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Wednesday, July 05, 2006

Home Ownership Above All Else

Here's a great article from Seattle Times writer Nicole Tsong about young people who apparently value home ownership above all else.

Although Seattle-area real estate is more expensive than ever - a tiny studio at the new NoMa Ballard condo building in Seattle, for example, starts at $180,000 - it's also more attractive than ever for young singles to buy, with cheaper conversions of apartments to condos, creative financing options and slick marketing campaigns aimed at them.

But there also is fear among young adults - and their parents - that they won't be able to afford real estate in the future.

"There seems to be a lot more peer pressure, more parental pressure to buy at a younger age," said Warren Ballard, vice president of Williams Marketing, which sells new condos and conversions. "The attitude really has changed."

But just because more young adults are buying doesn't mean the purchase is easy.

Young buyers are making major compromises and using creative financing to buy their first homes - including recruiting roommates or siblings, borrowing from parents, sacrificing space and living in less-desirable neighborhoods.
"Fear...that they won't be able to afford real estate in the future." Yes, it's definitely a good idea to make major life decisions based on fear, don't you think? Throw that pesky logic and reason out the window and go with your gut. Yikes.

The anecdotal tales in the article are priceless:
Dawn Wiggin, 27, decided she was ready to buy her own home only weeks before she signed the paperwork for a condo in NoMa Ballard.
...
But the 475-square-foot condo, priced in the low $200s, will be tough financially. The mortgage is $700 more per month than the one-bedroom apartment she's currently renting until her condo is finished this fall.

Until she bought her condo, Wiggin, a program manager, had extra spending money to travel and meet up with friends for happy hour. She also treated herself to a big vacation every year and took lots of weekend trips.
...
"It's going to be a challenge," Wiggin acknowledged. "I'll be paying a lot more, but it'll be fine. It'll be a great investment."

She still has several months for it to all sink in. And, she reasons, she would never save the extra $700 a month that will go to the mortgage, anyway.

"I'm just pretending I'm saving it," she said.

Thirty-one-year-old April Schiffman's two younger sisters already own condos, and her parents felt it was time for her to do the same. They provided the financial push, offering her a down payment as long as she paid her own mortgage.
...
But the purchase has made April Schiffman, a Web designer, a bit anxious.

"It's a lot of responsibility," she said. "It's not like an apartment, and you can give 30 days' notice and move out. You've got to make those payments."
...
"There's no one to turn to and say, 'Hey, somebody help,' " she said.

Her anxiety has subsided a bit since she signed the final paperwork. She plans to live in the 700-square-foot condo for at least two years, maybe more.

And she knows once she is settled into her place, the budgeting will be worth it.

"At that point, it'll be such a habit, I'll feel better (knowing) I have something and am building equity."

Taylor Halverson bought at a time in his life when many young adults don't even know what career they're headed for.

He bought his 580-square-foot loft two years ago with money he had saved. With a steady job, he saw the purchase as an investment.

"You're not paying money for nothing, i.e. rent," he said. "At the same time, you're investing in something that gives you a reasonable return."
...
He compares having a mortgage to dieting - it takes discipline and a lot of responsibility, he said.

While Halverson was among the first of his friends to buy a place, he said he didn't feel any pressure. Still, when asked what prompted him to buy at such a young age, he responded:

"Is 25 young?"
I'd be really interested to know what people who grew up in the 40's and 50's think about this sort of mentality. As a young person myself, I find it both amusing and frustrating at the same time that my peers are so willing to just throw caution to the wind and jump into this insane real estate market with both feet. I'd love to own a home, but it's not so important to me that I'm willing to give up every other nice thing that I could be spending my money on. Renting isn't "throwing away" money. It's paying money for a service, and in the current market, it's a dang good deal. I just don't understand how so many people can't seem to grasp that concept. Well, I guess I do understand... it's called thinking with your gut instead of your head.

(Nicole Tsong, Seattle Times, 07.02.2006)

55 comments:

matt said...

Yeah this article is a doozy, especially the 'Wiggin' anecdote.

First off, 200K+ for a storage-space sized 475 sq.ft. appartment is truly bizarre, that and the concept of starving for this 'investment' also doesn't ad. Personally I weigh 'quility of life' into everything I do, paying a little more for added convenience, etc...

It might be commendable for such a young person to take on such heavy financial responsibility so early, but the problem is she hasn't run the numbers, that and she's being exploited by the RE community from all angles (mortgage lenders/agents/developers). If she expects to make a dime off this place, she's going to have to camp out (and in 475 sq.ft., that's exactly what she'll be doing) for a good 5-10 yrs to get any kind of return assuming Seattle housing doesn't collapse...

