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Friday, August 04, 2006

Emotionally Attached

You want to know why the cost of homes has shot up so much in the last few years? I contend that it's not primarily the result of economic forces, but psychological ones. It's because of the seemingly unending supply of people with this kind of mindset:

We haven't actually lived in any of these places. We've only bid on them. And lost. In this housing market, we've tried to tell ourselves that we shouldn't get attached to any of the houses we bid on. The chances of actually getting one seem so low ... . And yet, how can I even think about bidding that much money on something I am not actually attached to? Just writing that check for earnest money is enough to make me sweat. Would I write a check that high on something I only had lukewarm feelings about?

And, of course, there is the time spent with the house itself. First I visit. Then I visit again and in our case there is at least one more visit to bring the parents by. By this time, I have usually mentally painted every room in the house, placed most of the furniture and planted a few flowers.

The housing market. It's taken many sweet memories away from me, even if they are technically memories of things that haven't yet happened. We've gone through four real-estate agents. Our social life has been completely stifled because we spend all of our free time driving around, looking for a place to live. And friends who say "you'll find the house you're meant to be in" are wearing us thin.

After we find one, we usually spend some time in a local coffee shop writing out the offer. The amount of money we are willing to spend has shot up dramatically from when we started this process. We sign page after page of legal documents, wondering if this will be our last offer, or if we are only just beginning.
I can understand getting a little attached to a home that you're hoping to get, but when you let that emotional attachment become your driving force, you become a part of the problem. I would like to buy a house, but while the price of homes has shot up in the last few years, the amount of money I'm willing to spend has barely increased at all. What possible justification could I have to allow it to "shoot up dramatically" other than sheer emotion?

A home is worth a certain amount of money to me. If home prices don't eventually come back in line with my expectation of their worth, I will either never buy, or move to a land of reasonable value. I won't play the "keep on jacking up your offer prices" game. Forget that.

(Wendy Lawrence, Seattle Times, 08.04.2006)
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44 comments:

meshugy said...

Emotion is always a big part of the housing market...be it boom or bust. Most people want to live in the cute, safe areas with lot's amenities and a good location. In Seattle, that usually means the North End...Queen Anne, Wallingford, Madrona, etc. There will always be more demand for these areas...

I won't play the "keep on jacking up your offer prices" game. Forget that.

I think there's a general feeling on this blog that there is some sort of organized conspiracy by sellers to rip off buyers. The market sets the value of a house, not the seller. If there's high demand and low inventory, you're going to have to out bid others. Otherwise you won't get a good house in a good area.

Peckhammer said...

"A home is worth a certain amount of money to me. If home prices don't eventually come back in line with my expecation of their worth, I will either never buy, or move to a land of reasonable value. I won't play the "keep on jacking up your offer prices" game. Forget that."

I believe that people have lost sight of value. And until they vote with their feet, so to speak, prices will remain stratospheric.

Nothing justifies the price of almost all homes on the Seattle Market right now. Take a ride around Georgetown and look at all the crap housing in that neighborhood, for example. And very little of it is worth the $300K+ prices that are being asked.

If the Toyota Yaris, with an MSRP of $12K today were to suddenly shoot up to $24K tomorrow, would that mean that the Yaris is somehow worth the price increase? It's still the same car, right?

The Tim said...

I think there's a general feeling on this blog that there is some sort of organized conspiracy by sellers to rip off buyers. The market sets the value of a house, not the seller.

Notice that I didn't say a single thing about sellers in my post. I'm laying the blame squarely on emotionally-attached buyers. For the last few years, "the market" has become a code-word for "emotionally-driven buyers that think they deserve the world (with a cherry on top), have been handed ridiculous suicidal financing to enable them to obtain it, and are competing against each other to see who can get the most stuff."

S-Crow said...

Rich Toscano, author of the popular blog 'Professor Piggington's Almanac for the landed poor', and frequent commentator/editor of the Voice of San Diego, and I have been conversing back and forth about factors outside of economic fundamentals that lead to false appreciation.

I don't know if we'll find the time toget something together, but I'll keep everyone posted.

matt said...

Shiller was right, this credit-boom/housing-boom has been fueled by psychology most of all. The same sort of mania can bee seen in things as silly as the beenie-baby craze of the late nineties, an economy unto itself that made absolutely no sense.

The problem with pining-away like this is that money loses its meaning as the emotional roller-coaster takes hold and the whole "I'm entitled!, why them, not me!" dynamic rules the day.

You should never make a purchase or invest (all though I wouldn't call buying into the Seattle market of the past few years an 'investment' per-se) based on emotion, and least of all fear.

