Renters ‘Do The Math’ And ‘Are Staying Put’ In Washington
A pair of reports provide an update on the housing market in Washington. “Whatcom County housing prices took a strange turn in the first quarter of 2006, rising dramatically in several communities despite more homes being listed for sale and fewer being sold compared to last year.”
“‘I would expect housing prices to level off as the inventory stabilizes and that the number of days a home is on the market will increase,’ (realtor) Lylene Johnson said. ‘Buyers have more choices now, and can take more time to make an offer.’”
“Johnson said that the number of homes listed for sale on March 31 was more than double last year’s March 31 totals in Bellingham, Lynden and Sudden Valley. Listings were also higher in Ferndale, Blaine and Birch Bay compared to a year ago.”
“Real estate agent Chet Kenoyer agreed with Johnson’s assessment, adding that he’s seen quite a few out-of-the-area buyers who are interested in housing, especially new homes just coming on the market. ‘Around 18 months ago, when inventory was very low, a seller could get away with just throwing a higher price on a house just to see what would happen,’ Kenoyer said. ‘Now there is a lot more inventory, and more competition, so a seller has to be realistic when it comes to setting a price.’”
And the Seattle Times found a housing bubble believer. “Seattleite Matt Rivett, 32-year-old aerospace engineer, ran the numbers on renting versus buying earlier this year after his first foray into house hunting. ‘I decided I didn’t like what I was looking at,’ Rivett said. He found houses overpriced and balked at busting his budget to get a house he liked.”
“But what really shut down his search was doing the math. Why buy, he reasoned, when steep house prices and rising interest rates make owning so much costlier than renting. Instead Rivett’s happily committed to a rental duplex near Ballard that has ‘a beautiful view, all the amenities, for about half of what a mortgage would have been in a neighborhood further out, in a house I wasn’t particularly fond of,’ he said.”
“‘The monthly mortgage payment on the median-priced home today is more than double the average monthly rent in the county,’ apartment expert Mike Scott says. Renters are staying put, saying they’re ‘willing to pay $2,000 in rent, but not willing to pay $3,000 in mortgage for the same type of housing, same carpets, same finishes, same lifestyle,’ said Carmen Esteban, a commercial-mortgage loan underwriter.”
“‘I think they’re examining their lifestyle choices. Yes, there’s the investment piece of it,’ Esteban said, referring to homeownership, ‘but it doesn’t get you a cup of coffee in the morning.’”
“As for Rivett, he was ‘very relieved after I made the decision not to buy. Now, I’m not house poor like I would have been after a home purchase. I’m not tied down and can afford to maintain my lifestyle. I’m willing to wait it out for a few years.’ In the meantime, he’s investing more than $1,000 a month, the difference between his rent and a mortgage payment, for an eventual down payment.”
“‘The monthly mortgage payment on the median-priced home today is more than double the average monthly rent in the county,’ apartment expert Mike Scott says. Renters are staying put, saying they’re ‘willing to pay $2,000 in rent, but not willing to pay $3,000 in mortgage for the same type of housing, same carpets, same finishes, same lifestyle,’ said Carmen Esteban, a commercial-mortgage loan underwriter.”
All of a sudden this is a new revelation? Does it really take an aero space engineer to figure this out? Maybe this really is “rocket science”?
Really Auger. Where were all these new math experts the last few years?
If got a guy trying to unload a beach condo for what he proudly states is $100,000 less than other units in the same building. Yet the numbers in his ad make it clear that the rent will only cover half the carrying costs of the place.
A lot of people didn’t use a calculator when they bought.
Mike Scott is understating the differential: more like $3000 in mortgage payments, or $1500 in rent. You can easily rent a $600k house here for just under $2000 a month.
The important part of the new math is that of declining home equity gains, and the big picture principle of this part is so simple even the innumerate can understand it. Suppose I plan to stay in a home I own for 5 years; then monthly payments of $3K to own versus $2K to rent only make sense if I believe I will be able to sell for 60 months X $1K = $60K more (after all expenses) than I bought for. If appreciation is going at 20% / year, this is sure to be the case. If the buyer was fooled by randomness and appreciation turns out to be 0% / year or negative, then he is out $60K or more
Bellingham condos for everyone!
“In the meantime, he’s investing more than $1,000 a month, the difference between his rent and a mortgage payment, for an eventual down payment.”
Those are serious savings. In 2 years, he’s going to have 24K, plus interest.