I came to the exact opposite conclusion and was interviewed for the 'Times by none other than Ms. Rhodes...

http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=aptrents16&date=20060415&query=rivett

I reached a completely different conclusion. I realized I wouldn't be throwing my money away by renting (just as The Tim commented) and that the bonus money I'd save would allow me to diversify my portfolio into something other than an inflated asset class (i.e Ballard RE). That and I wouldn't have to pay interest just for the privelege of holding said asset.

Instead I boosted my 401K and invested in Gold, liquid investments that don't tie me down. In addition I'm paying for the convenience of mobility (i.e. renting). If I decide to change jobs, move, get married, I can do it almost immediately, and for that convenience I don't mind paying extra, especially in an economy that's in flux like ours.

Peer Pressure is indeed the cause of these poor choices, and like Shiller says, this 'boom' or what-have-you is mostly psycological.

Anonymous said...

I think a lot of people have forgotten that real estate is not illiquid.

Also, they don't realize that mortgage interest, property taxes, insurance, and maintenance are as much "throwing money away" as is paying rent.

A large part of the problem is that they simply do not know how to save without the forced discipline of a mortgage payment.

Anonymous said...

Oops, I meant to say:

people have forgotten that real estate is illiquid.

-Anon Wed Jul 05, 11:23:08 AM PDT

marin_explorer said...

“I'll be paying a lot more, but it'll be fine. It'll be a great investment.”…“You're not paying money for nothing, i.e. rent…. "At the same time, you're investing in something that gives you a reasonable return.”

There's an interesting blend of fear and optimism in these comments. Many of us have probably felt the conflict of listening to peers vs. following our own better judgement; we eventually learn to stand up for ourselves and be adults. Home buying isn't a decision left to family, friends, or [gag] realtor advice. If you're not doing the math like Matt and others have, you're not ready. It's a lesson that will carry a hefty price tag for some.

Mikhail said...

Off-topic.

Has anyone heard of a growing use of incentives, or discounts, by Puget Sound area builders lately? As we've seen in other markets, it seems like a growth in give-aways and builder incentives is a leading indicator of real-estate weakness. I wonder if any such signs are showing in the Seattle area? Or are we still in a mode with buyers camping out to be the first to sign contracts on new developments?

I noticed some signs for a development near Auburn over the week-end, highlighting easy-credit and other perks. If the market were so hot why would the builder need such additional perks?

Anonymous said...

I have been getting a lot of condo leaflets/brochures in the mail lately. They look quite nice. I wonder if the build quality is as nice.

Anonymous said...

Lumen, they just reduced their priced for some condos by over 100K. They originally priced their court yard 675 sf condos (i.e. no view, but a nice court yard patio) just below 500K. But now it is just below 400K. What used to be upgrades worth over 30K (polished concrete from standard concrete, and nicer cabinets) now are standard included. Not sure if these are the signs that the market is weakening, or if they are overpriced to begin with.

On the other side, Vulcan have been increasing their prices. Originally during their launch party, I was told that Roller Street is suppose be starting at 350K, but not on their website it states starting from low $400s. Veer lofts, for full lofts, used to be Mid $500K TO Mid $600K (as I was told during the launch party), now on their website, it says Mid $500K to Mid $700K.

Anonymous said...

Aside from my own better judgement and reasoning skills, articles like this one tell me that I'm making the right decision to sit out the market insanity.

Perhaps I'm a snob, but I remember how stupid most of my peers actually are. Why would I follow their example on something as important as my own financial well-being?

Anonymous said...

I think they are crazy to sacrifice so much to buy a place, but is it really that hard to under the home ownership dream?

I don't think Seattle all that great of a place to live, so if I couldn't afford property I don't think I'd be living here.

But, home ownership is a goal for a lot of people. Not only because it is the American dream, but also because it marks a big step from the "college-renting" lifestyle many of them came from.

I tried an informal survey of the number of you who own property and very few replied. I suspect that many of you don't now and haven't ever own property in this area. This may come as a shock to you, but owning a home (that's financed correctly in a market that is appreciating) is always better than renting.

To quote Chris Rock:
"I'm not saying they should buy those places, but I understand"

Anonymous said...

Previous Post Cont ...

Yes, there are reasons why renting makes more sense. If you are going to move in less than 2-3 years, if your job status is unpredictable, etc.

But, generally, I stand by my statement.

