Timing Does Matter

Time — Pink Floyd

Whenever someone overpays for real estate, it is justified with platitudes like “if you used conservative financing and stayed within your income, then you will be OK.” Or “If you love the home and you can afford it, everything isn’t about money.” I hope people take comfort with statements like these because the financial cost is much greater than most realize. That is the topic of today’s analysis post: how much is buying at the peak really going to cost?

Today, we will look at two families, the Peakers and the Troughers (gotta love those names, right?) Both families have a combined family income of $150,000 per year, and they have both saved $100,000 they can put toward a downpayment on a house.

It is the Summer of 2006, and each family is looking at a $1,000,000 home. The Peakers think the property is a good deal, so they put their $100,000 down and borrow $900,000 with an adjustable-rate mortgage starting at 6% with a 10-year fixed period followed by a 20 year fully amortized payment at a new interest rate. Their monthly payments are $4,500 a month, but after all of the adjustments for taxes and fees and the other costs of ownership, their total monthly cost of ownership is $6,000 per month. (Please don’t turn the comments into a discussion on the true cost of ownership without reading the linked post.)

The Troughers, on the other hand, made the same calculation and decided that the cost was simply too high. They decided to rent and wait for prices to drop to rental parity. As it turns out, this $1,000,000 home can be rented for $3,000 per month (the cost of ownership was double the cost of rental in the summer of 2006.) In order to make this comparison apples-to-apples, the Troughers have decided that will live the same lifestyle as the Peakers, so they will put $3,000 per month into their downpayment fund while prices are dropping.

Fast forward to 2011: five years later, rents have been increasing at about 4% per year, so the Troughers are now paying $3,500 per month in rent, houses similar to the Peakers are now selling at rental parity which is about $560,000. During this five-year period, the Peakers and the Troughers have enjoyed exactly the same lifestyle: both have had use of a house with similar characteristics, and both have been living on the same amount of disposable income. The Peakers are now $340,000 underwater 5 years into their 10-year fixed term, and they are stressed about what will happen. The Troughers have a mountain of cash, and they are about to buy a home.

The Troughers have accumulated $325,000 in their downpayment fund by adding the rent savings each month and having this compound at 5% interest (the calculations are too cumbersome to post.) The Troughers now buy the comparable house for $560,000 using all of their $325,000 downpayment. This only leaves a $235,000 first mortgage. These Troughers are thrifty people, and in keeping with our all-things-being-equal example, the Troughers are going to continue to put away the same $6,000 a month the house is costing the Peakers. They will put $4,543 toward their mortgage, and the remainder toward other ownership costs. By making this $4,543 monthly payment — something they were used to doing from their 5 years of renting and saving — they will pay off the mortgage completely in 5 years.

Fast forward to 2016: It is now 10 years since the Peakers have purchased, and they still owe $900,000 on the house. Let’s assume they got very lucky, and we quickly inflated another housing bubble that brought the resale value of their home up to $1,000,000 — breakeven. The Peakers are facing a dramatically escalating payment as the 900,000 is about to convert to a fully-amortizing loan over the remaining 20 year term. Their payment will now rise to $6,447. Let’s hope they are making more money to pay for it.

Here we are in 2016, both families have enjoyed the same amount of spending money each month and the same lifestyle (remember the tax benefits are already figured in to the cost of ownership.) The Peakers have a $1,000,000 house on which they owe $900,000. They will either need to make a $6,447 payment or refinance again. The Troughers also own a $1,000,000 house, but their mortgage is completely paid off. Their only cost of ownership is reduced to taxes, insurance and maintenance. Whereas the Peakers are trying to figure out how they are going to make payments, the Troughers suddenly have $4,500 a month extra in their monthly budget, and their net worth is $900,000 higher than the Peakers.

What happens if we do not inflate another bubble, and comparable houses are only worth $800,000? What if interest rates go up to 8% or higher? The Troughers couldn’t care less, they are saving money versus renting, and they have plenty of equity; however, the Peakers are in trouble, and they may lose their home. People who bought at the peak are betting on appreciation, and they are betting against higher interest rates. Not a good bet to make when interest rates are near historic lows and prices relative to fundamental valuations are at unprecedented highs.

You can spin this example any number of ways, no matter how the Troughers save or spend their money, they will come out far, far ahead of the Peakers. They could either enjoy a better lifestyle (no mortgage equity withdrawal for the Peakers,) or save for retirement, or save for their larger downpayment. In the real world, those who did not buy at the peak can balance those options to best suit their needs and wants, the Peakers do not have these options. They are imprisoned in their house. Let’s hope it is a gilded cage.


I would like to thank MalibuRenter for providing the conceptual framework for this post in a comment he made last week. I would also like to publically thank him for the editorial job he did on my upcoming book.


Ticking away the moments that make up a dull day
You fritter and waste the hours in an off hand way
Kicking around on a piece of ground in your home town
Waiting for someone or something to show you the way

Tired of lying in the sunshine staying home to watch the rain
You are young and life is long and there is time to kill today
And then one day you find ten years have got behind you
No one told you when to run, you missed the starting gun

And you run and you run to catch up with the sun, but its sinking
And racing around to come up behind you again
The sun is the same in the relative way, but youre older
Shorter of breath and one day closer to death

Every year is getting shorter, never seem to find the time
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation is the english way
The time is gone, the song is over, thought Id something more to say

Home, home again
I like to be here when I can
And when I come home cold and tired
Its good to warm my bones beside the fire
Far away across the field
The tolling of the iron bell
Calls the faithful to their knees
To hear the softly spoken magic spells.

Time — Pink Floyd

96 thoughts on “Timing Does Matter

    1. Joe

      This is exactly the same scenarios I had experienced.
      Dec 1990, the time I was young, I brought my first house at peak, it costs more than 10 years to go back to that prices levels. I know I should wait 5 more years but I was planning marry very soon.

      This time I learned the lesson, we sold our both houses and renting since 2005. we pay $3000 rental fee for $900K house

    2. jefferson davis

      nice little story.. In the real world it doesnt happen like that ever .. Assumption is the muther of all f-ups.. (pardon my french) but you sit in your ivory tower talking about (what ifs- and maybeys).. no one saves in america, let alone the OC.. i would rather bet on real estate than on myself saving!!!! 2016 meadin price oc 865,000.. Go ahead and write a book no one reads books anymore.. try an e-book.. you sound like anyother guy at the POKER table talkinhg about timing and how it affects your cards .. BET ON YOURSELF .. take a chance and live where you want for what ever reasons.. I HATER TO ELL YOU BUT U ONLY live ONCE….

  1. finsup

    Excellent post. My only comment is that this example assumes “perfectly” timing the market (the Peakers buy at the peak; the Troughers at the bottom) — this is always difficult to do in practice — ask any stock market investor.

    That being said, it does illustrate the importance of “timing” when it comes to buying (and, I might add, selling) anything that can be considered an investment.

