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I was at a party last night with a dozen Irvine women, so I have some anecdotal evidence to back the blue pill argument. One lady offered up that her brother bought in Las Vegas because he could get so much house for the money. I said, “Well, if he bought this year, he could easily get a decent home for under $100K because of all of the foreclosure activity.” To which she said, “Oh, this was a few years ago.” A friend of mine (who works in the securities industry) looked over at me with some alarm, so I had a feeling she knew about Vegas. So, I gave a brief description of what I knew about the foreclosures and prices, and a little more about squatting.”
Here’s the amazing part: Some of the other women said, “At least that isn’t happening here.”
I said that it was happening here. There were squatters in Irvine, Newport, etc…that hadn’t paid their mortgage/RET/HOA in years. My securities friend added that in her neighborhood a few blocks away hadn’t paid in two years and had finally lost her home a month ago. The look on these women’s faces told me that many people still don’t know. It takes time to educate yourself on this topic. I have made the time over the past 18 months to do so. Thank God!
Wow! Please excuse the typos. I really should finish my coffee before I post.
Not for ca specifically, but for us housing in general ...
I’m sure those people who had their thirty year fixed rates locked in before the 1970’s inflation did very well off their houses. Could happen again ... Rates are low at the moment and the Fed yesterday hinted that more inflationary money printing/easing is a possibility should the economy start tanking again. Meanwhile Europe is looking debt shaky a bit. While Moody’s has been busy downgrading various government debts I. Europe and the us, investors running to traditional hedges like gold, stocks, or whatever as they try to avoid holding money and bonds. Meanwhile Obama considering making Fannie and Freddie make it easier for investors to mop up excess property. Could be an inflation/housing bubble in the making ...
Should be
Moody’s downgrading various European govt debts and stating it’s reviewing US govt debt for a possible downgrade
Totally agree, the coming inflation will drive cash into hard assets such as real estate and drive prices up. For me personally, the alternative to buying was keeping $250k cash in the bank (which I now used as a down payment) and see it disappear over the years through 1% interest rates and 3% inflation. No thanks, I am not letting the Fed dilute my hard earned savings through inflation I rather invest it in hard assets.
Housing is a good investment when you are buying at or below rental parity with a 20% down payment and see inflation of 3% per year.
With the leverage you are getting a 12% per year return. You are paying down the debt at or below rental parity, and the rental parity calculation includes maintenance. You are not dealing with the large rental increases that have occurred in socal.
The thing is in Orange County housing over the past 40+ years, housing has inflated 4.5% per year. You can take any 15 year period you choose and see this, outside of buying in the obvious bubble.
At 4.5% per year that’s a 18% per year return. Housing has definitely been a good investment in Coastal southern California.
Let me add that in past orange county bubbles a peak purchase still sees around a 4.5% yoy return 15 years later.
It’s hard to believe that will happen this time, unless inflation gears up 1970s style.
Coastal CA renter here. You’re correct, but the problem I run into is the rental parity equation. There’s a townhouse next to me (identical floorplan) that is currently for sale. I crunched the numbers and determined that even with a 20% downpayment my rent is half of what just the mortgage would be, not factoring in insurance, taxes, and HOA dues. I’ve looked at other places in the neighborhood and it’s very similar; 2BR townhomes/condos rent for about half of what the monthly carrying costs would be.
If I had the cash I would most definitely buy one of them, despite this rental parity discrepancy, and that’s exactly what’s happening. $250K wasted on a hard asset is better than $250K stored as a numbers in a bank computer that will lose value for the foreseeable future due to inflation.
Just to clarify, I’m not saying the selling price is $250K. I’m making the assumption that I have $250K cash on hand to invest (which I most certainly do not have right now, maybe next year if my business picks up).
If I had the cash I would most definitely buy one of them, despite this rental parity discrepancy, and that’s exactly what’s happening. $250K wasted on a hard asset is better than $250K stored as a numbers in a bank computer that will lose value for the foreseeable future due to inflation.
That makes no sense whatsoever. You admit that you would be “wasting” at least a portion of your $250K down payment (presumably because you understand that prices are still falling), and yet you somehow think that wasting less of it in the bank (“due to inflation”) would be even worse?
Uhhh….was your statement supposed to be sarcasm? Because taken at face value, it’s just plain wrong.
-Darth
Minus all the maintenance and taxes you sank into it over that 15 years. How does that play with your numbers, PR?