Anonymous said...

Super bad timing for overpriced RE buying. It is very true that fear - based decisions are the worst.

Also a shame that the "buy now or you'll never get in" propaganda is still at work in Seattle.

Wall Street Journal has an article today predicting 50% depreciation in RE in the hot markets.

That's what everyone's been calling Seattle for years, right? A hot market!

Link to the WSJ article at the Housing Bubble Blog, July 5.

Anonymous said...

The only caveat is that there is "healthy fear" (usually it causes you to make the opposite decision that these people are making). The fear that the market is overpriced, or that you "just can't put your finger on it, but it seems risky" is often a good instinct to follow.

I know everyone here would like to say they're logically doing the math and that's why they didn't buy, but developing some good "fear" instincts can help protect you too.

I guess I'd describe that kind of fear as associated with skepticism and some reasonable amount of pessimism.

Anonymous said...

Previous anon:

That is a pretty big qualifier these days: (if the market is rising and if you financed correctly).

I am willing to take a leap and guess that the market will head lower and most of the people who bought recently have NOT financed correctly...so, there goes your theory out the window...

Anonymous said...

That's what everyone's been calling Seattle for years, right? A hot market!

According to the local press, its not a hot market, its a sizzling hot market....

however, Seattle's different especially Ballard...

ser said...

Anon 4:17-

Have owned in the past. Want to own again.

However, there is no way I would buy into this huge credit/housing bubble.

Honestly, I've thought about it long and hard and I think even if I won a multi-million dollar lottery right now and had money to burn, I would not burn it in the Seattle housing market this year.

I'd live off the interest on my millions, pay rent and wait for housing to correct at least some before I bought with my cash!

Overvalued is overvalued no matter how much money you've got.

Anonymous said...

"I tried an informal survey of the number of you who own property and very few replied. I suspect that many of you don't now and haven't ever own property in this area."

Uhm...perhaps you were ignored because it was a pointless question.

I don't own property. I could own, but I think it's a bad time to buy, and it's substantially cheaper to rent. Do I have to own property in the market to be correct?

"This may come as a shock to you, but owning a home (that's financed correctly in a market that is appreciating) is always better than renting."

Wait...are you telling me that it's better to make money, than to lose money? Why...I'm...I'm...shocked!! Could you explain the concept again, just so I know that I have it down?

Give me more of your precious insight. Teach me. I am yours to mould.

Anonymous said...

Anon 4:17,

I own. I bought a bit of a fixer two years ago, and to be honest, it sucks. It's a time suck, it's a money suck, and it's an overall sucky lifestyle.

I'd rather be renting, "college lifestyle" or not. Renting would afford me about $700/month in extra income that I could invest in a diversified retirement asset mix, and I would have leisure time again.

Home ownership is overrated. Once I get the place into decent shape, I'm selling and finding a nice apartment.

Anonymous said...

it just amazes me how people still think renting is throwing money away and mortgage interest payments is not....

on a 350K home, interest would be around 2K.. monthly is around 2,300... in essence they are putting 300 dollars into the house and renting from the bank for 2K...

a year from now they look at the balance sheet and wonder why they still owe the bank close to 350K when they paid well over 25K that year...

Goes to show how we as a nation are poor in math...

seattle price drop said...

Anon 5:20-

I am as mystified as you by this phenomena of people not seeming to notice how much $$$$- BIG $$$$!!!- they're throwing away on interest payments while not paying off the principle.

When I bought, I got my loan from a bank.
Every month they sent a statement that showed exactly how much interest I'd paid them for the priveledge of "owning" and how much I still owed on the priciple.

It was a huge motivator to get that sucker paid off as quickly as possible. Which I did.

Are people in the dark about this now?

They seem to be with all the talk of tax deductions, the price doesn't matter, rather have a 400K loan at 4% than a 300K loan at 8%, etc etc.

I think during the current run up in prices there's been a deliberate attempt to disinform and de-educate people about interest vs. principal payments.

And it's worked like a charm! Nearly everybody bought it!

synthetik said...

I understand why you anon's feel this way. If I owned a home that I purchased in 2004 or 2005 my head would be buried in the sand as well.

la la la la la la la...I can't hear you...

A good analogy would be a love interest. How many of you have had a good friend that was dating the WRONG person. It was completely obvious to everyone other than your friend.

They didn't listen to you because it was painful to come to grips with that particular reality.

Most mental illness stems from the avoidance of mental pain.

Right now you are unwilling to listen to your own voice that's telling you to RUN AWAY, to leave that horrible, co-dependent relationship that is the boat-anchor of your home.

