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Just to add to fairmarketvalue's rant -
Using the 250k property value and a 6.25% rate. I come up with a 1539.39 monthly payment. I'll leave tax/insurance/hoa as constants.
Assuming a 20% decline, in the property value you guys are debating, over the next 2 years. (Roubini is projecting a bottoming in 2010) Then the subject property would be worth $200K. Just keeping things as constants we use the same 6.25% rate. I come up with a $1231.43 monthly payment.
Over that time the rent was $1650 for 24 months or a total of $39600, the savings you'd see by the lower purchase price over 10 years to a projected sales date, would be $36943 so the delta would be ($2657).
Add in the tax saving from the interest, and some level of appreciation off the bottom...
Just to add to fairmarketvalue's rant -
Using the 250k property value and a 6.25% rate. I come up with a 1539.39 monthly payment. I'll leave tax/insurance/hoa as constants.
Assuming a 20% decline, in the property value you guys are debating, over the next 2 years. (Roubini is projecting a bottoming in 2010) Then the subject property would be worth $200K. Just keeping things as constants we use the same 6.25% rate. I come up with a $1231.43 monthly payment.
Over that time the rent was $1650 for 24 months or a total of $39600, the savings you'd see by the lower purchase price over 10 years to a projected sales date, would be $36943 so the delta would be ($2657).
Add in the tax saving from the interest, and some level of appreciation off the bottom...
At this point, taking into account price/rent, incomes/price, etc. a lot of the "fundamentals" may point to a fairly fair pricing in the area. Furthermore, sales have continued to pick up even past the "seasonality" marker (school has already started) and the government foreclosure city buy backs will start to come online (Oct. 1st). Even "new" homes sales have picked up - and by definition they aren't foreclosures. Albeit all this data is prior to the last few weeks of Oct.
Saying that, I'd also be on the edge if I were to make a purchase decision today. If it wasn't for what is going on with the economy, I'd say go ahead it makes sense... but reading and discussing what has been happening in the economy would give me some reserve.
Since your subscribed to the foreclosure service, I'd still keep an eye on those listings and whether or not they have been growing or shrinking. A lot of people are going to lose their jobs in the near future... and that can lead to collateral foreclosures in the coming year. Furthermore, the Option ARM resets are coming up and may trigger another wave of defaults.
Of course, I'm sure you already know all of this... and that you are the best judge of the environment and current conditions. If you feel that you can weather some market turmoil and gut checks... then go ahead and follow your fundamental analysis. In the most part, if rents are equal to home ownership... most people with steady economic prospects would vie for home ownership.
Humanoid tends to err toward the cautious side, which is good in these times. But, in order for the US to get out of this, we'll need to have people step forward eventually.
Right now foreclosures are driving this particular neighborhood's pricing. There's a couple of more coming that haven't hit the market yet but ... not many more that I can see ... at least with the Notices of Default. Of course, that can change and, of course, some other people may try to sell but ... those people don't seem to be able to lower their prices enough to move those properties.
I already know there's going to be a lower comp in the neighborhood because one of the few foreclosures that hasn't sold is completely shot to hell ... the wiring is totally screwed, a ton of junk has to be hauled out of the back yard, etc. That property is going to cost a lot to fix up. The one I'm bidding on isn't.
As for other comps ... this neighborhood is basically wedged between a trashier neighborhood and a very ritzy neighborhood. So yeah ... the trashier neighborhood is also going to have lower prices because ... well ... it's trashy.
The ritzy neighborhood has been selling for $470-$500K and, even though prices will probably come down further ... I don't think those properties will ever be in my price range. The trashier neighborhood is definitely cheap but ... like I said ... I definitely don't want to buy there.
Which leaves me with a somewhat tightening market in between where most of the foreclosures have sold already.
