
It's A Terrible Time To Buy An Expensive House - huherto
http://patrick.net/housing/crash1.html
======
webwright
This is missing something that I think is (literally) the most important
change since the baby boomers: job tenure.

People used to stay at their jobs for decades or their entire lives. Nowadays,
what's the average job tenure? 2 years or less in tech, a touch more outside
of it. So how much do you want to constrain your next job search to a commute-
radius of your home (hint: research the relationship between commute distance
and happiness before you answer)?

People are more mobile nowadays. My rule of thumb with real estate is "If I
can't rent it out for more than the mortgage + 1% of purchase price (avg.
maintenance), I will not buy a house".

(disclosure: I own two homes with mother-in-law apartments-- both are
currently rented and profitable while I travel the world for bit)

------
josefresco
Point 8 is an important element of the last (or current depending on your
outlook) housing bust.

 _Because first-time buyers have all been ruthlessly exploited and the supply
of new victims is very low. From The Herald: "We were all corrupted by the
housing boom, to some extent. People talked endlessly about how their houses
were earning more than they did, never asking where all this free money was
coming from. Well the truth is that it was being stolen from the next
generation. Houses price increases don't produce wealth, they merely transfer
it from the young to the old - from the coming generation of families who have
to burden themselves with colossal debts if they want to own, to the baby
boomers who are about to retire and live on the cash they make when they
downsize."_

Important to remember that for every homeowner over-stretching to buy their
dream house is another home-seller making a healthy profit.

------
toddmorey
I think the madness won't end until we stop looking at housing as an
investment vehicle. Housing is an expense. We're all renters to some extent.
Even when I own my home "in the clear," I'll continue to have tax and
maintenance obligations forever.

There's also a very real lifestyle component. If it's a purely fiscal
decision, we should all be renting in Dayton, Ohio.

That's why these sorts of articles drive me nuts. He's assuming equal
inventory across renting vs. leasing. There are six people in my family, and
the local home rental market doesn't support those numbers, at least not in
the area where we want to live. In other markets, our only sane options would
be renting.

EDIT: I should clarify that I mean owner-occupied housing. You can certainly
make money in real estate that you can leverage; properties that you can rent
or sale. (Still, as an investor, I have yet to add any real estate.)

~~~
rtpg
I've always been confused about the housing as investment idea. We don't
consider cars to be an investment either do we? I feel like the idea can only
help to drive the prices up further.

~~~
snowwrestler
Cars are not an investment because, unless we are talking about collectible
antiques, cars always depreciate. That's why it's more accurate to think of
cars as expenses.

Real estate can appreciate. It's not guaranteed to do so, but it can, and with
significant leverage. That's why it's considered an investment.

~~~
rtpg
but the appreciation only happens because everyone wants it to right?

I get that building a pool makes your house worth more, but trying to ride a
bubble seems messy

~~~
snowwrestler
There are measurable fundamentals that consistently lead to local real estate
appreciation, like population growth, economic growth, increasing mean income
level, school district ranking, nearby commercial development, nearby
infrastructure development, etc.

Of course all of this can be trumped over short time periods by nationwide
trends like the recent financial crisis. But with strong local fundamentals,
such trends create more volatility than permanent depreciation.

------
bradleyland
When I read this, I can feel the pull of confirmation bias pushing me to nod
my head in agreement, but my skeptical side longs for more citation. The
author makes many claims of fact in this article, but offers no citations to
back them up. For example:

> _Because there is a huge glut of empty new houses. Builders are being forced
> to drop prices even faster than owners, because builders must sell to keep
> their business going._

Aren't there statistics available that show housing inventory levels over
time? I can't refute the claim, because I don't know where to find those
statistics, but I'm skeptical of claims provided without citation.

