Will Austin Home Prices Continue to Increase? (Van, Rule: sales, refinancing)

[CptnRn]

I think too much is often made of the property tax cost here.

We are retired in Legend Oaks in a 2400 SF house, our property taxes this year were $3,744.84. Or $312/month. That is with the age 65 and homestead exemptions. That is less than our average monthly utility bills of $367/month.

If you have not saved for your retirement and all you have to live on is social security, then that could be a hardship. But then you could always live in a smaller house also. This house is really more than we need and we could downsize, but we like the house and where we live.

[riaelise]

Not everyone can swing a 15 year mortgage and there is nothing wrong with that. A 15 year mortgage payment is SIGNFICANTLY higher than a 30 and for many middle classed and below families, that's definitely a factor to consider. Let's think about that, folks. I think it is much better for someone to obtain a 30 year mortgage and send extra. That shaves off years but at the same time you are not bound to sending a huge payment and risk defaulting if situations change and you find yourself money-challenged. It can happen to any of us, trust me. I think a smart move we did was refinance to a 30 and send the money saved as an extra payment. If something major and unexpected comes up (medical for example) and we can't send extra, then at least we wouldn't default or risk default or whatever. A person at UFCU told me that and I believe it to be sage advice.

As for moving up due to space reasons, a large (over 3500 sq ft) s definitely one of the top 3 things on our wish list when we were househunting. We didn't want to move because our house got too small. Some people knock us for it, but we moved into a very large house that will be basically impossible to outgrow. We had no qualms about moving to a suburb to get it. For us, personally, we are very pleased with our decision. After our refinance, we have a much lower mortgage, all the space in the world, and a nice amount of disposable income (which is important to us). Probably the only reason why anyone would mention the words "move up" to us would be moving into a higher price point neighborhood (i.e. homes that are $400K and up)..but we have absolutely no problems living with our fellow middle classed people. We are fortunate that our income has increased over the years so that we can afford to move to a higher dollar community, but we asked ourselves. Why? Our hood has low crime, is in a good location, and is overall a great place to live. In the end, it's just not worth less money in our pocket, so here we are. We'd probably move once the kids are gone, and it would probably be to Georgetown.

[Arnnnold]

Unfortunately, real estate is going to continue to rise in Austin. The main reason is private equity firms like Blackstone are being offered lucrative Public-Private Partnerships. They borrow money at little to no interest from the Federal Reserve, after a few years they spin off their real estate rentals into REIT IPOS. These private equity firms are being used as a kind of secret backdoor bailout of underwater homeowners, they are the ones that prop up the real estate market. As long as quantitative easing continues from the Federal Reserve real estate is slowly going to appreciate in every major city. They are bailing out homeowners without their knowledge. I guess the homeowners are super happy, but the first time buyers are not lol.

[austin-steve]

Originally Posted by riaelise

Not everyone can swing a 15 year mortgage and there is nothing wrong with that. A 15 year mortgage payment is SIGNFICANTLY higher than a 30 and for many middle classed and below families, that's definitely a factor to consider. ...

I refinanced a 4.75% loan that was 3.5 years in to a 30 year mortgage to a 2.75% 15 year last year.

They payment increased $400/mo, but the interest decreased and the equity portion increased by that same $400/mo. So while it's true to say the payment increases, the cost of the loan does not, and the "free and clear" date is moved up significantly. The only reason not to do that would be if the home owner can't afford that payment increase, or if the interest differential isn't big enough. Or if the loan is already close to being paid off anyway, in which case the interest portion of the payment is already pretty small.

Steve

[austin-steve]

Originally Posted by 10scoachrick

steve and some others might be able to chime in here(as long as we've derailed this thread a bit)...
Do 'we' think we will see any sort of shift in the homeowner landscape with the proliferation of 15 year mortgages made more popular in the past half decade or so? In other words, the lower interest rates made it more popular to take out a 15 year note when many, many of us assumed a 30-year mortgage would be inevitable. Even if we hadn't downsized and paid cash for the smaller place, we were halfway through our mortgage on the new house(with approx 8 years to go). Many others went the same route, financing with a 15-year note, so folks could be paid off in ~5-10 years from now. Might that factor in toward some sort of change in the RE market when some number of folks will be 'paid off' within the next decade?

Who has that crystal ball?

I think one thing that might happen, which I have no proof of but am just guessing about, is that those of us with sub-3% interest rates on 15 year loans will covet them in a higher interest rate environment and be loath to sell and let go of that great loan. That might mean less moving, whether upsize or downsize, and higher prices due to less resale inventory as people with low interest move less over the next decade.

