From CNNMoney:
"Home prices continued their plunge during the last three months of 2007, setting a real estate trade group's record for the biggest-ever quarterly drop. .Here's the NAR spin: last week I got a letter from a local Re/Max agent -- she managed to snag my address from a local organization to which our family belongs.
The national median price drop of 5.8%, to $206,200 from $219,300, was the steepest ever recorded by the National Association of Realtors (NAR), which has been compiling the report since 1979".
The heading (next to the Re/Max balloon is the quote: "To be well-informed is to have the world at your fingers." - Joseph Jones)
"Dear [Harriet's family],
Did you know that 2007 was actually the fifth highest year for home sales in history? Everything is relative and 2007 stands in stark contrast with 2006 but there is always a good time to buy and a good time to sell. Take a closer look at the numbers and you will discover that the state of the real estate market may not be everything the media leads you to believe. Sometimes we all need a little historical perspective to see the big picture clearly. Fortunately, I did all of the research and analysis for you already.
. . .
Nearly one-third of vacation homes are being purchased with the intent of becoming a full-time residence upon the buyer's retirement. With today's mortgage rates, buying a vacation home is a great option to consider. The potential rental income from the property can help pay the mortgage."
50 comments:
I have yet to see a property where rent covers the mortgage, unless of course you put 50% down (which doesn't count).
The other day I had a client that actually had a scenario where it MIGHT cost the same to rent vs buy.
This is what it took to come to a the same amount for a $200k place
1)The City of Alexandria giving her $30,000
2) Getting $20,000 from another program
3) A 20% off mortgage rate of 5.25%
THEN and only then would it cost about the same.
But we put our offer in for 10% under list, and they never even countered.
So that was a close one.
Don't buy a home because it is cheaper.
Frank Borges LL0SA - Broker FranklyRealty.com
Blog.FranklyRealty.com
Harriet,
I was reading this article. I found the following quote interesting:
""The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges," said Lawrence Yun, NAR's chief economist, in a statement.
Fewer expensive homes were sold, bringing down median prices.
"
The last line wasn't attributed to NAR but the whole point of using medians, as has always been explained, is that it helps to moderate the effects of big swings in the average price by home sales in the way upper tiers. The median, therefore, is a better gauge of where the market really is.
Another disingenuous spin on the numbers if you ask me.
My $0.02
Frank - I haven't seen a property where it would be cheaper to buy than to rent for a long time either, but this one from Harriet's latest list looks like one:
8191 COMMUNITY DR
MANASSAS, VA 20109
List Price: $110,000
Prior Sale: $293,000 10/24/2005
Listing Date: 02/11/08
-62.5%
It's great to see property prices finally getting back to fair values.
John,
That's in a community called "Irongate". There are about 70 1970's townhouses for sale there and I think most are in or near foreclosure.
Prince William County might have an "issue" on their hands over neighborhoods like this.
Mytwocents,
I agree, that statement sounds like spin.
Also, I would want to see proof about the higher end suffering disproportionately. In Arlington County, for example, hasn't the high end held up better? In Prince William County, the bottom of the market is seeing a lot of pricing pressure because of foreclosures.
Irongate is a slum. I haven't set foot in the place in about 4 years since a friend of mine that used to live there moved out, but I doubt it's improved any.
BTW, I was in no way recommending that $110,000 townhouse in Irongate as an investment, nor was I making an judgment on the quality of the neighborhood. I was just saying that at that price, rent probably covers the mortgage - something we haven't seen in a long time.
This process of falling prices starts in further out and/or less desirable areas first and then spreads like the Norovirus.
John,
Yes, with a 50% correction in prices the mortgage and rents are more in line. The current asking rents are $1,000 to $1,400. What I'm really wondering about parts of PWC like Irongate is (1) if there will be a glut of rentals, squishing rental prices down more or (2) if no one will want to be a landlord or a tenant there if the neighborhood goes even more downhill.
I read somewhere that the ratio is generally $100 of rent per $10,000 in property value. Based on that, that property should rent for around $1100 a month which is what they go for in Irongate.
It's definitely possible to get a $110,000 mortgage for under $1000 a month. I did it with a 30 year loan at 7.5%!
brian1703
you said 100 for every 10,000. That would mean a 500,000 house would rent for 5,000, there is not a chance. For 1,100 you can get about a 300,000 condo.