And what is a home really? Personally I subsribe to the following Metallica proverb Wherever I lay my head is home . Imagining what your stuff looks like in a home can be fun, but letting it eat you alive and sap your will to live? come on...

I was on business travel the other week and after a particular exhausting day I told a co-worker I was too out-of-it to get a couple of after dinner drinks and that I was going home i.e. my hotel room, took me a few minutes to realize what I'd said....

officeboy said...

One problem with all this is where is the increased cost coming from. Sure, with a used house there is a pretty low cost basis, and they could be sold for less. However, if steel prices doubled overnight and the yaris did sell for $24K wouldn't that just reflect the increase in price of materials? And wouldn't the cost of all cars move by the same percent? Even affecting used cars?

Right now building material prices are soo high. My brother is a smaller contractor and he's just finishing up on a 1700 sqft house in the south of Bellingham WA area. He's looking at over $200k in building costs, additional labor etc. 5 years ago for a similarly sized house (larger in fact) I was looking at under $100K for the same items.
I‘m sure building demand has pushed the price of materials up. But when do these prices start dropping? In this area, it is almost not worth building yourself due to materials costs.
Can anyone point me to the “lumber, concrete, plumbing, wire, and drywall bubble blog”?

Peter Taylor said...

The market sets the value of a house, not the seller. If there's high demand and low inventory, you're going to have to out bid others.

Thanks for the Econ 101 lesson. However, it's not so simple. The "market" may be influenced by false economies - for example, easily obtained credit. If everyone from my wife's hairdresser to my six figure income co-workers can get a $500k mortgage with no money down, that's bound to have some impact on the supply and demand curve of the market, wouldn't you agree?

And, as The Tim points out no one has ever suggested that there is a mass conspiracy on the part of sellers to bilk buyers. However, there is definitely a game played by sellers and encouraged by their agents. You're telling me that putting the house on the market and specifying a particular day when the seller will "review" offers to narrow them down before "selecting" a buyer isn't a psychological tactic designed to whip buyers into a froth?

I'm with The Tim. It's a sucker's game, so let the suckers play it.

Anonymous said...

I LOVE LOVE LOVE my SFH!

Peckhammer said...

I‘m sure building demand has pushed the price of materials up. But when do these prices start dropping?

When alternative materials are used.

I generally agree with the points you made. And working with metal, I can confirm that steel has indeed doubled in price. However, those increased costs have not resulted in the costs of automobiles doubling in price during the same period, nor does it explain why someone would buy a $350K house to bulldose it and build another one in it's place.

richard said...

I‘m sure building demand has pushed the price of materials up. But when do these prices start dropping?

Depends on what caused the demand to jump. I can see construction labor costs dropping fairly soon since new residential construction is slowing faster than commercial is growing.

Material prices? We're still competing against Canada, China and other high growth markets for materials. However, the softening of the US residential construction market will ease the pressure somewhat.

It's also worth noting that Katrina was responsible for much of the material shortage in late 2005-06. Unless we get hit with another disaster like that this fall, demand will taper off considerably YOY.

Wendell said...

How much are you willing to pay for a house in Seattle. This is only my second day reading the blog so maybe you've answered this before. My apologizes if you have.

Peckhammer said...

How much are you willing to pay for a house in Seattle?

Median US home price: $217900

Personally, I would be willing to spend $250/square foot for a SFH -- so long as there is a garage on the property (not included in the square foot calculation)

This, IMO, represents fair value.

matt said...

I be willing to pay the average median U.S. homeprice over inflation pro-rated to the median household income of the neighborhood I'd be living in in Seattle, maybe an extra 10% depending on location.

dash_point said...

What possible justification could I have to allow it to "shoot up dramatically" other than sheer emotion?

It strikes me that ownership has taken on such social necessity that we're willing to pay anything to get into a house. Forget how finanicially stupid it might seem right now; If you don't own, you'll be left behind impoverished as "owners" happily toast their equity wealth. Does anyone else smell the fear and desperation that drove up prices?

Personally, I think it's really pathetic to hear people judge lives by those who "own" and those who "rent". Life should be much more than all the toys accumulating in those "owned" garages. It's all a big joke.

Anonymous said...

meshugy, You never cease to amaze me with your remarks.

General Feeling of Organized Conspiracy...comeon... Can't you do do better than that.

There are many-many forces at work. Lax Lending is what I see as major driver.. imagine going out and getting into a biding war with couple people making Identicle incomes using 100% Loans, YOU WILL LOOSE EVERYTIME..

Even a person making less with 100% interest loan that really wants that property.

Much of the market of buyers would not be there meshugy if the lending industry was being accountable and you know it~!!

we can keep telling you meshug till were blue in the face and you ignore.