For example, my wife and I only need to live where I am (in Eanes) for 1.5 more years until my youngest finishes high school. We love the neighborhood and location, but actually like the less expensive SW Austin area better. Because of the low interest rate, and assuming in 2 years new loan rates are higher, downsizing to a less expensive home won't actually save as much due to the interest rate differential.

Like I said, I haven't done the math, but I've thought of this and the fact that I'm not sure if I'll ever see another 2.75% loan again in my lifetime. I'd kind of like to keep it and pay it off.

Steve

[hts]

Originally Posted by austin-steve

The only reason not to do that would be if the home owner can't afford that payment increase, or if the interest differential isn't big enough.
Steve

Steve, not true and I respectfully have to disagree.

While owning one's home free and clear has always been perceived to be the American dream, it's often a poor financial decision.

With today's interest rates being as low as they are (I was quoted 4.125% on a 30-yr fixed just yesterday/Friday, without any shopping around), it often makes *much* more financial sense to NOT pay off one's mortgage early, but rather take that same cash (in your case, $400/mth I believe) and invest it in the market.

More specifically, while paying off one's mortgage can lead to financial peace of mind for some, that extra $5k last year ($400k/mth approx for 12 mnths) would have returned the equivalent of roughly $3,300 (after 1/3 tax deduction) to the homeowner if used to pay down one's mortgage, whereas the same $5k would have returned approximately 30% (pre-tax) had it been invested in just a simple S&P 500 index fund in 2013 resulting in a potential value of more than $6,500 at year's end (or a difference of more than $3k).

Assumptions/caveats: Yes, I'm obviously simplifying the math here, the whole $5k wouldn't have been investing on Jan 1, everyone's situation is unique and obviously we can't expect the market to return 30+%/year, yadda, yadda, yadda, but my point is that most people fail to grasp the concept of opportunity costs and leveraged assets. I'm actually contemplating a 40-year mortgage just so I can potentially invest even more in the market (and I'm not talking risky derivatives, just simply Vanguard S&P500 and Total Market indices).

[Trainwreck20]

It also depends on which fund and which year...the next year may be a negative market year, or a near flat market. Looking at it on a one year basis is not necessarily a good way to look at it...look at it over the life of the loans (comparing both loans). After 15 years, you would have have been investing 4,800 a year extra at some return (I doubt 30% for those 15 years, or anywhere close). In the 15 year loan scenario, after you complete your loan, you are able to put your full payment into investment now, whereas the people in the 30 year mortgage are still only putting in the 4,800 for the next 15.

No idea on what the actual amount of the mortgage is, but ball-parking it back from the data Steve gave, the 15 yr mortgage person can start banking about 1,800 a month, or 21,600 a year compared to the 4,800 the 30 yr person is still investing. At the end of 30 years, the 30 year mortgage is a better deal if your return is an annual ~8.5% or higher. Lower annual yields point to the 15 year mortgage being a better investment.

[Arnnnold]

Here is a link to Blackstone's new rental backed security. Real estate is going to be propped up by the fed and private equity for now on. It's a shame for first time home buyers though.

Blackstone's Big Bet on Rental Homes - Bloomberg

[hts]

Yes, 30%+ is not a realistic expectation, but 10% certainly is:

Historic stock market (S&P 500) returns:

1928-2013 11.50%
1964-2013 11.29%
2004-2013 9.10%

There is no question whatsoever that with interest rates in the 4% range (or better if you have an ARM--I was quoted 2.5% on a 7/1 ARM), you're much better off investing that extra cash rather than paying down your mortgage even a single day earlier than its due date.

[riaelise]

Originally Posted by austin-steve

I refinanced a 4.75% loan that was 3.5 years in to a 30 year mortgage to a 2.75% 15 year last year.

They payment increased $400/mo, but the interest decreased and the equity portion increased by that same $400/mo. So while it's true to say the payment increases, the cost of the loan does not, and the "free and clear" date is moved up significantly. The only reason not to do that would be if the home owner can't afford that payment increase, or if the interest differential isn't big enough. Or if the loan is already close to being paid off anyway, in which case the interest portion of the payment is already pretty small.

Steve

Steve, refinancing to a 15 was way more than 400 bucks for us. Our mortgage would have been over 3000 per month. I'd rather be in a 30 and send in extra instead of having to pay a higher payment each month. In my opinion, that is better and more people are able to do it. Not everyone's situation is like yours. For many people, they have many more pressing expenses than paying off a mortgage early. 400 bucks per month is a lot. No shame in that. We purchased our home early, when we were in our twenties so it wille fully paid off before sixty. I'm fine with that, too. I purchased my first home at 21.. If I had stayed, it would have been paid off at 51. The whole equity thing doesn't really bother me anyway either. I like money in my pocket right now.