JOhn said...
"brian1703
you said 100 for every 10,000. That would mean a 500,000 house would rent for 5,000, there is not a chance. For 1,100 you can get about a 300,000 condo."
Like we've been hearing. Rents are currently out of whack with prices. Expect rents to rise significantly.
The price per annual rent in the DC area has a historical average of about 15 (Moody's has the stats), which means price per monthly rent is 180. So my rule of thumb is, if you can rent a property for $2000/month, don't pay more than $360K to own the same.
The price per annual rent in the DC area has a historical average of about 15 (Moody's has the stats), which means price per monthly rent is 180. So my rule of thumb is, if you can rent a property for $2000/month, don't pay more than $360K to own the same.
DC will undershoot on prices. When you have a bubble like this, the bottom generally occurs when rent will pay for the 15 year mortgage, insurance, taxes, and still return 7% ROI.
The price/rent ratio is *not* the right non-dimensionalized metric to gauge the bottom. I believe the correct metric will be return on investment (ROI). e.g., in the 1990's, in "The OC," prices plumeted below historical price/rent but the ROI accurately indicated the bottom.
Got popcorn?
Neil
From the original post:
Nearly one-third of vacation homes are being purchased with the intent of becoming a full-time residence upon the buyer's retirement.
So now we know 2/3rds were flips. ;)
Lance said:
Rents are currently out of whack with prices.
Lance, I posted for you on January 20th on bubblemeter this article which notes how DC has such a huge surplus of rental inventory that rent will be flat to declining for three years.
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/18/AR2008011801829.html
here is where I posted it:
http://bubblemeter.blogspot.com/2008/01/lawrence-yun-spouts-more-nonsense-in.html
I'm convinced you're really a Realtor (tm) or in some other way your income is dependent on Real estate sales. (The old Upton Sinclair sindrome.) You don't see to be able to leave the 2005 mindset. Cest la vie.
Back on topic:
I'm amazed at the results coming out nationally. Quite honestly, I didn't think we could have this rapid of a real estate crash.
Prices down 9.7% in a month in San Diego, 6.7% in the San Franciscan area.
http://www.dqnews.com/RRBay0208.shtm
From:
http://money.cnn.com/2008/02/14/real_estate/home_prices_fall_for_year/index.htm?postversion=2008021414
Fewer expensive homes were sold, bringing down median prices.
"California, south Florida, D.C., many of the high-cost markets are reflecting that," said Walter Molony, a spokesman for NAR.
Oh wait a second... DC is expected to have the same problems as CA and FL... We had a national gold rush to buy real estate. Now we're going to have a national liquidation sale to raise cash.
Got popcorn?
Neil
Harriet, I hope you don't mind one more post by me. :)
We all know median prices aren't nearly as accurate as Case-Shiller. But a 20% decline in one month in Riverside county California? Holy crap. I honestly, before today, would have told you that wasn't possible. But it did. In my book that is a crash.
http://www.nctimes.com/articles/2008/02/14/news/californian/4_01_282_13_08.txt
Look at the chart. An extreamly well graphed example of how prices follow sales.
hattip HBB.
Got popcorn?
Neil
Anyone who thinks that 1000+ month in rent for a townhouse in Irongate is reasonable needs their head checked.
Why rent in Irongate? You've got several decent 2/2 apartment complexes closer to 66 for about the same. Sure it's not a townhouse, but at least you don't have to deal with Mara Salvatrucha 13 (MS13). MS13 has infested Irongate. I rented a bedroom there in 04 for 400 a month. Irongate and parts of Manassas Park are really bad.
I don't care if prices drop to 0, no way in hades would I live with my wife and soon to be newborn in that neighborhood (unless the gangs left and they cleaned it up a bit).
That area is gang-ridden. Anyone thinking about buying there really needs to spend a few nights there and think it over real hard. If I were single, maybe, married w/ a family . . . not a chance.
Speaking of Arlington, if you examine the stats in detail (granted with limited number of sales), though the the median price was down the average was up significantly, and the median was up on SFHs.
http://www.mris.com/reports/stats/monthly_reti.cfm
TedK said...
"The price per annual rent in the DC area has a historical average of about 15 (Moody's has the stats), which means price per monthly rent is 180. So my rule of thumb is, if you can rent a property for $2000/month, don't pay more than $360K to own the same."
