a falling knife (that I can afford) in the Caribbean or maybe Buenos Aires than the crap hole that is NOVA. My office is inside the beltway.
Gary, Indiana…
Bulletproof
In fact, you’d better be wearing kevlar when traveling through Gary.
Not a snowball’s chance of Jackson Five staging a reunion tour announcement from there, eh?
I helped map Gary IN in 2000 for a digital mapping company. To enable vehicle navigation to a specific address we had to collect the first and last house numbers on every block - the address range of that block.
In Gary there were more than a few blocks with only one house - and it was burned out. Local lore indicated that some of the damage we saw in 2000 was the result of the MLK assassination riots decades earlier.
Another fun place to show the kiddies is Cedar Lake IN (south of Gary on US 41) - check it out some time - you won’t believe your eyes.
Gary Indiana is mostly black with huge unemployment and tons of welfare. Sort of like Detroit.
An unbelievable post apocalyptic place. Until a new bankruptcy court was built in Hammond, I’d have to go there once every 3-4 months or so. The parking lot next to the courthouse was surrounded by fencing topped with razor wire like you see outside a jail, and this was for the court employees and attorneys.
The park across the street featured open air drug dealing. I would estimate that about half of the houses (those still standing that is) within a three block radius of the courthouse actually had occupants within.
Sounds like a wonderful place for flippers to purchase sight unseen as the properties surely have “good bones”. With some granite, stainless, and a little help from St. Joseph, it’s a wannabe real estate moguls dream!
See…
When bottom’s already been reached, the limbo stick can’t go down no further~
“Sort of like Detroit.”
I usually don’t get defensive about Detroit, but I don’t think Gary has a symphony, a highly regarded art museum, two great ball parks and a downtown that has actually improved in the last 7 years since Compuware moved downtown. Yes, the city neighborhoods are a mess, but Detroit has to be viewed as a metropolitan area (like L.A.). Both grew in odd ways because of a lack of mass transportation.
One of the problems most people have is separating how “it was then” and not “how it is now”. Things have changed DRASTICALLY in the world and in the USA in the last 10 to 20 years. This country is no longer “how it used to be.” Many, many changes have taken place. Some good - some bad but let’s stick with property.
The USA is fast becoming a country of rich and poor as the middle class, which was once the strength of the USA, is being squeezed on all sides. In other words, the county is polarized as never before. In my personal opinion, all lot of it has to do with Bush and Darth Cheney but let’s not get into that. Let us just stick to “how it is now” and not “how it was then.” Large US corporations like GM, Ford, Chrysler, the steel companies, etc, are no longer viable economically. In fact, if the US government (specifically the military) and individual states and cities within those states, decided to buy foreign made vehicles, GM and Ford would be in the dumpster and would have gone TOTALLY bankrupt several years ago. These corporations once paid good middle class incomes and benefits to many US workers who then bought property which was affordable. Not anymore. WalMart, being just one example, has taken the place of large manufacturing corporations and they pay peanuts compared to the old manufacturing giants. Few people working at WalMart or Starbucks can afford $400,000 homes.
Thus, the country is becoming class fragmented where incomes are concerned. Those who are able to compete in the new tech industries (where you need a brain more than brawn) can command good incomes. Many of them can afford the high property prices. THEY will move to desirable areas and employers will set up shop in desirable areas to attract the brain instead of brawn employees, while the lower paid service workers will live in the not so desirable areas and, consequently, in less desirable property.
This is not 1950, 60 or 70. This is 2007 and the once dominant strength of the USA both economically and militarily is being questioned all over the world and it’s going to get worse.
“This is not 1950, 60 or 70.”
Really? Please tell that to my friends and coworkers - because they are just plain certain that the next fifty years will be as stable as the last fifty. And they buy the $300k condoze (thx aNYCdj) and $450k SFHs to prove it.
Your friends and co-workers need to stop watching the US governments propaganda outlets, CBS, NBC, ABC and start using their brains.
Which essentially means we have housing stock “designed” to fit the needs of a society with a very large middle class and a society with an ever shrinking middle class trying to figure out how to redistribute the existing housing stock to fit its current needs. Interesting problem.