Essentially you are driving yourself crazy (becoming mentally ill), which, just like a failed relationship will only end in extreme pain and suffering.

I bid you well.

Anonymous said...

Wonder if Realistic Realtor has put her house up for sale?

Remember, she was toying with the idea a couple weeks ago, then left the blog.

If she decided to sell, I wish her luck.

She was a mensch for coming on this blog and being honest.

Anonymous said...

Home ownership being part of the American Dream is just a marketing ploy. It is as ingrained as "a diamond is forever".

Wiggin is digging herself a hole.

Anonymous said...

I've owned before but when I moved to this area I started leasing to get to know the area before buying. I've worked hard my whole life and after selling my business I ended up with a decent amount of capital so am in a position to buy a very nice house (even with todays inflated prices) with cash. But after doing my due dilligence and analyzing all the data it was clear we've got a bubble market and that this was a horrible time to commit capital to real estate. So instead I'm happily renting a great home, earning great returns on my investments, and paying less than 1/2 in rent as this house would cost to buy on a 30 yr fixed mortgage. Regardless of how far you've come in working to achieve your financial independence buying now would be insane.

Anonymous said...

Amen. It is stupid to buy now if you're "rich" and suicidal to buy now if you're not rich.

Either way, you are looking at a substantial loss.

When the Wall Street Journal starts talking about 50% off, watch out.

It's coming. RE is in for a major hit, a few years too late, but it's finally happening. The cycle/circle begins it's completion.

Just like every other time and every other mania.

Eleua said...

When I was that age (gee, I sound old), my buddies and I spent our extra energy chasing skirts. Why we would spend our mid-20s, sitting in a condo, and fretting how we were going to swing the mortgage payment? Jacksonville and Pensacola had far better ways to spend a Friday and Saturday night.

It's one thing if your prospective spouse comes with some student loans, or modest CC debt. It's quite another if she comes with a negative $120K net worth, due to owning a crappy condo in a crappy part of town.

That's quite a bit of baggage.

What's wrong with kids these days? (fuddy-duddy alert)

Anonymous said...

Except Ballard. ;)

Anonymous said...

I'm the Anon who made the comment about home ownership being worth more than you guys give credit.

Here's what I know. I just sold my first property after owning it for 26 months for $400k which I bought at $260k (with a 4% realtor to boot) Yes, almost all of my payments were interest, but they were tax deductible and in the end I made a heck of a lot of money. I put in about $5k for a bathroom remodel plus various upkeep expenses over the years.

To the poster who talked about putting his money into a "diversified retirement asset mix" with the money left over from renting. In order to get the kind of gains this market saw in the last 2 years, you would have to make some very risky investments.

2 years ago the same attitudes existed (although not as much) about how expensive everything is and how hard it was to get a foot in this market. Had I not made some sacrifices to get into the market, I'd still be renting.

The "Diamond is forever" is pretty much a crock, but a bad comparison to the general attitude of home ownership over the last 50 years. Home owner over the last 50 years has had a number of benefits ranging for financial gain to family/social benefits.

Please don't take this to mean I'm trying to tell you I'm better than you. I just think you guys can't/won't/didn't/couldn't get into the housing market and have turned home ownership into the curse of Satan. There are plenty of tangible and intangible benefits to home ownership. As I said earlier, I think what these people are doing is crazy.

Anonymous said...

Anon 7:07-

Owning a home is a totally valid "dream". I've owned and been very happy with that decision.

However, I bought at the bottom, not at the top. So not only was it a great feeling of stability, it also made financial sense.

In fact, it was CHEAPER than renting.

The nonsense being pounded into young people's heads about "RE only goes up" is nothing but shameless lies from an industry that has nowhere left to go for prey but 20-somethings. They have eaten through every other demographic.

Somebody needs to be taken to the woodshed for a good a$$- whooping: RE agents, mortgage brokers, the media, whoever is knowingly feeding these lies.

So when you see the top, it's time to put your dreams on hold, if buying a home is your dream.

Rent your $700/mo. apt., eat out, get your hair cut wherever you want, go on vacations and buy when the mortgage and taxes are $700/mo.

You'll be glad you did.

There is another saying that we haven't heard much these past few years: "RE always goes down".

Eleua said...

anon 914,
If your comment is for me...

I guess if I lived in Ballard, then I might pass on the 20s scene and stay in my apartment all weekend.

Whenever anyone asked me where I was from, I said "Seattle."

"Oh, I hear it's beautiful there."