    1. IrvineRenter

      I think the larger point is about value and debt. If you take on huge debts under terms that do not retire it, the only way of adding to net worth is through appreciation. If your purchase is based on cashflow value, and if the debt is amortized, future values are far less important. I does not matter much what happens after prices reach rental parity because the smaller debt and accelerated amortization schedule will quickly build net worth even if appreciation is zero.

      1. AZDavidPhx

        You should also mention the amount of interest that the Peekers will pay over the life of the loan versus the Troughers.

        Of course we know that nobody really cares because the average person on the street cannot see past a monthly payment. Nevertheless, think about all that interest money that the Troughers will not have to pay. All that saved money will enable them to go out to eat, go see The Dark Knight, etc and stimulate the economy while the Peekers sink the majority of their monthly income into a payment for their shelter.

      2. finsup

        Your point about value and debt is well taken; however, let’s move this example BACK five years to 2001. The Troughers think 2001 prices are outrageous and continue to rent, while the Peakers buy at, oh, what — $350K (with 5% down — they haven’t saved the hundred grand yet), and five years later own an asset that can be sold for $1M. Assuming no refinancing or HELOC shenanigans, who is sitting prettier after five, ten, or fifteen years?

        If we make the Peakers just a TAD more responsible … say, let’s give theem a fifteen year fully amortizing mortgage back in ’01, now they’re probably well ahead of the Troughers financially, especially considering the net present value of tax breaks given to homeowners during their first ten years of ownership. (Forgive me, but I’m not going to do the calculations!)

        When it comes to solid investments, timing or time will always win; poor timing or running out of time will always be a losing hand.

        1. Perspective

          Hindsight is wonderful isn’t it? We can always play “what if” and find winners and losers.

        2. MalibuRenter

          If you go back to 2001, the price to rent ratios were much, much more reasonable than 2006. Price to rent ratios went up ~75-80% between early 2001 and the peak in 2006.

          Note that you don’t have to have any amount of foresight to calculate the current price to rent ratio. It’s future home price appreciation that demands foresight, analysis, psychic powers, etc. You also don’t need psychic powers to calculate the cash costs of being an owner or renter for the next year.

          If you bought a house in May of 2001, and looked at its price in May 2008, the return according to the Case Shiller index would have been 8% per year. If the CS futures are right, by 2011 that return will have dropped to 3%.

          1. finsup

            Ahhh, Malibu my friend, that’s 3% per year on the initial, entire purchase price of the home … and remember the debtor Peakers borrowed 95% of their purchase price in my 2001 example. Ergo, the 2001 Peakers earned over $120,000 on their 5% ($17,500) downpayment over these ten years — not too shabby.

            The problem with waiting to purchase focusing only on the price to rent ratio is that you may get burned if other economy environmental factors (such as inflation) really kick in — if rents and interest rates really take off, (and admittedly, this is a big “IF” — but plenty of smarter folks than I seem to think it will), some of these so-called “knife catchers” who have locked in fixed rate mortgages will be in relatively good shape vs. the renters.

          2. MalibuRenter

            Funny you should mention inflation. When I first did exact analysis of the aftertax cost of owning a home, I was SHOCKED at how high the aftertax cost rises, with a fixed rate loan.

            “What?” you say? “The payments are level, right?”

            Well, the mortgage payments are level, but the costs of ownership certainly aren’t. If you assume overall inflation of 3%, for people in the 25% tax bracket, aftertax costs of ownership rise by about 1.4% per year initially and about 2.3% per year from 26-30 years out. There are several causes. 1. Maintenance and insurance costs increase. I assumed they increase roughly in line with inflation. 2. Property taxes increase. In CA, the increase is limited to 2% per year. Elsewhere, the property tax increases are the major driver of increasing ownership costs for people with fixed rate loans. 3. Being generous and assuming that you get to take mortgage interest as a tax deduction (and continuing to do so for 30 years), the deduction drops each year. That’s because each year you are paying down some principal. More and more of your level mortgage payment goes toward principal each year. Less goes toward interest, and you get a lower income tax deduction.

            If you are in the higher tax brackets, the costs of ownership rise faster from year to year. That’s because the $ value of the interest rate deduction drops more from year to year than for people in the 25% bracket. For people with combined 40% tax rates (State & Federal combined), aftertax costs of ownership initially rise by about 1.6%, and accelerate up to 2.6-2.7% annually by year 25.

          3. IrvineRenter

            The 3% per year gets eaten up pretty quickly if the monthly costs exceed the cost of rental. To achieve a meaningful profit on appreciation requires the investment is not bleeding cash each month.

            Also, if inflation increases due to increasing wages, rents will inflate as well, and the price-to-rent ratio will come into alignment. Inflation only benefits borrowers with fixed-rate loans. The vast majority of bubble buyers used adjustable rate mortgages (80% or more in 2005 and 2006.) That group of bubble buyers will be hating life when their already high payments increase dramatically. If interest rates take off to combat inflation, then the amounts people will be able to finance will decline, and so will house prices. The only way bubble buyers can benefit from inflation or interest rates would be for the FED to keep interest rates very low and allow wage inflation to rise unchecked. The FED may be forced to do this, but I doubt it will come to pass. Where is Paul Volcker when you need him?

          4. buster

            What about inflation eating away at the real value of the home? These poor suckers that bought at the peak are seeing a 20% nominal drop in price but a 40% drop in REAL value as inflation eats away their debt-laden house. Nothing like paying too much for depreciating asset while inflation further reduced the real value by another 5% per year. OUCH!

          5. No_Such_Reality

            If instead of buying the home, they bought Apple’s turn-around story, they’d have around $343,000 from their $12,750 investment. It still had two years to go to bottom. Imagine if they’d have doubled or tripled down believing in IPOD. Whee, hindsight is fun!

            More importantly, I think you will find few here arguing that a 2001 purchase that was financed appropriately, hasn’t been milked by Helocs and was within the purchasing power of the buyers, was an outright bad buy. In 2001, the price to rent was closer to 1.1:1. Pretty much the noise level.

          6. scott

            The argument I have heard why inflation is your friend with a fixed rate mortgage is not your house value is rising, but the real value of your mortgage going down. If (a big if) my salary rises at least with CPI, and all my other living expenses go up with CPI except my fixed monthly mortgage payment, my real payment has fallen any my real standard of living is higher all else equal. If my house goes up by CPI (which if wages are going up by CPI, it should, as rents should move up if rent/income stays constant). If my house price goes up with CPI, my real rate of return is zero as the basket of stuff I could by with my house remains the same. I look at it as when I bought my house in the early 1990’s my total cost was at that time equivalent to renting however my total cost today is less than renting…rents moved up in line roughly with inflation (maybe a bit better in NYC metro area where I am), while my P&I;have stayed fixed at 1992 levels

      3. QueenCityEddie

        Retiring debt doesn’t directly build net worth. If I have $100 cash and a debt of $100 my net worth is $0. If I use the $100 cash to retire that $100 debt I still have zero net worth – but I’m out of debt. Retiring debt can sure help cash flow by avoiding high interest payments, plus it reduces the temptations (and ability) to use your cash for non-worth generating activities.