Nicely put. I’d add that the existing housing stock not only was designed to fit the needs of a society with a large middle class, but also was designed around the assumption that this large middle class had affordable access to large amounts of energy for commuting, heating, and cooling. So, some of it may have been doomed even if the middle class were not shrinking.
‘ while the lower paid service workers will live in the not so desirable areas and, consequently, in less desirable property.’
- Here in So Cal we simply open our border and allow the folks to take all of less desirable jobs.
Of course the US will never be as dominant again as it was during those years. The rest of the world was flat on its back, with shattered industries and economies from the war. By 1970 they had largely recovered and we went from having a monopoly on industrial production to having to compete again. Unfortunately, during the monopoly period, many industries got complacent and the re-emergence of competition destroyed or decimated them.
Folks have to understand the it was the immediate postwar decades that were the anomaly.
The global economy isn’t exactly a zero-sum game. But other countrys’ percentage of the pie are growing faster than the pie is. IMHO, it’s not so much “what we’re doing wrong,” but more “China is finally getting something right.” I mean, they’re still FAR, FAR behind us productivity wise, but heck, during the cultural revolution, they were something like 1/100th as efficient as we were.
The problem therein is that those higher income workers (which probably describes most HBBer’s) aren’t sufficient in numbers to sustain any individual market. Remember the “Plankton Theory” we discussed a while back?
Once it becomes clear how completely the economic landscape has changed, we will no longer be able to count on the stability a dominant middle class has provided for so long. Following the CS reset charts, I’m guessing that a dismal Christmas will make clear to everybody what kind of situation we find ourselves in, and the spin from the candidates from both parties will change to accomodate the pain. The economist Thornberg’s comment that “consumers are running on fumes” is dead accurate. Those 8-10 dollar an hour “service and hospitality” jobs that provide the numbers to claim “full employment” just will not power this country forward.
Yeah, spike66, I loved that “fumes” comment, too.
When will Nashville fall? We just bought a house in our neighborhood for my mother-in-law to live in. We got a better deal than we would have last year, but with my luck I know the market will start dropping like a rock the moment we close
Nashville is a nice town. Did the bubble get big there?
newbie here. can someone help me out? I’m being screamed at constantly about the tax advantages of mortage interest. While this is obviously a savings, does it really offset the cost of a loan at, say, 6.5% Appreciate your help here….
newbie here. can someone help me out? I’m being screamed at constantly about the tax advantages of mortage interest. While this is obviously a savings, does it really offset the cost of a loan at, say, 6.5%? I have been a believer so far that to own a home free and clear was more desirable than to owe a mortgage. Some people who have done well for themselves in real estate over the past 40 years tell me that i am dead wrong. Appreciate your help here….
You really have to run the numbers yourself. I for one already get hit wit the Alternative Minimum Tax - and I am a renter. I would get absolutely no tax deduction for mortgage interest.
Set up a spreadsheet and run the numbers - and don’t forget opportunity costs - they can be expensive. I have a buddy that owns a $1M house outright and always brags about how it doesn’t cost him much to live - and from a cash flow standpoint he is correct, but the $1M could be earning about $50K per year in T-bills. At least he didn’t HELOC his way to insolvency.
Senor, Never, ever do anything for tax`advantages….no tax advantage is worth jeopardizing your future. The worst case is you pay the friggin’ taxes. So what!
AMT will decrease or eliminate your property tax deduction but not your mortgage deduction. Charity and mortgage interest do not get affected by AMT.
That said keep in mind that the mortgage interest/property tax deduction will only give you a % back of each dollar spent. If you are in the 25% tax Federal bracket and 8% State you’ll get back 33 cents on each dollar you spend. A help yes, but it’s silly to spend a dollar to save 33 cents if renting is significantly cheaper. Good Luck.
Oh, that is whay you mean. That is speculator talk. If you believe that the stock market always goes up and you can borrow against real estate for extremely low interest costs, you can borrow, invest in stocks, and make more on the appreciation than you are paying in interest (subsidized to some extent by the tax deduction). But that only works if the stock market can’t go down.
Some people also do this with real estate. Buy something, take out equity to use as a downpayment on another piece of property. Also works if the real estate always goes up more than the cost of borrowing and you can finance the equity out of it.