The entire thing seems very rational, but I'm reminded of the quote, "The
market can remain irrational longer than you can remain solvent." I wish there
were more citations to back up the facts. Maybe I'll do some of the footwork
myself.

~~~
twoodfin
Agree. And where are the indications that interest rates will rise
substantially any time soon? I'm not saying that's impossible, but this piece
seems to take it as an article of faith that we're in a period of
unsustainably low rates.

~~~
dxhdr
[http://mortgage-x.com/images/graph/fhfb_contract_rate.gif](http://mortgage-x.com/images/graph/fhfb_contract_rate.gif)

We are in unprecedented territory here, interest rates have never been this
low. Is it sustainable? Who knows. Given history I'd be more inclined to
believe it's not.

~~~
twoodfin
Doesn't that chart contradict the article? Home prices didn't decline from
1960 to 1980, as interest rates climbed dramatically:

[http://www.multpl.com/case-shiller-home-price-index-
inflatio...](http://www.multpl.com/case-shiller-home-price-index-inflation-
adjusted/)

There's obviously some relationship there, but it's not as clear cut as this
article makes it out to be.

------
varelse
This looks like the same set of points Patrick has been making since before
the bubble burst. They're all great rules of thumb. And all bubbles pop
eventually, but the problem is that it's very hard to predict exactly what
pops them and when it will happen.

So in retrospect, it would have been a terrific idea to buy a house in SF in
mid-2009 and then sell it now. But if you followed Patrick's advice, there's
no way you would even consider doing so. And bluntly, if you're a hacker, you
probably _should_ follow Patrick's advice. SF is the land of perma-renters.

Paying too much rent now and moving when the current bubble pops and/or
sticking around long enough for the Ellis Act to make your apartment a bargain
both seem like better strategies than speculating to me. Focus on what you're
good at to pay the rent in the short term.

It's the people whose brains are wired into local and national real estate
markets who stand a decent chance of knowing when to buy or sell, many, not
all, of them realtors. Now if you can give people a better finger on the pulse
of this market, go for it. Zillow, Trulia, and Redfin need not apply - their
attempts at property valuations are wacko.

~~~
hackula1
Buy when people around you say the market sucks.

Sell when people say it is awesome.

This goes for real estate and basically anything else.

~~~
varelse
And that's just it, Patrick is mostly a perma-bear. So trotting out his
recommendations when the market is stupid up makes him seem more sagely than I
personally think he is.

When I used to participate in his online forum, it seemed to me that his main
objective was to eliminate the mortgage interest and property tax deduction
immediately so it would trigger an immediate crash in the market and allow
anyone with cash on the side to clean up. Whatever floats your boat of course,
but that seemed a pretty reckless plan to me. That said, reforming said
deductions gradually is probably sensible, just not all at apocalyptically
once.

------
ambiate
It is important to weigh in many factors. The easiest to grasp is debt to
income ratio. (Debt/Income) _100\. Student loans, phone bills, internet,
netflix, insurance, etc. Tally it all in. Divide it by your monthly income.

For example: $650 student loans,$100 cellphones,$90 car insurance,$300
food,$250 gas,$150 electric (average over 12 months),$80 water/sewage/trash
\---- $1620

($1620/$4000) _ 100 = 40.5% recurring debt to credit ratio

Note: Most lenders do not factor in utilities. You should. They will let you
drown.

It is always wise to take your Good Faith Estimate and refactor your d/c
ratio.

$1620 recurring,$350 mortgage,$120 home insurance,$150 taxes,$80 mortgage
insurance \---- $2320 (2320/4000)*100=58% 42% of your income remains to be
spent on fed taxes, benefits at work, non recurring debt, random quirks of
life.

I really think 2x Household salary is pushing the limit of what you can
afford. Vehicles break, pipes bust, utilities are going to have
fees/unexpected jumps, people get sick, etc, etc.

Don't waste your life preparing for the unknown. Just don't dig yourself into
a hole that you can't swim out of once the floods come.

~~~
eloisant
I don't know, if shit hits the fan you can change your utilities budget.
Change your cellphone plan to a prepaid, take the bus instead of your car, eat
ramen everyday instead of going to the restaurant...