"Well...it rains all the time and the women are ugly."

In reality, it only rains 220 days per year.

Southern women and PNW women each spend 2 hours to get their 'look' just right. Southern women will spend 2 hours to look their absolute, knock-out best. PNW women will spend 2 hours to make sure the blackness of their lipstick, matches their nails, and the purple spiked hair goes with the combat boots and various facial piercings.

Anonymous said...

Anon 9:24-

It simply is not worth it to buy into a market that is crashing- do you get that?

Furthermore, who knows how long the "bottom" will last?

It could be a long one.

So telling people to make sacrifices to buy a home is not appropriate at this time.

Next year, maybe.

Also, it can be a VERY good thing to pay off your mortgage.

I paid mine off, had a little rental at the same home ,and from there on in it was a cash cow. REAL money coming to MY POCKET every month.

The mortgage tax deduction is highly over-rated.

Here's another thought, the time to make the sacrifice is BEFORE you buy, saving for the DP, etc., not after.

Anonymous said...

I always find it interesting when people quote how much they "made" in the housing market when they took the proceeds and put them right back in. That sounds more like a balance transfer to me rather than a "profit". Only time will tell if that "profit" is real or evaporates. Really, as we are all trained, there is no downside or risk involved with RE. People constantly take long-term realities of the housing market and turn them into short-term myths. I think most people posting on this blog probably would jump into a rational market where prices were set based on realistic expectations and an understanding of expenses, liabilities, risks, and rewards.

Anonymous said...

Marin Bubble Blog and Northern New Jersey Bubble Blog for July 5 both have links to the Wall Street Journal article.

Lake Hills Renter, are you out there? Hope this article will make you feel better about your decision not to buy!

100% said...

Anon 9:48-

I think 99.99999% of the renters on this blog are here because they do indeed want to buy very badly once the fundamentals appear once again.

For sure, I'm one of those 99.9999%.

Why would anyone who had no desire to buy give a hoot about a housing bubble? Especially with renting so much cheaper?!

In fact, I'm going to correct that percentage and say 100% of the people coming here want to buy once it makes sense to do so.

Anonymous said...

Do I want to buy a home once the fundamentals return? Yes.

Do I want to buy a home in Seattle once the fundamentals return? No. Some people like it here. I'm not one of them.

Nevertheless, I do want to hurt myself every time I hear some 22-year-old nitwit raving about the money they made on their real estate "investment." That's why I read this blog.

You can say that I'm bitter that I missed out on the boom, but I know better. After all, I've already watched the internet bubble form and implode. And while I lost a little bit of money in that mess, I watched a hell of a lot of smug 20-somethings go bankrupt in the aftermath (and you can bet that they were online, bragging about their investments, too.)

I read this blog because I know that I'm right about the real estate market, and I'm right about the historical trends, and I like to comisserate with people who think the same way I do.

That said, for the life of me, I can't figure out why people are so invested in changing my opinion. What's the matter, guys...getting a bit nervous?

realistic realtor said...

"Wonder if Realistic Realtor has put her house up for sale?"

Not yet. I'm going to hold on to it a little longer.

I'll say this, real estate can be volatile in the short-term, but is relative stable over the long-term. In the 2.5 yrs I've owned my home it increased nearly 6-digits based on current market values. To me, that was worth cutting down on eating out and vacations, not having an Ipod. I rearranged priorities, not sacrificed my standard of living.

Ten years ago I had the opportunity to buy a house 1/2 block from Green Lake (3,000 sf 5bd, 2.75 ba) for $335,000. Back then, that was an outrageous price. Today, that home is worth over $850,000.

Point is who knows where the market will be in 6 mos, 12 mos, whenever. I rather play and lose than sit on the sideline contemplating what may be, could be, will be, never be.

BTW, he not she.

Anonymous said...

Anon 10:27-

Have you noticed that the closer we get to outright implosion, the quieter the trolls get?

They've been getting quieter the past few weeks.

Hard to deny something's up with interest rates rising as fast as inventory and price reductions.

And even the mainstream media's getting in on it.

Did you see the Seattle Times article on suicide loans and the havoc they'll cause last Sunday?

It said they were prevalent in markets that had appreciated X amount. Then buried deep in the article it said SEATTLE had appreciated X amount.

Pretty funny. I'm thinking some of the roll back in trolls is due to RE related job loss and people who suddenly realize they are FB's.

Why keep touting the party if you are no longer a participant? And wouldn't/aren't these the people who would have been interested and had the most to gain by being bubble blog trolls in the first place?

seattle price drop said...