    2. George8

      As the real estate price cycle swinging, one does not have to catch the very bottom or top to benefit or get hurt. However, common economics sense and some timing certainly go a long way to one’s advantage.

    3. awgee

      It is a fallacy to think that one has to “perfectly” time the market in order to time the market and profit from it. It is also a fallacy that “you can’t time the market.” The real estate market is probably the easiest market to time. Sell after the top when the top is recognizable and buy after the bottom when the bottom is recognizable. It ain’t perfect, but it is a hell of alot better than, “The real estate market always goes up over any ten year span, so it really doesn’t matter when you buy, if you plan to live in your home and not flip it.”

  2. rebarbarian

    A small quibble but the net difference between the Peakers and the Troughers is 1.8 million.

    1. IrvineRenter

      I am not sure I follow you. In 2016, both would own a $1,000,000 asset. The Peakers would have an offsetting liability of $900,000 while the Troughers would have no debt on the property. The difference in net worth would be $900,000 — the amount of the Peaker’s debt.

      Of course, with the extra $4,500 a month of extra disposable income going forward after 2016, the Troughers could certainly end up much, much farther ahead in another 10 or 20 years.

  3. cara

    I was going to quibble that you didn’t list the interest rate for the 2011 purchase, but at $4500 on a $250k mortgage, it hardly matters what the interest is, you’re paying it off so fast.

    This is why I am all about the 15 year loan. I want prices to reach parity with rent for 15 year amoritization. To heck with this 30 year thing, you pay more in interest than you do in principle over the life of a 30 year. That’s for the birds, man. Or the banks, really.

    1. IrvineRenter

      I stayed with the 6% rate assumption to keep the example simple. Realistically, I suspect rates will be 8% or higher in 2011. This will lower the price of rental parity. If interest rates are higher when people’s 10-year fixed periods expire, the payment shock will be even more dramatic, and if they are underwater, they will be unable to refinance.

      I agree with you about the 15-year schedule. I will likely get a 30-year mortgage, but I will treat it like a “pay option” loan by making the 15-year amortization payment whenever possible.

      1. cara

        Yup. That’s exactly my plan. Unless they offer enough of a discount in the rate for 15 versus 30, in which case I will have to weigh the value of lower interest on a 15 with the greater flexibility of a 30. Right now the rates are only 0.5% different, at the peak they were a full percent off, so I’ll run the numbers when I get to that point.

      2. Matt

        It’s my plan, too….but, we have to realize that it was probably a lot of pay-option ARM borrower’s “plans” as well.

        Best laid plans of mice and men……

        The nice thing about the 15-year is you know an NOD is around the corner if you don’t make those payments. It all comes down to a question of willpower. Which is why (knowing that I have very, very little willpower) I’m going to set it up to be automatic. (I do the same thing with my student loans….I have them on the 30-year plan and pay them at a 15-year rate with automatic bill pay. Well, not 15 years, more like 18, but it’s a nice round number that way)

  4. AZDavidPhx

    There is still a sense among the masses that the house price depreciation is temporary. Their bets are “all in” on a recovery taking place in the next few years.

    We’re going to have to work through that before we arrive at the capitulation stage of the mania.

    Until then we will continue to be subjected to the usual suspects treating us to their delusions of hysteria that justify overpaying for their houses. We will also continue to watch people on here try to question the definition of “over paying” and “affordability” in an effort to rally and cheer up their fellow mortgage owners.

    If you bought a house anywhere near the peak – you are screwed either way – your faith and prayers being put into a housing recovery are going to only lead to dispair.

  5. Jill

    I’m probably being naive but who is buying a million dollar home on 150K combined? DH and I didn’t and neither did anyone we know. (We had a higher combined and a 100K downpayment and bought a house at 465K – I don’t think we would have qualified for more than a 600K loan).

    Was this really the model in CA? It wasn’t in MA (I’m a real estate attorney – I sat through hundreds of closings during the boom years)

    1. IrvineRenter

      I know one family with a combined income of $130K that purchased a $1.1M home. They had $250K in equity from their previous home sale. I know another family with a combined family income of $240K that paid $1.25M. They put down $100K that they got in a loan from the other house they kept. There are other examples, but borrowing 5-7 times income was more the rule than the exception from 2004-2008.

      1. Perspective

        “…borrowing 5-7 times income was more the rule than the exception from 2004-2008…”

        I agree with IR’s post; timing the market is the wise and prudent thing to do. However, I have a problem with the comment, “…if you used conservative financing and stayed within your income, then you will be OK..” The problem is the example you used does is NOT conservative, and this fact skews the deviation between the two families greatly.

        While 5-7x income was the norm, it is not conservative. A family earning $150K should’ve have spent no more than $375K on a home. Keep the example the same above but change the two families’ incomes to conservatively afford a million dollar home. They would each be making $400K!

        1. MalibuRenter

          In a decade or so, people will tell their young children “You used to be able to buy a million dollar house with no money down, and no proof of income”. The children will be just as skeptical as they are when grandpa talks about walking to school five miles barefoot. They will both sound equally implausible.

          If the Peakers and Troughers each made $400k a year, the cashflows all come out the same. What is probably different is the Peakers’ ability to keep paying after any reset.

          1. Perspective

            The cashflows would come out the same, but the Peakers would have much more flexibility to adjust to the changing circumstances because a much smaller percentage of their income would be dedicated to housing.

            i.e. The discussion of the difference in wealth related to their home purchase timing ($900K) becomes relative. If both families earning $400K (the conservative amount required to purchase a million dollar home), invested a conservative portion of their income (30%, or $10K monthly), after 10 years, each family would have $1.5+ million outside of their homes’ values (assuming 5% ROR).

            Yes, the Troughers come out ahead assuming all is equal. But the Peakers are fine, IF they remained conservative and bought a home less than 2.5x their income. If the Peakers adjust their savings/spending due to their poor timing, they can make-up the difference as well.

          2. No_Such_Reality

            At 2.5X, Irvine’s median is going to be $210,000.

            That’s about 60% or more down from today.


          3. IrvineRenter

            The thing you are ignoring to make the Peakers OK is the quality of life. The properties that were available at 2.5 times income were so much less desirable than comparable rentals that buying, even with conservative terms, was still not a good idea. A Peaker who bought within their means owns a small 2/1 when they could have been renting a 3/2. Further, when the Trougher is later buying a 3/2, the Peaker is still trapped in a 2/1. You can argue that the Peaker is OK, but the lower quality of life doesn’t seem worth it to me.

