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The Sky is Falling
April 3, 2006 11:46 AM   Subscribe

I've become obsessed with the idea of the Real Estate Bubble. I don't even live in NYC or SF, but I must read Brownstoner, Curbed, and Curbed SF every day. For more local, but less spectacular, chills I read Urban Trekker. And for a more global view of the gloom: The Matrix, The Housing Bubble, and Bubble Meter. Finally, for one last depressing shot, America's Overvalued Real Estate tracks down the most depressingly overpriced "pieces of shit" across the country. Related discussions here, here, here, and (premature or prescient?) here.
posted by ereshkigal45 (87 comments total) 2 users marked this as a favorite

 
Itulip.com ran an article this week with a specific example of a local crunch, and just how bad they can get.
posted by Malor at 12:01 PM on April 3, 2006


Real estate bubble on Wikipedia
posted by Sharcho at 12:03 PM on April 3, 2006


Heh, the "cute spanish" really does have a nice view, though. A third of a million dollars is a bit much, though. It's really amazing that prices could get so high.
posted by Paris Hilton at 12:03 PM on April 3, 2006


I don't think the bubble will burst unless until the economy as a whole tanks. That could be a while, or next year... but I think most of us will have more to worry about then than just that we owe more on our house than it's worth.

I do feel like the bubble can't swell much anymore. With housing prices as they are, non-homeowner friends are pretty much fucked these days, with 2-3 bedroom houses in shitty neighborhoods going for over $200K, and looking at $350K to get into a place in a good school district -- and you can expect to put another $25-50K into those. How are you supposed to swing that?

There was an article locally (seems to be gone form philly.com, sorry) last week that was saying that all new home development in the Philadelphia region is concentrated on $500/sq foot projects -- thats $350K for a one bedroom condo.

Who has money for that? If I hadn't bought a couple years ago, I'd probably be looking at a life of renting, or somewhere else in the world.
posted by illovich at 12:06 PM on April 3, 2006


On a sidenote, many people who jumped in headfirst and took ARMs to get by are starting to suffer...A couple I know are in foreclosure. Very sad.
posted by poppo at 12:09 PM on April 3, 2006


Of course, if rural areas cruch because of gas prices, the urban market will tighten up even more.
posted by Paris Hilton at 12:13 PM on April 3, 2006


I grew up in SF. What prompted this post was hearing from a friend that he knew someone who had just paid 900K for one of those awful condos built in the early 70s in Diamond Heights. Diamond Heights!

I bought 13 years ago, so any money I lose will be theoretical. Still, I'm obsessed with its loss.
posted by ereshkigal45 at 12:13 PM on April 3, 2006


Pretty soon you'll be able to trade futures and options on housing indices.
posted by milkrate at 12:14 PM on April 3, 2006


Fixed Rate, baby.
posted by grabbingsand at 12:15 PM on April 3, 2006


That iTulip article was pretty interesting (and chilling).

I also loved looking at overvalued.com, although it was tough for anything to be a more egregious example of housing inflation than the ice cream stand.
posted by OmieWise at 12:17 PM on April 3, 2006


Anything for washington state?
posted by uni verse at 12:18 PM on April 3, 2006


I don't get why the housing bubble is such a big deal. I mean, yes, traditionally, the home was your biggest investment. You could improve it over the years, or just kind of sit on it and allow it to gain value on its own naturally. Of course, this wasn't always the case - the neighborhood could go downhill or someone could happen upon a dioxin dump in your backyard. Still, real estate was considered a "safe" investment.

What I don't understand is this - why don't people just invest in something else? There are plenty of safe investments out there. Sure, renting sucks - I know this firsthand, as a renter. There's a disencentive to fixing up your place, because you're really only doing favors for your landlord, who, due to the real estate bubble, is probably gouging the shit out of you. This can be dispiritng. However, if you're making enough money on other investments, why is renting so bad?
posted by Afroblanco at 12:20 PM on April 3, 2006


There is no bubble.
posted by notmydesk at 12:21 PM on April 3, 2006


No mortgage interest tax deduction...
posted by sfts2 at 12:23 PM on April 3, 2006


A friend of mine did a very detailed analysis of the cost of owning vs. renting when moving back to Phoenix - which has been one of the primary "bubble" markets. It was a no-brainer for him to rent since he could get find an apartment just as nice as a condo in his price range for a few hundred dollars a month less. But even if he eliminated the disconnect between housing prices and rental rates, buying was by no means the obvious choice. He found that he would need to assume very healthy pricing appreciation over the long-term to break-even - something like 8% annual growth or more. His model factored in about everything he could think of - tax benefits, property tax, housing association costs, maintenance estimates, etc.