It's very important to keep in mind that the average price to annual rent ratio of 15 that you quote is the average ratio for the past 15 years, which include about 6 bubble years. Therefore, this 15 year average actually overstates the non-bubble long-term average.
The pre-bubble price to annual rent ratio was 11 for the DC area (refer to November 2007's Fortune Magazine for details) and therefore the price to monthly rent ratio was about 130.
In other words, prior to the bubble
a property that rented for $2,000 a month had a sales price of about $260,000.
I see no reason why the price to rent ratio will not revert to its pre-bubble mean.
If you guys think rotted out townhomes in MS13 central is indicative of the price drops for all real estate you are mistaken.
No way in hell you will see nice townhomes in nice neighborhoods closer in ( i.e. Fairfax or closer ) selling for 110k unless they have something major wrong with them.
As far as the rent thing goes, there are many other factors that go into home purchase than price, FOR A FAMILY.
I get the impression that most bubbleheads on this board, ( exception of Tabitha who is actively searching for a home ) are single and could care much less about raising a family than for getting some sort of ultra cheap house.
Once you have a couple kids, safe neighborhoods, great schools, a nice community feel become much more important than the investment potential of a home.
Neil, john fontain,
In the Fairfax areas I am interested in, the price/annual rent is currently in the range of 20--25. For this to reach 15, prices will have to go back to late 2002 levels, which will take a couple of years. If it has to fall even further to a P/R =11, then we are talking about pre-2000 prices. Such an event seems unlikely within the next 2 years; if it happens, it may come 3--4 years from now and I can't wait that long. I would rather take the risk and ride it out.
Doug,
I will not wait beyond the next 4--5 months because of family and kids' schooling. But I keep P/R = 15 as a reasonable guide for the upper limit when looking at bank-owned properties. Banks are coming close to that level already. Regular sellers are still expecting 20--25 multiples.
Doug - Wasn't Irongate "rotted out" and "MS-13 central" two years ago when someone paid $293,000 for that townhouse? If so, those factors don't explain the price drop.
And I don't think anyone is suggesting "nice townhomes in nice neighborhoods closer in ( i.e. Fairfax or closer)" are going to sell for the same absolute dollar amount as that Irongate townhouse. The point isn't the absolute price, it's the percentage decline in price that we are focused on. You do realize that there are brand new townhouses inside the beltway selling for almost 40% off peak prices (see Ellery Circle) don't you?
And as to your inference that people with families need to own in order to provide a good neighborhood and school for their family, is it not possible to rent a home, rather than own one, in a nice neighborhood?
Yes John, but back then a lot of idiots thought _every_ piece of real estate was worth investing in. All of the properties that had major issues are now back on the market and being sold at discount.
What I am saying is that will not be indicative of the properties that are in good neighborhoods/locations, have nice layouts, are in excellent shape.
There will be some homes like that available that are bank owned and will be great deals for buyers but you cant expect all properties to fall the same extent that the awful ones do.
And yes, home rental is a great option for many people, especially if you cant afford to own in the area you want to live.
Oh and I just looked up Ellery Circle and those are a group of foreclosures that flippers bought and dumped on their banks.
I'm showing half of them already under contract, despite being in an abysmal location that happens to fall inside Falls Church. That area has a ton of high rise, crime infested apartments. Very low income area.
Like I said though, some people will get great bargains if they actually want to live there.
doug,
I'm married with a kid on the way, but I'm sorry, 300k for a CONDO or TH in Centreville, or shoot even closer in, is still WAAAAAY too much.
If you have a family, sometimes you have to delay short-term gratification for long-term gains.
As long as I can rent a decent place for less than half to 2/3rds of what the mortgage would cost, I'll rent.
I told my expecting wife, if I have to rent the rest of my life b/c housing prices are way to high, so be it, I will not pay 300k for a TH, when I can rent it for 1000. I'll save up the money and in 10 years, I'll buy the place outright instead of mortgaging 30 years of my life.
Providing for a family is about security. By forgoing the short-term gratification of buying a house when I got married in '05, and renting cheap, I was able to save boatloads of money.
Looking at my finances, even with a newborn child, after three years of working I have enough saved up (saved not invested-biiiiig difference) to live for 2+ years at our current standard of living.
I could get killed tomorrow, and my wife wouldn't have to worry about bills for over 2 years!
That's security!