Why are you on this board? Sure isnt for investment information. You hardly strike me as a person that does any sort of investing?

meshugy how many mortgages have you signed for? Bet I have you covered about 15-20 fold over.

cosmos said...

From Peter Schiff with Euro Pacific Capital: "In my opinion, the relative calm created by the long, slow, and utterly predictable series of ¼ point rate hikes over the past two year has lent primary support for the U.S. dollar and the bond market. Once this prop is removed by a Fed pause, despite a knee-jerk bond rally, I expect both bonds and the dollar to be sold. But what the Fed giveth on the short end, the market will likely taketh away on the long end. Ironically, when the Fed finally stops notching up short-term rates, the market will likely start pushing up long-term rates. This will frustrate the Fed and Wall Street bulls who had hoped that a pause would breathe life into the stagnating economy.

"A surge in long-term rates will immediately translate into higher mortgage rates, putting the final nail in real estate’s coffin. The bubble is finally dead, may it rest in peace. Unfortunately the same can not be said for those who bought into it, and those who financed the speculation. For them, and the entire nation for that matter, the real estate nightmare is just about to begin."
(emphasis mine)

I suspect the psychology of the housing market is about to take a u-turn.

Anonymous said...

I don’t see how emotional attachment has anything to do with rising prices. Greed is the culprit, not attachment. Speculative investment, crazy amounts of equity, and low inventory have more to do with this than emotional attachment.

Here’s the reality. When you approach the market for the first time, you have all sorts of naive ideas about how much you want to pay and how much something is worth. Slowly, these ideas get chipped away.

First, you realize exactly how expensive even mediocre property is. You either settle for less, find a way to come up with more money, or decide not to buy.

Second, if you actually make a bid, you realize that there are at least four other parties bidding on the same property. The winner is usually the person willing to pay $30,000 or more above asking. I know people who have put offers on 5 – 10 properties, and have never actually won.

This is an extremely expensive and draining process in this market. This article summarized this rather nicely. The author is obviously looking for a house in the city. (This is the cruelest market right now.) It’s not her emotional attachment or feelings of entitlement that are driving up the prices. It’s simple supply and demand; there are more buyers (flippers, people with suicide loans, and normal people with normal finances who just want to own a home) than there is inventory.

In this market, someone with perfect finances, a six figure income, no dept, 20 percent down, and only aspirations of a 900 square foot house (garage and yard are optional) has a hard time finding anything affordable (or making a winning bid). That’s really sad. That's what the article is about.

Anonymous said...

I think a person has to be strong and independent-minded not to get sucked in--if you find yourself weakening, shut off the t.v. quit reading magazines and avoid real-estate touting friends.

Ta-Da! You are free!

The world is just as beautiful whether you "own" a house or not. In fact it may be even more beautiful because you don't have a mortgage.

There is nothing like not being in debt--whether you own or house or rent.

Why do people mortgage their lives so cheaply?

I think it is because of panic at the VOID----people actually feel they need to enslave themselves to something...anything!

It's kind of sad.

Peckhammer said...

I don’t see how emotional attachment has anything to do with rising prices. Greed is the culprit, not attachment.

I agree with much of what you said. However, emotion, dogma and brainwashing are definately at play here. The best example I can think of are weddings. Let's start with the ring? A diamond is the universal symbol -- a worthless stone outside of the tool industry, marketed to women -- yet an essential component whose size and selection value are based upon the following formula: the equivalent of 2 months salary.

The industry is run by a cartel who would be arrested on-site if they stepped foot in the US, and who artificially control supply and demand with vaults. Let's face it, a turd is no more valuable that a diamond in a gold setting. Sure, the diamond may be more attractive... unless you are a dung beatle.

Who in their right mind would spend the equivalent of a down payment on a house for a wedding reception, yet it happens every day. Why? For the same reasons that people are compelled to buy 2500 sq ft houses with granite countertops and dual sinks in the master bathroom.

This is America's grand marketing scheme: The Ownership Society -- and it comes from the highest level of government, and is reinforced by the media and others.

It’s not her emotional attachment or feelings of entitlement that are driving up the prices. It’s simple supply and demand; there are more buyers (flippers, people with suicide loans, and normal people with normal finances who just want to own a home) than there is inventory.


The supply and demand argument is moot when you can finance 100% of your purchase for artificially low rates -- even if the condition is only temporary. IOW, I can afford ANYTHING if I am using monopoly money.

Anonymous said...

There is nothing like not being in debt--whether you own or house or rent.

Why do people mortgage their lives so cheaply?



In a good market, there are good reasons to own. You get to deduct your mortgage interest, which can be QUITE an incentive if you make a lot of money. It can be thousands of dollars! For some people, the increase in money spent on mortgage (over renting) is actually offset by the deduction. If you can find something cheep (not in this market!), you might actually come out ahead; it might be cheaper to buy than rent.