          4. Perspective

            I agree; it’s not worth it. I’m trying to make the point that the Peakers who remained conservative aren’t “screwed” as many commenters repeatedly suggest here. It is a huge lost opportunity, likely the largest lost opportunity in their lifetimes should Irvine prices decline 40%+. The Peakers quality of life compared to the Troughers quality of life will be less (assuming all things equal).

            What if the Troughers, feeling so good about their market timing fortune as compared to their neighbors finance each other new BMW 5 Series ($50K each) while the Peakers plug along in their older cars for the next decade? Well, now we’re closer to parity because that just cost the Troughers net worth nearly $200K (if financed @ 6.5% for five years).

          5. Laura Louzader

            How true this comment is.

            Every condo I viewed within my price range, figuring 2.5X my income to borrow, was steeply inferior to my lovely rental.

            I just couldn’t face such a steep comedown in lifestyle just to say that I “own” a place, and seeing it drop in price by 30% two years later would have been unbearable..

            …and I strongly felt that we would see such a drop because the prices have dropped by about that much so far here in Chicago, with a lot further to drop.

          6. muzie

            I think you missed the point. You were supposed to compare oranges with oranges hee, I don’t get how having one family spend the money on cars would make any sense in the comparison.

            Why not go ahead and say the Peakers bought a 1$ lottery ticket because they were so desperate and made out with 10M$ with the winning lottery ticket.

            Adding cars into the mix has no relevance and just obscures the point of the post – beig that timing DOES matter.

    2. RichW

      << I’m probably being naive but who is buying a million dollar home on 150K combined? ... Was this really the model in CA? >>

      Unfortunately, this was the model. Homes that were priced at 4x income (popularly considered the ‘norm’ for coastal California, vs. 3x nationally) pre-bubble, ended up at 8-10x. Restricting your purchase to homes priced at 600k vs 1M would have given you a shotgun shack in a crime-ridden area such as Santa Ana (maybe 1000 sq ft on a slab, bars on the window, no yard, etc.). Homes were nominally overpriced by a factor of 2x across the demographic spectrum. I know people with incomes of 65k taking option loans to buy a 650k home in early bubble, which peaked at 1M and are now falling rapidly. So either you bought garbage, or overpaid (and speculated on further appreciation bailing you out), or sat out the bubble (my case, having arrived here in 2002 and waiting 1-2 years to see if I would stay, and closely analyzing prices in that time frame and already seeing that pricing made no sense – but all, and I mean all, my colleagues had drunk the kool-aid and laughed at my decision… then… now they worriedly ask me where I think it will go, and their faces turn white when I tell them it won’t be reflating but dropping more).

      I have good friends in Chicago suburbs who claim their prices never got crazy, though I see stats that those areas increased 30% above nominal trend lines. Now seeing prices 10% off peak, they are thinking it won’t drop further as ‘homes are moving’ etc. We’ll just see what the L-recession, combined with reduced borrowing ability and overhang of supply, does to that thinking.

      FWIW, I am renting a 1200sq ft apt in HB for 1600/mo (putting up with reduced storage, but no neighbor issues due to location in complex – 3rd floor corner unit with no adjacent walls, etc.) – so my savings are even greater than the example quoted above. You’d be surprised how many folks think I’ve been ‘throwing away my money on rent,’ and have never even run a spreadsheet calculation.

      1. msv

        I love the “throwing away money on rent” line too. Its incredible that the vast majority of people don’t actually understand or appreciate the costs of home ownership. That’s when I break out the spreadsheets.

        1. Anonymous

          I think of it as “throwing away money on mello roos”. If you rent, you get all the same schools, beautifully landscaped sidewalks, parks, etc. and enjoy all the amenities the non-tax deductable mello roos homeowners are payihg…

        2. camsavem

          Actually I think most people think because you are a renter you are actually a dirt bag.

          Some freinds of ours moved to the Bay Area in 05, banked a ton of equity, then back again in 07, also banked a ton of equity.

          Were supposed to just get into a rental because the “knew” that it was a buble but I think could not see themselves as renters.

          They ended up putting 700K down on a 1.6M dollar home that is not probably not worth a Million.

          Had they rented for a couple of years they could have probably paid cash for a much nicer property or something close…..

      2. MalibuRenter

        Just imagine how many people are “throwing away money” paying off inflated home values.

  6. no_vaseline


    Yes. Some folks streached that income to 1.5M. Honest.


    Nice post today. I did exactly this caluclation for my dad when I moved in 2006 because he thought I was crazy I wasn’t buying (he and my mom have been full equity since like 1993 or something). He doesn’t think I’m crazy anymore.

  7. RG

    Just a quick note from a first time poster to say how tremendous I feel this blog is, I devour it on a daily basis and always find some interesting insights.

    Also, I followed the recommendation from a few weeks back about the book Chain of Blame and about 3/4 through with it. A very good read in my opinion.

    IR thanks for the effort in running the blog and to all the commenters, very much appreciate the perspectives.

  8. Mr Duncan

    The 5% interest rate to me seems a bit optimistic. 3-year CDs are barely going at that rate. Would these savers have scheduled their money to become available in 2011? Or would they have put it in more liquid assets? What does the stock market look like in 2011?

  9. Mr Duncan

    When you’ve saved so much money in your downpayment fund, when it comes time to buy, are you really getting a good deal? $350k would enable me to buy an annuity that lets me work half time. Or I could start a business. These prices are really only sustainable because people don’t have large downpayments.

  10. phil

    I really hope that $1M home eventually goes for $560k!

    In general, are most people here thinking the market will revert to what it would have been absent a bubble? If so, does that put pricing back to 2001-2002 levels? I know a recession, especially if it impacts a lot of local jobs, will ultimately reduce pricing further, but let’s take that out of the equation.

    We would like to move to Northwood Pointe, but the pricing there is (still) crazy imo. I’m hoping $800-900k will eventually buy a 3000sq ft place there.

    1. MalibuRenter

      The May 2011 Case Shiller futures predict that prices then will be the same as October 2002. That means someone who bought in October 2002 would have a 0.0% annualized capital gain in 2011.

      The CS index doesn’t take into account inflation. So in real value terms, with an average of ~3% inflation, an May 2003 purchaser would have lost about 24% before commissions and closing costs. Toss in the other costs and it’s about a 30% loss.

      To break even after inflation and commissions, you would have to have purchased June 2001 or prior. That’s a breakeven on the real purchase and sale prices. I can run the numbers, but I think following today’s example for a renter and purchaser from 2001, the renter would still end up a bit better off.

  11. Kelja

    Went to an open house this weekend. Great house in old Carlsbad on a high point with spectacular views of the ocean about quarter mile away. It was a complete remodel making a dated one-story into a very nice classy two-story – an ‘entertainer’s dream to be sure!

    Value priced between 1.78mil and 1.95mil. Nice to look at but not within my range.