Realistic Realtor-

At 335K, it must be paid off so wow why would you ever want to sell that place?

Green Lake's a great place to live for 335K.

However, it sounds from your post that you may be implying that your sacrifice in buying a 335K, 5 Bedroom, 3000 sf home on Green Lake is comparable to the sacrifices of somebody buying a 475 sf condo in Ballard for 200K.

You don't really believe the 2 examples are comparable, do you?

Where to start?

Let's say that 10 years ago, you fell on some financial hard times and needed a money boost. With 5 bedrooms and 3000sf, you could rent out a couple rooms at a cool 1000/month.

Who's the girl in the article going to rent to? I guess she could sleep on the couch and rent the bedroom out, if there is one.

Do you honestly believe that buying in '96, which was when the current run up started, and therefore at the bottom of the cycle, is comparable to buying now, 10 years into it? And what many see as the top of the current cycle?

You have 500K unrealized profit which you yourself were thinking of cashing in on because, presumably, you sense we may be at the top. In fact I think you said you were thinking that you might get another 30 K if you held out one more year.

That's not much appreciation on 850K in a year. What is that? 3% ? And it's a BIG house on GREEN LAKE!

So how much appreciation is this woman in Ballard going to see on her 475 s f condo?

And I'm sure you've noticed, condos are becoming a dime a dozen in Seattle. Not exactly prime real estate!

As a realtor, I'm sure you know that some things will always retain value better and longer than others.

A large home on Green Lake bought in '96 is NO comparison to a studio sized condo, (even in Ballard!) bought in 2006.

Sorry for the rant if you were not trying to compare the two.

Totally apples to oranges.

Some RE purchases really ARE better than others. It pays (big!) to know the difference.

Your sacrifice of vacations, ipods, etc. were worth it. If nothing else, even if the market tanks to the center of the earth, you've got a great place to live.

The same cannot be said for this woman in Ballard. If the market tanks, she's stuck in what is basically a studio apt. and paying through the nose for the priveledge.

meshugy said...

Point is who knows where the market will be in 6 mos, 12 mos, whenever. I rather play and lose than sit on the sideline contemplating what may be, could be, will be, never be.

So true....you can find articles calling for a housing crash all the way back to 2002. But look what's happened since then?

I admire those of you who are waiting it out...I don't think you're right, but I do admire the dedication and perseverance. Unfortunately, the market in Seattle is nowhere near a crash right now. The first 6 months of this year have been the second best year on record (2005 was the best). All waiting has done so far is make the dream of buying an ever more remote possibility. Prices continue to climb as well an interest rates. You get less for your $ every month....

Anonymous said...

Can you post a link to this article?

Did you see the Seattle Times article on suicide loans and the havoc they'll cause last Sunday?

Eleua said...

Meshugy,

You are a valuable part of this forum. We need guys like you.

You remind me of one of my co-workers back in 11/99. Back in '97, he couldn't spell STOCK, but by '99 he was just full of stock bull.

We worked together one night, and he just went on and on about how bears don't get the new paradigm of the 'NEW ECONOMY.' He was making $80K/mo by playing puts and calls, on the really sexy tech stocks. Given that I also do the put/call thingy, I tried to get him to hedge a wee bit against a violent rollback. Nothin' doin'. He had a "system."

I went to another employer in January of '00, so I lost track of him. If he didn't change his "system," he would have lost, at least, $500K in 4/00 alone, to say nothing of what he lost trying to make it up during the rest of the NAZ implosion.

Don't stay too late at the party, 'shug, and please keep telling us just how dumb we all are. When people tell you how smart you are, that is when it is time to be afraid - very afraid.

seattle price drop said...

Re the funky mortgages:

The article is in last Sundays (July 2) RE section of the Times, front page, "Short Term Mortgage Rates Rising, Economy Feeling Effect".

It explains how home prices were allowed to rise so far only because of the loans handed out over the past several years:

"As a result, homes appreciated by the double digits in some areas, including Seattle". (page F 5, paragraph 4)

They are saying home prices became disconnected from incomes because of the easy money.

Eleua said...

They are saying home prices became disconnected from incomes because of the easy money.

WOW! Next thing you know, they will report that the cyclical, daily rise in air temperature is caused by a big, bright light that presents itself in the Northeastern sky every summer morning.

Well, late is better than never.

realistic realtor said...

Sorry, I should clarify...I had the opportunity to purchase the Green Lake house 10 years go. But I didn't. Back then $335,000 was an incredible amount and on the high-end for Green Lake properties.