When he tried to bring his findings up during discussions with his friends in the city, the most common response was something along the lines of: "But owning your home is one of the best investments you can make." Of course, no actual analysis went into this statement - it is more emotional or tautological than anything.
posted by mullacc at 12:23 PM on April 3, 2006




In Canada, interest paid on your home's mortgage is not tax-deductible. This changes the balance of how much mtg debt people are willing to carry.
posted by raedyn at 12:36 PM on April 3, 2006


Anything for washington state?

Seattle Bubble
posted by ereshkigal45 at 12:38 PM on April 3, 2006


Or, you could move to the South, where the people are nicer, the weather is better, and you would have difficulty spending $200/sq ft without being ostentatious.

For instance, the town I am about to move to you can buy a 5,500sq ft house for $875,000. On a lakefront. With a private pier . That's only $160/sq ft.

We're putting an offer in today on a brand new construction in a quiet, established neighborhood, 3br 2ba, all brick, hard wood floors, 2 car garage, level lot on a cul-de-sac, etc for $96/sq ft. And I still consider it overpriced, but we're paying for the neighborhood.
posted by Ynoxas at 12:41 PM on April 3, 2006


Washington City paper has a section every week (not online though) called "Celebrating DC Real Estate boom" where they show a house and it's before and after pricing, usually jumping $200K-300K.
posted by destro at 12:44 PM on April 3, 2006


Ynoxas, try moving just a hair to your west, like say Nashville, and see if you can find your super cheap housing. Housing is cheap where you live (if you go by your profile) because you live in the sticks. That is pretty much true anywhere in the country, even the north. In urban places, property values go up because you can't just buy a stretch of farmland and plop down a house.
posted by Pollomacho at 12:55 PM on April 3, 2006


Check out the graph in this post on the Economist's View weblog showing real home price (index) vs. time.
posted by pitchblende at 12:58 PM on April 3, 2006


When he tried to bring his findings up during discussions with his friends in the city, the most common response was something along the lines of: "But owning your home is one of the best investments you can make." Of course, no actual analysis went into this statement - it is more emotional or tautological than anything.


People who go on about how home-buying is the "best investment they ever made" quite often haven't made any other significant investments. If you suck at saving money but are responsible enough to meet existing monthly expenses, buying a home is the only thing that will save you. You're forced to put that extra $200 to $700 away every month.
posted by orange swan at 1:01 PM on April 3, 2006


Or, you could move to the South, where the people are nicer, the weather is better, and you would have difficulty spending $200/sq ft without being ostentatious.

"Nicer people" and "better weather" being equally subjective of course.
posted by Armitage Shanks at 1:09 PM on April 3, 2006


Wow, this is a really misleading graph. I love these examples of "how to lie with statistics" and this is a great one.



Lesson: you can insinuate an "obvious" correlation if you're allowed to shift the x-axis of 2 different data sets. To add to the confusion, make one data set cover 10 years, while the other covers 25 years. Sheesh. Seems pretty dishonest to make a chart like this.

(Source: Economist, via Wikipedia)
posted by gemini at 1:12 PM on April 3, 2006


During this housing bust my real estate investment has made a 40% return while my small portfolio has returned between 5 and 10%. Additionally, I now pay less per month than I did as a renter and the money I do spend monthly on housing goes directly towards building my equity as opposed to my landlord's. So, though I'm no financial expert nor real estate tycoon, I can confidently say that buying a home was the best investment I ever made.
posted by Pollomacho at 1:16 PM on April 3, 2006


January 1st, 2100
posted by Potsy at 1:17 PM on April 3, 2006




Better weather... if you have air conditioning.
posted by Artw at 1:19 PM on April 3, 2006


"Past performance is not necessarily indicative of future results."
posted by mullacc at 1:19 PM on April 3, 2006


Pollomacho: What bust? I assume you mean boom? Anyway, there is a huge disconnect between the statement "buying a home was the best investment I ever made" and "buying a house is the best investment a person can make." Maybe you got lucky. Or maybe you did a poor job choosing your portfolio (portfolio of what?). Or maybe the time horizon hasn't been long enough to judge.
posted by mullacc at 1:24 PM on April 3, 2006


Yes, there's a bubble. How can the average house be worth $240k and the average American earn $30k-ish? By most counts, the overwhelming number of Americans aren't financially qualified to buy a house.

I know when I looked at Zillow (which admittedly has some holes in the data) for my house, I've already peaked, and by projected out my homes curve to the national market, I get May of this year.

The biggest danger isn't the homeowner who can't get out, but rather the jobs lost. I recall hearing that 40% of the jobs "created" post 9/11 were homebuilding related (Home Depot, Bed Bath Beyond, Carpet Manufacturing, etc.). When the bubble breaks or deflates, presumably those jobs go with them.