We all have to pay money to live. Period! How is being a slave to your landlord any different than being a slave to the mortgage company? If you buy, you have the opportunity to get your money back later. (Assuming you didn’t buy at the height of the bubble using a suicide loan.)

Yes, there are people out there who have the 20 percent down, good credit, and only want a 30 year fixed. For the record, with sane financing and 100 K a year income, the first time buyer can afford about 350,000 right now. What’s wrong with someone like that buying 350,000 house or condo? (To be fair, that person should wait a year or so for appreciation to level off and for inventories to rise. That way, they will get the most for their money.)

Anonymous said...

The supply and demand argument is moot when you can finance 100% of your purchase for artificially low rates -- even if the condition is only temporary. IOW, I can afford ANYTHING if I am using monopoly money.

The supply and demand argument is certainly not mute when there is too much credit in the market. Too much credit == more potential buyers. Whether or not someone can make their payments two years from now has little affect on me today when I have to compete with him or her for the one non-dumpy-house in the city that has come up in the last six months for 350,000. (It might have more affect on me when the default rate affects the market. If that occurs, then there might be more supply and less demand. ) In this kind of market, the 350,000 house will close for 400,000.

The laws of supply and demand still work in Monopoly, even if the market is flooded with fake money.

Peckhammer said...

You get to deduct your mortgage interest, which can be QUITE an incentive

This is even less plausible than WMDs...

with sane financing and 100 K a year income, the first time buyer can afford about 350,000 right now.

And what does the buyer give up? Retirement contributions? I question your notion of what "afford" means.

Anonymous said...

This is even less plausible than WMDs...

Your WMDs are here.

ANNUAL MORTGAGE TAX DEDUCTIONS
FOR THE FOLLOWING LOAN
________________________________________
Loan Amount: $350,000.00
Interest Rate: 6.5%
Term of Loan: 30 years
Monthly Payment: $2,212.24


Year Annual Tax Deduction
1 $22,634.82
2 $22,372.82
3 $22,093.28
4 $21,795.01
5 $21,476.77
6 $21,137.22
7 $20,774.93
8 $20,388.37
9 $19,975.93
10 $19,535.86
11 $19,066.32
12 $18,565.33
13 $18,030.80
14 $17,460.46
15 $16,851.93
16 $16,202.64
17 $15,509.87
18 $14,770.70
19 $13,982.03
20 $13,140.54
21 $12,242.69
22 $11,284.72
23 $10,262.58
24 $9,172.00
25 $8,008.37
26 $6,766.81
27 $5,442.11
28 $4,028.68
29 $2,520.60
30 $911.52

I don't know about you, but this would shave off a couple K from my tax bill.

And what does the buyer give up? Retirement contributions? I question your notion of what "afford" means.

Annual payments: $26,546.86. With an income of 100K a year, that leaves someone a lot of money left over to put into a 401k.

Peckhammer said...

I don't know about you, but this would shave off a couple K from my tax bill.

Oh yeah... sign me up! I can spend tens of thousands of dollars in interest income to get a "couple thousand" back in tax savings. Now that's a ROI that makes sense!

Let's use your numbers:

Year Interest Principle

2006 $22,634.81 $3,912.07
2007 $22,372.80 $4,174.08
2008 $22,093.28 $4,453.60 2009 $21,795.01 $4,751.87 2010 $21,476.76 $5,070.12 2011 $21,137.21 $5,409.67
etc.

Annual payments: $26,546.86.

Not counting taxes, insurance, closing costs, etc.

"Hey Rocky, watch me pull a rabbit out of my hat!"

Anonymous said...

Oh yeah... sign me up! I can spend tens of thousands of dollars in interest income to get a "couple thousand" back in tax savings. Now that's a ROI that makes sense!

If the tax savings makes owning close enough to renting, then there is a compelling reason to own; I pay about the same, but get some of it back when I sell. When you move out of your rental you get nothing back.

Your position only works if the difference between a mortgage payment (plus taxes, insurance, closing) and your monthly rent can always generate more money (through investments) than the money you get back when you sell. Sometimes this might be true, but sometimes it isn’t.

The whole point of this blog is that there is probably a bubble, so it might be better to rent right now. I agree with that. However, if there were no bubble, and you had all of your ducks lined up, it might make sense to own.

dash_point said...

Regarding building material costs, you might like to read this article at the Vancouver blog. From the article, it looks like the US housing slowdown is causing a lumber surplus in BC. What does that say about future building costs?

jcricket said...

The whole point of this blog is that there is probably a bubble, so it might be better to rent right now. I agree with that. However, if there were no bubble, and you had all of your ducks lined up, it might make sense to own.