Miantenance and taxes are included in the rental parity comparison as well as the tax benefit.
For me however, my payment was fixed 15 years ago and refinanced lower. My monthly cost of ownership including maintenance is about 30% of what it would cost to rent. I save more than a few thousand dollars a month owning versus current rental cost
An excellent investment indeed.
People who bought even just 10 years ago can see a significant savings over rents today.
Heck… even if someone bought a $900k house in 2005 with 20% down (loan of $720k), if they were prudent enough, their carrying costs today with a refi would probably be less than renting a similar home now in Irvine.
Correct, and 10 years from now rents in Irvine will probably be 50% higher. Maybe more if 1970s style inflation kicks in.
You can’t get 70s style inflation without powerful unions. Now you can get 201x style inflation, the result of massive money supply growth, but I am not sure that will have the same positive impact on real estate. I imagine a scenario where commodities price increases outpace wage increase, extending the trend we have seen over the LAST 10 years.
A 50% increase in rents over the next 10 years would be 4% per year. Though not ludicrous, that level of increase seems unlikely.
My rental costs have declined over that past 4 years.
Once again, if you want to rent, there’s no point in “renting a similar home now.”
Most people who want to rent can find an apt. for a fraction of the rental of a SFR rental.
And buying a 900k tract house isn’t “prudent.”
Typo, should be “various government debts in Europe and the US”.
Also, with the showdown over the US debt looming - if you can’t cut benefit and you can’t raise ya see, then you pay for stuff by printing money anyway and sending it out as benefits, to pay debtors etc. Which is inflationary but avoids voters fingering you as they unelectable party…
Should be “can’t raise taxes”.
Typo correction should be
Should be
Moody’s downgrading various European govt debts and stating it’s reviewing US govt debt for a possible downgrade
Someone posted a great Realtor ad on reddit this morning and I just had to share it:
Woah, sorry about the size. I didn’t realize it was so large. Hopefully IR can remove that. Here’s the link:
i have a copy of that one. I am going to use it next realtor post I do.
Walking distance to John Wayne airport baby, sign me up!!!!!
do we get panoramic views of south coast plaza?
Runway View?
Even at nominally more money… owning (or 30-year borrowing) is better to me than renting.
You can’t live in stock investments.
And I disagree that “anyone who bought in the last eight years is likely underwater”. There are many people who bought in Irvine from 2003 on with 20% down or more and their homes are still worth more than their loans, probably more in number than the Ponzi HELOCers profiled here the last few years.
There are two sides to the coin.
It’s true that many are not underwater, particularly in certain neighborhoods which have defied gravity.
I would say that few who purchased in 2003-2006 got the outcome they were expecting.
People beleive what they want to beleive. It doesn’t matter what the facts are. Remember all the 60’s and 70’s people that denied the existing of gravity because their truth doesn’t need to agree with your truth. They could spend the truth of gravity because they it was not a part of their reality.
The allure of unlimited personal wealth and benefit to society by ever increasing house price is hard to break. Everybody a winner when gambling in Las Vegas. “I always win in ___ ....” The beat goes on ....
I agree that owner occupied homes are a poor investment right now.
I bought an SFH in September. If Zillow “Zestimates” are anything to go by (and I haven’t looked at many local comps), then in just 9 months my home is worth 10% less already than what I paid for it.
Except I didn’t buy the house as a short term investment or looked at it as an investment at all really.
After renting for 6 years in OC, I wanted a roof over my family’s heads and to start getting slightly less destroyed every April 15th.
Meanwhile, since of course I’m not “paying attention” to my home value at all
, it’s mid 2011 and my lender keeps sending me tons of junk mail egging me on to Refi my mortgage for cash!!!
So the stupid stuff has not stopped and there’s no shortage of rope out there.
“After renting for 6 years in OC, I wanted a roof over my family’s heads and to start getting slightly less destroyed every April 15th.”
Those are legitimate reasons to buy. Since you were not expecting double-digit appreciation and didn’t view your home purchase as an investment, you are calm and happy despite any short-term fluctuations in value. The key to home ownership success right now is managing expectations.
to start getting slightly less destroyed every April 15th.
2 things that are a tax on people who didn’t pay attention in H.S. match class: the state lottery and the federal home mortgage interest deduction.
