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I think that placing too much emphasis on rental parity may be a bit short sighted. Yeah, maybe you can buy for less than you can rent, but that is right now. That doesn’t mean that you may not lose all your equity due to deceasing values or become upside down in the future.
I believe prices will fall further, and they will stay low for quite some time, but that doesn’t mean a buyer from today will necessarily lose money. Anyone buying with a cost below rental parity can rent the property out until prices come back. That stands in stark contrast to those who bought during the bubble who need to sell in order to stop the monthly bleeding.
IMO, prices will get much more sticky on the way down once they fall below rental parity because buyers at those price points are not nearly as distressed as buyers to paid more than rental parity.
“Anyone buying with a cost below rental parity can rent the property out until prices come back.”
Fairly good point, but ... the owner has to live someplace. And from a strictly financial standpoint, there can be a large opportunity cost to tying up or losing down payment equity.
I don’t know if comparing recent prices to bubble prices is relevant either. My wife likes to tell me she saved money by not buying something. I never quite know how to respond.
“And from a strictly financial standpoint, there can be a large opportunity cost to tying up or losing down payment equity.”
That’s one of the reasons we include the opportunity cost in our cost of ownership calculations. Most people ignore this cost.
BTW, I went to Peter Schiff’s presentation last week. I am starting to change my mind about gold, at least until we hit the top of the next interest rate cycle. We are going to print our way out of debt and devalue our currency. Gold will do well until interest rates move much, much higher.
” ... at least until we hit the top of the next interest rate cycle. We are going to print our way out of debt and devalue our currency. Gold will do well until interest rates move much, much higher.”
Well, it seems we agree on something.
went to the Barclay presentation as well. i want to see Planet Reality eat his words with a fork and spoon when this treasury bubble bursts, we default, and rates are in the stratosphere.
What did schiff say some 40% of US debt rolls over in the next year? USA = Option ARM on a teaser rate.
Is it true Gerald Celente and clients lost $ during this MF Global BK because they were invested in PAPER gold? They were betting on paper, not gold. That is a big argument for owning physical PMs only.
Eric sprott has a portfolio allocation of 80% PMs. I think his net worth is > $1B. He might be one of the wealthiest on the planet once this debt/fiat currency debacle has run its course.
http://www.youtube.com/watch?v=W02n-wjPqNE&feature=feedu
Celente paper gold kneecapping.
If you are going to invest in gold, physical is the only way to go IrvineRenter. Welcome aboard. the occupy movement would be much wiser and more effective to just stay home and swap cash for gold coins. Capitalism cannot exist / will not function efficiently without honest money and market interest rates. All else results in massive distortion and economic inefficiency.
I remember the gold debates in the forums on this blog back when. as we exit the eye of this economic hurricane, gold prices - ‘we aint seen nuthin yet’
Maybe I missed this, but what are you using for you average rental prices? Where did you come up with this number?
all I saw is this:
“For example, if an area or zip code has an aggregate rent of $2,500—a common number in Irvine—I will assume $2,250 is available to make a mortgage payment.”
I am getting the rental numbers straight from the MLS data. This data does not include Irvine Company apartments.
Do you think that is an accurate way to get rental data? Not that I know any better way but I have never ever looked for rentals through the MLS. I would guess that a very large number of rentals are not posted on the MLS or at least it is only the higher end homes that may typically be rented through the MLS. Don’t most people look for rentals via craigslist, westside rentals or other means?
Again I am not really sure, but you could be using a vastly inaccurate input for rentals into your analysis. Just questioning your data. Wondering if garbage in, garbage out is happening here.
A significant number of rentals are leased outside the MLS, but a great many are on the MLS as well. There is no shortage of rental data. In fact, there is often more rental data than sales data. It’s easier to rent a home than it is to sell it. With so many data points on the MLS, I have to believe it is a reasonable representation of what is going on in the market.
Jumbo Mortgage Holders Pose Highest Risk of Strategic Default
Los Angeles Times (11/13/11) Harney, Kenneth R.
A new Moody’s study has determined that homeowners with jumbo mortgages now constitute “greater strategic default risk” than any other type of borrowers. A steep number of jumbo loan owners continue to be dogged by negative equity. More than 50 percent of the jumbos that Moody’s analyzed in which owners are still making payments have home market values lower than their outstanding loan balances.
http://www.latimes.com/business/la-fi-harney-20111113,0,200940.story
Sorry. The concept of “rental parity” based only on a comparison of ‘average rentals via MLS’ and the calculation of what that amounts to in terms of a 30 year, conventional fixed rate loan with no PMI, is, simply, too simple for single-family homes in Orange County. Even as long ago as 1975 some single family homes in the county had HOA fees. And that was long before Mello-Roos became a resident. Yes, there are some tax benefits on the interest side, but HOA and Mello-Roos, and insurance are like throwing money into a hole, unless you really want to live there. But to suggest that a comparison between a rental payment and only the mortgage portion of the cost of ownership being EQUAL is not accurate. MLS data on rentals is more unreliable than for sales. And to exclude TIC rentals is simply missing the point. Housing prices in Irvine are being artifically inflated (yes, another balloon) because of control of the market to an extent that exists nowhere else simply because TIC owns 39,000 apartments in Irvine alone. They are inflating their own bubble in order to continue to inflate the value of their land, retail investments, commercial investments, etc.
Perhaps you are right, but it is the best methodology I could develop with the data available. Plus, it matches what we have been seeing on daily posts for the last few months. Most of the properties I profile are selling at or below rental parity.
You may be wrong about that rental figure. This is a big house, so you’d be looking for a family rental—and the house is right next to the drug-dealer’s park. I sure wouldn’t rent it for $1800. There’s a good reason properties over there are now like $100k less than properties on the other side of the railroad, or the other side of Yale.
If you can find a 3 bedroom single-family detached home anywhere in Irvine for under $2,000, please provide the link. I can’t locate one on Craigslist or on the MLS. Even the Irvine Company’s three bedroom apartments rent for more than $2,000.
“drug-dealer’s park” In Irvine??
good question. There’s a park near the house but it’s always the usual Irvine stuff: basketball, barbecue…etc. A detached SFR house in this part of Irvine will rent for at least $2,200 a month. It’s hard to find even a 3-bedroom condo for less than $1,900.
I think that Carl Pham guy is spreading rumors and only he knows why.