BTW, pure conjecture here - the "American Dream" of home ownership, and a mortgage, allowed the finance industry to get us through the last couple decades - now that the consumer is tapped out, and they rewrote the bankruptcy rules to (even more) protect industry, they're about to let the US homeowner get screwed and bare all the risk for their (government) financial irresponsibility.
posted by rzklkng at 1:31 PM on April 3, 2006


Gemini: Seems pretty dishonest to make a chart like this.

Well that remains to be seen. You can't deny what happened to values in Germany and Japan. The numbers are clear and the trends are disturbing.
posted by Skygazer at 1:35 PM on April 3, 2006


I can't even tell what that chart is supposed to be about. I see three lines, but only two keys. And they're comparing diffrent timespans? What?
posted by delmoi at 1:44 PM on April 3, 2006


delmoi: yes, it's different time frames. They're showing an average of home prices in the last 10 years in the 3 named "bubble" states, compared to the first 10 years of the Japanese property bubble, along with the next 15 years of the Japanese bust. The 100 line is only highlighted because... well who knows why, but it's an axis, not a data line.

I don't think it's so deceptive, as long as you understand that correlation is not causality.
posted by rkent at 1:47 PM on April 3, 2006


Yeah, I'm a believer; I'm watching all the condo-conversions and crazy prices here in san diego, and it seems quite precarious to me. I wouldn't be at all suprised to see the prediction on that graph come true...

Nonetheless, the graph looks like one of the examples out of How to lie with statistics. Its just a weird change of the x-axis that takes a while to parse, especially if you don't read the fine print. And changing the scales or the offsets of the axis for each dataset is a sneaky thing to do on a chart.
posted by gemini at 1:52 PM on April 3, 2006


now that the consumer is tapped out, and they rewrote the bankruptcy rules to (even more) protect industry, they're about to let the US homeowner get screwed and bare all the risk for their (government) financial irresponsibility.
posted by rzklkng at 4:31 PM EST on April 3 [!]


Amazing the rope the "finance industry" (i.e., Banks) have been able to tie around the country's throat, when they're alllowed to practice legal loan sharking (Credit cards), charge 30% interest and $39 penalty fees and build up a billion dollar lobbyist warchest that allows them to rewrite bankruptcy laws and screw people coming and going.

When values start sinking and consumers are looking at worthless debt in the 100 k's and no chapter 11 relief, things are going to get very interesting. It's (still) about follow the money. Who wins boom or bust?
posted by Skygazer at 1:53 PM on April 3, 2006


No mortgage interest tax deduction...
posted by sfts2 at 12:23 PM PST on April 3 [!]


Yea, when does THAT happen?
posted by rough ashlar at 1:53 PM on April 3, 2006


The timespans are NOT different. The Japanese numbers cover 25 years. The US+UK numbers cover 10 years.

If you notice, the US numbers stop at 10 years, where the Japanese numbers continue to the end of the graph. So the Y axis is perfect.

The X axis has to be in different scales, because the monetary units are different. It appears very likely to me that it's simply a percentage graph, where the base figure in each case is considered '1', and everything else is treated as a percentage of that base price.

In other words, that graph is not misleading at all. Gemini is criticizing without understanding.
posted by Malor at 1:57 PM on April 3, 2006


(in escrow)
posted by dontoine at 1:59 PM on April 3, 2006


But isn't the population of Germany and Japan getting top heavy (old people) and an increasing number of homeowners are dying?

Whereas, in the US (and Canada), immigration more than adequately compensates for the deceased...
posted by PurplePorpoise at 1:59 PM on April 3, 2006


I just put in an offer on a house today, sigh... But we're looking at it as a place to live for the next decade or two, not as an investment.
posted by The corpse in the library at 2:03 PM on April 3, 2006


The bursting of the housing bubble is history, not futurology. While year-over-year prices are moderately up, it's because we're working off the incredible price leaps in the second half of 2004 and first half of 2005. The aggressive market ended in September 2005, with the simultaneous end of summer buying and the shock of Katrina-driven gas prices.

Whatever sequential gains which have been seen since November 2005 or so (the point at which most closings represented September 2005 or later contracts) have been at or below the rate of inflation, and many hot markets are already falling sequentially. The bigger story is in the HUGE increase in inventory -- reflecting a large group of sellers stubbornly trying to get a higher price, and hoping that buyers will crack in the second quarter (now through June 30th) when they "have" to sign contracts in order to move school districts, etc. I really doubt that buyers will crack -- because most buyers think that prices will fall, and that psychology is unbeatable.