Simmsays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
I’m in the exact same situation as the guy in Seattle. I work in downtown DC and just rented a 500K renovated rowhouse for… $1200. To buy a house comparable to this further out, it would have cost me at least double in mortgage payment. To take it a step further, I’m sharing the house with a friend, so I’m only paying $650.
Now, all the money I’m saving, I’m investing in my 401k. I’m able to use pretax money, reduce my income tax liability, and earn a better return than housing has for this year. When I do get ready to buy (when the bubble’s burst), I can borrow against my 401k for the purchase, if I like.
Ditto…
I could buy my unit, as is, for $400k (that’s over $1750 a month in interest, property tax, hoa, and insurance alone, AFTER tax savings. Gross its nearly $3k/month), or keep renting it for $1325 a month until they can find a sucker to buy it (for $480k after slapping on new counters, cabinets, floors, and appliances), max out my 403.b, save another $500/month long term…
Guess which one I’m doing.
Economies of scale in rentals today provide stable housing expenses.
Many projects have been paid off over last 15/20, so landlords can be competitive on rents.
Meanwhile the costs of single-family detached housing are blowing thru the roof, aka property taxes (NH is now taxing “views” as a revenue enhancement); maintenance (double-digit material costs as hurricane country gets re-built); heating (double-digit increases even with a non-existant winter); sewer and water (good luck out West); and property casualty insurance (if you can get it).
In MA, the newhealthcare system mandates employer surcharges for every business not providing insurance for their employees. So for all the lazy, fat f*cks who hire landscape companies to mow their lawn-up, up, up goes the bill.
Renters way, way on the upside with prudent investment of cost differentials.
Home ownership today=Tax and debt bondage.
Rent=Freedom and peace of mind.
The role of freedom in the rent vs. buy equation is vastly underrated. With jobs that disappear virtually overnight, is it really a good idea to be trapped in crushing obligation that depends on every penny you make? I think not.
I’m the ultimate commitmentphobe. If someone would rent me a place for 20 years and leave me alone, I’d do it and not think twice.
I’m with ya Txchick. To buy a house in my neighborhood (No. San Diego Coastal) would cost from $675,000 (for a tiny fixer) to $1.7mil.
I have a neighbor who’s a married fireman with a small child who stretched to buy a tiny older beach cottage duplex on my street as a live in investment. I’m talkin’ 500sf per 2bdrm unit, no view, no laundry hook-ups, one parking spot total etc. The place is so small that when you open the sliding closet door in the bedroom you can actually walk through the closet into the other bedroom! His plan is to cram his family into the rear unit and rent the other. But he was asking just under $2000 a month. I looked it up and he paid $685K in March of ’05. I figured his monthly nut is $3600 to $4000 (based on the 80% California I/O 100% financing stats) hence the $2K asking price for rent.
Needless to say no one was interested and I’d drive by the for rent sign and kept seeing the old rental price crossed out and changed to something lower. He eventually rented it for I don’t know what. But it reduced three times that I saw
My point is that we rent a 1200sf 2bdrm duplex down the street from the fireman four blocks to the beach with a huge fenced yard for my border collie, a large two car garage, and a panoramic view of the ocean from La Jolla to San Clemente and the rent is a third of his mortgage. (I think the average here is around $1500 and the rent to own ratio is currently very large.) Sometimes I drive by his house to go surfing he’ll be doing repairs in the front yard and he seems to have a really worried look on his face. Renting may not be everyone’s cup-o-tea but in today’s market, it sure works for me.
Rent=Freedom and peace of mind.
Sometimes I wonder if I don’t go to the extreme, but I choose to live free. With the exception of some tools and furniture, I can put all my important worldly possessions in my truck and go anywhere I want, anytime I want. I won’t be a slave to anyone. I picked up my laptop, calculator, kid’s photos, and walked out of my last job when my incompetent boss blamed me for somrthing he was responsible for (they fired him as a result [ha ha Bob, ha ha]. I have enough cash to last several years as a result of not buying an overpriced house, and that gives me much freedom and peace.
Yep. Me too. I’ve spend the last several years getting rid of “stuff.” And work for someone? I’d blow my brains out. If I had to do that to buy a house, no-brainer. This chick rents forever.
I just built a duplex on land I’ve owned for a few years in Olympia. I’d hoped to build a retirement home for myself, but the timing seemed right to get out. Both units sold in one day with just an ad in the local paper. It seems like the market is still pretty strong in that area, although there are a lot of For Sale signs out.
