Buying a house, looking to find a place for appreciation. (Austin: school district, deal)

[pjoseph2]

We are under contract to buy one of the expensive houses in a SW Austin neighborhood. Lots of sunlight, clean lines, country feel et al.

There are 11 other houses listed (~ 1 year's worth of inventory). The following were the factors in our decision to move forward.


1) Housing today is not an investment, but simply a place for the warm & fuzzies.

2) Prices have clearly not bottomed. The Inspector mentioned that he is doing a lot of foreclosures these days, especially at the low end. At the high end, it is a lifestyle decision. And the mid range? Appears lukewarm during the peak season.

3) But the cost of money will likely be going up soon. Commodities are rocketing upwards. In other words, a house appears to be a good inflation hedge.

Would appreciate thoughts or insights. Especially from Realtors since they tend to be colorful

[jobert]

I've said too much in this thread, but wanted to add my last two cents. Housing is a good hedge against inflation under the right circumstances. We are obviously faced with rising commodity prices in general. This was brought on by many factors, but the most important factor was the two rounds (so far) of QE from the fed. This didn't go as planned - why? Because the powers that be absorbed the trillions of paper worth printed by the government just to shore up their books (bad loans, subprime mortgages, and the many ways they were bundled and sold to investors) and in effect this money has "vanished" into think air - (well actually, it was indirectly used to paper-over our trade deficit with the Chinese). As a result this money has not made it into the hands of the other 95% of americans, yet we have been "stuck" with the result: rising prices+stagnate wages = stagflation.

The price of everything is rising, while our nominal wages stagnate. In easier times (with $1/gal gas), we were more than willing to spend 40% of our net income on a mortgage. When gas rises to $4+, milk becomes $6 gallon, plain white t-shirts become $15 each, etc - what percentage of your income are you willing to spend on a mortgage? 35% 30% 25% 20%?

That percentage will go lower as inflation rises, and the average american income doesn't. and Americans will redefine the term "necessity" and this will extend to housing as well. Right now we are still willing to pay 300K for a house that costs 150K to build, but that will change over the coming decade when society is faced with stagflation. Factor in those over the coming years who currently own expensive houses and who will face hard decisions between putting food on the table, and paying the mortgage. I think the evacuation from the $300K market has just begun. $200K will be "the new $300K" for the average middle-class american family with a typical 100K household income.. We well start seeing people only willing to pay only 2.5x their salary for a house, unlike the 3x-4x (or more) that we've seen over the last decade in Austin.

Until house prices on the higher end start falling down towards actual replacement cost, then buying into this housing market (that is also currently being evacuated by baby boomers) is a bad idea, unless you buy at the lower end (<250K) because that is where the boomers are all fleeing to over the next few decades, and those houses are actually closer to replacement value than the 300K+ market.

My advice: Spend as little as possible for your house. Invest the rest in commodities.

[achtungpv]

I don't think foreclosures have caught up with us yet. I know someone that stopped paying for their house around spring '10. They just received notice to move out. They also got $4,500 cash from their lender for not trashing the house on move out.

[pjoseph2]

Moderator cut: orphaned Housing as a percentage of the budget will have to come down in order to compensate for the many COL increases. Food, energy, insurance, clothes among other things.

The Bernank and his QE is destroying middle class America. The Federal deficit will be monetized. The dollar will be sacrificed. That is my read.

As an aside, my mortgage rate locked today was 4% (15 year fixed). After taxes, that is an effective rate of 2.76%. Think this is a great deal as just gas goes up more than that on a given day.

[HD34]

Originally Posted by sliverbox

Look at any chart showing the last 100 years of appreciation in both real estate and stocks and you'll clearly see that over time, stocks have appreciated at around 7%-8% per year versus real estate which has appreciated around 2%-4%. The winner is glaringly apparent.

Sliverfox- I agree with the overall point you are trying to make but your assumptions of historical stock market returns are not 'glaringly' accurate. 7-8% historical returns of the stock market does not replicate a balanced portfolio for the average investor. What type of long term investment strategy are you talking about? 100% stock? Also, don't forget to account for your investment costs. Unless you are a low cost index investor you are probably paying around 1-2% in fees for your 7-8% return.

A primary residence can be an important part of one’s overall portfolio but many investors are learning it should not be considered a large part of their retirement portfolio. That is like putting all your investment money in the oil industry, one particular segment of the market.