Absolutely no way I could have done that buying over the past 3 years.
Oh sure I'll eventually buy (maybe this winter, depends on what I can rent vs. buy), but I'll make sure that no matter what I will have over a year of financial security for the "if something happens".
Lance/kh can go on about how buying is so great (and most of the time it is-if you get a decent deal that fits your budget, allows you to save, etc.), but most people, even in DC, live paycheck to paycheck or with at most 2 months savings, and have recently counted on housing to bail them out when they get in a bind.
What happens to this country if we go into a serious recession, and people start losing their jobs? Sorry, DC is not immune to recessions, it's prob. better than most, but its still not immune.
With little money saved and credit markets crunching, it will be bad.
In the end, most people are stupid when it comes to money. They blow all of it when times are good, or put it in the stock market (not that investing in stocks is bad, it's just not saving, it's a risk vehicle, an investment, that too many people have seen as automatic profits, not always so), and then they have none when times are bad-and then they beg for a handout.
Another thing, I personally think the whole "good" schools thing is WAAAAAAY overrated. I grew up in the backwoods of North Georgia-my HS was an absolute joke. My parents however, had initiative and ensured that I received a decent education in spite of my HS. I went to Georgia Tech and graduated 3.85 GPA summa cum laude. You don't have to have good schools to succeed (it helps, but it's not necessary).
What you absolutely need is any combo of the following.
A) Parents who care about their kids and spend their time working with them and helping them learn, instead of assuming it's the schools responsibility. And we're not talking about taking kids to extracurricular activities-or doing their projects for them, I mean actually helping them learn.
B) Kids who are enthused about learning and who want to learn.
300k for a townhouse in Centreville might be a good idea GTE811i.
Here is why. Using todays 30 year fixed rate of 5.625% we get a mortgage payment of $1,381.58. After tax and insurance, $1,664.91. Assuming you make more than 75k a year, you will be taxed at 30% of your income ( more if you make more ). That means, 30% of that payment will be returned to you in the form of a tax credit, or about 500$.
Thus your effective payment would be 1165$ a month.
Right off the bat, your first year you will pay $3160 towards the principal, or $265 a month. Thats effectively making your rent $900 per month.
The question right now is whether or not that principal will cover the amount of depreciation your home will go through until property values level.
I suggest you start saving now, so in 2-3 years when the market is level again, you have that 60k to put down on your house. Hopefully the rates wont go up substantially.
tedk said:
I would rather take the risk and ride it out.
Nothing wrong with that. As long as you know the magnitude of the risk. I personally will buy when the downside risk is $100k or less. That is the threshold of pain I believe is manageable. So while I'm very bearish, I do calculate in the probabilities/risks and accept a certain amount of being underwater just doesn't matter. But the current risk is far more than $100k for any home I would consider. :)
Got popcorn?
Neil
Doug said...
"And yes, home rental is a great option for many people, especially if you cant afford to own in the area you want to live."
It's a great option right now, whether you can afford to own in the area you want to live in or not. I live in Arlington and can afford to own. But what's the point of buying when I can rent for half, yes half, the current cost to own? It makes no economic sense to buy in these circumstances (especially when you factor in future depreciation in market prices).
"Oh and I just looked up Ellery Circle and those are a group of foreclosures that flippers bought and dumped on their banks. I'm showing half of them already under contract, despite being in an abysmal location that happens to fall inside Falls Church. That area has a ton of high rise, crime infested apartments. Very low income area."
I'm sensing a pattern here. Correct me if I'm misinterpreting you, but it appears you keep coming up with reasons to "explain away" any examples of price declines (such as "abysmal location," near a "ton of high rise, crime infested apartments," in a "very low income area."). Didn't these factors exist two or three years ago and, if so, am i not right in concluding that they don't explain the price declines?
It couldn't be that prices are falling because they rose to high, could it? Nah, it must be something, anything besides that.
John,
Look at my comments, I am not denying that housing is declining. If you can read, you can clearly see that in my posts on this board.
Im saying that the properties that you are cherry picking, do not represent the norm.
And if you read my post above, I said this very thing - that properties in problem areas, or that have major problems will decline more/faster than prime real estate.
The pattern I am seeing is you ignoring the prose in my posts because you cant refute what I am saying but dont want to admit I might be correct.
@doug -
Methinks you might want to check your math somewhat.