That may be "The Tim's" (tm) point, but a lot of the comments seem to indicate that people think there is almost never an advantage to owning a home. I keep reading that all the interest is bad, you're screwed the worst if you own a mortgage and there's an economic downturn because all debt is bad, home buying never "pencils" out, etc. The same people who claim this regularly claim they're going to do better in the stock market (not just now, but even in a downturn) and that you can almost always rent as nice a place as you can own.

I'll agree that the bubble has made many home-buyers positively silly in their decision making process. Buying a home isn't so advantageous that you should "mortgage" your entire future on just your housing. If buying a house means you have no emergency savings, no/little retirement savings and can't enjoy any other aspects of life, it's not worth it.

But to argue that renting is always better is just ludicrous, both economically and psychologically. To argue that all debt is bad is economically simplistic, especially given the low mortgage rates these days (yes, even 7% is low, especially factoring in that it's more like 5% after tax deductions). To completely discount the psychological aspects of renting vs owning (which are different for everyone, I know) is folly. For most people, owning your home is a much more positive feeling than renting. Gee, it's a shocker that the idea of coming home to a place that's yours every night, sleeping there, raising a family there, etc it's almost as important as the economics. And yes, your house is yours - it's an asset, and the mortgage a liability. The property taxes, interest and maintenance are carrying costs, but the house is still an asset. And people can and do feel differently about assets.

I believe that anyone with a 30-year, fixed rate mortgage, with emergency savings, retirement savings, extra discretionary income, and a long-term outlook is going to end up just fine, even if they buy a house at today's price point. I wouldn't hold it against them if they did, or if they chose to wait because the risk of a price drop is too high.

Anonymous said...

"And yes, your house is yours - it's an asset, and the mortgage a liability."

Ya know what's funny? I keep hearing first-time homebuyers parrot this line, shortly after taking out an interest-only ARM on a home they can't afford. It makes me mad, because it's a dangerous over-simplification.

Until you've completely paid down your mortgage, you don't own your home. The bank owns your home. Don't belive me? Stop making payments. Find out what happens.

A mortgage is a liability until it no longer exists. A mortgaged home, on the other hand, is not an asset. It is a bet that it will be an asset in the future.

Anonymous said...

"I believe that anyone with a 30-year, fixed rate mortgage, with emergency savings, retirement savings, extra discretionary income, and a long-term outlook is going to end up just fine, even if they buy a house at today's price point."

+++I agree, but the median Seattle income is $55,000, so how many Seattle residents can really afford to buy a home at today's prices?

Anonymous said...

Primary Residences are NOT ASSETS.

They are Liabilities.
Only Income bearing holdings are assets.

Primary residences are almost 100% never can be considered assets in the truest form. They are generally money pits, not much different than a car other than they appreciate generally go up in value.

Take that back the house deteriates in value if not maintained it can actually loose value as well. Historically the land gains value generally speaking. However not guaranteed.

Personally going forward the next couple of years are most likely going to be a bad time for most holding stocks. I wouldn't be surprised to see most peoples contributions to there 401 Plans simply a wash or maybe going backwards even with a lot of the matching plans.

Anyone here have Excutive Plan where they work? I would almost put money on there plans don't have the limited options that many face.
**it really sucks looking at a 401 with Stocks Funds & Bond market Index. I dont want to be in either place right now. I only contribute up to the point of 50% matching at this moment because I don't think my choices will net me any gains in the next several years.

jcricket said...

Primary residences most certainly are assets. They may not be "investments", but they are assets. It's Accounting 101. Houses can be converted to cash, hence, they are an asset. If they are secured against a mortgage, there is a liability, so the value of the asset is the cash value minus the liability. The fact that your house value isn't fixed doesn't mean it's not an asset.

Assets and liabilities are two different columns + two different accounting concepts. Pretty simple.

Ever see a 10K from a public company? Just like corporations that put their real estate holdings, hardware, etc. (many of which are leveraged to a bank) in the assets column, so too can a primary homeowner put their home in the asset column.

Your house also has carrying costs (taxes and insurance). None of those make them any less of an asset. Plenty of assets have maintenance requirements (like most IT hardware + physical plant owned by companies)

The ability of your "item" to generate income also has no bearing on whether it should be treated as an asset or such.

What you presented sound like something that Kiyosaki preaches, as oversimplifies/redefines assets and liabilities to suit his ludicrously bad (and often illegal) advice. I think this article from John T. Reed points out the flaws with pretty much everything Kiyosaki says.

I also like that your second paragraph completely waffles, as you say "almost completely never 100%" and then says house are like cars, except for all that pesky appreciation at a rate greater than inflation.