But when you have debt, you can't just decide not to pay this month or you
really get in trouble.

------
amanfredi
In many places, homes available to rent are not and will never be comparable
in quality to homes available to purchase.

~~~
envex
Plus renting is basically flushing your money away each money opposed to
building equity in something over time.

~~~
dan1234
You're flushing money every month with the interest on a mortgage + taxes +
maintenance. You just have to hope that this is less than the amount you'd be
paying in rent. (assuming property prices stay flat)

~~~
snowwrestler
Property prices never stay flat because of inflation.

This matters because the payments on a fixed-rate mortgage do stay flat; they
don't adjust with inflation.

I just refinanced to 4.5%. Long-run inflation is 3% so my actual cost to
borrow is 1.5%. With the mortgage deduction it is just over 1.1%--nearly free
money, in other words.

It's true that I pay property taxes. In my jurisdiction they are just over 1%,
so now my actual cost to own is maybe about 2.2%.

Maintenance is a bit of a red herring...most straight maintenance is
inexpensive (cleaning, painting) or optional (fancy landscaping).

Most expensive "maintenance" is actually improvements. For example last year I
replaced both my A/C unit and furnace. It was a substantial cash outlay, but
the new units are far more performant and efficient than the old ones. If I
stay in the house another 5 years I will completely recoup that investment in
lower monthly energy payments. And if I don't, the modern new appliances will
allow me to set a higher asking price in a sale.

~~~
VLM
"Long-run inflation is 3%"

LOL the political reported rate is what the .gov is willing to provide in COLA
increases. It has nothing to do with actual costs. You're budgeting based on
made up numbers provided for someone elses "pay" rate increases.

Look at say... gas prices. Double in a decade. Thats about 7% per year. Or the
price of food, or medical insurance, or tuition, or price of cars, etc. Think
of what real people actually spend money on.

You can get better numbers from shadowstats. Somewhere toward the low end of
6% to 10% is about right. We'll call it 7% long term average.

The problem with 7% annual inflation rates is very few people can maintain
those pay increases, every year, for an entire 30 year mortgage... So
eventually you end up house poor.

Lets say J6P gets a 3% pay raise but the cost of everything else increased by
7%, for a generation or so. That means the money left over after food, car,
etc aka the rent either directly for land or indirectly for money to buy land,
will drop by about 4% per year. For awhile you can mask that by lowering
interest rates, but once you reach "basically zero" like now, problems
develop.

Finally the mortgage interest deduction doesn't work like that. If you pay
more interest to the bank than the standard deduction fraction then you don't
have to pay income tax on the fraction above that. Basically you need low
income, high interest payments, and then all you save is taxes on the portion
above the standard level. You're still out the same money, just not out the
income tax on a small sliver of the total interest over a certain limit. I've
paid enough of my mortgage off that I no longer get a mortgage interest
deduction. Oh, I could file it anyway, but I'd have to pay more in taxes than
just taking the std deduction. Eventually you reach AMT range and then things
get weird.

~~~
snowwrestler
If you want to rely on some random website for your financial data, that is
certainly your right, but I don't think we could have much of a conversation
about it.

------
jpmattia
It's worth noting that patrick was among the few active bloggers that noticed
the housing bubble early. Ben at the thehousingbubbleblog, calculatedrisk were
two others. Folks that were paying attention and shorted the banks made some
money.

But of course: this time is different, broken clock, and <insert your
financial cliché here>, etc etc.

~~~
muzz
The more salient part is the broken clock.

CalculatedRisk changed his opinion as the facts changed (he is data-driven,
and one of the best blogs out there).

