Basic appreciation question (vents, 2009, appraiser, foreclosure)

[cohdane]

We are seriously considering a home and trying to make an informed decision. Please correct the following premise up or down if it is flawed:

Q: If I buy a house today, it needs to appreciate at least 6% from the purchase price in order for me to "break even," assuming I intend to use a realtor when I sell.


Thanks for honest, non-snarky opinions.

[2bindenver]

I say 8% to cover all the closing costs, depending on how long you intend to live there. You can always choose a flat fee broker, if you "have" to sell.

Then again you have to live somewhere.

[Silverfall]

I also agree 8% or more depending on whether or not your state has real estate transfer taxes. If you pay buyer closing costs that this number becomes 11%+. For every year you plan to live there add 1% to that percentage for homeowner maintenance.

So, if you buy a house now and sell it a year later using a 6% agent, 1% toward closing costs, 3% towards buyer closing costs, and 1% towards upkeep and maintenance then you would need 11% the first year, 12% your second year, 13% your third year...on and on...

[chet everett]

Silverfall:

Check your math dude!!!

Appreciation is CUMULATIVE! The more years you live in a place the SMALLER the appreciation of any one year needs to be to get the seller into the "black".

[Humboldt1]

I think Silverfall's advice makes sense. I think they are saying after 11 percent for first year you only need additional 1 percent appreciation to break even for each additional year you are in the place. The longer you are in the place less appreciation you need each year to achieve break even status.

HOWEVER, this forgets inflation. The longer you are in a place, the more inflation and opportunity cost of capital should weigh in your decision.

You will need to be in a place at least 5-10 years in this market just to break even, unless you are able to pick up foreclosure or shortsale for the right price.

To achieve breakeven, forgetting inflation and opportunity cost of capital, you need to appreciate at 3 percent for the next 5 years. I don't see this happening in most markets. In 10 years if you buy today, you might breakeven, maybe not.

[chet everett]

Really depends on WHAT and WHERE, but I would agree that IF you could get 4 straight years of AVERAGE 3% a year appreciation you'd probably be a good bet for breakeven after all costs. It ain't JUST real estate agents that 'get paid' at a closing, you have the lender, the title company, the attorney, the appraiser. Don't forget there is 'overhead' of annual property taxes in MOST jurisdictions, and title transfer taxes in many too.


Funny things happen when you try to draw a line out over a longish horizon -- all kinds of taxes change, demographic forces come into play, 'anomalous events' become more & more likely (not too many talk about what happened to real estate in lower Manhattan post 9/11...).

When one does look at the LIKELIHOOD of interest rates remaining at the 5% or less level it is a double edged sword too -- I well remember the 12%+ rates of the Carter administration made for negative/flat prices, while anyone with any cash was locking it into T-Bills. Investors move away from things like real estate when the cost of borrowing money goes UP...

[PotterGeek]

Are you guys including the rent money being spent NOW in regards to "breaking even" on the purchase? The OP's not getting any of that back, and the longer they rent, that's money not recouped, so basically it's a loss. You never break even renting.

Cohdane,
6% in what time frame? A year? Five years? Overall?
I don't see anything appreciating in the next year, maybe even few years. With that being said, even if the market stays flat, or even dips a bit more ($10-20K), you still may break even if you were otherwise going to rent for a couple more years. At least you stand some chance of getting some money back versus knowing you won't get squat back continuing to rent.
Good luck

[fairmarketvalue]

Humboldt, Come on! You and I don't agree on some levels, but you honestly think this isn't going just a little too far? 10 years? So much can happen in 10 years. How could anyone, even you, in the banking industry, predict what will happen in 10 years, expecially concerning RE. Now, since everyone on here likes to talk about "trends" and "historicals" etc. You must know that what goes up, must go down, and the what goes down, goes back up again. Whether we are talking about interest rates, home prices, etc.,, the numbers that are present today, will be different tomorrow, and next year, and the year after that. In 10 years, I would guess that even the biggest doomers on this forum would not speculate that a home bought today "might break even" in 10 years. Wow, no wonder so many are affraid to buy. And as a banker, I hope you're not spreading this "negetivity" to potential clients in your company.

You've talked about your father owning farm land, commodities, your rental properties, and it is hard to believe someone with your knowledge in the value of RE, of ANY type, thinks this way. What in the world would possibly keep you intersted if this is your prediction? At this point, I think we should both be thankful we have a beautiful home to live in, that our Chicago area is not and never did suffer nearly as others, that you have investment properties that are returning income for you, and a good paying job to secure a future. I know I am. I don't have investment propeties and would not be interested to own one, not interested in selling our dream home, paying for it very, very comfortably, have very little to no risk of ever losing my job and since I own my own firm, am hoping I can "help" this economy in some way by being one who rises up and believes we, as a nation, can!

I read your post from a previous thread, and in particular, that you think Obama is full of "$#!T. I beg to differ. I think he is truly trying to make a difference. I am sure his intention is not to let things get so bad that he accomplishes nothing in his "8 year term". And I would guess that unless something goes terribly wrong, he'll get re-elected. So to say that RE won't recover for 10 years is just plain silly. I have 4 children 2 will be done with college in 10 years, one nearly done, and one starting. It's hard to imagine a LOT of things won't be different in 10 years, including RE and its turn to "go up" again.

[sheenie2000]

Originally Posted by fairmarketvalue

So much can happen in 10 years.

Yes a lot can happen, take a look what happened to Japan:

http://www.doctorhousingbubble.com/w...ate_prices.jpg

They peaked out 1990 and have crashed, 15 years later they were still declining.

Obama said this: "Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever. "

Sound familiar?

Calculated Risk: Obama on Nationalization

Why would we be any different?

[cohdane]

Originally Posted by PotterGeek

Are you guys including the rent money being spent NOW in regards to "breaking even" on the purchase? The OP's not getting any of that back, and the longer they rent, that's money not recouped, so basically it's a loss. You never break even renting.

Cohdane,
6% in what time frame? A year? Five years? Overall?
I don't see anything appreciating in the next year, maybe even few years. With that being said, even if the market stays flat, or even dips a bit more ($10-20K), you still may break even if you were otherwise going to rent for a couple more years. At least you stand some chance of getting some money back versus knowing you won't get squat back continuing to rent.
Good luck

PotterGeek--

There's no time frame per se, just wondering if I sold tomorrow or sold in 15 years, whether 6% was a given in terms of what is automatically a cost when it comes time to sell. Sounds like it's more towards 8-11%.

You know me, we're not looking to flip by a long shot. I just believe we have further declines ahead in my area (at least 10-15%). So if I add 8-11% to those further declines, I start to get a sense of how many years out it would be before someone cheap like me wouldn't be pained to sell for less than "break even."

Declines plus costs equal about 25%. It'll take a few years before the market even outs and begins to climb again. Typical climb is 3% a year or so. So I'm looking at 8 years after however long it takes for the market to turn in the first place.

As for the rent thing. I figure it this way: I'd rent a house that would cost roughly the same as the mortgage, taxes and insurance on a house I'd buy (there are nice houses for rent here). Assuming 10 years: At the end of renting, I still have my downpayment money in hand, plus interest. At the end of buying, I'm out the same amount as renting, plus any upkeep/repair costs, and if the market doesn't behave well, I don't get my full downpayment back. And (heaven forbid) if we're Japan, I'm paying a lot of money to move in 10 years.

Trying to do due diligence. This house isn't an "exact fit" for us and I just want to be cautious in case it's really rubbing us the wrong way after a few years.