We're most likely moving into a mildly deflationary period in prices -- several years of of low-single-digit declines in the hottest 2004-2005 markets, perhaps bringing them down by a total of 10-12% from the mid-2005 highs. Ordinarily this would be no problem -- there certainly wasn't rioting in the streets in LA when prices fell at about that rate in the early 1990s. (Well, there was rioting, but I don't think Rodney King was terribly exercised about his home equity.) IO and negative amortizing mortgages, though, will make this hurt a bit more for a few people, but those people really only have themselves to blame.
posted by MattD at 2:05 PM on April 3, 2006


Malor: The X-axis (horizontal) has a different offset for the two data sets. IOW: "years since base date" is a somewhat misleading way to label a graph, when you've defined different base dates for each dataset. But its a minor complaint. Still... if someone were using this to really try to convince me of something, I'd be annoyed.

/derail
posted by gemini at 2:06 PM on April 3, 2006


The two lines on the graph are in proportion and are clearly labelled in bold Years from base date - the base dates are printed not once but twice on the graph itself - I don't see anything misleading here. - Tufte's first book is a good reference for graphing techniques.
posted by Lanark at 2:15 PM on April 3, 2006


Boy the overvalued blogger sure has a hate on for small houses.
posted by Mitheral at 2:16 PM on April 3, 2006


Another thing that's going to pop the bubble hard. Some homeowners struggle to keep up with adjustable rates.

All those people who have zero-down, interest only loans? They're going to be screwed. All those who refinanced in the last three years, they're going to be screwed.

When all those people get screwed, housing becomes a buyers market. This means all those people in construction? They're screwed. Can't afford the payment? You may well be screwed, as the number of houses on the market that aren't selling increases, the prices go down, and suddenly, you're underwater.

Enough people underwater, who can't make the payments, they start walking away, well screwed. The banks get what they really don't want -- property. They sell at fire-sale prices in order to make something good from the loan. That drives the market down further. More people are underwater, and get screwed. If the banks get stuck with enough unmovable property, lots and lots of people get screwed.
posted by eriko at 2:20 PM on April 3, 2006


Another thing that's going to pop the bubble hard. Some homeowners struggle to keep up with adjustable rates.

All those people who have zero-down, interest only loans? They're going to be screwed. All those who refinanced in the last three years, they're going to be screwed.

When all those people get screwed, housing becomes a buyers market. This means all those people in construction? They're screwed. Can't afford the payment? You may well be screwed, as the number of houses on the market that aren't selling increases, the prices go down, and suddenly, you're underwater.

Enough people underwater, who can't make the payments, they start walking away, well screwed. The banks get what they really don't want -- property. They sell at fire-sale prices in order to make something good from the loan. That drives the market down further. More people are underwater, and get screwed. If the banks get stuck with enough unmovable property, lots and lots of people get screwed.
posted by eriko at 2:20 PM on April 3, 2006


Oh, yeah -- and when you get truly screwed, you find out about the new bankruptcy laws.

Life is going to get very bad for a good number of people.
posted by eriko at 2:22 PM on April 3, 2006


Pollomacho: What bust? I assume you mean boom? Anyway, there is a huge disconnect between the statement "buying a home was the best investment I ever made" and "buying a house is the best investment a person can make." Maybe you got lucky. Or maybe you did a poor job choosing your portfolio (portfolio of what?). Or maybe the time horizon hasn't been long enough to judge.

OK, how about this: buying a home is the best investment a person can make. You have to live somewhere, why pay for someone else's property? You don't have to buy an overpriced crack house. The odds of a corporate bankruptcy or a stock market crash over the long term is far greater than a revolution or disaster making a land investment go to null value. Buying an inflated-priced condo is certainly another story than tangible dirt that you live on.
posted by Pollomacho at 2:25 PM on April 3, 2006


The obvious message of the graph is this:

Japan's house prices grew for ten years, then suddenly tanked. The US, Britain and Australia's house prices have been growing now for ten years. Draw your own conclusion.

It's really not deceptive at all, in the "how to lie with statistics" sense -- its real flaw is that it doesn't account for Japan's aging population.
posted by reklaw at 2:32 PM on April 3, 2006


reklaw: you're right. I'm sensitive to stuff like that after spending a year trying to teach 9th grade algebra. So many folks have a really hard time getting simple graphs. Messing with the axes can be pretty confusing. But probably not for most mefi (and economist) readers.
posted by gemini at 2:40 PM on April 3, 2006


why would an aging population matter? Less demand for housing?
posted by gemini at 2:41 PM on April 3, 2006


I know very little about real estate, investing, and investing in real estate. I bought my home about six and a half years ago, before the bubble really began to grow in my area. Fixed rate loan, refinanced later at another, lower rate (again, fixed rate). If this bubble bursts, what does it mean to me? Anything in the real world sense? I am not (as) interested in the investment value as I am in owning a place I can say is truly my own. (or should I take this to ask?)
posted by [insert clever name here] at 2:48 PM on April 3, 2006


reklaw, Japan's aging population had very little to do with this problem. Their huge economic bubble did. Remember when they were saying that Tokyo was worth more than the entire state of California? That's a bubble. Their economy suffered terribly for fifteen years, and only started picking up steam when their central bank started trying to prop up the yen against the dollar.... that meant printing yen and buying dollars, which gave a big, semi-false, boost to the Japanese economy.