    Told the realtor that possibly I’d be looking to buy something in a year or two, but was watching for how low the market could go.

    The downside to that strategy, he informed me, was that interest rates might rise. I agreed that was a good possibility. But… if that happened, I said, it would price another whole segment out of the market. Fewer buyers = lower prices.

    He saw my point.

    1. Matt

      I *was* more concerned on interest rates a month ago than I am now….just my humble, rather uninformed opinion, but it seems like the Fed is trying to keep rates low for a while, and doesn’t want to “shock” the market with a rapid increase in rates.

      1. camsavem

        The Fed has no control over interest rates, buyers of 10 year treasures do. Foriegn countries have an interest in keeping their products affordable here, but if inflations turns their hendges negative…….look out.

  12. El Flailey

    Your logic and math is definitely spot on, as always. But I’m not sure I agree with that “timing” should be the governing principle.

    For example you imply that “troughers” will save $3000 a month towards a down payment fund. To make it apples to apples. But we know that kind of action is extremely unusual – few people have the discipline for that. Furthermore you assume they put their money in very safe investments that pay 5%. Most people would probably have a mix of mutual funds or at least something that’s not totally risk free. Or not. 5% risk free is not easy to come by BTW.

    Also, renting is a pain especially for families with children. People want to nest and have some stability for their kids, etc. There’s a risk of moving every year or two, unpredictable rent raises, the house being sold from under you, a shady landlord who defaults. Etc.

    And you’re assuming a level of sainthood for one party that doesn’t sound common. I understand it’s a thought exercise to illustrate how massive the differences can be between two approaches. And it’s a good one, so maybe I’m judging it on the wrong terms.

    But I, like you, have some math chops as well, and I’ve been in the process of deciding what to do about my situation. I live in NYC which presents an entirely different set of issues but I’ve also been evaluating how to react to this market.

    I decided that instead of trying to second guess the market, if we’ve reached the bottom etc, I’m going to take a different approach. My approach is as follows:

    * I’m buying a second/weekend home as we speak, I’m recently married and want to put down roots and own and fix things and all that stuff. My NYC apartment is stabilized and replacing it with a purchase is madness until we way outgrow it or are truly rich, I’ve done the math.

    * My decision isn’t based on some serious market calculation or future prediction, it’s based on best guesses as to our future income, what we can afford to pay, what our family/children situation will be, where I want to have a weekend place, and what kind of place.

    * I am only considering 30 year fixed mortgages, period. I got a good rate lock a few months ago (thank god) and put down 10%. I have another 10% in cash, held out as a temporary insurance policy. I’m going to pay a modest PMI for 6-8 months, make sure I don’t need a new roof or expensive work on the house, ensure expenses and utilities are OK given our income, and if all’s well I’ll pay the other 10% during the spring, get rid of PMI and have 20% down.

    * Then I plan to use and enjoy the property. Sure if it drops in value I maybe made a mistake. If it rises that’s a windfall.

    But here’s the thing:

    – I actually get to use the house, now, while I’m younger and still don’t have kids yet. I get to fix it up and make it something that will be ours. Renting isn’t the same.

    – I DROVE THE BEST BARGAIN I COULD GIVEN THE MARKET CONDITIONS I FACED AT THE TIME. I didn’t overpay in the CURRENT market. I can’t predict the future, but it is a fair price based on comps and appraised well.




    That’s in all caps because I think those couple principles are the bedrock of making a decision, not timing. I’ve looked at the market, sure it might fall more. It’s already fallen a LOT, I think I got a good deal. Who knows, I could be wrong. I might kick myself if prices plummet. Quoting Jay-Z, what someone else eats don’t make me sh!t. If someone nearby pays a lot less than I do later, my house is still the same. If I have to sell soon I could take a real actual loss, but my job has been stable for 10 years so I doubt that, and nothing is riskless.

    Why the long post? You’re saying “timing does matter” and talking about complicated rental and savings decisions that are much easier said than done, and I don’t think the best way of looking at things. If people follow the general principles above, generally, over the course of their life and multiple real estate purchases as they raise their family, they’ll be fine.

    They might buy for the first time at a peak, a bad situation. But if they follow basic rules of paying what they can afford, being comfortable that they think they are paying a fair price for the enjoymentthey get out of the property, and don’t overextend, they’re better off than obsessing about where the peaks and troughs are. Yes 2005-2007 was a good time to hit the pause button. But in general I think a different mindset of real estate — one that regards it as a purchase with utility rather than an investment security — is the way to go for the average buyer.


    1. No_Such_Reality

      Sigh, timing isn’t the principle, the principle is making a comparison and not being emotionally driven to buy a home.

      In Irvine, @ peak, owning = $6000/month, rent = $3000. If the psychological value of being chained to the tract house is worth $36,000/yr, go for it and take the mental health benefits at work this fall on your benefits enrollment.

      As for your buy, well, with no facts we can’t really argue, fair trade for the utility of the property would be fair rent. Are you paying fair rent?

      1. El Flailey

        My example just isn’t typical. I’m buying in an upstate rural area with very little rental market to speak of. There’s a few summer rentals but it’s very thin. It’s a thin market in general.

        In addition the house has to be partially renovated due to water damage. My wife is an architect at one of the big NYC firms and she’s drawn up plans and we have that priced out. She pays a LOT less for certain things than civilians do, and after designing things for others she’s really into doing this. So we’re buying a project to some extent, and you can’t rent and then rebuild your dream country house and fill it with tons of stuff you wish you could use but are sitting in storage, it sort of doesn’t work that way.

        Also prices are really low up there. A 20% drop in the value of this house would cost about what I paid for my car, for example. It’s on 20+ acres and near enough to NYC that there’s definitely a floor to what I can lose, though of course I could lose quite a bit. And it’s a 100 year old house in the style we want, there are maybe 50-100 such houses in the entire area, with 2-4 on the market at any given time.

        My example has nothing to do with buying versus renting in a cookie cutter tract house subdivision or so on. So I dunno why I’m talking about it so much, maybe you guys should put me on ignore, I’m sending things off topic. 😉

        I agree completely with your logic — making an assessment based on fair rental value is of course crucial. And I agree that the emotional idea of “owning” when you borrowed all the money anyways is over rated.

        But I read this blog every day and have for awhile. What prompted me to post was that I thought his example was goosed a little bit — some small adjustments to those numbers change a lot. What if rents rise faster than 4% per year. What if you have to move your entire family 2-3 times in 5 years because you’re renting, that’s expensive both literally and otherwise. What if interest rates do wierd things.

        And we’re all of the consensus in these parts that prices will fall *massively* in the future. But the example above posits a 45% price drop. That’s not conservative, that’s severe. What if rents rise a little faster than expected, and prices drop 15-20%?

        Give me an XL sheet with both examples above and it would be easy to show how very small changes in assumptions about interest rates (and the discount rate, etc) will make those numbers do all sorts of things.