Interest and taxes are NOT "returned" to you as a tax credit. They are adjustments to gross income, if you itemize.
E.g., assume a theoretical $15,000 per year paid in mortgage interest and taxes on the house of your choice. Assume that the house is your only itemized deduction.
Let's say your gross income is $75,000, and you paid out $21,000 in Federal income taxes via payroll deduction. Calling the $15,000 mortgage interest and property taxes a TAX CREDIT would get you a refund check of $15,000. You would have paid $6000 total in Federal income taxes. This is a good deal if you can get it.
HOWEVER, the way it actually works is - your mortgage interest and taxes are "adjustments" to your gross income. Thus, you pay taxes "as if" you were earning $60,000, not $75,000. If the tax tables say your $60,000 tax rate is 28%, you will "shield" 28% of your mortgage payment/taxes, or $4200, thus getting a refund check of $4200 of the $21,000 you paid out.
Adjustments to gross income are better than a stick in the eye, but they are NOT the same as a tax credit. In this instance, there is a $10,800 difference.
@doug -
Methinks you might want to check your math somewhat.
Interest and taxes are NOT "returned" to you as a tax credit. They are adjustments to gross income, if you itemize.
E.g., assume a theoretical $15,000 per year paid in mortgage interest and taxes on the house of your choice. Assume that the house is your only itemized deduction.
Let's say your gross income is $75,000, and you paid out $21,000 in Federal income taxes via payroll deduction. Calling the $15,000 mortgage interest and property taxes a TAX CREDIT would get you a refund check of $15,000. You would have paid $6000 total in Federal income taxes. This is a good deal if you can get it.
HOWEVER, the way it actually works is - your mortgage interest and taxes are "adjustments" to your gross income. Thus, you pay taxes "as if" you were earning $60,000, not $75,000. If the tax tables say your $60,000 tax rate is 28%, you will "shield" 28% of your mortgage payment/taxes, or $4200, thus getting a refund check of $4200 of the $21,000 you paid out.
Adjustments to gross income are better than a stick in the eye, but they are NOT the same as a tax credit. In this instance, there is a $10,800 difference.
John said:
I'm sensing a pattern here. Correct me if I'm misinterpreting you, but it appears you keep coming up with reasons to "explain away" any examples of price declines (such as "abysmal location," near a "ton of high rise, crime infested apartments," in a "very low income area."). Didn't these factors exist two or three years ago and, if so, am i not right in concluding that they don't explain the price declines?
John, that's like statistics and probability. It involves thinking that the REIC discourages. lol
The latest news is that the pricier homes are getting hit the hardest. No facts yet... I know Lance will try to mock this statement. But so far my 'scuttlebutt' has been proven correct every time about 6 weeks later. :)
Did anyone have bloomberg on today? Holy cow were people scared about the bond markets! Oh wait... we bears have known that a long time. ;)
Got popcorn?
Neil
"The latest news is that the pricier homes are getting hit the hardest."
That really doesn't doesn't seem to be the case in the DC area so far.
The higher end market in many areas has all but frozen... but sellers have not yet been forced to capitulate.
Check out 20124 at MRIS.(Clifton VA)
It is a small area west of DC with extremely expensive houses most of which are located on several acres or more.
4 houses sold in Jan... with 98 on the market.
Sales prices haven't collapsed the way they have in other areas, but how long can that hold up?
Another place to look is Mclean Va.(generally considered the nicest section of the DC metro area.)
The months of inventory is through the roof, really really huge numbers, but there haven't been any big price drops.
So according to our local real estate pumpers that means Mclean etc are doing just fine. Obviously anyone with some kind of education in economics will recognize that price drops are on the horizon.
In 22102 only 2 single family homes sold in Jan, with 97 on the market.
In 22101 14 sold, with 190 on the market.
Mclean's totals? 16 houses sold, 287 sitting on the market.
Mclean is the primest of the prime in the DC area.
"Why rent in Irongate? You've got several decent 2/2 apartment complexes closer to 66 for about the same."
Yes, but they probably don't accept rent payments in cash and they almost certainly have occupancy limits.
"300k for a CONDO or TH in Centreville,"
If you know the neighborhoods and do a little detective work, you can buy a 2/1 or even 3/1 garden apartment or TH in Alexandria for $350-400K.
While that is outside of your spec, it's not that much of a stretch.