Not a bad plan if you tried to implement it in a nice bubbly area in 2000. Very very very risky thing to try right now.
Leveraged investment strategies are not for amateurs.
Garrett, I point out something all the time. We are becoming more and more transitory due to the fact that people no longer spend a lifetime with one company. The cost of more frequently buying and selling real estate can be huge. But the other cost of homeownership that is never considered is the fact that many people pass up opportunities because of being weighed down by a home. I would love to see a study on the earning potential of a person willing to relocate compared to a person that has a house hanging around their neck. I’m sure we all know people that turned down great opportunities for this very reason.
Garrett,
The best thing I can say is run from this screaming idiot as fast as you can and NEVER, EVER listen to him/her again about anything.
Numbers, numbers, numbers. You need numbers.
What is your income and your marginal tax rate? What is the amount of the mortgage? What is the rent you are comparing it to? What are the property taxes on the house? Does your state have an income tax? Will you be able to deduct for the purposes of the state income tax? What is your state marginal tax rate? Do you itemize on your federal tax return? If you don’t now, how much will the mortgage interest/property tax deduction push you over your standard deduction? Will you be subject to AMT? Will Congress fix the AMT for the middle class with minimal deductions?
That is the info you need for a start, but the best thing to remember is this - the less money you make, the less a mortgage interest deduction helps you. And the deduction does not change your FICA (social security and medicare) taxes at all.
Essentially — it makes your “real” interest rate somewhere around 4 or 5%, depending on your tax bracket. However, you also have to add in the cost of property taxes, HOA’s (in some cases) insurance and maintenence.
The tax benefit for me, as I’ve figured it before — 5 years into my 30 year fixed, 6.5% mortage — seems to pay for about two months of total payments each year. I guess that ratio will decrease over time, as tax/insurance goes up, and the ratio of principal in my payments goes up — but, then I’m at least payin’ down the mortgage as that occurs.
To put it simply — it helps, but it doesn’t do anything extreme like offset half of your interest payments. There no reason to buy just to get the deduction, though, if the rest of the deal doesn’t make ecnomic sense. And, paying interest is not any better than paying rent, unless you’re getting consistent property appreciation.
Lets do the math. I live in a house that zillow estimates is worth 650K in Sherman Oaks, CA, lets assume to be conservative it is worth 600K, total yearly expense for the house is,
Interest = 600,000 x 0.065 = 39,000.00
Taxes = 600,000 x 1.1 = 6,600.00
Total Tax deductable = 45,600.00
Now it gets interesting, question is what is your marginal tax rate. Do you have other deductions that would have put you over standard deduction any way … so for sake of simplicity we assume a tax rate of 30% so your savings are
Tax savings = 13,680.00
After Tax Interest+Taxes = 31920.00
Insurance + maintenance = 6,000.00
Total Yearly Expense = 37920.00
Total Monthly Expense = 3160.00
My monthly rent = 2,250.00
So I get savings of 30% if I rent the house instead of buying it. Also, on a Sat I can sit around drink my tea and write on this blog instead of fixing the sprinklers. Now you realize that the carrying cost for the landlord are higher, because she does not get the mortgage deduction.
Landlord Cost = 4,300/Month. So In a stable market a landlord should be able to charge about 4500/Month for this house. Since she can only charge 2250.00 means this house is only worth about 300K. Hence, the general assertion that houses are over priced by 50% in the L.A. area.
As a married couple I believe the standard deduction is very close to $10,000 so in your example you have to subtract $10K from the $45.6K. leaving it even less desirable.
Refer to my earlier post about “things have changed”. Buying property was once the #1 way to build assets. My mother bought a house in the UK for $2,000 in 1947. It’s now valued (my 75 year old sister still lives there) at $450,000. In 1970, I bought a flat in London for $25,000. It’s now worth $1.2 million. My ex-wife is delighted she stayed in it after the divorce.
What’s changed? A LOT. In my opinion, government planners in western nations have looked into the crystal ball and seen the future. In particular the BIG problem of retirees who will live longer because of advanced drug treatment (expensive) and surgical procedures (expensive). There is not a snowball’s chance in hell that government, run by any party in any western country, will be able to pay the the costs. Some countries will be better off than others but the USA is NOT one of them.