After 15 years of suffering, their economy was strong enough to take a little abuse, and in fact probably needed the jumpstart, but the bank's insistence on accumulating large quantities of dollars ultimately will hurt their country a lot. At this point, they're in a lot better shape than we are... recessions build strength in an economy, because companies have to become very efficient to survive. But their central bank is still abusing them, and continued mass buying of US dollars is likely to have bad results over the long term.

After their bubble popped, the fundamental mistake their government made was trying to prop up all the 'zombie companies'... companies that weren't profitable, and never would be. That prevented new, healthy companies from arising and moving into those market niches, and greatly delayed their recovery. In other words, instead of accepting a lot of short term pain, they inflicted less intense, but much more pronounced, long-term pain.

Simplistic answers like 'aging population!' just mean that you haven't really looked at the problem.

gemini: Of COURSE the base dates are different in that graph. The Japanese bubble runup started a lot earlier than ours did. The two graphs look eerily similar is because they are eerily similar. The fact that one started 15 years later means nothing.

You're jumping up and down because you don't want to believe the (obvious) conclusion.. that we have a BIG, BIG problem. That graph is solid, and you should be learning something from it. Your criticisms seem deliberately obtuse to me.
posted by Malor at 2:50 PM on April 3, 2006


clevername: owning one house, and not having it mortgaged to the hilt, is likely to be fairly safe. Just don't get into the property speculation thing.

If you bought six and a half years ago, and your job is solid, you should be fine. Just don't think of your appraised home value as being 'real' value. If you lose your job and are forced to sell that house, you will almost certainly not get as much as it's 'worth' now. As long as you're not counting on that money, and your loan is a low percentage, you're likely to be okay.

You might want to read the link I posted in the very first comment, about what happened in a small local crash.
posted by Malor at 2:53 PM on April 3, 2006


...that we have a BIG, BIG problem

I agree. I'm just nitpicking about graphs and axes. Don't mind me.
posted by gemini at 2:55 PM on April 3, 2006


Yeah, uh, me too.

For "aging population", substitute "general bad economic stuff" if you want (although I'm not sure how you'd plot that on a graph). My point was that the deceptiveness of that graph, as far as it is deceptive, lies in the fact that it draws a parallel between events in the UK/US/Australia without paying any attention to Japan's circumstances. It paints Japan as some kind of "this could happen to you!" example without saying anything about why Japan's line did that.
posted by reklaw at 2:59 PM on April 3, 2006


That's true, reklaw, but all they're doing is graphing price-over-time. It's just a graph, you can only say so much with it. By itself, it proves nothing: you're right about that.

If you dig deeper, though, you'll find many other parallels, and the more you dig, the more uptight you're likely to get.

Nobody here is claiming that that graph alone predicts doom. But that graph, plus a whole LOT of other data that's available if you go look, says that things are badly amiss.
posted by Malor at 3:04 PM on April 3, 2006


Pollomacho: You sound like a real estate seminar huckster. You've taken the ideas of diversification and risk/reward and thrown them out the window. Ownership in a single piece of property is very similar to an investment in a single company's stock - yes, that company may go bankrupt or otherwise fall apart and cause value to be destroyed. But all sorts of things could happen to your house or your neighborhood. Owning a house is not the same as owning a diversified portfolio of real estate. Perhaps the probability of your house losing value is probably less than the risk of a specific company going to hell - that will be reflected in the greater returns expected from the stock investment. Most people invest in the stock market through diverse portfolios, but almost no one has a diverse real estate portfolio. A diverse real estate portfolio, over the long-term, is likely to have a lower expected rate of return than the stock portfolio because of the reasons you mention - this does not make one investment better than the other, just different.

A house can be a person's best possible investment if they are like the person orange swan mentions, i.e. someone who does not have the discipline to save except when that savings comes in the form of a monthly mortgage bill.

I'm not saying you're wrong, but I am saying that it is not clear-cut and cannot be applied to every scenario without some level of basic analysis. Most people don't do the right kind of analysis, but simply buy into the tautology.
posted by mullacc at 3:07 PM on April 3, 2006


From overvalued: "The house is just 20 ft. wide by 38 ft long. Most people have bedrooms bigger than this house." Hands up everyone whose bedroom is 760 sq ft.
posted by Mitheral at 3:37 PM on April 3, 2006


This idea of buying a house as a way to "save" money doesn't make sense to me. You are necessarily speculating on a rising real estate market if, like most of us, you aren't paying in cash and you can't guarantee that you'll be living in the house for 15+ years.