OK, assuming your $1,900/mo is accurate, and we won't even worry about the fact that most goes to interest, in the beginning. Just straight talk money! Sooooo, lets say she keeps that same monthly for 10 years. That comes to 228,000 in total payments. Since she didn't have a down, this is rather high but still under what she paid on paper of 250,000. And just to humor you, lets say she gets NO appreciation in 10 years and sells for the same $250,000. She made roughly 20,000 and lived, RENT FREE for 10 years. If she were to continue to rent for 10 years, giving that money to someone else, therefore having NOTHING to sell in 10 years, that $228,000 would be GONE!!!! Is THAT simple enough for ya? I hope so. Pretty scary I have to "give the numbers" for you to think my posts are more than rants.
Umm...honestly I don't even know what to say to this. Firstly some technical points are off. The $1,900 will go up each year as property tax, insurance etc goes up each year. You are also ignoring the cost to sell your house. If you factor in both of these she ends up with about $0 when she sells.
Secondly, your claim is just odd. If she is paying $228,000 over 10 years and only getting $20,000 back in what sense did she leave rent free? She isn't living rent free, she is out $208,000 over 10 years!!
Lastly, what you are saying here doesn't address my calculations in the first place. My calculations were to demonstrate how over paying for an asset compounds over your life time. There is no way to eliminate the loss. The best thing you can do in the case of a house is pay off the mortgage faster. That will at least reduce the loss a bit, but will not eliminate it.
Also, the house being about the same as what she paid for it in 10 years is pretty realistic as the price is likely to slowly decline over the next 2-3 years, then flat line for a bit and then will start to appreciate slowly.
I really wonder whether you even read what people type.
Just to add to fairmarketvalue's rant -
Using the 250k property value and a 6.25% rate. I come up with a 1539.39 monthly payment. I'll leave tax/insurance/hoa as constants.
Assuming a 20% decline, in the property value you guys are debating, over the next 2 years. (Roubini is projecting a bottoming in 2010) Then the subject property would be worth $200K. Just keeping things as constants we use the same 6.25% rate. I come up with a $1231.43 monthly payment.
Over that time the rent was $1650 for 24 months or a total of $39600, the savings you'd see by the lower purchase price over 10 years to a projected sales date, would be $36943 so the delta would be ($2657).
Add in the tax saving from the interest, and some level of appreciation off the bottom...
Don't you have to include the loss of $50K of equity somewhere in this calculation? When you go to sell the house you bought at $250K you're $50K in the hole compared to the purchase at $200K even if the payments were equal.
Assuming you need to move in 10 years, I see the numbers as
Buy now at 250K, pay $185K over 10 years in P&I, sell at $200K after those 10 years = 0 initial investment, 185K P&I, -10.6K equity = $195K net costs.
Buy in 2 years at $200K, pay 118K over 8 years for P&I plus another $39,600 rent for the 1st two years, plus have 23.6K equity = net cost $134K over 10 years.
The difference is about $61K.
This can be approximated by taking the value $50K loss in equity at 6.25% interest in 10 years and subtracting the total rent. Basically, you're taking some of the money that would have been lost to depreciation and spending it on rent instead. Since the cost of borrowing $50K from the bank for 10 years is way ahead of the cost of renting for just 2, you come out way ahead by waiting.
Because the rent is paid for a much shorter time than the interest on the depreciation, you'd come out ahead even if prices only drop 5%.
Also note that appreciation doesn't help in this comparison. Since you're selling the house for the same price in both cases, any appreciation is added to the net cost for both scenarios, so it cancels out when you're looking at the overall cost difference between the two. In real life it slightly favors the buy later case because you're closer to getting enough equity to get rid of PMI, but in this case you have to be fairly optimistic for that to help either side.
Humanoid tends to err toward the cautious side, which is good in these times. But, in order for the US to get out of this, we'll need to have people step forward eventually.
This is just a classic game. Yes everyone is better off if we all "step forward", but the one that waits is even better off. But if every waits then everyone is worse off. Gotta love game theory.
Quote:
Originally Posted by sheri257
As for other comps ... this neighborhood is basically wedged between a trashier neighborhood and a very ritzy neighborhood. So yeah ... the trashier neighborhood is also going to have lower prices because ... well ... it's trashy.
If prices in the trashier neighborhood drop, it will lower prices in your neighborhood. Likewise if prices drop in the better neighborhood (say with the coming Alt-A defaults). Neighborhoods aren't isolated systems, at some price point people will start to make substitutions. This is why the whole "real estate local" mantra is only half true.