        Predicting the future is a dangerous game for the average person who’s not a professional investor. My thought is just that I think — for the most part — that real estate investors should spend more time honestly assessing their lifestyle and plans, think of their house as a purchase rather than a source of income, and take people’s opinions of where the “peak” and “trough” are with a grain of salt.

        1. Party Pooper

          if you really thought you made the right decision for you, why are you defending it so much on some anonymous blog started in Irvine, CA?

          I think you really do protest too much.

          1. El Flailey

            Same reason we’re all talking about it. Everyone’s at work but wasting time on the internet. Right?

            I dunno how I ended up talking about myself so much, should watch the caffeine maybe.

            This blog rocks, it’s the smartest RE analysis blog I’ve ever seen. Thought I’d chime in for once. I think the original post is instructive but I found it less compelling than the usual… I have an aversion to funny math, which is so rare on this blog but this seems like a notable exception.

          2. finsup

            C’mon, PP, give El a break … I happen to agree just about 100% with his views on (personal) residential real estate, and I’m sure there are others who’ll agree. As for his thoughtful example, that’s what makes these posts interesting and educational.

            This blog is more thought-provoking than most, and it apparently has a following well beyond Irvine. (I’m from F-L-A.) There are lessons that can be learned from the Irvine housing market that can be applied in some fashion to every housing market in the world.

        2. No_Such_Reality

          Buying a recreational house is different than buying a primary residence. You aren’t buying shelter.

          With housing purchases, little assumptions can add up. What if rents rise at 5%? or 10%? Or drop? … never happens right, oh wait, they did last downturn… and it appears they’re already soft this downturn.

          You can tweak the numbers around but ultimately, you need a best guesstimate. With those best guesstimates, you get a valuation. Then you go with your gut if it doesn’t emphatically point one way or another. In Irvine so far, the direction is pretty emphatic even being very generous to housing.

          This is the part no-SoCal people don’t get. The purchase hypothetical wasn’t the exception in 2006, it was the Norm out here. In fact, the example was generous to the buyers. Literally in LA/OC/SD, something like 2/3rds did OptionARM financing on all home purchases in 2006.

          Prices are already 20% off in Irvine. Another 20% and we’re nearly that 45% off. For that reason, depending on how affirmative you are with rent prices, mortgage assumptions, maintenance etc. you can get the numbers close to rental parity based on how generous you are.

  13. alan

    Great Post IR..

    I would go further, I want the feds to require all mortgage brokers, lenders to provide potential buyers with a rent/own comparison for the property so that people know going into the transaction just how they stand and also lenders should not be allowed to make loans that are more than 1 1/2 x rental value. If people want to buy homes 2x rental equivalent or greater, they need to pay cash period.

    1. Perspective

      Not bad ideas. It will take more to change the psychology concerning renting; too many people view it negatively. This downturn should do a lot to change that mentality.

    2. IrvineRenter

      The proposal I am making in my book is that the entire appraisal system be changed to rely on the income approach rather than the comparative sales approach. The comparative sales approach simply enables irrational exuberance. Using the Income approach would stop housing bubbles in their tracks because borrowed money could not be used to inflate prices beyond their cashflow value.

  14. Brotha Man

    Hey IR,

    As a new member, I want to thank you for this great site which I’m enjoying and learning a lot from not only you but some of the other members as well.

    Also, I found out about IHB on Streeteasy.com, which covers the Real Estate madness in NYC so it seems that the word on IHB is really getting around.

    Again, thanks for all the great info and keep it coming.

    Brotha Man

  15. Kimo

    Like many I have been a devout, daily lurker on your blog. Today’s post is a classic! Right up there with the post about So Cal’s cultural pathology. Outstanding work!

    Your plan sounds great. Why don’t you put it off for 2-3 years and then you can have your cake and eat it too? IMO, the “joys” of homeownership are overrated. Why would you want to spend your free time and money fixing up a second home? Use that time and energy to learn to play an instrument, golf, surf, paint, anything… You are fortunate enough to find this blog and see the light. Don’t muff it!

    1. El Flailey

      I admit I’m not necessarily typical. My wife is an Architect and is excited to work on a project for herself. I actually really, really am desperately looking forward to owning power tools and splitting wood and sitting on the porch, etc. My father has a cabin nearby, I’ve known the area for 20 years and like it.

      Spending time fixing up a second home is actually the incentive, not a downside. Spend 10 years ensconced in concrete in NYC and you might see it too. Nothing sounds more fun to me right now than clearing brush. Hell even looking at trees is exciting.

      And I already know how to play an instrument, a couple of ’em, that’s what i used to do for a living. And now I have a big house to put them all in and play ’em with friends.

      I don’t want to wait three more years. I’ve been renting a weekend place for the last three years, the positive change to my lifestyle as a result was remarkable and I know I’ll use it. But a rental isn’t the same. No power tool usage, no way to set up my stuff, no way for my wife to satisfy her antique purchasing addiction. Now I’ve done my homework and am buying.

      But I digress, my particular story isn’t that important. What’s important is that I have a good sense of what I’m getting and I feel like that money will be worth what I get. And what I get is my own place, some memories, a place for the inevitable kids to get some fresh air, a barn full of woodworking and musical instruments, some exercise, etc.

      I know what that will cost. I think it’s a good buy. I’ll improve the house substantially. It’ll probably be worth a little more as a result. But unless it’s truly absolutely devastatingly catastrophic I’m sure I’ll be OK, won’t get rich off it, hopefully won’t lose much. Maybe will not get a good “return” financially, but in lifestyle I’m not worried.

      I’m rambling perhaps — but life is short, and to me real estate should be done intelligently as a lifestyle decision. It’s a place to live, or use.

      The recent mentality is that real estate is a way to save, to make money, to invest in a rising asset. Looking at it that way is very different than looking at it the way you look at any durable good purchase — that could be a watch, art, a trip, etc. I once read that the secret to investing in art (as a non professional/dealer) is to buy things you know for sure you will be happy to look at in the future, and that you can afford.

      I’m conscious of timing. I’ve been looking at places and working on this since November and passed on a lot of marginal things. Maybe if I thought prices were skyrocketing I wouldn’t have done that. Sure timing matters.

      But IR (a certified genius who I read daily) I still think is falling into a trap of making real estate entirely about certain math, and when you do math like that spread over time (like NPV calcs, say) then assumptions matter a LOT. Change that 5% interest rate on savings to a more realistic 3%, add more risk of possible interest rate rise in the future, and the math swings wildly.

      Comparing renting to owning is not apples to apples, the two are very different propositions, especially for single family homes.

      And of course there’s the forced savings issue — it’s *highly* dubious in my opinion to assume people will save ALL of any savings from renting. Sure you can advocate for it, but much like abstinence education in theory vs. practice it’s worth noting that people tend to have a LOT of trouble sticking to that strategy.