Patrick.net has essentially been a perma-bear on real estate. While that view
was correct at one point in time, he never changed his view significantly when
the facts completely changed.

~~~
jpmattia
> _CalculatedRisk changed his opinion as the facts changed (he is data-driven,
> and one of the best blogs out there)._

I should have emphasized this point myself. Also, the CR comment board used to
be of HN quality, but for economics and housing. (Lately, not so much.) If you
follow one econ blog, I'd heartily recommend CR:
[http://www.calculatedriskblog.com/](http://www.calculatedriskblog.com/)

I will note though for the topic at hand: CR has commented that there is
little correlation between interest rates and house prices[1]. I believe he
has neglected that most of the data from which that statement is derived had
interest rates (and borrowing standards) out of range compared to where we are
now.

[1] [http://www.calculatedriskblog.com/2013/06/house-prices-
and-m...](http://www.calculatedriskblog.com/2013/06/house-prices-and-mortgage-
rates.html)

------
icefox
If there was ever an article that needed a [citation needed] this would be it.
There are so many statements that are either flat out wrong, but something
people like to believe to things that are only right in some locations. bla,
flagged

~~~
prawks
Care to list a few of the things that are flat out wrong for those not as
knowledgeable?

~~~
notahacker
Fairly early on he states that where rents are typically 3% of house prices
and interest is typically 4% of a house price "it costs more to borrow the
money as it does to borrow the house". Except that interest is 4% of the house
price in $YEAR_PURCHASED per annum, and the rental rate is 3% of the house's
value in $CURRENT_YEAR per annum so the comparison isn't very meaningful
except in the short term: the mortgage payment is a fixed cost whereas the
rental rate is a variable that will tend to rise over the course of a 25 year
mortgage unless there's something _very_ strange going on with the regional
housing market or US inflation and economic growth. Even at modest rates of
inflation the total cost of interest paid over the course of a mortgage will
tend to be lower than the total cost of renting over the same period (even
without accounting for nominal appreciation in house values); whether the
additional cost of renting is a _reasonable_ premium for not incurring the
risks of owning that home is another matter

~~~
prawks
Makes a lot of sense, thanks!

------
mberning
Or 10 reasons why it is a great time to buy a cheap house. I bought a roughly
~$100k home back in 09 which I could now rent for about $800-900 per month.
There is a nice little house on a smaller lot right around the corner listed
for only $65k. For somebody like me that has a decent income and decent credit
the opportunities to buy nice little rental properties and make a tidy rental
income have never been better it seems.

~~~
codex_irl
What part of the country do you live in? I bet it is not in the SF bay area
;-)

~~~
virmundi
Probably not, but not everything is the Bay.

I'm moving to Florida. I plan to buy a house that is 30k. Small bungelow. Just
me, the wife, the dogs and a cat. At the same time I plan on buying a 55k
fixer-upper.

The first I should be able to pay in cash. The second, won't get bought until
my current home sells. However, that second house, once improved (by us: we do
flooring, plumbing, painting and simple eletrical) should value at 160k.

Once we move to the fixed house, we'll rent the other for 500 a month. Should
be doable since my wife is currently in FLA in a 300 sq/ft studio at 500 a
month.

I purposely didn't want to go to the Bay for this reason. I avoid California
at all cost for this reason. My long term plan is to startup a tech firm, hire
college grads, train them and try to keep them with the company for 5+ years.
Hard, but doable. The nice thing is they can get 45k a year, and get a pretty
nice home/environment that would be hard to beat. So we'll see, but again the
Bay really matters in the HN echo chamber.

------
jonnathanson
Some very solid points about the market in general, but I wonder how several
of these points (particularly the points about oversupply, baby boomers, etc.)
apply to places like SF or Manhattan.

SF, in particular, seems to be extremely young (though that could be
observational bias on my part), well-monied, in sharp undersupply of housing,
with rent matching or in some cases exceeding the cost of a mortgage.

Historically, it's been a boom-and-bust sort of town as far as housing prices
are concerned. And there are always places like the East Bay and the Peninsula
to capture some of the demand. But it's not as if the Peninsula is cheap these
days, so Oakland seems the more likely candidate to take on the burden (which
then raises a thorny question of where all the low-income Oaklanders go when
the gentrification accelerates).