Look, if you rented a simple apartment for life and invested all your savings in good balanced funds that didn't overcharge for their services, you would most likely end up ahead of someone that put too much of their saving into real estate and bought and sold every 5 years. I think if you buy what you can afford (20% down) market risk is greatly reduced and quality of life goes up. The problem too many people have is they want the big house now and put themselves at risk.

[HD34]

Originally Posted by LittleCityATX

All the people that want a house NOW instead of saving and paying cash also 'hurt' everyone around them. It's like the banks have figured out how to get average people to compete against each other in how much money they are willing to surrender to the banks. "You want this house, well I want this house more AND I'm willing to give the banks even more money than you are!"

For example, a house that would cost 150K if no one had access to financing, would cost a person exactly $150K to purchase. That same house might cost 400K or more when people are able put down 0% with a 4% loan PLUS the interest over the life of the loan making the total cost 800K. Now a person that wants that house has to compete with all the people that are willing to pay 800k (over the life of the loan) for that same house.

So who benefits when people are driven (by desire and lack of foresight) to give 800K to the banks over 30 years, when without financing it would have only cost 150K and a delay in gratification? The banks of course. Without financing, we would still be competing for housing, but on a cash basis not on a 'who wants to be the bigger debt slave' basis.

That's a good point. This also effects the overall market, including how much people end up paying for rent.

I personally like the free market system but it doesn't always work in my favor. I've been eating flank steak for years but now I might as well get a filet b/c now the flank is the sexy cut.

[pjoseph2]

Something i read the other day. As soon as you want that new pickup truck advertised on TV, the Fed has got you.

Leading lives of quiet desperation (Thoreau).

[hound 109]

Originally Posted by LittleCityATX

All the people that want a house NOW instead of saving and paying cash also 'hurt' everyone around them. It's like the banks have figured out how to get average people to compete against each other in how much money they are willing to surrender to the banks. "You want this house, well I want this house more AND I'm willing to give the banks even more money than you are!"

For example, a house that would cost 150K if no one had access to financing, would cost a person exactly $150K to purchase. That same house might cost 400K or more when people are able put down 0% with a 4% loan PLUS the interest over the life of the loan making the total cost 800K. Now a person that wants that house has to compete with all the people that are willing to pay 800k (over the life of the loan) for that same house.

So who benefits when people are driven (by desire and lack of foresight) to give 800K to the banks over 30 years, when without financing it would have only cost 150K and a delay in gratification? The banks of course. Without financing, we would still be competing for housing, but on a cash basis not on a 'who wants to be the bigger debt slave' basis.

I'm not a fan of "banks".

But builders/realtors make significantly more on transactions than the banks. But since the feds (who are clueless or greedy or both) are backing over 90% of all loans.... then the banks are certainly happy to handle the transaction for them (at no risk).

Loans are still being made with -0-% & 3% down (backed by the feds). The feds are lap dogs for the national builders & national realtor associations who invest thousands & get back millions (who wouldn't?).

But you're right. Clueless schmo's are overpaying on new homes every day (& will for the 30 years on the loan). But if the home is given back (forclosed on) to the bank..... & many will because the homeowner doesn't have any skin in the game.... then your kid & my kid (& their kids) will be paying the bills decades from now.

& so it goes.

[LittleCityATX]

Heh I deleted my post, but after people had replied - didn't feel like getting into it for some reason because there are so many caveats and reasonable counter-argments. For example, it can be true under the right circumstances that debtors with 30 year fixed mortgages win (high inflation).

But yeah, I'm all for free market too. The mortgage system in the US is not free market.

[hound 109]

Originally Posted by LittleCityATX

Heh I deleted my post, but after people had replied - didn't feel like getting into it for some reason because there are so many caveats and reasonable counter-argments. For example, it can be true under the right circumstances that debtors with 30 year fixed mortgages win (high inflation).

But yeah, I'm all for free market too. The mortgage system in the US is not free market.

I'm glad you didn't delete it. For 90% of the people out purchasing homes, it's a dumb investment. I think most would completely agree with you on this. Some of us even got to add our own 2 cents.

& you're 100% right....the mortgage system is about as far from free market as it possibly could be. Socialism is more "free market" than today's US mortgage system.