Let's say you buy a $400,000 house. Let's say you put down 20%. Let's say you did the "responsible" thing and got a 30-year fixed. Let's say your interest rate is 6.75%.

Using a basic mortgage calculator, your totals are approximately:

Year Interest Principal Balance
2006 $21,495.77 $3,410.39 $316,589.61
2007 $21,258.31 $3,647.85 $312,941.75
2008 $21,004.32 $3,901.84 $309,039.91
2009 $20,732.64 $4,173.52 $304,866.39
2010 $20,442.05 $4,464.12 $300,402.27
2011 $20,131.22 $4,774.94 $295,627.33
2012 $19,798.75 $5,107.41 $290,519.91
2013 $19,443.14 $5,463.03 $285,056.88
2014 $19,062.76 $5,843.41 $279,213.47
2015 $18,655.89 $6,250.28 $272,963.20
2016 $18,220.70 $6,685.47 $266,277.73
2017 $17,755.20 $7,150.96 $259,126.76
2018 $17,257.30 $7,648.87 $251,477.89
2019 $16,724.72 $8,181.45 $243,296.44
2020 $16,155.06 $8,751.10 $234,545.34
2021 $15,545.74 $9,360.43 $225,184.91
2022 $14,893.99 $10,012.17 $215,172.74
2023 $14,196.87 $10,709.30 $204,463.44
2024 $13,451.20 $11,454.97 $193,008.48
2025 $12,653.62 $12,252.55 $180,755.93
2026 $11,800.50 $13,105.67 $167,650.25
2027 $10,887.97 $14,018.19 $153,632.06
2028 $9,911.92 $14,994.25 $138,637.81
2029 $8,867.90 $16,038.27 $122,599.54
2030 $7,751.19 $17,154.98 $105,444.56
2031 $6,556.72 $18,349.45 $87,095.12
2032 $5,279.09 $19,627.08 $67,468.04
2033 $3,912.49 $20,993.67 $46,474.36
2034 $2,450.75 $22,455.42 $24,018.94
2035 $887.22 $24,018.94 $0.00


* Total Interest:$ 427,185.01

In other words, you are paying the bank app. $20K a year for the first 10 years for the privilege of investing in real estate. If the market goes down in that time . . . well, it could be bad.
posted by _sirmissalot_ at 3:59 PM on April 3, 2006


I think that the best argument in favor of home-ownership as an investment is that, if all else fails and the market totally tanks, you can still live in your house in a way that you can't live in 293 shares of General Mills. However, this only holds true if you actually own your house. If you're paying off a mortgage, things can still go very wrong.
posted by Afroblanco at 4:01 PM on April 3, 2006


sirmissalot: The basic assumption is that your mortgage payment = what you would have paid to rent. So, in your example, that $3,410.39 in principal paid during year one is what you "save" in the form of residual equity value of the house. If you had been renting, that money would be going to someone else.
posted by mullacc at 4:04 PM on April 3, 2006


mullacc: it costs me $1,000 less to rent my house than it would for the mortgage payments (I'm in Seattle). We put aside that $1K a month, so actually I'm making money whereas if it was a mortgage I would be paying that extra $1K to the bank.

When a mortgage would cost less than rent, then I do think you should buy. It does suck to rent and I'd rather be building equity right now. But as for saving money . . . that's what I'm doing by renting.
posted by _sirmissalot_ at 4:10 PM on April 3, 2006


Pollomacho: Yes, I do live in a non-urban environment, that is kind of my point. It's not exactly "the sticks" but it is a small town by comparison to the north, yes.

But, even in Nashville (which many northerners would still consider a smaller city), where I work until the end of this month, very nice homes in the exclusive neighborhoods where country musicians live still fall in realistic cost ranges.

$500/sq ft. is simply unbelievable to me.

Half a million dollars will buy you more house than you and a family of 4 could ever need anywhere in the state of TN if you are willing to be flexible within 1/2 mile where you live.

And it really is nice here. Honest. We get all 4 seasons but in realistic quantity. The storms can be bad out in west TN though, as I'm sure you all have read by now. Too flat.

I had a fairly strong interest in moving to Arizona about 2 years ago (motorcycling year round baby!), but the housing markets in Phoenix and Tuscon frightened me away. My friend in Tuscon just had 40% appreciation on his house in 2 years. That is not sustainable.
posted by Ynoxas at 4:16 PM on April 3, 2006


sirmissalot: In this case, "saving money" = "building equity." If you took the $1k difference between your current rent and what the mortgage would've been and spent it on hookers and cocaine, well, you won't be saving anything (in the financial sense, though your hilarious stories may be of greater value in a different sense). But if you had just been making those mortgage payments, it would be forcing you to save money (in the form of equity).