Advice like "your home is not an asset" gets people into as much trouble as "your home is an investment".

Oh, and good luck timing the market. I'm sure you'll be successful in the long run.

Anonymous said...

Houses can be converted to cash, hence, they are an asset. If they are secured against a mortgage, there is a liability, so the value of the asset is the cash value minus the liability.

Yes, anon 5:13 is wrong. But you're wrong, too, jcricket. As long as they're mortgaged, houses are assets only for the bank. As a homeowner, your "asset" is limited to the amount of principle you've paid on your mortgage, plus any appreciation on the property. If you default, the bank will sell "your" home at auction, and use your "assets" to pay down your debts. You might get some cash back out of the deal, but if you default on your loans, that's unlikely.

Of course, even if you've paid down your mortgage, you have to sell your home to get your money back. Then you have to find a place to live -- which means either a) spending a big chunk of your "asset" on another home or b) spending a big chunk of your "asset" on rent, or c) living in a box by the river.

This is why a ever-larger number of retirement planners don't count primary residences as assets. They're just too damn difficult to convert into real money, and a ledger-style analysis doesn't capture that illiquidity. Is there wealth accumulation in a home? Certainly. But unless it's earning you rent every month, it's not a financial asset in the traditional sense.

Anonymous said...

jrcricket-

IMO, if you really think that a lot of people on this blog think that owning a home is a BAD idea UNDER ANY CircumSTANCES, then I think you are bringing a lot of bias and blinders to your reading of these posts.

What a ridiculous notion.

The point is this: We are in a massive credit bubble right now. The assumption is it WILL correct.

Therefore, NOW is a REALLY BAD time to stretch to buy a home. ( note: I said to STRETCH to buy a home).

Prices will go down. For those who cannot comfortably afford now, they need to wait to buy.

Do you get this?

Anonymous said...

"A home is worth a certain amount of money to me. If home prices don't eventually come back in line with my expectation of their worth, I will either never buy, or move to a land of reasonable value. I won't play the "keep on jacking up your offer prices" game."

My, oh my. The world is lining up to accomodate your expectation, dear.

Anonymous said...

It's time for me to write about "why I bought a house here in 2005".

We returned to the Seattle area from the Bay Area after leaving this area for college many years ago. We sold our house and had to decide whether to buy or rent here.

After giving it a great deal of thought, we decided to buy, for a number of reasons:

1. For job reasons, we needed easy access to both the eastside and downtown (we don't like commuting very far). After living in a terrible school district in the Bay Area for years, we wanted to be guaranteed good schools. The combination of these two things more or less limited us to Bellevue and Mercer Island. Prices in both areas were going up, and supply, especially on MI, was limited (and for SFH, will essentially never increase)

2. Interest rates - we locked in a 30-year fixed @ 5.5%.

3. Using several $100K that we received when we dumped our bay area house, we could afford the new house sort of reasonably - > 30% down, the rest at the fixed 5.5% rate. We bought a house that was much cheaper than what the mortgage brokers said we "could afford". After taxes, we're paying the equivalent of $2700-3000/month rent on the place.

So, how has this played out so far? Since we bought, it appears that:

1. prices in my immediate area have gone up at least 10%, and probable a bit more.
2. Interest rates have moved about 1%.

Since we're planning on staying here for quite a while, the monthly payment on a 30-year fixed mortgage is the important thing for me to look at.

Current payment is around 4000/month.

If we bought the house today, the payment would be

400/month more for interest
500-600 more due to increased cost basis (note that since we had a large down payment, our mortgage would increase more percentage-wise than just the increase in the property cost).

I don't expect to make a killing going forward, but I also expect that it's unlikely that the monthly payment for this house with a fixed mortgage and the downpayment we put down will drop to what we're paying anytime soon.

I think we put a lot of thought into this decision, but I'm interested in hearing others' points of view. My point here is that not everyone who has bought in the past 18 months has just been a lemming. There are reasonable reasons for choosing to buy.

jcricket said...

This is why a ever-larger number of retirement planners don't count primary residences as assets.

While I think we're generally on the same page, I would rephrase what you wrote to say that retirement planners do count primary residences as (capital) assets, they do not recommend relying on the value appreciation for anything other than purchasing the home you'll need in retirement (as you mentioned) or lowering your retirement housing costs. However, if you do not own a home, or have a large mortgage into retirement, a good financial planner will recommend you save more to come up with the additional monthly income you'll need to cover the cost of rent.

Housing is an asset that, when treated correctly, has a number of extremely important "financial" purposes that are part of anyone's diversification strategy - fixes the cost of your housing over the next 30 years, reduces/eliminates the cost of retirement housing (at least makes it a wash), provide you with a source of emergency cash if you need it in retirement (reverse mortgage, sell/move into apartment, HELOC). But housing is not an income generating asset (like a rental property would be if you owned it) and wouldn't be relied on for anything outside those purposes (like for any non-housing living expenses).

