Is Home Ownership Really Worth It?

[twaddle]

Won't argue that it won't regress/revert to the mean but strongly disagree that our mean is determined by home sales in Louisville KY.

Agreed. So, what is the fundamental driver for appreciation in an area? Wage growth, population growth, job growth, and building constraints, right?

I agree that parts of the Bay Area should outperform KY over the long term. But it'll probably be limited to Silicon Valley, and only if prices don't get so high that companies will start looking at KY to maintain their margins.

Of course, if the current credit squeeze drives us into a recession, all bets are off until the economy recovers. Currently, even the mainstream economists (and the fed) are predicting that the housing bubble and resulting credit squeeze will at least impact consumer spending and economic growth for the next 5 years or so.

 

[kcowan]

One other thing about the past is prologue assumption is that wages have been driven up by productivity growth from the industrial revolution. Regression to the mean will be driven by affordablity.

What is going to drive up wages in the next 50 years?

 

[twaddle]

What is going to drive up wages in the next 50 years?

Demographics. Honobob is betting that Boomers will be retiring en masse to Las Vegas and HI, while the few remaining youngsters will get higher wages in Silicon Valley. Probably not a bad bet.

 

[aenlighten]

Your return will vary

If your stocks do 10% and half is paid in marginal taxes while rents rise 5%, you will do better buying if you do so at a favorable time since expenses vary little but returns vary greatly. The average house performs like bonds. If you don't like bonds, you shouldn't buy the average house, but you really need to look not at averages but at what you intend to buy. The problem in expensive areas is not the return itself but the failure of local growth. Prices are high now, but where was everyone 10 years ago, and where will they be 10 years from now?

 

[honobob]

Probably not a bad bet.

Ding, ding, ding!

Actually I thought water would limit the growth in Vegas but they keep [-]stealing[/-] acquiring it from other states. They are almost built up to the mountains so maybe they'll stop there until they figure a way to build straight up. I'm not in Vegas for long term and it will be the first property I sell off but I believe the future is good at least 10 years forward if not forever.


S.F. luxury homes cross $3 million threshold: survey - San Francisco Business Times: Sorry don't know how to tiny url

Twaddle, doesn't look like I'll get that 50% off beach house anytime soon. Maybe if you go down there with a sign "The Reversion is Near" things will speed up. Wear a white sheet, you'll be taken more seriously!

It's been pointed out by others that Hawaii and SF are not dependent on wage growth. People who buy $3M homes are not counting on next years cost of living increase. The desirability by people with money will fuel the demand in the Bay Area.

Twaddle, thanks for the investment spread sheet. I inputed info for a possible Hono purchase and it shows % return on initial equity starting at 47% and increasing to 106.7% by year 10!! I've also been playing with my historical data and it sure confirms my predictions in the 70s, 80's, 90's & 2000's. Actually proves I was smarter than I thought I was. Trouble to follow for sure!

 

[twaddle]

It's been pointed out by others that Hawaii and SF are not dependent on wage growth. People who buy $3M homes are not counting on next years cost of living increase. The desirability by people with money will fuel the demand in the Bay Area.

Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home.

And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer.

Patience. The sale hasn't even started yet.

 

[lets-retire]

Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home.

And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer.

Patience. The sale hasn't even started yet.

Not if the person moving up who has lived in the house several years decides it might be a good time to rent. Then the upwardly mobile person doesn't need to sell they just rent out thier house and use the monthly rental income to offset the cost of buying the more expensive place. It is more common than I initially thought.

 

[perinova]

Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home.

And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer.

Patience. The sale hasn't even started yet.

Anybody considering a $3M home doesn't need to worry about appreciation of the home. This is a whole other market that doesn't follow the same set of rules since the median is where most homes and incomes are situated. If there is no buyer at $3M and the seller needs to sell wouldn't the house go down to $1M in a snap?

The house could stay on the market for years too. Just like this one not far from where I am (NJ) has been listed for $12M for about 3 years and the taxes are $75K per year!!!
Coldwell Banker Residential Brokerage - Real Estate Company


I understand that there has been boom and busts in Hawaii as well. Luxury is the first thing that gets cut in any budget.

Sometimes the market changes dramatically somewhere because people discover the place and flock there for jobs or enjoyment.
The key is to find the former before everyone does and to avoid places that may decay.
BUT people will be complaining that too many people are coming and that the place will not be "like it used to be". Highways, noise, property taxes and all. So what will it be?

 

[twaddle]

If there is no buyer at $3M and the seller needs to sell wouldn't the house go down to $1M in a snap?

It depends. The high-end really isn't that much different except for a few factors: buyers have a ton of ego and generally the ability to weather financial blows, and greedy builders tend to create too much inventory.

In my area, high-end properties are sitting on the market for a long time, and there's on the order of a year's worth of inventory. Probably the worst segment from a supply and demand perspective.

Which is why I think that segment will get hit the hardest in the end, just as I witnessed during the SoCal crash of 1990-1996. Big discounts a comin'.

I figure the big sale starts this fall. I came up with a name for it last year.

The Great Fall of 2007

What do you think?