You also seem to have the idea that once the foreclosures stop the prices will stop declining. Foreclosures have driven the rapid decline in prices, but they aren't responsible for the decline. In fact they are an effect of the decline.
Don't you have to include the loss of $50K of equity somewhere in this calculation? When you go to sell the house you bought at $250K you're $50K in the hole compared to the purchase at $200K even if the payments were equal.
Not if you've got to put $50K into the house just to fix it. All of this is great in theory until you actually see these properties. The condition of these properties can vary widely and, therefore, so does the price. Another property can sell for $50K less but it can also cost just as much to fix.
When people trash these properties ... they really trash them, taking all of the wiring out, just as an example. Fixing that isn't cheap. A friend of mine who's trying to do just that says the contractors are charging her a fortune ... which she has found surprising since we're in the middle of a recession. But I guess the high number of foreclosures has driven up demand for this kind of work.
You also seem to have the idea that once the foreclosures stop the prices will stop declining. Foreclosures have driven the rapid decline in prices, but they aren't responsible for the decline. In fact they are an effect of the decline.
Well ... the bank owned properties have been driving the market in my neighborhood since that's the inventory available at cheaper prices.
I don't know who else is going to be able to sell for cheaper. They would have had to bought several years ago and, presumably, never borrowed on their house during the boom. Chances are, there's not too many of those people left.
There is one private owner who has been trying to sell for $100K more than the bank owned at $350K but that house hasn't moved.
Other than that, there are no other private listings ... except for a short sale that was recently lowered to $260K and is already under contract. So, that's really a bank situation as well, basically, since the bank will have to approve the sale.
Don't you have to include the loss of $50K of equity somewhere in this calculation? When you go to sell the house you bought at $250K you're $50K in the hole compared to the purchase at $200K even if the payments were equal.
Assuming you need to move in 10 years, I see the numbers as
Buy now at 250K, pay $185K over 10 years in P&I, sell at $200K after those 10 years = 0 initial investment, 185K P&I, -10.6K equity = $195K net costs.
Buy in 2 years at $200K, pay 118K over 8 years for P&I plus another $39,600 rent for the 1st two years, plus have 23.6K equity = net cost $134K over 10 years.
The difference is about $61K.
This can be approximated by taking the value $50K loss in equity at 6.25% interest in 10 years and subtracting the total rent. Basically, you're taking some of the money that would have been lost to depreciation and spending it on rent instead. Since the cost of borrowing $50K from the bank for 10 years is way ahead of the cost of renting for just 2, you come out way ahead by waiting.
Because the rent is paid for a much shorter time than the interest on the depreciation, you'd come out ahead even if prices only drop 5%.
Also note that appreciation doesn't help in this comparison. Since you're selling the house for the same price in both cases, any appreciation is added to the net cost for both scenarios, so it cancels out when you're looking at the overall cost difference between the two. In real life it slightly favors the buy later case because you're closer to getting enough equity to get rid of PMI, but in this case you have to be fairly optimistic for that to help either side.
None of us has a crystal ball. but this is a fun little exercise.
I was extending fairmarketvalues example. Basing my calculations on that sets of assumptions. Adding only the Roubini projection of 2 years from a bottom and my own assumption, but not prediction, of a 25% decline over those 2 years.
In that example the subject house was sold 10 years from now at $250k, in your run of numbers your house was sold at $200k.
Since there are so many potential variables there is an infinite set of possible outcomes. You could assume that in a declining market that interest rates in two years may be 8%, based on a belief that with asset valuations declining the risk of loans is higher. Or that in 2 years interest rates are lower 4.5% based on the belief that the government has taken over the business of residential lending.
We may also decide to inflate the sales price because of another housing boom rising from an extended period of reduced residential construction while world and US populations grow.
Each person needs to decide what is best for them based on their tolerance for risk and vision of the future. The pundits will continue to throw statistics around, and express their opinions of the future.
Last edited by FLBob; 10-28-2008 at 08:28 AM..
Reason: small addition
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It's a wash