Remenber, stocks and bonds (unless they pay dividends) don't generate any income either, until you sell them, so according to the "get rich quick in RE" hucksters (esp. Kiyosaki), they're not assets either. The redefinition of terms is actually important.

Colloquially speaking, outside of recent years runup where people actually counted on rapid appreciation for profits, I think most people say "housing is an investment" like "your education is an investment". It's something that "pays off" in the future, in a number of ways. I certainly agree that the recent "your house is an ATM" and "housing never goes down" memes are harmful. All I'm saying is that redefining housing as a non-asset ignores the importance place a house should play in your financial strategy.

jcricket said...

What a ridiculous notion.

Respectfully, I don't think so. I regularly see homeowners on this board called fools, idiots, locusts and "f*ed borrowers". The "doesn't pencil" argument comes directly from another thread here. Housing is redefined so it's not an asset, universally derided as a money pit, the mortgage deduction has no value, etc. I don't think I have blinders on, but I am generalizing, and perhaps overly so. So my apologies to you if you're not one of the people I described.

The point is this: We are in a massive credit bubble right now. The assumption is it WILL correct.

OK, right, that's an assumption. It would appear we are ripe for some sort of correction. Might not end up large enough to feel like a correction. Might not happen in the time frame you think, or the way you think, or in the areas you think. Might not have the effects you think it will have, for the length of time you think it will have. I think there's a lot of disagreement among economic theorists as to exactly what we are seeing and what the short and long-term results will be. I'm not so sure it's as simple as "what comes up must go down"

Therefore, NOW is a REALLY BAD time to stretch to buy a home. ( note: I said to STRETCH to buy a home).

If this was the only point being made, I'd wholeheartedly agree. I regularly tell friends who are thinking of buying a home not to stretch themselves, and

Prices will go down. For those who cannot comfortably afford now, they need to wait to buy.

Simply looking at the overall housing market won't give you economic certainty about the price of the house you want to own. Prices for homes you want may go down, or they may stay the same or go up while other more or less expensive homes drop in value. An example (to pick on "The Tim") might be saying, "A home is worth a certain amount of money to me." - You have to adjust that for inflation, cost of construction & permitting over time, compare to lifetime of rent increases, or the "I will either never buy" part of his conclusion is likely to come true.

Unlike stocks and bonds (which are just paper), housing does have significant inherent (albeit fluctuating) costs to it. I don't think it's the economy certainty you think it is.

Despite that, it's rarely a good idea to stretch yourself to 40 or 50% of your income to buy a home, or have no savings, no retirement savings, etc. And if renting is a significant savings (such that it will be 10 years or so before your rent catches up to any mortgage payments), buying might not be the best idea solely based on that financial view.

Do you get this?

Yes, I understand that people, including you, believe we're in a speculative housing and credit bubble and that prices will go down. A smaller percent of bubble believers think an economic meltdown is imminent and housing prices will fall to 50% or even 20% of their current value (I'm not sure what they think will happen to the stock + bond market, but I would say get ready for meltdown there too in that scenario).

My point about the complexity and lack of economic certainty can be seem in the following: There are at least a couple of examples (London, Paris, NY, SF, LA) of housing that has become increasingly unaffordable for all but the rich over the last 30 years. That has not resulted in a massive, sustained correction in housing prices in those areas, despite several recessions during that time. That doesn't mean housing prices haven't dropped in those areas at points (they have), but not to the level where "the average person" can afford them. I'm not arguing this is a good thing, but just that there is evidence that certain areas (I'm not convinced Seattle is one) can sustain housing prices at a level of unaffordability higher than you would think, usually by pushing middle and lower income class folks out of those areas and into more distant suburbs. So if you're waiting for Leschi or Kirkland or North Capitol Hill to become "affordable" again, you might be waiting forever.

Eleua said...

Until you've completely paid down your mortgage, you don't own your home. The bank owns your home. Don't belive me? Stop making payments. Find out what happens.

Actually, unless you get allodial title to the land (and you can't, so don't worry), the state owns your land. Don't believe me? Neglect to pay your annual taxes, or contest an emminent domain assertion, and find out what happens.

Eleua said...

jcricket,

Nice post.

Since you refer to:

A smaller percent of bubble believers think an economic meltdown is imminent and housing prices will fall to 50% or even 20% of their current value (I'm not sure what they think will happen to the stock + bond market, but I would say get ready for meltdown there too in that scenario).