I was actually arguing up-thread that in situations like yours, even if the real estate market is appreciating, you may be better of renting while investing what would have been the downpayment and that monthly difference between the hypothetical mortgage and your actual rent.
posted by mullacc at 4:21 PM on April 3, 2006


Along with the new bankruptcy laws, there's another gotcha for all the upside-down mortgagors and/or foreclosures:

If you do a short sale (bank sells your house for less than what you owe and forgives the rest), the "forgiven" debt is considered taxable income.

Say you have an I/O mortgage for 600K. You lose your job and have to move. Unfortunately the real estate market has dived and the house is now worth 500k. After closing costs and commissions the sale only nets 480K to the bank.

The bank then files a 1099 with the IRS stating 120K of taxable income to you.
posted by de void at 4:38 PM on April 3, 2006


On the radio the other week here in Vancouver they were saying that 8% of the area home buyers take out "interest-only mortgages". !!!.

That means that they are not, in any way, paying down the principle, and they are effectively paying rent to the bank, taxes to the government, repairs to a contractor and nothing to themselves. When interest rates rise, which they certainly will, those people will be foreclosing on their astronomical homes that were bought at extremely high prices.

The bank, trying to recoup the mortgages, will be forced to either sell at lower prices and special rates or end up trying to rent the homes out through a property management group.

Big impact on the whole market for just a few idiots who can't balance their chequebooks.
posted by Kickstart70 at 4:46 PM on April 3, 2006



sirmissalot: In this case, "saving money" = "building equity."


Certainly true, but I think you are missing my larger point. That $3-$5K of equity you are banking each year for the first 10 years is a speculative gain. You are betting that the market will go up. It is only a real savings if the market gives it back to you, which I would argue is especially risky for the next 5-10 years--just when you are paying mostly interest. In general I think people assume 1) they are building much more equity than they are in the first decade of the loan, and 2) that "equity" is a magic term that means money in the bank.

Also note that my assumption of 20% down and a 30-year fixed are highly optimistic. In most of the most bubbly markets, the majority of loans have been much riskier.
posted by _sirmissalot_ at 5:26 PM on April 3, 2006


We have an interest-only mortgage, and none of what Kickstart70 just wrote is true for us.

"When interest rates rise, which they certainly will..."
The rate on our mortgage will never rise, because it is a fixed-rate interest-only mortgage. We are set for 30 years at the same rate unless we choose to refinance, so higher rates will certainly never be imposed on us.

"'interest-only mortgage' [...] means that they are not, in any way, paying down the principle
That's not what that means. It means that they are not yet compelled to pay toward principal. We are in the "interest-only" period, yet we pay a big chunk of money to the principal every month. Not everyone has to be forced to do what's in their own, ahem, interests.

We selected an interest-only loan because of what happens when you pay extra toward the principal, namely that all future payments are decreased every time the principal is reduced. In contrast, extra payments against a traditional mortgage eliminate payments from the end of the of the loan period. We were attracted to the opportunity to reduce future payments because it means that in a few years we can get it to where we can comfortably run our household on either one of our salaries, should children or any other situation push us that direction.

We could have bought our home with either a traditional mortgage or an interest-only mortgage, and we made a fully-informed choice of interest-only.
posted by NortonDC at 5:34 PM on April 3, 2006


The basic assumption is that your mortgage payment = what you would have paid to rent.

Actually, I think it's that (your mortgage payment - tax refund on interest paid for the year + property taxes + maintenance) == what you would have paid to rent.

Granted, over time you get less back from the interest paid, but in return for that, you don't have flaky landlords that kick you out because they're going condo or because your baby cries. Plus you can have dogs without concern for the security deposit.

Having said that, we bought a house three years ago assuming we were at the peak of the market, and having decided that it was more important to have a house for various boring reasons. Since then the prices have continued to rise, and an identical house is now going for double what we paid -- and if it sells, we're likely going to sell ours, pocket the money, and either live elsewhere or rent again.
posted by davejay at 5:50 PM on April 3, 2006


But mullac, if you are saying that you SAVE 1k a month by renting so over 30 years thats 12000*30 = 360,000, roughly the equity in the house if the markets sagged over that whole period. But if it rose thats all lost money.
posted by uni verse at 5:52 PM on April 3, 2006


M: Oh snap I forgot interest, nevermind. That means you pocketed over 700,000! You're right.
posted by uni verse at 5:55 PM on April 3, 2006