So, how do they solve the problem? Obviously people are not saving so getting them to use their savings isn’t going to happen. Obviously there are not enough people coming into the workforce to “top up” the various social programs like medicare, etc. Wages will not rise too much in the future. Too much foreign competition in the new world order of the 21st Century. India, China, Thailand, Vietnam, etc, etc.
In the USA, a financial tsunami is on it’s way in these areas. How can it be fixed? There are only a few options. One is to means test retired people. Let’s say Joe America is 75 years old, is already on expensive drugs for high blood pressure and now needs a triple by-pass heart op and will to be on even more very expensive drugs for the next 10 years or longer if he lives into his 90’s. Cost: Way up in the hundreds of thousands of $$. His wife is in the early stages of dementia and needs extra care. Joe is too ill to look after her 24 hours a day. In fact, she might have to go into a home. Cost: $6,000 a month. Joe has a few dollars still left. He can just about live on his pension. Outside of that, he has nada. Nothing. Zip. However, Joe’s house, which he bought many years ago, is now worth (say) $450,000. When Joe eventually dies, his 50 year old son will get that $450,000. The son is looking to retire early if he can and being left $450,000 will smooth the way. Of couse, that takes another wager earner (tax-payer) out of the picture…….and there are a LOT of boomers coming down the line with property they bought in the 60’s, 70 and 80’s which have been paid off and are free and clear. And a lot of those boomer’s children rubbing their hands with glee in anticipation of being left hundreds of thousands of $$.
The fly in the oitment is that government doesn’t like losing tax payers and doesn’t like losing taxes. Especially when they are being faced with massive (and I do mean MASSIVE) budget shortfalls. The governments answer: Means testing and reverse mortgages.
I was reading a mortgage broker website the other day and one broker was telling other brokers (who were having a hard time closing deals) to get into the reverse mortgage business. He said he had started and was doing good and he figured it would only get better.
As for tax advantages. Had you bought in the 80’s or 70’s, owning property might have been adventageous but my wife (a CPA/Lawyer) says now it isn’t, because of the current bubble, and probably not for some time to come.
We owned property and sold in 2003 (a little too soon because who would have imagined the property market to go insane like it did) but she says property is now being used as a cash cow by government as a tool to increase wealth, so they can skim off some of the wealth as taxes, keep the consumer society going until eventually, the equity will be sucked dry as owners enter their later years and need extra money.
My own feelings are, if you feel more comfortable owning, then go ahead BUT NOT until at least 2011 or 2012. This sub-prime is a terrible mess. Far worse than the talking heads are letting on and we have not seen the worse period yet. When it does reach bottom, you will have plenty of time to buy. Probably several years of stagnant prices. However, don’t be fooled by any hyped up-swings.
In a “boom turned to bust” market, there are many periods where greater fool dip buyers appear - only to become financially trapped when the prices drop again. Don’t worry, you’ll know when there will be “blood on the streets” where property is concerned. Also, TOTALLY ignore realtors, mortgage brokers, economists (most anyway) and others with a hidden agenda. These people, including Helicopter Ben, were saying jus a few months ago that sub-prime was not a problem. Now they are starting to sing another tune. The sub-prime problem is very serious. Especially in the US where the national debt is so big and the financial credibility of the $$ is dropping every day. Don’t listen to Darth Cheney who says deficits do not matter. Darth Cheney has, by the way, transfered millions of his own $$’s out of the USA and into places like europe because he knows the dollar is in serious trouble and headed in one direction. South.
In the last year I have talked to people all over the country about real estate and their local market. Almost without fail, the one comment repeated over and over again was. “I can see why most places in the country will see declines but around here things are different because ………” Fill in the blank with any one of a hundred reasons for why your community is special.
Now this would have been a compelling story if it was consistently only one or two communities. However, you have to understand. I have heard this about every major city, every major resort town and every wonderful peaceful little rural community there is in at least 25 different states. Obviously this is rationalization not fact.
It is human nature to do this. So, I don’t fault these people, nor do I think they are stupid. Denial and the suspension of portions of reality are part of the psychology that make up a bubble.