I only bought 2.5 years ago...not Green Lake. When I purchased, the mortgage was $700 more than my rent. So, it's relatively similar to the Ballard example.

Back to Green Lake...the what if's...Appreciation would have been 3.9%/yr but I wouldn't have invested $335,000. Who pays cash for properties? The investment would have been say 3-5% down + mortgage payments that would have been offset by rental income and int. deductions. Therefore, the return would've be greater than 3.9% per year.

---------------
I agree with the BH's, the housing affordality index for King co is about 80% and prices are just outrageous. If I didn't jump in when I did (which was a tough decision...pre-realtor days), I'm not so sure I could afford to do so now. Ok, so that kinda contradicts an earlier statment about playing in the game rather than sitting on the sidelines...if you can't, you can't.

seattle price drop said...

Thanks for the clarification RR. I also missed the boat on a 180K house in '96 that was last on the market for 1.2 million dollars.

I don't expect it to go back to 180 K, but I sure don't think it's going past 1.2 million either!

It's examples like this one (and I've seen plenty) that make me laugh when I hear people deny there is a bubble in Seattle.

Appreciation? We've seen plenty. More than most places in the US.

Anonymous said...

"Appreciation would have been 3.9%/yr but I wouldn't have invested $335,000....The investment would have been say 3-5% down + mortgage payments that would have been offset by rental income and int. deductions. Therefore, the return would've be greater than 3.9% per year."

Riiiight. You were going to get a loan of $335k, in 1996, with only 3-5% down.

Two questions:

1) What are you smoking?
2) Can I have some?

In 1996, in the real world, everyone else was paying 20% down on a 30-year fixed, with an interest rate of somewhere around 7%. By my calculations, you would have paid about $220,000 in interest by this year, and paid down about $50,000 in principal.

For those of you playing along at home, that's $22,000 per year in interest. If we assume the rosiest scenario -- you're in the top income tax bracket -- that means that you would save about $6600 a year on taxes due to the mortgage deduction.

So, you put away a total of $117,000 in principal, paid a total of $220,000 in interest, and saved $66,000 in income taxes over those 10 years. And you sell this year for $850,000....a net profit of $579,000 on a $337,000 investment. That's a 5.6% annualized growth over those 10 years (assuming that you paid for maintenance, insurance, taxes, and utilities by renting out your spare bedrooms -- hope you don't value your privacy!)

So, hey...5.6% annualized growth...not bad, Mr. Buffett! When is the book coming out? You should have your own cable show!

Not so fast, though. What if, instead of your expensive home, you had put your money into the Dow instead? Well...on July 6, 1996, the Dow closed at $5,588 per share. Today, it closed at $11,152. Guess what? That's a 7.15% annualized growth rate.

D'oh!

Real estate is a bad long-term investment.

Anonymous said...

There is something missing from your analysis - capital-gains taxes. Nowadays, you're likely to pay more taxes from stocks than from housing due to the $250k capital-gains exemption for housing. (It's worse if you're paying short-term capital gains taxes on your stocks, rather than long-term.)

But fundamentally you're on the right track. Over the long term, housing appreciates with wages and stocks appreciate with corporate earnings. Guess which one grows faster?

Anonymous said...

In fact, I'm going to correct that percentage and say 100% of the people coming here want to buy once it makes sense to do so.

Nah, I already have a house. I only come here so I can read and share risky cases, so I can feel good about having bought when I did:

AA is a woman in her late forties. She had a house in Bellevue that was foreclosed against ten years ago. In January 2005 she put 20% down on a $500,000 Kirkland townhome with a 5/1 ARM. Her lowest APR was 5.99%. With her APR pegged at five percentage points above index, I'm sure she's paying more per month now.

VM & DB have two children. They moved from their Shoreline home (sold @ $314K this year) to a house in a Snoqualmie planned development. They have two mortgages totalling $435K. The primary mortgage is 30-year fixed, the second mortgage has a 15-year term.

I figure ABA must be making $120K-$160K, and the couple's joint AGI is about $160K. Who buys beyond 3.5 times their household income?

Reading about the mortgages made me choke. Sure, ABA has an adult child, so she doesn't have after-school care to contend with, and the couple has youth on their side. Sometimes it seems everybody has rich grandparents who kicked off, or earns $150K/household (who is actually earning the median income?) or are darn excellent with their money, aside from stashing retirement funds away.

Anonymous said...

So true....you can find articles calling for a housing crash all the way back to 2002. But look what's happened since then?