I lived in Kirkland Washington during the tech bubble crash. My rent went from $1200 all the way down to $950 during the proceeding two years. The reductions in rent were provided every time I needed to sign a new lease. As the jobs went away so did the workers and as a result the inventory went up, so prices came down. Now things are still not back to there peak from five years ago. I have been saving over a $1000 a month as well, investing in dividend stocks and a Washington mutual platinum savings account. Now I rent a 500K home for $1375 a month so I guess according to that the home should be appropriately priced at 180K.
The correction is on its way, we just need a catalyst perhaps gas at $3.40 and interest rates near 7. It’s going to get very ugly over the next five years, cash will be king again
Oddly enough, I could buy the place I rent for less than I’m renting it for.
However, I don’t want the commitment so it’s an easy choice. Plus I hate Dallas and am leaving.
A few years back, this was the way the numbers worked out in many places…
Here, here. Up to about 1999 you could buy in DC with a 15yr fixed for less than rent…
Also, isn’t it weird that in times when it is cheaper to buy than to rent, people feel no sense of urgency to buy.
But when it is much more expensive to buy than it is to rent, people feel an urgency to buy.
This psychology is so backwards!
Because you’ll be priced out forever!
It’s fascinating, isn’t it? Same thing with stocks - people will sell something that’s up 20% because they “fear” it will come back down, but won’t sell at a 20% loss because the “hope” it will go back up. Totally backward assed….
It’s fascinating, isn’t it? Same thing with stocks - people will sell something that’s up 20% because they “fear” it will come back down, but won’t sell at a 20% loss because the “hope” it will go back up. Totally backward assed….
Actually, locking in a 20% profit is not a bad idea if you feel the stock is fully valued. However, I agree that holding a 20% loss is almost always a bad idea — unless you are cost-averaging during a bear market, in which case you would continuing buying as it declined further. That type of investing takes confidence and the patience of a samurai.
The only urgency that I feel when I write the rent check is a concern that the landlord actually picks up a calculator and sees that the place is worth 3 times more than the cashflows if he can get a sucker to buy. That is my most urgent fear.
I could care less about the speed of the crash as long as the mania dies down and my nice rental won’t sell even if the landlord wanted to.
I’ve never felt an urgency to buy. I’d hate to tell you the deals I’ve passed up over the years and what I could have made on them. To me, not being trapped is the primary motivation for everything.
I really wanted to buy back in like 1994 in Ann Arbor MI, just before a long run-up happened here, when it last made financial sense discounting manic-appreciation-expectations. Rents were about the same as mortgages, maybe more…but back then the banks wouldn’t approve me to pay a mortgage for as much as I was renting my apartment for! Those were the days when you still needed to have a sizeable downpayment and actual decent income, and I had neither…which wouldn’t stop me at all now…hmm..I wonder if there’s a connection!
I’ve just signed a lease in manhattan on the upper westside for $3800 per month. We’ve been looking for 1 year to buy a comp apt 1400 sq. feet. To buy it costs about 1.4 million. Carrying costs before tax savings are $7000 per month. Plus I would have to put down 300,000. Right now I’d rather have that 300k sitting in a cd at 5% thats 15k in intrest. The numbers yell rent, if you believe that prices in the short term will not rise and probably drop.
Bob - I grew up in that hood - Mom is still on Riverside Drive in a 900 sq. ft. apartment - $770/mo - rent control. Her neighbors pay more than that in common charges, never mind the mortgage….
i’m renting a home in sonoma county for $2k a month,if i bought with $i200k down and a 30 year fixed it would be$6 k plus a month piti….some of my neighbors have made remarks about renters,i tell them i’m a loan broker,and my calculator works…love watching them fill their navigators at the gas station.
Who are the winners in this game? I have been a bear like all of you waiting on the sidelines for a year and watched interst rates go from 5.4 to 6.5%.
I can afford $150K down payment + $2500 mortgage.
Last year I could have purchased a $150+$475K =$625,000 home where as same payment gives me a $150+$400=$550,00 home.
Home prices have gone down a bit $625K can now be negotiated for $600K still 50K penalty for staying on the sidelines.
There is bubble, there is inventory (lots of it) but my numbers say, it was a foolish decision to wait.
Having said that, this is the worst time to buy. Interest rates my go up little bit more while prices can crash xx%. I hope the xx% is double digits.
You just spelled out why prices will have to come down.
Patience.
Bubbles in real estate, unlike stocks, can take years to unwind. History has shown anywhere from 3-5 years (common in the US in previous bubbles) to upwards of 20 years (Tokyo) before prices actually hit bottom and start rising again.
And just save the extra. If you can afford a $600k home, you can instead save the over $1-1.5k/month extra that buynig would cost you after taxes.