It would be an older place, '40's, '50's, '60's vintage, small rooms, tiny windows but safe and habitable. Paradoxically, these places tend to have larger yards, some are almost parklike with 50 year old trees.
gte811i,
Here's a place, a 2/1 for $320K in 22302, Parkfairfax.
I don't know the area that well but it's part of Northridge and very close in.
It only makes sense if it's close to your job.
zapoteca,
It's almost useless explaining the actual numbers to people . . . they want to believe what they want regardless of actual calculations.
My original assertion stands, the vast majority of people are absolutely STUPID when it comes to money.
kh, I have plenty of money to put down a nice downpayment (20%+) on a 300k place. Unfortunately most people don't understand, just b/c I can buy in this market doesn't mean I should.
I mean let's logically think about this . . . the general rule of thumb is spend no more than 2-3x your income on a house. Yes, yes it is a rule of thumb, but there is a good reason it's there, b/c it works!, you aren't too far in debt and it still allows plenty of money for food, clothing, family expenses etc. Using the upper limit it means generally you need to earn 100k or more for 300k place. If we stretch it to 4 times (really far), you need at least 75k/year for a 300k.
Most people do not make 100k a year, sure maybe dual incomes, but they just don't. Median household income in Loudoun is 90, so by definition most do not make 100k.
Right now I make more money than the median household, and the mean household income in pretty much the whole NOVA. Based upon normal rule of thumb I should expect to spend no more than 300k. And all I can get for 300k is a crappy, run-down , POS, condo/TH in Alexandria??
Gimme a break. Screw that crap! It makes absolutely no sense that the upper end of my range is that.
Nope, tell you what my plans are. I'll take my good salary for right now, rent as cheaply and safely as I can with my wife and newborn. Sock away 50% of take-home, and wait it out. When I'm done with my current obligations in DC in 2 years, if I can't buy a decent place for my family then, screw DC.
I didn't grow up in DC, I'm highly educated with master's EE. If prices don't come down, fine, ya'll can have it, I'll move somewhere else and buy a place outright with the money I've saved.
It's ludicrous people think DC is the greatest, having lived in multiple countries and cities, from my perspective it's not. The most important thing to me is providing a decent living/security for my family. I don't need to be in DC to do that.
kh you ramble on about how Arlington/Alexandria is posh and is the greatest city living. You can have it, I want no part of it.
I'll take 30 acres of land in some hick part of the US with no traffic, fresh air, and most importantly freedom. Freedom to yell, play music as loud as I want to, paint my house whatever color I want to, have it designed, landscaped however I want. Freedom from neighbors harassing me about my house, freedom from HOAs, freedom from pollution, freedom from depending on others, freedom from intervention. Freedom and independence, that is worth more than all the gold in the world.
Unfortunately, most people don't want to be free or independent, oh they feign it, but they want someone else to help them when hard times come and they want rules for everyone.
I just bide my time . . . saving as much as possible to make those desires come true.
So yeah, from my point of view, paying 300k for the privilege of being locked away in a condo/th is a privilege you can have. I'd rather rent the privilege of being locked away than buy that privilege.
At 150k, then it's a nuisance until I can have bigger things, 300k not a chance.
"I'll take 30 acres of land in some hick part of the US with no traffic, fresh air, and most importantly freedom."
No argument from me. Go for it.
gte811i wrote:
" the general rule of thumb is spend no more than 2-3x your income on a house. Yes, yes it is a rule of thumb, but there is a good reason it's there, b/c it works!,"
No ... it doesn't. It was "written" when interest rates where in the double digits. When you're paying 5% interest on mortgage you can buy a lot more house for the same monthly payment than when you're paying 15% interest. Lots more. Maybe 3 or 4 times more WITH THE SAME MONTHLY PAYMENT.
gte811i, finally someone gets it. I agree wholehearedly. Thank God, your family has you. You are a man after my own heart! Educated, successful, smart and family-minded! And you are to be commended.
"When you're paying 5% interest on mortgage you can buy a lot more house for the same monthly payment than when you're paying 15% interest."
That's not what's driving him. That was a "for example".
What's driving him is the thing that's befuddled everyone, well everyone except you.
Most folks have not come to terms with the fact that there is no more cheap, affordable, land within an hour of the city center.
Until you come to terms with this reality, prices do not make sense.