That $3-$5K of equity you are banking each year for the first 10 years is a speculative gain. You are betting that the market will go up. It is only a real savings if the market gives it back to you

The equity you are building each year is not a "gain" at all. Is it additional paid-in capital. During the first 5 years of your example mortgage, you pay down about $20k of principal. You will then owe $300k on the mortage. If you sold the house at the end of year 5 at the same price you bought it, you will get back $100k ($400 - $300k mortgage = $100k, the $80k downpayment plus the $20 in additional equity built up). Now, if the value of the house depreciates, all of that depreciation will be manifest as a deduction from the $100k on equity. And visa versa if the house appreciates in value. The $100k is an investment that may gain or lose value just as any investment might - this swing in value will be more drastic during the earlier years of the mortgage because of the leverage on the house (i.e. the relative amount of equity to debt).
posted by mullacc at 6:08 PM on April 3, 2006


I have to say the overvalued blog is pretty funny, anything under 1000sq is a "hovel" based on it's size. I've got a 750sq ft house, and it's plenty big enough for a small family. Try owning a 3000 sq ft home in New England and heating it for a winter, and you'll think 750sq ft doesn't sound nearly as bad.

I've watched the prices in Central Mass double in the past decade and yet I don't think there's a bubble here. My mortgage payment is still less than half of monthly take home pay which is well within my means, and probably even less than a rental property. There might be some new stuff that's being built and sold for ridiculous sums of money, but that's always the case, and that's always the stuff people take a bath on when the economy stumbles a bit. The economy might be bad compared to the late 90s, but it's nowhere near bad enough to cause a massive home sell off either.

If you're "investing" in real estate, I'm sure you'll take a hit sooner rather than later. But if you're planning on owning for 10 years or more, the dip in prices won't be noticable in the long term. The prices go down, they return a few years later.
posted by inthe80s at 6:09 PM on April 3, 2006


davejay: You're right. You have to take into account all the cash flows involved in home-ownership. I was just trying to simplify the equation.
posted by mullacc at 6:10 PM on April 3, 2006


My mom recently groused to me about how rising interest rates are getting her down, and thus I learned to my dismay that my mother has an ARM.

I would like to coin a phrase for those who got themselves ARMs when the gettin was good, and now face an... uncertain future:

Adjustable Rape Mortgage.

(Ok maybe it's hubris to say I am coining this, but I haven't seen it or heard it anywhere and the only Google result looks like some sort of Engrish / typo / search engine spam or something)
posted by beth at 6:17 PM on April 3, 2006


Ok sorry I dunno how to get a Google search query url without the stupid references to my browser in it. Why they need to have it in there at all, much less *twice*, is beyond me.

And now you know what browser I use. I feel so exposed.
posted by beth at 6:20 PM on April 3, 2006


I don't get why the housing bubble is such a big deal.

Here's one good reason.
posted by stavrosthewonderchicken at 6:32 PM on April 3, 2006


The housing bubble is fueled by people's ever-increasing willingness to pay ever-larger amounts of money to *not* live near Republicans.
posted by stet at 7:05 PM on April 3, 2006


The housing bubble is fueled by people's ever-increasing willingness to pay ever-larger amounts of money to *not* live near Republicans.
posted by stet at 9:05 PM CST on April 3 [!]


Wonderful. Truly witty.
posted by Ynoxas at 9:18 PM on April 3, 2006


ereshkigal45,
Even though I'm eons away from owning my own home, I found the links you posted & this thread to be very informative and will definitely be passing them on to family & friends. Thanks:-)
posted by invisible ink at 10:01 PM on April 3, 2006


Along with the new bankruptcy laws, there's another gotcha for all the upside-down mortgagors and/or foreclosures:

If you do a short sale (bank sells your house for less than what you owe and forgives the rest), the "forgiven" debt is considered taxable income.
- de void

!!!
Good lord.
posted by raedyn at 8:29 AM on April 4, 2006


invisible ink writes "Even though I'm eons away from owning my own home, "

The good news is if this crashes hard you could be a lot closer.
posted by Mitheral at 9:22 AM on April 4, 2006


> The housing bubble is fueled by people's ever-increasing willingness to pay
> ever-larger amounts of money to *not* live near Republicans.

I know any number of ghettos that could use some housing investment. That'll get you as far from the country club set as it's possible to get.

Don't all speak at once.

posted by jfuller at 12:16 PM on April 4, 2006


sirmissalot: The basic assumption is that your mortgage payment = what you would have paid to rent.

Sort of - the hopeful part of the equation is that, over 30 years (assuming a fixed-rate), your mortgage payment would remain the same while rents would go up by whatever percentage rents go up by. So it's less a ratio of mortgage to rent currently, but what the ratio would be down the road.
posted by jalexei at 1:58 PM on April 4, 2006


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