 

[kcowan]

Slowdowns start at the top and percolate downward, whereas hot markets start at the bottom. In the previous bubbles, the decline has taken several years. So be careful not to jump too soon.

Of course individual markets vary a lot. But this time most markets were affected.

 

[haha]

It depends. The high-end really isn't that much different except for a few factors: buyers have a ton of ego and generally the ability to weather financial blows, and greedy builders tend to create too much inventory.

In my area, high-end properties are sitting on the market for a long time, and there's on the order of a year's worth of inventory. Probably the worst segment from a supply and demand perspective.

Which is why I think that segment will get hit the hardest in the end, just as I witnessed during the SoCal crash of 1990-1996. Big discounts a comin'.

I figure the big sale starts this fall. I came up with a name for it last year.

The Great Fall of 2007

What do you think?

I think a $3 million home in Birmingham or Cincinnati probably is in a different market from the ordinary house. But in high end areas on the west coast not necessarily so. A good performer in middle management can get into one of these with his option winnings, and make payments aided by his bonuses. To me this is vulnerable.

A $1mm place right across the street from me has been for sale for about 6 months. The owners rehabbed it-lots of marble and stuff, but an incredibly bad layout and really just an old house, ok looking but nothing special. They have already bought down in Leschi, so they have 2 sets of payments to make. (Something the agent most kindly told me about!)

Prior to moving up here I lived for a time in Montlake. The house next to me down there has been on the market for a year also at $1mm. The owners moved there, had a baby, and decided they didn't want to raise their kid in Seattle. He works downtown, so they now live on Bainbridge and make 2 sets of payments. I have been in the house, and although it is much better than the one up here it is really just an old house on a not very nice street. A selling point is that it is one of the few places that one can live in Seattle and have a short walk to an express bus to the software employment on the Eastside.

My guess is something happens and these prices start to crack, but so far people seem to be hanging tough, the realtors(TM!) talking a good fight, etc.

Vamos a ver!

Ha

 

[twaddle]

I know some people around here in that same situation: bought a new place without selling the old place. And both places are over $1M. That's gotta hurt. Ziprealty.com will give you some interesting stats. In my area, we've got 236 houses listed. 116 of those have reduced prices -- 50% of the listings have dropped their prices. And this is pretty much peak season, so the fall and winter should be interesting.

I think this is when we'll find out who really needs to sell and who is just fishing. My guess is that the higher rates on non-conforming loans will drive the last nail in the coffin, sellers will give up any idea that they can hold out for a recovery, and we'll see a rush for the exit.

BTW, I just checked craigslist and saw an interesting listing in my area. $1.3 million. For a mobile home (OK, it's on a waterfront lot, but that's still an insane price).

 

[chinaco]

Gee Whiz! $2-$3mm houses. I am in the mid-west. That sort of house very large. Many rooms, much furniture and stuff, a lot of upkeep. Need housekeepers, etc.

What would be a reasonable salary to support a $2MM house and the accompanying lifestyle?

I suppose there might be a range from the person in fairly good financial shape (not distressed) to the person on the edge of just making it.

I calculated a $2mm mortgage @ 7% for 30 years. The payment is 13,306 per month or $159,672 per year. A house like that would probably need a lot of furniture, utility bill, insurance, prop tax, etc...


There is a rule of thumb that a mortgage should not exceed 40% of salary.
That would mean that the salaries would be:

Bad shape guy income range (50% - 60%) : $266k/yr - $320k/yr
Good shape guy income range (30%-40%) : $400k/yr - $533k/yr
Extreme LBYM guy income range (10% - 20%) : $800k/yr - $1.6m/yr

Remember this is for 30 years if it is a working stiff.

Not sure it the 40% rule is linear for higher salaries... therefore, the illustration might be an extrapolation that is not realistic. Plus people may be well enough off to pay $1mm down.

Of course if it is someone who is making millions of $ in a windfall... it is a different story.

 

[FIRE'd@51]

What would be a reasonable salary to support a $2MM house and the accompanying lifestyle?

I calculated a $2mm mortgage @ 7% for 30 years. The payment is 13,306 per month or $159,672 per year. A house like that would probably need a lot of furniture, utility bill, insurance, prop tax, etc...


There is a rule of thumb that a mortgage should not exceed 40% of salary.
That would mean that the salaries would be:

Bad shape guy income range (50% - 60%) : $266k/yr - $320k/yr
Good shape guy income range (30%-40%) : $400k/yr - $533k/yr
Extreme LBYM guy income range (10% - 20%) : $800k/yr - $1.6m/yr

I would call your "good shape guy" the "not so good shape guy". You have neglected property taxes (probably 20K-40K depending on location) on that $2MM house and insurance (another 4K or so). So, in your example, the annual housing payment could be pushing 200K

When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income. So I would argue someone buying a $2MM house should be earning at least 700K to be in good shape. IMO, someone carrying a $2MM mortgage with 400K of income is an accident waiting to happen, unless he is on a very fast corporate track.

 

[W2R]

When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income.

