NJ house hunting experience

[semtex]

Last weekend, my wife and I did our house hunting.
A small four bed room colonial built at 1920, the fourth bedroom is the attic. Lot is around .1 acre. Location is nice, at Montclair, NJ. Owner slashed price from 580 to 540. My realtor strongly recommended it to us. In her word, same house will be gone in a week at the last year, maybe with price at 600.
One thing shocked me is that property tax is nearly 15000. What the heck!
Currently we are renting one floor of a two family house at the same good area. It is around 1300 SF with 1600/month. To get the house, we will have around 50% living room increases, but what we pay for it? In my calculation, nearly triple our current rent.

I do not know how to define a bubble, but my wife and I decide to pay more money on rent instead of owing a house.
Let's call it a long term PUT.

 

[mathjak107]

same homes by the same builder were 120,000 cheaper in pa than nj ...all you had to do was cross the river ...they were both pulte /k.hovinian developments

 

[wabmester]

I do not know how to define a bubble

Oh, allow me!

 

[semtex]

mathjak107:

We moved to NJ from Phily.

 

[mathjak107]

we started looking in the lower mcungie area near allentown

 

[brewer12345]

mathjak107:

We moved to NJ from Phily. 

semtex, you may wish to expand the areas you look at if you still wish/need to buy a home. There are plenty of pleasant areas in NJ to live that cost a lot less than Montclair.

 

[astromeria]

wab, where do you make those charts/get the data? I'd love to see the Carolinas and particularly Charleston County, especailly compared to the rest of the South & US--but I bet we'd all like to see our own regions, and I don't want to start a stampede for your time!

 

[wabmester]

wab, where do you make those charts/get the data?

I steal them from here:

OFHEO National Home Price Appreciation Tracker

 

[semtex]

brewer12345,
in fact, the iead location is westchester, since my wife works there and I am at the city. But you know the story there.
In fact, my requirement is one and half hour commute on one way and good school. Simple, right. But no much choice when you plug in it.

 

[MasterBlaster]

The charts that Wab showed would be more realistic if they were normalized by the 30 year mortgage rate or a 30-year T-bond rate.

House prices in the absense of prevailing interest rates aren't all that meaningful.

One could make a case that home price affordability is no worse now than it was in the mid-eighties.

- And by the way, I see deflating prices based on interest rate trends but not a bubble.

 

[brewer12345]

brewer12345,
in fact, the iead location is westchester, since my wife works there and I am at the city. But you know the story there.
In fact, my requirement is one and half hour commute on one way and good school. Simple, right. But no much choice when you plug in it.

Gotcha. Well, keep renting for another year or two, and I suspect tha prices will be a lot more to your liking.

 

[wabmester]

The charts that Wab showed would be more realistic if they were normalized by the 30 year mortgage rate or a 30-year T-bond rate.

House prices in the absense of prevailing interest rates aren't all that meaningful.

Mortgage interest rates tend to reflect inflation, income tends to track inflation, and housing prices tend to track inflation.   We've had several periods with the 10-year treasury in the 5% range before, but we've never had this kind of home appreciation.    OTOH, Japan has had *very* low interest rates for years while still experiencing home price depreciation.

 

[MasterBlaster]

Mortgage interest rates tend to reflect inflation, income tends to track inflation, and housing prices tend to track inflation.   We've had several periods with the 10-year treasury in the 5% range before, but we've never had this kind of home appreciation.    OTH, Japan has had *very* low interest rates for years while still experiencing home price depreciation.

I'm not sure that I believe your premise.

Looking at the charts you showed it looks like inflation has been constant since 1970. Do you beleive that ?

As I remember things interest rates in 1980 were ~15% versus 6-7 % now.

Where's the bubble ?

 

[brewer12345]

Mortgage interest rates tend to reflect inflation, income tends to track inflation, and housing prices tend to track inflation.   We've had several periods with the 10-year treasury in the 5% range before, but we've never had this kind of home appreciation.    OTH, Japan has had *very* low interest rates for years while still experiencing home price depreciation.

I think much of the recent run-up is due to loosened lending standards.  I cannot think of another period in time when an individual could get a "stated income" (i.e. we will take what you tell us to be your income) mortgage that allows the borrower to pay 1% of the balance a year (i.e. a lot less than interest) and not be considered in default.