So, to those who are not in a state of suspended reality you probably all know what to do. Certainly you have guessed that we are no where near the bottom of the market. To those who have suspended reality. I hope you come back to earth soon and that there will still be time for you to avoid any serious financial losses.
You’re not kidding about human nature.
Someone did a survey of people in all the little cities and unincorporated areas of L.A. a few years back. Every single one of them described all the areas making up greater L.A. as “lacking community”, but they also stated that their particular little “village” was different. Yeah, right.
Ralph, it’s sorta like how most people believe the public school system is doing a rotten job, but their kids’ school is different.
Thanks polly. you are awesome. I live in CA and am independantly employed as a physican at about $250K per year.
you will probably be hit with AMT, However, a person in your income bracket can afford to hire an accountant to run the numbers for you. The one I use warns me about the AMT consequences of my actions for a few hundred dollars.
So, if you are renting right now, look up the zillow estimate for your property. Run the numbers like I did for mine and then you can definitively tell the shouters to zip it.
Also, I have noticed that when I start on this analysis their eyes glaze over and they stop shouting.
oops, my detailed analysis of the house I am renting did not show up. Anyway it showed that even with the tax deduction it would cost me 3100 to buy the house, whereas I rent it for 2250.00, 30% savings.
Be sure to run the numbers for several years out. Depending on the house price and your downpayment, the benefits may not last long.
Bubble proof areas like San Francisco and New York City? WTF? San Francisco still has the potential for massive earthquakes. New York City has the potential for a massive terrorist attack. I was not in our office when the steampipe blew the other day. But I was told it rattled the whole building. People figured it was a bomb. The stories of the chaos that took place were circulating around our office. People were in a panic. These areas have some pretty nasty things that could kick their real estate markets in the teeth. No place is bubble proof, period.
Also, consider Arkansas. Way overbuilt and mostly in the $300k range, that few locals can afford. That to me is a result of the housing bubble. Same with the mcmansion thing.
That statement is a bit of an exaggeration (maybe not so much in the very NW part of the sate, but for the rest of the state for sure). I live in central AR. Certainly there has been a national bubble created by the cheap credit and that impacted AR as it did everywhere else. However, as with many things, it’s a matter of degree. Right now, about the NW qaurter of the state is being effected by the natural gas drilling that started recently, this has had an upward effect on local housing prices, and needs to be removed/accounted for in the discussion of the nationwide bubble due to the money supply (although it may cause it’s own problems later).
NW Arkansas (by that I mean the very NW, not the entire quarter), the Springdale/Rogers area, is hugely overbuilt. There is a lot of money in that area, and they had some huge growth going on. May have been partly caused by Sam Walton’s death and how Wal Mart did business differently after that. Probably other factors as well. That area doesn’t represent the entire rest of the state very well. It better represents these high-bubble areas that are talked about on this blog so often.
Central AR is overpriced. However, in percentage terms I don’t think we experienced anywhere near the bubble seen in the obvious other places (CA, FL, etc). Talking to some local construction folks, residential building has come to a screeching halt in the town I’m in (Conway). We have seen significant growth in the past 10 years and will probably continue that trend for the most part, however residential building was obviously affected by the money supply, as in other areas.
I keep up with the monthly realtor numbers for Arkansas. 15-20% drops in the number of houses sold in many places in Central AR. Arkansas seems to lag in so many things. We lagged in the increasing prices, and I believe we are lagging in the bursting. The tightening of the residential construction combined with the RE sales numbers are (as everyone knows) typically leading indicators of price. It will take some convincing, but prices are going to have to come back down if they want to sell those houses.
Overall, in percentage terms I don’t think the bubble was as bad, but it was still significant. We are also experiencing some other stuff related to the natural gas drilling.
Me? I”m looking forward to prices coming down. I’ve been in my 70k 3 bedroom 1141 sq/ft house for 9 years now (new when we bought it). It was good in college, and has been a nice house, but I’m ready to move up, get a couple acres and a couple thousand sq/ft. I’m watching and waiting. And rooting for a tightening of credit standards (I have a VERY high FICO, and we have a good debt/income ratio) and lowering prices.
As with anything else, we’ll probably only know the extent of the bubble’s impact on any one area once the air has all been let out.