Max out your 401(k). If you aren’t on track to save $14k in your 401k this year, you can’t afford to buy a $600k house when you stop renting.
And be PATIENT.
I know its hard. I’m in the same boat. I’d love to buy a nice, 1000 sq foot mediteranian style bungalow in Berkeley or El Cerrito. They are absolutely wonderful $350k-400k houses. They are NOT worth $650k+.
Also, since buyers look at the “cost/month”, interest rates get factored into the price. All the buyers wiling to pay so much a month have already bought.
Interest rates can accelerate the slide. In which case, having an extra $50k for the down payment in +3 years is a big win: everyone else has priced based on a lot less down.
Steinravnik brought up an interesting point about 401K investments. How many new homeowners in this market are taking on too much mortgage and reducing their 401K investment to be able to afford it? Many companies offer a 401k match as well. I am assuming in a flat real estate market the return from the matching alone might beat the return from investing in a house. Let’s take an example. On an 80K salary with a company 401k plan where they match 75% of the first 6%, you would be forgoeing $3600 in compensation. I’d like to think people are calculating their ability to afford a home on their post investment take home but given what I have seen on this blog I highly doubt that.
Also, for those with ARM loans, what would be the first two changes made to be able to cope with a rate reset? Cut 401K to zero. Claim maximum dependants on your paycheck.
oh yes indeedy…
my hubby wanted to borrow from our 401k to make the dp on a house, and then cut his 100% matched 5% that we had been contributing. They let you do a one-time borrowing from the 401k to come up with say a downpayment for your house; I would guess not a few people have done that as well as reduce contributions!
This needs to be deconstructed; there are 2 entirely separate decisions involved (although I suspect they are often conflated as people stretch to {or past :(} their absolute limit).
Borrowing for a deposit from your 401k, especially when young, is often a very sensible idea.
Reducing contributions which get matched to any significant extent is madness.
Further to my previous post.
I have a government job (duck, duck … weave, weave) in IT in Australia, and when the contracting offers were flying around a few years ago I weighed up the alternatives very carefully.
One reason why I stayed put was that at the time I spent most of my evenings and weekends as a volunteer in junior sport, but another definite factor was the defined benefit superannuation (=pension) scheme. 5% contributions were and are compulsory (with up to another 5% optional with no match).
The notional employer match on the compulsory contributions has been actuarily estimated at between 200% and 350% (depending on circumstances), if you keep your money in the scheme until retirement.
And yet I personally know someone who twice resigned from jobs with those benefits, so she could get simple refunds of her contributions and accumulated interest to pay off bills.
I was able to save half of my take home pay last year because I rent. I am content with my choice. The value of my savings has gone up considerably in the last year due to supply and demand forces. Now the banks are paying me quite a bit more to hold my money for me. Judging by the reports of negative savings I suspect that the banks will pay me even more in the future. When I am ready to buy house prices will be low and tax deductable mortgage interest will be up.
For all the nuvo Texans spending their first spring and summer here in Big D (that’s D for “Depressed”), high temp today: 94 degrees. Tomorrow: 97. Hello $500+a/c bills for your McMansion. Now was it REALLY that important to impress the neighbors with your debt financed monument to your financial illiteracy?
I think that they forget the reason they built with 9′/10′ ceilings was to allow a place for the hot air to go in those pre-air conditioning days. Now you spend a lot of money cooling all that extra air.
It’s sunny and 65 degrees here at the beach. Of course, it got down into the 50s last night, so I probably spent a few bucks on gas heat.
Hey TxChick, I have an apartment for rent
It’s pushing close to 90 in Charlotte. We normally have nice weather here until late May to early June.This is shaping up to be a scorching summer.
From the same newspaper:
http://seattletimes.nwsource.com/html/localnews/2002933061_danny16.html
I live in North Bellingham. I personally would not live in a house less than 325K, because below that all you can get is a dilapidated 70’s rambler or worse. So I live at a complex for $640 with over 800 sqft, plenty of room for my wife and I. There are cheaper places than that even, but I liked the location. We’re laughing all the way to the bank.
There are a LOT of rich Californians and Canadians who own houses here and they always say something to the effect “… but wont housing just keep going up.” I dont even argue anymore. Everybody at work thinks I’m crazy for “throwing away all that rent money.”
I looked up a condo I rented in Bellingham in the mid 90’s near the university. Rent was $600. The unit next door sat on the market for an entire school year at $69K. Now, renting that condo is around $750/month and units in the same complex sold in 2005 for $169K.