      I don’t know if I have a point, or disagree really that strongly. I just would argue that attempting to time the market is fraught with minefields. That was true on the way up and it’s true on the way down too.

      To me the thing that has been lost is the idea that real estate purchases should be based on current and projected lifestyle plans and desire, ability to pay, and the array of options one faces.

      In short – the mentality should be one of “I’m making a purchase, I’m buying the use of this house, do I feel comfortable with this deal” not an “investment” based on unsustainable leverage and unreliable guesses about future market conditions. You buy stocks and bonds the latter way. You buy investment/commercial real estate that way too. A home for your own use is a purchase, a financed purchase but a purchase nonetheless. IMHO

      1. Tired of Reading

        Never, ever, ever write “in short” again after writing 15 paragraphs in the comments on a blog. You may not be a typical buyer, but you are a typical bore.

        1. El Flailey

          See that was your little tidbit of information. You could have skipped the other part and just read the “in short” part. It’s the same as the other things I wrote, but with all the boring stuff taken out.

          And I’m an atypical bore. Most people who are boring are boring for entirely different reasons. Embrace diversity, my friend.

          1. Dave


            Thanks for taking the time to write. I read it all and enjoyed it.

            The pull of the land is very strong in me as well, Tennessee in my case.

        2. Emma Anne

          The fact that you have been renting a weekend place for the last couple of years changes things IMO. For one thing, you know you will use and enjoy this place. And for another, you will save the rental amount.

          If you don’t mind saying, how does the house payment compare to the rental? I don’t mean dollar amounts, but proportions.

          1. El Flailey

            It’s not an apples to apples situation. (we sure talk a lot about apples here don’t we).

            I’ve been renting in the Hamptons. The cost to rent for the summer season has been about the same as my new mortgage will be for the entire year. Here’s the fun catch – the Hamptons rental is a four bedroom that I split with 8 couples for just summer months. The new place is a much larger four bedroom that I own.

            The new place is upstate, Hudson Valley. My father got a place up there and we started going there last fall and decided that’s where we wanted to be. It’s also closer to NY.

            NYC real estate has a set of rules that are hard to get used to. My new place would be worth about $30 million if it were in South or East Hampton, NY. I’m paying somewhere around 1% of that. Slightly closer to NY, but north instead of east.

            Like I said, NYC changes the rules. But to answer the quetsion I’m paying roughly the same to own my own place year round as I was for a 1/8 summer share.

            As for an equivalent rental in the same area? There really aren’t any. The market is incredibly thin. You can get a lakefront weekly rental but there’s nothing like this year round on the market, ever. To the extent you can guess/extrapolate from what’s out there I’d say I’m probably paying about a 20-25% monthly premium to own. But it’s apples to pomegranates to some extent.

      2. Kimo

        I had not thought about the NYC concrete jungle angle. And very strong work on your part, marrying an architect and all. Best of luck with the home purchase. Good thing it is a free country and we can do whatever we please.

        My wife and I are poster kids for the troughers. Sold as the top was falling away in Sacramento in 2006. Air Force moved us to Hawaii and we had to decide whether or not to buy in the $900K range. I am a physician and I make good money but we did the math and said NO WAY. We rent for $3000 but it would cost us $5500/ month to own. So we are socking away the dough and will buy again in a couple years.

        As a homeowner I did enjoy fixing up the place. But now I can’t believe how much free time and energy I have that I used to spend on the house.

        1. LC

          Yeah, I went from $5000/mo to $2500/mo by selling and renting. I bought in 1999, and I did spend some fixing up, and I did like working in the yard. I don’t need status and validation that badly!

          What I do realize is that I can put the difference in the bank, and in ten years time I can buy a house outright. Ten years can go pretty quickly. Banks a rich enough without my help.

  16. ockurt

    Talking with a friend of mine from work this past weekend about his house purchase in RPV, which he bought at the peak with creative financing. He’s at least not in total denial about the market, and knowing he’s lost some $, and probably will lose some more. You start to realize how all these people afforded these $1M homes back at the peak, as he used an interest only product, a maxed out 2nd HELOC, with 10% down. Kind of scary, but I know he isn’t the only one. When I hear stories like that, it makes me want to stay in my cheap condo, even though my family would like a bigger place.

    Don’t know if this was mentioned, but the other big downside of buying at the peak is that you’re locked in with the higher purchase price with regards to property taxes. That adds up to alot with everything else.

    1. Perspective

      You’re not locked-in… necessarily. The OC Assessor has already lowered many valuations for homes purchased over the past couple years. So if you bought in 2005, you won’t pay taxes based on that price (assuming your property has been assessed lower).

      However, your value will jump back up to its bubble value if neighboring homes start selling for that price again (while your neighbor who buys much lower will be protected from that size of a jump by Prop 13).

      1. ockurt

        True, but then you have to wait for the Assessor to control your fate and sometimes that can take time. I’d rather buy at a lower price and not have to wait.

        Furthermore, values won’t “jump” back to their bubble value in CA if neighboring homes start selling for higher prices as Prop 13 limits any increase to 2% a year.

        1. MalibuRenter

          One exception to the 2% annual increase rule is for homes which have previously had their assessed value reduced due to falling market value. The reduction can be “recaptured” in as little as one year. The new assessment can’t exceed the 2% trend from when it was purchased.

  17. Red

    Market timing actually looks pretty easy when it comes to buying; a quick look at the Case-Shiller index shows that the bottom – if we call anything within 5% of the bottom that – lasted for years last time around. The LA data should be a reasonable standin for Irvine:
    Peak Jan 1990 at 100.23;
    the bottom at 73.07 was March 1996, but values were within 5% of the bottom from Dec. 94 (76.07) to June 1997 (76.62) – 2.5 years of bottom!
    Values surpassed the previous peak in Feb. of 2000, 10 years later.
    The recent peak for LA was 273.6 in Sept. 2006.
    I wouldn’t even think of calling a bottom until 2010, given that history…

    1. Rocker

      Yes, Case-Shiller helps you to put things in perspective, and their model is one the best things available right now, and it’s incredible that the real estate market didn’t have anything like that before or a housing market futures for hedging.

      When Case-Shiller was announced in 2006 (?), and the housing futures market, Shiller book, etc. I went nuts and devoured all the information available on the web, for some time I was dowloading their spreadsheet from the MacroMarkets website before S&P;bought the whole enchilada.

    1. IrvineRenter

      Yes, it will be what ravages the high-end markets. Everyone watched subprime wipe out values in Santa Ana, Riverside County and other markets, but somehow they think the problem really was “contained to subprime.” Nope. Alt-A and Prime are just on a different reset schedule.

  18. tonyE

    Good song, interesting story.

    I got a question… at what point will I be able to buy a BANK OWNED house as a rental… with no money down?

    I figure that as we reach price rental equilibrium, some banks might just want to get rid of their “stock of homes” bad enough that they might sell it at a 95% LTV to buyers who have good credit and plenty of assets.