I’d say Malibu, CA, Aspen Colorado and Jackson Hole WY are probably bubble proof.
Don’t know about Aspen or JH, but Malibu took a significant hit in the 90’s.
txchick57,
You know, this RE bubble will certainly gut the middle class. I’m wondering, though, if it won’t eventually have an outsized effect on the rich, too.
I’d wager that the next few years are going to see hedge fund craters everywhere, not to mention a boatload of shell-shocked ex-IB zombies walking around like those in the REIC are nowadays (What the hell happened?).
We know that the upper-classes tend to have most of their money invested somewhere, therefore it stands to reason they could lose a lot quickly. Have you read anything that broke down the impact of the Great Depression by income group?
Nope, Aspen’s gonna take a hit. It’s already happening in Telluride and other ski towns. Slowing down. As are the towns that service them (Glenwood springs, Montrose, etc.). Nobody will be immune.
I’ve skied for almost 30 years now and man has it gotten expensive, and the numbers of skiers on the slopes is down to 20%, mainly boomers, nowadays…
The other 80% of the mountain?
Young punks on snowboards, that won’t be there, as money runs out…
Thus, ski resorts will go away, til 1 or 2 are dominant in a given area and get all the business.
You have that impression because you ski predominantly in the skate-punk influenced ski areas of California. This factor is especially pronounced in southern California and in the less challenging resorts around Tahoe.
In many areas of North American, skiers still outnumber snowboarders - sometimes far outnumbering riders. Go to the big Colorado resorts, to Little Cottonwood Canyon, to Jackson or to Whistler. Snowboarders are sometimes just merely a distraction at these places…
Further, eventually, snowboarders grow up, make money and then spend it on vacations and second homes in/near winter mountain resorts. Just like skiers.
For top end ski towns, the slowdown is already here. Sun Valley, Idaho has a bunch of inventory - some of it has been sitting for almost 2 years and still in the hands of the developers. These are largely vacation properties and we’re seeing other areas that would appeal to the same demographic in really severe trouble. Beachfront condos in South Beach, Kona and Maui; luxury condos on The Strip in Vegas; Costa del Sol in Spain - all of them are in deep, deep trouble.
I’m seeing reators listing expensive homes in the ski areas on Craigslist. So much for the exclusiveness of Sothby’s.
http://tinyurl.com/2r8cre
dang, reators = realtors and Sothby’s = Sothebys
for all you anal types who care…
Add Big Ski Montana to your list. The fact that our local paper had to print a story about it means, the slow down can’t hidden anymore, and thing are much worse than what they want the puplic to know.
Ben Stein talked about the bath he took on his house in Malibu back in the 80’s… The beachfront will be expensive but follows the market like everything else.
I really hope JH isn’t bulletproof!!
There really is a limited # of super rich ppl and they don’t want a dreary 3/2 even if it is in one of these places. It’s hard to make decent money in JH or Aspen(well the vacation spots).
So who’s gonna pony up for the overpriced bungalows and ranchers in the Town of Jackson going for close to $1mil?
Maybe you can tell I’m just trying to dream up a way for me to envision myself actually owning a place in JH, one day.
The people who live and work in Jackson and are relatively recent buyers there are either beneficiaries of the Bank of Mom & Dad or are very successful local business people.
Others? Well, good luck. They’ve mostly been moving over to Idaho and doing the Teton Pass commute. LA and other urban commutes might be long, but they don’t often contend with avalanches or with roads being completely shut down when the weather dictates such.
Jackson has moved into a different realm as a playground for those in the highest financial strata in the last 10 years, so it will weather this thing much better than almost anywhere.
“are either beneficiaries of the Bank of Mom & Dad or are very successful local business people.”
add old timers and yeah i guess you’re right, that’s practically the entire supply of lower end valley homes.
I know people who do that commute and it sucks but at least you’re not feeling invaded all the time.
Still the premium is gonna come down a bit I think, it will never achieve a “normal” price/rent or price/income. But still I see a better time to buy coming for those areas.