I’ve actually heard people argue that you should never pay off your mortgage, because then you won’t get the interest deduction on your taxes! Talk about the tail wagging the dog!
The home mortgage interest deduction reduces your taxable income. It is NOT a credit (which directly reduces your tax burden 1:1). If someone is in the 25-28% tax brackets, then they get those percentages back on the home mortgage interest that they pay. Meaning, for every $100 you pay in mortgage interest, the gov’t gives you $25-28 back. Your total expenses are still $75-72 dollars higher than they would be without a mortgage!!!
If you are above the 28% tax bracket, then it gets even worse! People at those incomes are getting murdered by the AMT, so they likely don’t get any mortgage interest deduction at all. They’re paying their mortgage interest AND paying FULL taxes on the income that paid that interest.
If having taxes due on April 15th bothers you so much, just adjust your W-4 so that you pay more taxes through the year! Personally, I prefer not to give the gov’t any more interest-free loans than I have to, so I always underpay as much as possible and make up for it on tax day.
-Darth
correction: that’s math* class, not ‘match’ class…
-Darth
No kidding about the math. Pay off your mortgage asap and you will be in much better shape. The idea of giving the bank $1 in interest to get 30 cents from Unlce Sam is not quite the deal it’s cracked up to be.
I will only purchase my next home with a 15 year loan and hopefully pay it off in half that time.
Real estate is one of the few assets classes in which “regular people” can still leverage debt to build assets/wealth. Debt can work to your advantage since you can invest your money for example in rental apartments instead of paying down your initial loan faster (if you get a good price the rent should pay for the mortgage and othe rcosts and once they are paid off after 30 years you get the rental income, or you refinance at some time and buy even more apartments…). So a reasonable amount of leverage makes sense from my point of view if your goal is to grow your assets.
Or if your goal is to be underwater on a mortgage.
Leverage is a great thing if prices are going up. Not so great if prices tank. As we saw from the bubble, many people were overleveraged with multiple properties and lost big time.
Rentals are one thing. If it’s your own home, pay it off!
@Darth:
While I understand that you should pay your mortgage off as opposed to keeping it for the tax writeoff, I don’t think that’s what Mark was alluding to.
When we rented for a short period of time, our tax bill was much higher because we no longer had the mortgage deductions. And while it’s not a credit, for some people, reducing your taxable income could mean the difference between tax brackets and getting taxed at a lower rate which does result in reducing the taxes you have to pay.
At least that’s what the tax software tells me when I compare the scenarios with the same income but one has the owner deductions and the other doesn’t.
And this is just my opinion, but I would rather put the extra dollars into my loan/home than Uncle Sam.
Simple question:
Would you rather pay:
a) Rent + more taxes
b) Mortage + less taxes
... if those were the same total amount?
If those were the same amount?
Bwa-ha-ha-ha-ha!
Yeah, it is a simple question; for simpletons.
a) Rent + more taxes
b) Mortage + less taxes
... if those were the same total amount?
a) they aren’t
b) he wasn’t saying that they were
... if you weren’t such an RE shill?
-Darth
@Darth:
RE shill?
I’m amazed at how much people think they know about someone just by their comments on a blog.
And I never said your whole income is taxed at the higher percentage, I’m just saying your tax burden does get reduced by deductions even if they are not credits, and staying at a lower bracket also reduces your taxes. Do you pay more taxes when “bumped to a higher bracket”, yes or no?
Do you own or rent? Do you realize tax savings as an owner, yes or no? My previous simple question above is basically the premise of what rental parity is about and isn’t that one of the methods IrvineRenter uses to determine reasonable real estate pricing. Are you arguing against his premise now? Is he an RE shill or “simpleton” (as awgee points out)?
And yes, I let the professionals take care of the heavy lifting, but thanks for the advice.
IHO: “And while it’s not a credit, for some people, reducing your taxable income could mean the difference between tax brackets and getting taxed at a lower rate which does result in reducing the taxes you have to pay.”
You are certainly determined to display your gross lack of understanding about the tax code.
“bumped us up into a higher tax bracket” is a common complaint used by people that don’t understand the tax code. Your entire income doesn’t move together from one tax rate to the next. That’s why they call it a graduated income tax scale: different segments of your income are taxed at different rates.