This is proof of... what?

This area was in a deep and persistent recession in 2002, but prices were still rising at above the historical mean rate. That's highly abnormal.

The last time this area had a recession that deep in the early 80's, the housing market softened, rather than accelerated.

Seeing what was going on in 2002 as the early stages of a mania unsupported by fundamentals like job, income and population growth was logical. But it was certainly too early to make a prediction about timing.

That's one of the key characteristics of a bubble - it goes on growing well beyond point that any rational analysis could predict.

Anonymous said...

Windfall profits from the past are always dredged up as evidence for buying into current speculative markets; unfortunately, such profits are no longer sustainable and are subject to reversals of fortune.

I read about a guy who registered the url "finance.com" for $60, then sold it during the dot.com craze to Citibank for $3 million.

Obviously, in retrospect, we should have done that before him, but we didn't.

However, now that the dot.com mania is over, there's no point in doing it now. There's no longer any upside.

Get the point? Buying housing years ago would mean windfall profits today - BUT such profits are no longer achieved by buying in at the top of the market. As a significant correction is likely, buying in now risks equally large losses.

I don't hate housing; I've owned in the past and will own again; I make enough money to buy in even at these inflated prices; however, I hate losing my money in bad investments.

It's really that simple.

lake hills renter said...

Lake Hills Renter, are you out there? Hope this article will make you feel better about your decision not to buy!

Yes, I am still out here, and it was just a momentary lapse of doubt. I'm back to my bearish self now. :)

Anonymous said...

100% said...

"In fact, I'm going to correct that percentage and say 100% of the people coming here want to buy once it makes sense to do so."

Wrong! I have never really wanted to buy a house. I like being a renter. And no, I am not a deadbeat -- I'm 43 years old, single, and gainfully employed. And I like someone else having to worry about the plumbing, the replacement windows, the landscaping, etc.

I read this blog (and TheHousingBuggle.com) because I want to know about the larger economic picture. When RE crashes, lots of other sectors will be affected. I want information and opinions about good places to rent, where I should look for my next better-paying job, etc.

I do not want to buy a house or a condo. I want to move up to a better rental apartment.

--SeattleSis

RedHotLama said...

She got the open 1 bedroom, which is like 50sf bigger than a regular studio. Its basically a studio, just has a half wall between the bed and couch.

http://www.nomaballard.com/floorplans.htm

Anonymous said...

It's true that mortgage interest is pretty much like "throwing money away," but some of that throwaway you get back with tax deductions. Plus, it's hard to put a price on pride of homeownership, as cheesy as it sounds. I just bought my first home for way more than I ever thought I'd spend on a "starter" home, but I love the fact that I can change the paint colors to whatever I feel like. I love the fact that I can rip up the nasty linoleum and replace with something nicer. I love the fact that I just knocked out the stair rail and built a new one for nothing more than the price of building materials and a little sweat. I especially love that I don't have to haggle with snaky landlords anymore!

I'm not saying that home prices aren't inflated, but generally speaking, real estate rises over time. Even if the market softens (or bursts, heaven forbid), I have no problem riding out my investment through the dip in the market and making money when I choose to sell on the upswing. And through that dip I'll be living in a place I'm proud to say I own.

The Tim said...

Good for you, Anon @ 02:58:43.

As I've said before, I don't think it's inherently wrong to buy now, provided you do so with your eyes wide open to the risk involved, and you're willing to ride out any impending storm. What's not wise is to buy right now thinking you're just going to ride the appreciation wave for a few years then upgrade, and to stretch your finances to the max in order to do so.

Anonymous said...

You should comment more often Tim :-) Quite the voice of reason. Anyone buying for quick appreciation is risking a lot, and always has been, if nothing else because of the il-liquidity of RE.

Despite that, there are still many compelling reasons to buy a home, which are all too quickly dismissed by the most bearish people here. Most people (75%?) that I know don't plan their housing and moves around the RE market ups-and-downs. They plan moves around major life events (e.g. getting married, having a second kid, moving out of state for a job, retirement, etc.). Moving is disruptive and they like the stability of owning/knowing their house or (as the previous anon poster said) getting to do stuff that makes the house more to their liking.

I also doubt people who do view RE solely as investment/through economics are as good at timing the market as they think they are. That was certainly true of both stock market bulls and bears. Lots of people didn't get out before the crash, or re-invest before the run-up. I remember plenty of "short covering" as the stock market increased and plenty of people who sat out on the sidelines past 2002 waiting for an even bigger crash.