    Do you think that’ll work? After all, with a healthy rental market for all of those people who can pay the rental fee on a 2008 $500K home but not the fully indexed mortage payment on the 2006 $1MIL home…. I figure that renting such homes will easy enough..

    And, once we reach the through, I figure we’ll be getting a nice 2% appreciation ( or a bit more ) per year…

    The new 100LTV loans might be for The Rental Property owners?

    1. IrvineRenter

      “with no money down?”

      This doesn’t seem likely. 100% financing was one of the problems that created this mess. If they open up the market to speculators with 100% financing again, you will never find a property that cashflows positively.

      1. tonyE

        There might be strings attached on such loans.

        You would have to provide a business plan and show that you are not planning to (a) live there and (b) flip the property.

  19. Rocker

    I welcome in the Peakers “family” those that extracted all the equity from their house at the very peak through HELOCs, cash out re-fis, etc. with the assumption that they were entitled to all that money without even selling their house (I was told that!) and that their Irvine home will keep appreciating just because they sleep every night on it, Irvine to “da moon!”

  20. Ochomehunter


    *Will there be a dead cat bounce? History says there will be.
    *If there will be one, when you think it will start and how long before we see a serious slide?

    With Oil retreat and $ bounce, there is already a deat cat bounce in the stock market taking place in Financial and other sectors. I think this is the start of Housing DEAD CAT BOUNCE AS WELL.


    1. Matt

      I think we’ve been seeing the dead cat bounce for a couple of months, actually.
      OC sales (2008/2007)–from BMIT data:
      Jan: 1286/2400
      Feb: 1471/2449
      Mar: 1663/3130
      Apr: 2166/2682
      May: 2266/2675
      Jun: 1930/2641

      When I see those numbers, I see a dead cat bounce in April-June, ESPECIALLY when you consider unemployment and inflation numbers that started getting worse in March.

      YES, there’s seasonality in there, but I see a bigger bounce than seasonality should predict, and seasons have to compete against reality getting worse.

      Also, purely anecdotally, I’ve started seeing a few listings post increases (and later decreases). I think some folks have been dipping their toes in the water (and some sellers have overreacted, hoping for a hit of that sweet, sweet Kool-Aid); some of those folks seem to have bought.

      I’m not sure it really qualifies as a dead cat bounce, though, because prices certainly haven’t gone up, or even held steady. Maybe the dead cat is dropping so vertically straight down that it’s skipped off the sloped surface, a la Homer jumping Springfield Gorge, or Chef (RIP) falling off the bridge from the Super Adventurers Club. Yes, Chef bounced more than a few times, but, in the end, a mountain lion and grizzly bear ripped off his face and leg. (Actually, I’m beginning to REALLY like this metaphor…the bear gets to feast on the fallen corpse!)

    2. IrvineRenter

      I agree with Matt. I don’t know if the action this selling season even registers as a bounce. It is more of a temporary flattening than a true bounce. I expected a bit more of a bounce this year and last as the remaining kool aid intoxicated buyers found bargains. Headfakes and false rallies tempt those who are unsure of continued price declines and prompts some to fear being “priced out” and buy into the false rally. The fact that prices have not even budged upward after a 20% decline is very bearish. In stock market terms, it would be called a bear flag. The market is catching its breath before the next leg down.

  21. cynic

    In an alternate reality,

    The Troughers were living in their 1 year lease and the end of the year, the owner got so tired of paying a ridiculous mortgage, he just walked away. That left the troughers trying to argue to a sheriff why they should not be thrown out while their lease is still active.

    The Trougher’s wife, who was working at a job 15 miles away now had to deal with the prospect of having to find a suitable home at very short notice, negotiate a lease, pack, move, unpack and by the end of which process, they were facing the expiration of another lease and the whole story started again.

    The Peakers on the other hand, were self employed and managed to keep their business going long enpugh that they were able to pay down their 900k mortgage down to a manageable 500k in 10 years, in time for the reset. At that time, interest rates were 3% below what they had originally paid for the house, so they promptly re-financed with a cash out and a conservative LTV of 70%. They were now in a great position to either bequeath their homes to their children or retire on their equity in a house that never appreciated in value in 10 years, but gave them nearly 500k in equity.

    The troughers, in the meanwhile, had divorced, stressed out from all the moving. Their kids were malcontents with no friends because they never stayed in a school district long enough to make any friends.

    But they had a thick fat bank account.

    We can do this all day long. But who was really better off?

    1. Gray

      I think you got that story wrong. Actually, the truth is that Mr. Peaker had a heart attack after his neighbor was forced to try a short sale that drove the comps for the neighborhood down. Mr. Peaker simply couldn’t deal with the shock that real estate doesn’t always only go up. Since the Peakers, with their luxurious lifestyle, didn’t have the means for an adequate life insurance, his widdow couldn’t pay the nortgages on one salary much longer, but still refused to accept the ugly reality. She went into foreclosure, had problems finding a rental because of her credit rating, and developed a serious alcohol problem.

      See, of course it’s possible to invent probable alternative stories, based on some coincidence that happens to only one family, but not the other. The strength of IR’s story is that both families are totally equal, except the decision to rent vs. buying. So, your alternative reality story isn’t a fair argument against IR’s tale of two families.

  22. Stephen

    Galleria Towers I, II & III in Dallas Purchased by
    Fortis Property Group.

    “We acquired the Galleria Towers from Blackstone (which acquired them from Trizec Properties) in November 2006, and maximized value by aggressively pushing rental rates while at the same time increasing the occupancy from around 90% to 98%,” said Fortis Chairman Louis Kestenbaum. Louis Kestenbaum is the father of Joel Kestenbaum, also of Fortis Property. “The disposition of this asset furthers our goals of maximizing investor returns and geographically diversifying the holdings within our portfolio. We achieved close to 100% profit on our equity investment in the Galleria Towers over a one and a half year holding period, and attained similar returns on our recent sale of International Plaza Tower III across the Tollaway.”

    Built in the 1980s and early 1990s, the Galleria towers range from 24 to 26 stories tall and adjoin the Galleria shopping mall, as well as the four-star, four-diamond Westin Galleria Hotel. Amenities include on-site banking with ATM, security card-key access, conference facilities, a state-of-the-art fitness center, a leasing and management office and an independently-operated day care. The buildings are currently 98% leased.

    Fortis Property Group, LLC is a real estate investment, operating and development company. Its real estate projects include the ownership and management of Class A office and industrial properties located throughout the United States. Fortis currently owns two other Class A office buildings and an industrial property in the Dallas, Texas area. Nationwide, Fortis currently owns more than 20 properties, which contain over six million rentable square feet. Fortis Property Group CEO Jonathan Landau further indicated that Fortis anticipates raising a value-add real estate fund that will invest in Class A office properties in prime office markets throughout the United States.

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