But it's conceivable that SF basically becomes the Mahattan of the Bay Area, a
playground for the rich, while everyone else gets pushed into the outlying
boroughs and beyond. In such a scenario, where money is little object to the
buyers determined to own in SF, what happens to pricing?

I don't know anyone who owns a home in SF right now who doesn't think the
current prices are insane. (Anecdote: one friend just bought a condo in a new
building, and three months later, the closing price for a _lesser_ unit in the
same building was $200k higher than what he'd paid for his). But are they
actually going south anytime soon? Also: while mortgages and interest rates
are great indicators for the housing market in general, SF seems to have an
unusually large supply of cash buyers.

In conclusion: I'm not disagreeing with the article, nor am I bullish on the
local housing market. I don't fully understand why it's behaving the way it
is, and that's never a great sign. But superficially, it seems to be the sort
of "microclimate" that doesn't track the aggregate US market very closely. How
many of these enclaves of wealth does the US have, or will it have, that seem
to have a low to zero beta w/r/t the overall market? And if it's a significant
amount, when will speaking in aggregate terms start to lose a bit of meaning?

On a related note, I'd love to see a comparison of urban vs. rural vs.
suburban areas across the US. I suspect that concentrated urban centers are
obeying very different laws of physics, so to speak, than suburbs and semi-
rurals with their huge tracts of overbuilt housing inventory. Example: I used
to live in LA, and when the press spoke about how hard-hit LA was during the
housing crash, they painted with a pretty big and sloppy brush. The
_surrounding_ areas (Inland Empire, etc.) got the plague, but housing in LA
proper barely registered a slight cough.

~~~
equalarrow
> But it's conceivable that SF basically becomes the Mahattan of the Bay Area,
> a playground for the rich, while everyone else gets pushed into the outlying
> boroughs and beyond. In such a scenario, where money is little object to the
> buyers determined to own in SF, what happens to pricing?

I lived in Manhattan and in SF now and I would say, yah, I can see that.
Already though, the 'boroughs' are being pushed further out. Buying in SF is
an all cash over asking price deal (I've heard over 25%). My wife and I have
been looking around the east bay and north bay and while those prices are a
little more down to earth, the same thing is going on there as well - cash.
Maybe it's not so over the asking price, but those that can't buy here in the
city, don't want to ruin their chances buying elsewhere, so cash is still
king.

It's pretty crazy; I saw a house by us in the Upper Market around - a 2br 1ba,
900 sqft - go for over $1.2m (I pass this place as I walk to muni every day).
That was a month or so ago. Last week walked by it, there was a for rent sign.
Looked the place up, $5800/mo rent. Ridic. Yesterday, the rent sign was gone.
I was like, wow.. Ok..

I felt like our trade up in our building from a $1500 1br apt to a $2200 2br
apt was a little crazy. But I'm sure our place now would rent for $3k easy.
Needless to say, we're staying put for a bit, still continuing to save.

I think the big thing on the psychology here is the fact that so many people
can swoop in with a lot of cash over ask. You really do realize it's a rich
people's city - to own. My wife and I have a small toddler with another kid on
the way and couple the current climate with how crappy the public schools are
here and it's only a matter of time before we hit the eject button. Add to
that the homeless problem that never seems to get any better (I've lived here
on and off for 20 years and it seems like its only gotten worse) and you have
the makings of a city where families don't live (more dogs than kids here).

We still love the city and we'd never _ever_ thought we'd say we're lookin to
the suburbs. But now, we are. Who knows if this will change over the next few
years.

~~~
efnx
> Add to that the homeless problem that never seems to get any better...