Everyone knows that you can throw up a pretty nice house for a couple hundred grand. What makes THAT place worth a half mill or a mill or more?
If you look at a typical assessment break out, they say the land is only worth a hundred grand or two. Why is THAT house 800K?
It's not. It's the dirt under it that's 600K and the crib on top is $200K.
Then there are places like Fairlington, Parkfairfax, like the example I pointed to.
Not very fancy, a little tatty even, and those kitchen base cabinets, oh . my . God, can we say Retro! Except that there's a park-like common area around the houses.
In my area, two of my brilliant neighbors have pushed their houses out to the edge of their property lines.
Their kids play in the street.
One neighbor even built a retaining wall so there's no place to park their cars, except on the street.
Then here, where people discuss home valuations, we have people spending on parties and cars, because, that's their lifestyle choice.
Which is fine. However they should consider that the next price jump might be the one that they can't buy into.
gte811i has a plan. It's to bail when the time is right, for him.
I know people who did that, bailed just before the last price jump. Both bought back in this area, just at the peak in 2004 and 2006.
Then there's a guy who's going to Europe to live the good life and come back when prices are lower. That's another conundrum.
They might all be right and Lance might be wrong. might
Ok Lance, then let's go with the debt to income ratio.
Let us assume a debt-to-income ratio of 28/36 and Fairfax County's median household income of $100K :
Yearly Gross Income = $100,000 / Divided by 12 = $8,333 per month income.
- $8,333 Monthly x .28 = $2,333 allowed for housing expense.
- $8,333 Monthly x .36 = $3,000 allowed for housing expense plus recurring debt.
Let's make the assumption that there is no debt, excellent credit and $50K down payment. I'm sure most folks are laughing now, but let's stay with that. :) Good credit should get you a 30 year fixed at 6%. A $2,333 payment with the $50K down payment will cover a $383,000 house in Fairfax county (.89% tax). The PITI for this comes to $1,996.50 (PI) + $284.06 (T) + $50 (I). Please keep in mind, I did not add in closing costs, the fact that an escrow payment is just about always higher than the needed amount for taxes, possible HOA fees, or that you cannot avoid PMI unless you put in 20% or do an 80/20 loan. All of this adds up to less house.
So after all of that perfection, the ratio stands at 3.83. gte811i's 2-3 is definitely on the frugal end because of today's interest rates. I have said 3.5x is fair. For Jan 2008 vs Jan 2007 of Fairfax county, MRIS says :
Average Sold Price:
$472,016 $531,143 -11.13%
Median Sold Price:
$395,000 $456,250 -13.42%
Notice how Jan 2007 was 4.56x median income. Seems the median is getting closer for the perfect buyer above. Many on this board are talking about much more expensive homes too. I guess we all make over the median. ;)
Jan 2007 vs 2006
Average Sold Price:
$531,143 $512,201 3.70%
Median Sold Price:
$456,250 $450,000 1.39%
Jan 2006 vs 2005
Average Sold Price:
$512,201 $475,995 7.61%
Median Sold Price:
$450,000 $408,500 10.16%
Jan 2005 vs 2004 (LOL!!! No bubble here!)
Average Sold Price:
$475,995 $392,206 21.36%
Median Sold Price:
$408,500 $325,000 25.69%
Jan 2004 vs 2003 (LOL!!! No bubble here!)
Average Sold Price:
$392,206 $328,128 19.53%
Median Sold Price:
$325,000 $274,950 18.20%
Jan 2003 vs 2002
Average Sold Price:
$328,128 $293,467 11.81%
Median Sold Price:
$274,950 $250,000 9.98%
Jan 2002 vs 2001
Average Sold Price:
$293,467 $277,846 5.62%
Median Sold Price:
$250,000 $218,875 14.22%
Jan 2001 vs 2000
Average Sold Price:
$274,453 $240,882 13.94%
Median Sold Price:
$215,000 $190,000 13.16%
Jan 2000 vs 1999
Average Sold Price:
$240,924 $221,283 8.88%
Median Sold Price:
$189,900 $190,000 -0.05%
Or the "holy cow" view of the January's median sold price :
2008 $395,000
2007 $456,250
2006 $450,000
2005 $408,500
2004 $325,000
2003 $274,950
2002 $250,000
2001 $215,000
2000 $189,900
1999 $190,000
What home prices "should" have done assuming 4% a year starting from 2000 :
2008 $259,891
2007 $249,895
2006 $240,284
2005 $231,042
2004 $222,156
2003 $213,612
2002 $205,396
2001 $197,496
2000 $189,900
It is worth nothing interest rates are lower, so people can afford more house.