Suppose that the cutoff for the 25% tax rate to the 28% tax rate was $100,000. (It’s not, but let’s stick to that ‘cause it’s a nice round number for our demonstration.) If that were the case, and you had taxable income of $105,000, your entire taxable income would NOT be taxed at 28%. Only that last $5,000 would be taxed at 28%. Even single billionaires pay ZERO tax on the first ~$5,800 of income due to the standard deduction (not that any billionaires would actually select the standard deduction).
http://www.irs.gov/newsroom/article/0,,id=233465,00.html
http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html
I strongly recommend that you let a trained professional guide you on any future financial decisions based on the tax implications. You clearly have an inadequate understanding of the tax code to be making these decisions on your own.
-Darth
Anyone making good money (those $250K+ jet owners) gets murdered by AMT, which means mortgage + more taxes. People continually gloss over that topic, which leads me to believe most here have never seen a W2 that would subject them to AMT.
Actually… I believe AMT can kick in for people making less than $250k (but as pointed out, I’m not a tax expert). Where it was intended for high-income earners who were using shelters to avoid taxes, it has been reformed so that it can affect people with high enough income and common itemized deductions like mortgage deductions.
But I agree, AMT does get glossed over because it shouldn’t affect a median income family which I assume the majority is here (unless everyone earns $250k+ here). Although, at $250k+, you should be more worried about the UHC not the AMT (another topic for another blog).
Agreed. It’s “my home” so I’m going to forgo other things and pay off the mortgage ASAP.
But I’d also like to save for my kids’ college education, but 18% tuition increases across the UC-system puts a mushroom cloud over that well-intentioned happy party.
FWIW I’ve heard financial advisors in OC (PRUDENTIAL!) telling people not to pay off their mortgage so fast, but rather to shovel more and more savings into 529s and investments because of the massive run up (overvaluation) of undergraduate education prices right now.
I continue to save, but I’m not doing this.
I’m kind of hoping for a market correction on education prices. When it comes, may it occur faster, more thoroughly and decisively than this OC housing correction did!
Even with 18% increases UC is an incredible bargain. You should worry more about whether your kid will get in. It takes a 4.0 to get into just Cal St. these days.
If your kid can get in, then they’ll have the academic chops to also compete for merit scholarships at the UCs and non-Ivy/Stanford privates (Ivy/Stanford only give need based aid).
I agree.
For any parents who send their children to preschool/pre-primary daycare or private school, $1k per month (the approximate new yearly cost of a UC) isn’t a shock.
You should be glad if your kid only wants to go to a UC and not an Ivy.
IHO - got some resonant frequency going on tonight.
Up here we have some amazing private schools that don’t exist in OC. We are very fortunate to have that option. There is one in particular, The Harker School, that I can’t quite stomach the tuition for but is a pretty direct path to Stanford.
I’m in the same boat as you. Wanted a place that I could live long-term and no longer wanted to deal with renting from IAC. So I’ve bought also in Sept 2010 and have ignored zillow since then.
I thought that IR featured this story recently, but I couldn’t find it in the recent posts. So, here’s a good article on the bank’s delay tactics, and my apologies if it’s already been posted:
Foreclosure Roulette Revisited
The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time.
http://www.foreclosuretruth.com/blog/sean/foreclosure-roulette-revisited/
-Darth
I had not seen that one. Thank you. I may use that next week.
Some of this stuff is just beyond belief. I don’t think I could have thought up most of this stuff if I tried. Fact truly is stranger than fiction!
-Darth
The comparison of home value appreciation to stock market gains is very bad statistics. There are several things wrong with it, but one of the most obvious is that the median CA home in 1980 is likely worth more today than the median CA home in 2011. Homes built 30 years ago were built closer to city centers and desirable areas, with shorter commutes. Those that weren’t are often in areas like Irvine that are more desired today in 2011 than they were in 1980. The statewide numbers include many places with hour plus commutes to areas that may have been hour plus commutes in 1980 but are no longer.
To get a fair comparison you’d need to calculate the gains exclusively on homes that actually existed in 1980.
There are other mathematical problems with calculating average gain by comparing medians to medians, but this one isn’t even comparing apples to apples.
spam removed
Hello spammer,
Actually, IR generally points out the DANGERS of “leverag[ing] property into a steady source of income”. Since you’re just a pathetic spammer, you didn’t catch onto that. Assuming that your window cleaning is as competent and thorough as your reading abilities, I’m sure that no one that reads your post above will hire you. Well done!
-Darth