 

[semtex]

brewer12345,
You mean in the next one or two years, the north NJ house price will keep flat? From my trading experience, the early bubble burst period has the most down percentage. We could see it from chart. Currently this not happen yet.
I would like to bet on it. That's why I call my renting choice as long term PUT.

Could you share your view?

 

[wabmester]

Looking at the charts you showed it looks like inflation has been constant since 1970. Do you beleive that ?

You can see the inflation of the late 70's and early 80's in the graph, it's just dwarfed by recent appreciation, so it doesn't stand out due to scale.

 

[wabmester]

I think much of the recent run-up is due to loosened lending standards.  I cannot think of another period in time when an individual could get a "stated income" (i.e. we will take what you tell us to be your income) mortgage that allows the borrower to pay 1% of the balance a year (i.e. a lot less than interest) and not be considered in default.

The new mortgage products were created because it was the only way people could afford homes at the new prices. Creative financing was an enabler. But I think speculation was the root cause.

 

[brewer12345]

The new mortgage products were created because it was the only way people could afford homes at the new prices.    Creative financing was an enabler.   But I think speculation was the root cause.

Perhaps, but the withdrawal of loose financing will likely cause the RE market to really come apart at the seams.

 

[brewer12345]

brewer12345,
You mean in the next one or two years, the north NJ house price will keep flat? From my trading experience, the early bubble burst period has the most down percentage. We could see it from chart. Currently this not happen yet.
I would like to bet on it. That's why I call my renting choice as long term PUT.

Could you share your view?

I think you will see RE prices around NYC drop significantly along with all the rest of the bubble areas. Places that ran up the least and have had the most robust economic growth in the meantime, will fare the best. Places with overpriced houses that are mortgaged to the hilt and have high and rising RE tax and insurance bills will get whacked the worst as mortgage lenders are forced to regain their senses.

 

[semtex]

The "afford" issue always puzzles me. How could people afford the price? My wife and I both work and are savvy savers. Be honest, we could not afford it.

So where are the income for the buyers? Inheritance? Good stock picker? Good tax practice?

 

[brewer12345]

The "afford" issue always puzzles me. How could people afford the price? My wife and I both work and are savvy savers. Be honest, we could not afford it.

So where are the income for the buyers? Inheritance? Good stock picker? Good tax practice?

Nope. By and large, none of the above. You are thinking like a responsible individual who would put 20+% down, avoid mortgaging yourself to the hilt, and taking a traditional 15 or 30 year amortizing mortgage.

The buyers who drove prices up did so using "new" mortgages. Some use interest only mortgages which do not require the borrower to repay any principal for a few years. Many/most used a first mortgage for the first 80% of the purchase price, and a secong loan/LOC for the next 20%. Less common in the East, but wildly popular elsewhere, is the "option ARM", which allows the borrower to pay 1% of the balance per year and tack any interest this doesn't cover (these loans are around 7% rates now) onto the mortgage balance. Many of these loans are alos "stated income", meaning that you can lie about inflate your income and the lender won't check. *wink, wink, say no more*

All of this stupid siht will eventually come back to bite lenders, borrowers and the rest of us in the ass. And when it does, RE prices will be dropping rapidly in may areas.

 

[tryan]

my wife and I decide to pay more money on rent instead of owing a house.

Offered 2 tenants the house they rent from me ... each was VERY interested until they learned that thier monthly costs would INCREASE 50-60% (w/o maintenance costs). Needless to say, each declined my offer.

Sooo, I raised rents 5% ... not a peep from the tenants.

 

[semtex]

There is something I never understand. One of them is how people sleep well with a big mortgage.
Still remember the car salesman's response when I said I will pay it right now.
Savers are such a rare breed, far fewer than drug dealers.

 

[MasterBlaster]

There is something I never understand. One of them is how people sleep well with a big mortgage.
Still remember the car salesman's response when I said I will pay it right now.   
Savers are such a rare breed, far fewer than drug dealers.

Did you buy a red Farari and pay in cash ?

Actually some people love big mortgages. They look at home equity as "dead" money that is not working at all for them. These people borrow to the hilt and leverage everything for maximum gain.

I'm like you though, I don't like to be in debt to anyone.

 

[brewer12345]

There is something I never understand. One of them is how people sleep well with a big mortgage.

Hey, if they can make the payment, they think everything is OK.