I was amazed when I learned that Orange County busses its homeless to SF. I
often wonder how many other affluent areas sweep their troubled people under
their neighbor's rug?

~~~
mikeyouse
You may have already seen, but add Reno and Las Vegas to the mix:

[http://www.mercurynews.com/ci_23087181/san-francisco-
probes-...](http://www.mercurynews.com/ci_23087181/san-francisco-probes-
dumping-psychiatric-patients-from-nevada)

[http://www.nbclosangeles.com/news/local/SF-City-Attorney-
Loo...](http://www.nbclosangeles.com/news/local/SF-City-Attorney-Looks-into-
Allegations-of-Patient-Dumping-204226291.html)

------
nbuggia
Most people don't buy a house for investment, they buy it because they have
reached a point in their lives where they want to settle down and live
someplace with their kids for 10+ years.

In that world, I think you can simplify things quite a bit. First, buying a
house is more of a hedge against inflation than an investment. The market goes
up? You've got more equity to move somewhere else. The market goes down? Well,
you lose money, but everything else is cheaper too.

For the average person, I think the real lesson here is to make sure you can
afford the house, put 20% down and it is within x2-3 your annual income. If
you live in low-supply/high-demand markets like Seattle, SF, then you might
end up paying more, and it is just a trade off you need to make.

------
njharman
I bought a duplex 4 years ago. With rent from other side my total (taxes,
insurance, mortgage) has been ~$500 (1/2 to 1/3 of what I could rent for. PLUS
I've gotten tax benefits, and $250/mo equity.

When I buy a house shortly, the duplex will start making $500/mo + ever
increasing equity amount. Until I decide to cash out.

Property/land is one of the most available avenues to wealth. But, it's no
silver bullet. If you are an idiot and/or and/or make poor choices you will
probably loose. No different than any other business, endeavor or purchase.

Property is so varied geographically, price bracket, types of property,
condition of property, even seasonally, that blanket statements "Don't buy
expensive house" lack any relevancy.

~~~
r00fus
Are you factoring in maintenance? Depending on the age and quality of the
construction, you might be looking at big issues lurking under the radar (ie,
plumbing, roof, etc). When we bought our duplex, the house inspector didn't
really go into an amazing depth of detail, I wish we'd had more focus on the
foundation (sometimes acts like a sump - solution is a french drain estimated
@ $5-10k).

~~~
mdip
I hear you on the house inspection. As a naive first-time buyer, I was told
over and over again to get an inspection and I did. And, all-in-all, it was a
waste of $300. The roof was more damaged than I was led to believe, and there
were several huge "code" violations with the plumbing and electrical. Luckily,
I have family handy-men who taught me how to correct these problems myself and
on the cheap. If you decide to pay for a home inspection in the future, make
sure you don't use one that is recommended by your realtor _(facepalm)_.

The "maintenance" issue is often misunderstood and the costs are different
depending on if you live in the home or are renting it out to someone else.
Case in point, my furnace started failing a few years ago. I could have fixed
it on a Saturday afternoon for a hundred or so (it was made in 1986 -- they
were not particularly sophisticated devices back then). If I wasn't living in
the house, I would have gone this route. Instead, due to the $250/month
heating bill to keep my house at a cool 65 in the winter coupled with the
availability of generous tax credits, I upgraded the A/C and furnace. I now
keep my home at 75 degrees and pay $80 in the coldest months of the winter.

 _Most_ of the problems I've run into have a similar theme. I could have
gotten another few years out of my roof with patch work ($~100), but I
replaced it because I wanted a better looking (and functioning) roof ($3000).
I had a water tank problem that, I discovered, wasn't even failing -- the temp
was just set too high. ($0) Due to tax credits and a desire to run more than
one device that consumes hot water, I replaced it. ($800) People who are
afraid of the unpredictability of these costs can purchase insurance (read the
fine print and no, it's usually not a good deal). And a lot of the really
expensive repairs that you hear about have more to do with people failing to
inspect their home regularly, themselves (get in the attic, watch the way the
water drains when it rains, etc). It's a lot cheaper to fix a downspout/gutter
that's imperfect than it is to solve a foundation issue that creeps up as a
result of water affecting the stability of the ground around a basement.

The article doesn't really apply to where I live. If you're renting out here,
it's at a set of suburban-ish apartment complexes (900sq. ft. 2br, 1ba $800)
or extremely low-end houses usually in undesirable neighborhoods vs a dearth
of single family homes around 1400 sq. ft, 3br, 1.1 or 2 ba with basement
space not included in the square footage. While there are homes in the million
plus range, they're huge or have something that's highly unique about them
(like a million dollar light house[1], supposedly the only one in Michigan
that can be privately owned -- and even that's been sitting on the block for
two years with the offering price dropped from 1.5 million).

[1] [http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-
por...](http://www.oldhousedreams.com/2012/04/20/1886-lighthouse-port-sanilac-
michigan-1599000/)