Since I am the only person on this forum that actually is on record stating that a sustained RE drop of that magnitude is in the offing, I thought I would respond.

Yes, I believe that a complete RE meltdown is a very real, and highly probable scenario. I have stated such on my ClearcutBainbridge forum, and explain my reasons for it.

As for the stock and bond markets...

Those will endure a thorough beating, right along with the housing market.

Interest rates are held artificially low, and EVERYONE knows it. When someone stands up and shouts 'FIRE' in a crowded FOREX theater, you can count on the bond market melting down.

Expectations of the UNIVERSAL PUT, ala the Federal Reserve are too high. Once confidence is lost in the FED, the major indicies will probably sell at 1/2 to 2/3 of their present value, and that is if the entire house of cards does not collapse. On 8/8, the FED will likely announce that it is done raising rates. My guess is the market will sell off dramatically, given that just about everyone knows the FED is done.

Remember, it was the Stock bubble that was supposed to get the Boomer Generation into retirement, but when that vanished, Greenspan fomented the current credit/housing bubble to replace it. The economy of the past 25 years is really nothing more than the story of gradually sinking interest rates, and the expansion of the money supply. That is in the process of reversing.

Bonds, stocks, and RE. All will sink in value.

Americans, even Babyboomers, will have to learn that they need to produce their way out of trouble, not just run up the credit card.

This will not be pleasant for anyone.

Eleua said...

FYI,

I am looking for Prime to hit the high teens, the DJIA to dip into the 6000s, and the NAZ to hit 500 (along with my 20 cents on the dollar for Bainbridge RE prediction.)

I'm also looking for 4/5ths of the Boomer Generation to curl up in the fetal position, suck their thumbs, and wonder how they will:

-pay off the his/hers Escalades
-make the next payment on the McMansion
-send Baby-on-board Jason and Jennifer to college
-pay the HELOC for the plasma TV, Hawaii vacation, and granite countertops.
-Botox, viagra, liposuction and Rogaine

Anonymous said...

Eleua said...
FYI,

I am looking for Prime to hit the high teens, the DJIA to dip into the 6000s, and the NAZ to hit 500 (along with my 20 cents on the dollar for Bainbridge RE prediction.)
+++++++++++++++++++++++++++++++++

With all that hot weather your skull overheated apparantely.

mercer_island_guy said...

anon "why i bought in '05",

I too moved from the Bay Area to Seattle in 2005 and went through the same thought process as you. I chose to buy on Mercer Island because of schools #1, location (both short commute to seattle/eastside jobs and short trips into Seattle) #2, and community (low-crime, small-town feel, kid-oriented, 18% asian) #3. We locked in a 30-yr fixed @ 5.75% and put down over 20%.

I made the decision to buy a brand new SFH (no view or waterfront) assuming we would see flat home prices in 2010. My worst case scenario is comps being down $200k by 2010. My best case scenario is comps being up $300k by 2010. My most-likely scenario is comps being up $100k by 2010. (IMHO, the $100-$150k increase in land prices on MI in 2006 will not sustain and will drop to mid-2005 prices. That's about $500k for a no-problem, non-view, 1/4 acre tear-down lot.) In all cases, I expect MI to be the last to fall and first to rise in normal markets driven by normal buyers.

Bottom line is we decided to buy for peace of mind, which I must say is an emotional but common bias. I feel we minimized our downside risk by buying quality dirt. I would not buy a condo right now. If

I were buying on MI today, I would expect prices to be flat to down ~$100k by 2010. If you can pull the trigger with that in mind, you're going to be very happy on the island.

Wendell said...

Peckhammer said...
Median US home price: $217900

Personally, I would be willing to spend $250/square foot for a SFH -- so long as there is a garage on the property (not included in the square foot calculation)

This, IMO, represents fair value.

Seems to me that $250/sq ft will get you a lot of house. Sort this list by price per sq foot. You will see that of the 108 neighborhoods tracked you are only priced out of 37 of them.
http://seattletimes.nwsource.com/homevalues/prices/prices_king_snohomish.html

Anonymous said...

I purchased in May, and it was a largely emotional decision that I needed to do this now. After many years of college, I finally had a stable job and enough savings for a 5% down payment. I knew I could save and get better financing, but I pressured myself to believe that this was the rare life window when I'd be able to push the deal through, and that prices would keep going up up up if I did nothing.

The place is nice, but the financing wasn't great and I'm not saving anymore; it all goes onto the I/O morgage pile. I so want to unload the place and chalk it up to lessons learned, but the market's sagged enough that it won't happen any time soon.

When your realtor/advisor says don't get attached to a house, believe them. It's not your "future", just a (rather largeish) financial investment. Don't rush it, and if you see any red flags kill the deal without hesitation. There will always be others.