I hadn't heard that one (always went with the 0.28 times gross income if no other debts). I think yours makes a lot more sense, though. I multiplied that out for my own case, and that is a sensible upper limit to spend on a house for someone with my income.

More than 3 times my gross income would have been financially ruinous to me (ER plans or not), I think!

My present house is worth 2.5 times my income, and was worth 2.7 times it when I bought it back in 2002.

Since my house is paid off, I plan to continue to live in an equally nice house after ER, but due to lower gross income after retirement, it won't fit into that formula quite as well.

OK, anyway, a $2MM house at 2.5-2.7 times gross income would imply an income of $740K - $800K. Uh huh. Not likely in my profession.

Not only that, I really don't need a house that extravagant! Never have, never will. It would just be a pain in the behind to maintain, clean, and navigate, not to mention the electricity bills. I had a house once where I nearly had to use roller blades to get from the laundry room to the master bedroom. Been there, done that, not doing it again in this lifetime.

 

[FIRE'd@51]

Since my house is paid off, I plan to continue to live in an equally nice house after ER, but due to lower gross income after retirement, it won't fit into that formula quite as well.

That's ok. My formula is just a guideline for a typical person purchasing a home with a fairly large mortgage. For us "older folks", who don't have a mortgage, the house value to income ratio will, in most cases, be considerably larger. You can still use your 28% rule, but it would only have to apply to the property taxes, insurance, and estimated upkeep of your house and property.

 

[trirod]

Our house is about 0.9 x our annual income, so I guess we really are LBOM! Or it's just that we're in the mid-west where houses are really cheap.

 

[W2R]

Our house is about 0.9 x our annual income, so I guess we really are LBOM! Or it's just that we're in the mid-west where houses are really cheap.

I think that is wonderful, even in the mid-west. Housing may be cheap there, but also high paying jobs are probably not as plentiful there as in coastal areas, either. You are definitely LBYM!

 

[Moemg]

My house is worth 23x my annual income .Luckily it's paid off . That's why I think selling and renting would be a good idea for me now .I could sell my house and invest the money even with renting a place on the beach I'd still have a good chunk left over .In the meantime the principal would stay safe ( I'd do a low risk investment money market or laddered cd's )so when I got tried of renting I could again buy .Am I missing something in my plan ?

 

[chinaco]

I would call your "good shape guy" the "not so good shape guy". You have neglected property taxes (probably 20K-40K depending on location) on that $2MM house and insurance (another 4K or so). So, in your example, the annual housing payment could be pushing 200K

When I was working, the rule of the thumb was that you could buy a house costing 2.5 to 3 times your gross income. So I would argue someone buying a $2MM house should be earning at least 700K to be in good shape. IMO, someone carrying a $2MM mortgage with 400K of income is an accident waiting to happen, unless he is on a very fast corporate track.

I used the information from some mortgage site that indicated no more than 40% of income for the house payment. I did not look closely to see if it indicated before tax or after tax income... I did this in the morning while drinking my first cup of coffee. Maybe the 40% was one of those subprime high risk lenders that is in the news.

Never the less, when I saw someone talking about a $2-3mm house, I thought it would be an interesting illustration.

 

[haha]

Never the less, when I saw someone talking about a $2-3mm house, I thought it would be an interesting illustration.

Here are some listings from a popular city of Seattle neighborhood. Not the most expensive, but one that I know 'cause I walk around here.

Summary List - TheMLSonline.com | 425-467-6577

 

[aenlighten]

A million dollar mortgage

is the most that is deductible which is why most really expensive properties have small or no mortgages. The real cost of a house is something like double what you pay for it though when you consider depreciation, maintenance, repair, utilities, taxes. With an equal amount invested you don't need an earned income.

Have you considered transaction costs? Property taxes? The latter could make a big jump if your assessment is below market. Inflation will depreciate your money if you spend your interest. Near term prices should decline too so that may not be a problem, just be careful for when they switch. Invested, it could only provide 4% safely, so can you rent something you like for 4%?

 

[Moemg]

[ Invested, it could only provide 4% safely, so can you rent something you like for 4%?[/quote]


I could easily rent something I like for 4% of the income of the invested money and still have a good chunk left over .

 

[ChrisC]

[ Invested, it could only provide 4% safely, so can you rent something you like for 4%?

I could easily rent something I like for 4% of the income of the invested money and still have a good chunk left over .[/quote]

Hmmm, if I want to leave my spouse or children a financial legacy of some sort, and I have $3 million, and I'm relocating to another part of the country having just sold the old homestead, I'm thinking that I should probably buy instead of renting, especially if I move to a state with favorable homestead exemption from creditors, like good ole Texas! If I buy, I could put a boat-load of cash into a house, and if my health goes bad, I won't have to drain all my expenses for health-care costs -- I have good old homestead and medicaid (which allows you to shelter up to $750K in home equity) if things really get worse and I've run through all my savings and portfolio -- that home would go to my spouse or kids.

Now, if I rented, and my health gets really bad, all of my creditors will be able to get to my portfolio and drain it for my expenses -- I have nothing to leave my spouse or kids.

 

[Moemg]

Thanks chris ,I forgot about that issue .