Ever wonder what the real value of a property is? Want to see just how overpriced RE is?
What follows are the instructions to build a tool to provide you with a way to compute the value of a property (given a fixed rate of appreciation for the last 10 years) using just a simple spreadsheet.
1) Open a blank EXCEL (or other) spreadsheet
In cells A4 thru A14 enter an ascending list of years (1996 thru 2006)
2) In cell A1 type “Int Rate”
3) In cell B1 type in “5″
4) Under Format menu select “Cells..” and under “Category” select “Percentage” (so B1 displays in percent)
5) In cell A3 enter “Year”
6) In cell B3 enter “Value”
7) In cell C3 enter “Appreciation”
9) In cell B4 enter in the 1996 price of the property you are interested in from “Zillow.com” (see note below)
10) In cells B5 type “=B4+C4″
11) Select cell B5 and while holding the mouse down, click on the lower right corner of the cell B5 and drag the formula down thru cell B14.
12) In cell C4 type in “=sum(B4*$B$1)
13) Select cell C4 and while holding the mouse down, click on the lower right corner of the cell C4 and drag the formula down thru cell C14.
14) In cell A16 type “Asking Price”.
15) In cell B16 type in the “Asking Price” of property.
16) In cell A18 type in “% Overpriced”
17) In cell B18 type in “=SUM(1-(B14/B16))”
18) Save the file
You now have a “fair value” calculator where you can play around with interest rates (cell B2) to see what the value of a property is today given a fixed rate of appreciation over the last 10 years. I used 5% as a “historical rate of appreciation” for RE in this example but this actually is somewhat liberal.
You will see using this approach that you can judge the approximate worth of a property given a fixed rate of appreciation over the last 10 years.
note: To see what a property was worth 10 years ago using Zillow.com follow these steps:
1) go to http://www.zillow.com
2) Enter the address of the RE you are investigating
3) When the Zillow map comes up showing the property info click on “See Home Details”
4) Under the graph click on “See more graphs and data”
5) Enter in the Security Verification number
6) When the graph comes up select “Time frame” to be “10yr”
7) You will then be able to see the 10 year price history of the house and can determine what value to put into cell B4 of your spreadsheet.
Enjoy….and arm yourself with knowledge.
fyi…Seattle is running anywhere from 20 to 40 percent above fair value, depending on the area.
I came to the same conclusion. Prices around Seattle are anywhere from 20% to 40% too high. My calculations are based on owner’s equivalent rent. Here’s a calculator I put together for myself in case anyone is interested.
Real Estate Value
or,simply
%overpriced= ASK- ZILLOW1996x(1.05)^10
keep it simple, Moose.
As an Aero Engineer myself, I can appreciate having to live in proximity to an urban area to work. I can also appreciate that not everybody will be as willing to figure out the rent-to-buy calculation and what the real costs are in this market (too bad people shut down in reaction to the mention of “math”).
I made the same decision as Matt Rivett did (tough luck on the name, bro), and I have not regretted it. My current employer is set to change contractors in a year or so, and the writing on the wall says that my future will be at the least, less certain. The East Bay is still moving houses, and if I had one to sell now, I might pull it off, but in another year, there might be a lot of competition, including from co-workers. The only thing I could have afforded locally is a townhome or condo, and moving one of those albatrosses at the same time that the Dublin inventory comes on-line will probably be a bit tricky.
I have begun to think that the Bay Area is moving in the direction of other modern ghost towns, like Rochester, Detroit, and Buffalo. Price out the engineers, eliminate manufacturing, and all you have left is people too old to work. Engineers make financial mistakes all the time, but I’ll bet the rate of their stupidity in this arena is lower than the general population. In another 10 years, do you honestly think that the engineer who moved to Los Banos and commutes to the Silly Valley will want to move into a 1960s-vintage home in San Jose? Will the one that rented see 20% off the peak as justifying the extra 10 years of aging and wear on the house?
Quick personal Sacramento experience that illustrates the difference in the rental market in only 6 months.
Last August, relocating from San Diego with wife and 2 dogs. Rents on POS 2 bedroom 1,000 sf 1940s era homes asking $1,600 mo rent. Most owners very snobby about accepting pets. Homes rented out quickly after internet ads first appear.
Now, ads in papers filled with brand new, never lived in 4 bd/3 ba , 2,500 sf and up McMansions renting from $1,700 to $2,300 per mo. Pets are accepted with open arms. Homes for rent section in local paper growing daily.
Will defenitely upgrade to bigger/better house when 1 yr lease runs out on this 3 bd/2 ba if this trend continues.