Alexa... don't let yourself get sucked into putting too much effort into correcting lance.
As usual he doesn't have any interest in an honest discussion of the market.
"No ... it doesn't. It was "written" when interest rates where in the double digits."
This statement is quite simply false. I don't know if you make this stuff up or are lying or what.
Take a look at this chart:
http://www.mortgage-x.com/images/graph/fhfb_contract_rate.gif
http://tinyurl.com/yrhpot
There was a roughly 8 year period where double digit mortgage rates were the norm between 1978 and 1986. The 3:1 "rule" was in existence long before that period of high interest rates and continued to apply afterwards.
You have to imagine a time when home buyers actually wanted to pay off their house. Back in the 50s and 60s when the 2.5x or 3x salary rule became standard 30 year mortgages weren't nearly as popular as today. Many buyers chose shorter mortgage so they wouldn't have to pay as much interest on their house.
Now of course we have people that try to sell houses like they are used cars. Sell the payment not the price right?
Sooner or later you have to pay that money back. You can go on and on about payments, but in the end you have to pay back the money you borrowed if you ever want to truly own your house.
Well I didn't just make it for Lance...I made it for others to see my thoughts and to even "prove it to myself". :)
leroy, alexa,
I do agree my calculations are a little on the frugal side, but as leroy said I actually do want to pay off my house.
I have learned some very important lessons in life that have helped me become financially sound.
1) Unlike the current mantra, Debt is NOT wealth. Debt can be used to gain wealth (such as starting a business, etc), but it is not wealth.
2) Always live below your means. Just b/c I can "theoretically" afford a 300k place, doesn't mean I should do it. Theory and the real world clash all the time, life happens, kids get sick, cars break down, natural disasters happen, etc.
3) Always, always save at least 10% of your salary. See #2 above. Save while times are good to live well while times are bad.
As a side note, #3 is why I dislike our current monetary policy in the US (good 'ol inflation), it punishes people for being fiscally smart, and encourages debt. What does society learn in general when the Feds bailout stock markets, housing etc? It's a conditioned response. Society learns that they don't have to take responsibility for their actions b/c someone will bail them out. Thus, there is no incentive to save for a rainy day (as a society), b/c someone will bail them out.
What they unfortunately don't realize is that just like with crime, there is hardly ever a cop around at the moment of the crime-and thus people should learn to be able to defend themselves financially.
Warren Buffet is a very conservative person. It has paid off well for him, and he has made people wealthy with those conservative decisions. Many of the current mortgage owners are so broke they are having to throw the keys at the door and drive off.
You are a very wise engineer,gte811i.
I dont care what the prices drop to - I cant raise a family in this city.
I cant afford a mansion in McLean and I wouldnt like the people there anyway.
I cant deal with the traffic to live further out and I cant live with the human congestion/crime/prices living further in.
I look forward to leaving in a year.
Very constructive comments, Stealth4. Have fun wherever you go...
zapoteca, my math was fine, my wording was incorrect!
Tax Credit was the wrong term, but 30% of the money you spend in mortgage interest will be returned to you if you are in the 30% tax bracket - just like I said.
"zapoteca, my math was fine, my wording was incorrect!
Tax Credit was the wrong term, but 30% of the money you spend in mortgage interest will be returned to you if you are in the 30% tax bracket - just like I said."
Doug my man - I hate to tell you but this just isnt right. The math and terminology you are using are consistent for a tax CREDIT, but thats not the same as the deductibility granted under the IRC. It isnt as simple as a dollar for dollar calculation - as zapoteca pointed out, it reduces your taxable income, but then you only get a percentage of that.
Just to use round numbers, say you made 100K, were taxed at a flat 20%and paid 5K in mortgage interest. Your example implied taxes would be calculated as follows:
100K X 20% = 20K
20K - 5K (interest) = 15K in taxes.
Thats not correct, under this example the IRC works as follows:
100K - 5K (interest) = 95K
95K X 20% = 19K in taxes.
Thus, the 5K I paid in interest deductions over the course of the year really only worked out to be a 1K benefit for me.
See the difference?
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