Jackson, WY is very, very overpriced. Why are those fools paying millions to live in a cold climate out in the midwest? The only good I can see is the beautiful mountains
My area (W. Colo.) is TOTALLY bulletproof, so they say. We have wonderful skiing (this scarcity of snow lately is just an anomaly), lots of tourists (gas prices will come back down), we’re becoming more and more a part of the oil patch (SOMEBODY told me they’ll figure oil shale out soon), good weather (except in the height of summer and dead of winter), decent wages (hey, I survived OK on $10/hour when I was in college not all THAT long ago), nice lakes (OK, so one of our counties has the highest W. Nile rates in the region), nice streams to fish in (whirling disease is actually somewhat rare), great hunting (you can have your deer checked for wasting disease by the wildlife guys, so not to worry), good schools (especially if you’re into charter), and did I mention affordable housing (we have a yurt manufacturing company right here). LOL.
LOL!
Colorado yurt with a nice view..
http://en.wikipedia.org/wiki/Image:FinishedYurt.jpg
I think this is an interesting thread.
My 0.02$ contribution is that we are forgetting how drawn out the last bubble was. In retorspect it seemed fast compared to this one but in reality the prices dropped for several years (90-92) and then flatlined for several more (93-96).
Its still real early.
There are no bubble proof markets.
Fundamentals are like laws of physics.
They always win.
once the hedge fund bubble pops Manhattan RE is going to be in trouble. the burbs are already having trouble.
“‘We’ve lost one part of the market, that’s the credit risk buyers,’ said Armand D’Alfonso, president of Nothnagle Realtors. With banks unwilling to take risks on that market, ‘prices are bound to go up,’ D’Alfonso said.”
Can anyone make any sense out of this statement. You’ve elimated buyers (flippers) and prices will go up?
the previous paragraph mentions median prices:
“..The median price edged up 3.6 percent to $121,250, compared with $117,000 during June 2006,…”
Perhaps Armand D’Alfonso feels that without specuvestors, a lot more upper end properties will be sold than those of the low-end-flipper-genre .. thus raising the median price.
And in the true spirit of NAR psychobabble, a median price rise is an indication that it’s time to get off yer fat rump and buy.. before you’re priced out of the market foreverdontchaknow..
In the true spirit of some local media outlets (Alt-A Bay Area), they’ve mistakenly jumped on the NAR and CAR bandwagon in the belief that recently rising medians are a sign of the market’s health.
We’ll see how that works out.
Lehigh Valley are of PA has a massive bubble that’s burning out quickly right now. The local paper & realtors (one in the same) try and claim it’s because of commuters from NJ & NYC. The problem is they were just trying to escape a bigger bubble in those places and driving 3-5 hours a day. Do the math, new car(must) maintence, gas and no home life, why do it? Now prices are falling and inventories are at record levels and the bubble is coming down.
I think our prices are heading for 1998 and below after this settles around here. That’s what the average local should pay and afford.
Does anyone think cheap $50k houses can still go down in price? Lots of those in the “rust belt” and some other semi rural areas. Those houses werent much cheaper in 1998 but someone said that doesnt matter because prices should be going down in those undesirable locations(not all are high crime)
My top choice to relocate is NW Pennsylvania. Oil City, Franklin and dozens of small surrounding towns. Predict the price by 2010.
Those places will always be cheap. I am talking about the Lehigh Valley not anywhere near Erie. The realtors & paper talk about commuting. If commuting was an option, living in the lehigh valley, you can drive 2 hours northwest and buy a 3-5 bedroom home on a few acres for under 100k, no problem. It’s just not something a logical person would consider.
I agree but people like me who are self employed only need to commute to shop and its close enough to bike or even walk. Good that there is a lack of jobs to keep house prices low for self employed guys like me. Places like those are a haven for the self employed or retired. Lots of retired people are no longer considering Florida cause $100k won’t get you much. Maybe this will change by 2010 but NW Pennsylvania is gonna still be far cheaper than anywhere in Florida and the weather is better(I hate humid heat) the crime lower, much less crime, etc.
But how much cheaper will those places get? If prices don’t go down there and they drop alot elsewhere, what makes you think people won’t want to live in better locations for slightly higher price?
Albuquerque will be riding 20% appreciation for the next 10 years. By then, a house here will be more expensive than San Francisco or LA. Boy, am I excited. Hey, I just looked out the window. I saw a flying pig go by!