~~~
r00fus
> If you decide to pay for a home inspection in the future, make sure you
> don't use one that is recommended by your realtor (face palm).

This x 1000.

In fact, I think that's one of the big lessons learned in my first property
purchase. If I could do-over, I'd have hired a completely independent
inspector (rated highly on yelp/servicemagic/angieslist) and maybe have two
separate inspections. At the very least we could have negotiated some
compensation from the sellers.

------
vermontdevil
I now do not consider buying a house a good investment due to property taxes.

The bill is coming soon for a lot of school districts (especially those with
strong unions) with the rapid costs of health care for retirees.

This is going to be our next crisis as we can see it playing out in Detroit.

~~~
fluidcruft
Rent pays property tax, too. It's indirect, but it gets paid.

~~~
VLM
You can leave the district when it hits the fan in a month (or so) if you
rent. If you own, you're stuck paying the "rent" aka prop tax or you eat the
obvious capital loss. A owner is a sheep ready for the shearing...

The older the district, the worse the financial conditions, roughly. If you
rent and move to an exurb that didn't exist in 2005, they can't by definition
have employees retiring from the local school in 2015 with 30 years experience
and 30 years of benefits to pay out. Also roughly speaking the older the
community the more corrupt it is in general, which is expensive. This is
before we get into infrastructure expenses.

~~~
fluidcruft
In every state I have lived, school retirement and health plans were handled
at the state level. Hoping districts isn't going to shield you from your state
government. The school districts pay into state plans as directed by the state
legislature. It's the state legislature that's on the hook for the unfunded
liabilities, not the school districts. School districts only make the
equivalent of social security payments.

And it's not like the employees aren't playing into the system the same way
that private sector employees pay into Social Security. Many/most state
employees are excluded from participating in Social Security--the States in
their infinite wisdom decided long ago that they would rather roll their own
rather than submit to the tyranny of federal control.

------
mdlevinson
Prop 13 affects the baby boomer point in California. Even with huge amounts of
equity tied up in their homes, older people can't afford to sell because their
tax bill when they downsize will dwarf the gains they make by cashing out.
Also, the fact that their kids can inherit their tax basis (a grossly unfair
dynastic tax benefit that should be repealed) makes people do whatever they
can to stay in their homes. The result: that much less supply, higher prices,
and the young subsidize the old and rich with their property taxes.

------
nsxwolf
If you have a family, there are benefits to setting down roots and buying a
house. When you rent, you never know what the future holds. The owner might
want to sell the property at some point and not renew your lease. This becomes
a very disruptive life event for children. Homeowners of course do relocate
for other reasons, but it tends to be on their own terms and not someone
else's.

~~~
VLM
"This becomes a very disruptive life event for children."

Between the ages of 6 and 12, maybe. Below that age they don't really notice
or care, above that age the coverage area for middle and high schools is so
immense that if you move out of the coverage area it was intentionally. There
are eleven thousand household units in my kids high school. Seriously claiming
I wouldn't be able to rent a single one?

The worst case scenario would be kids around 10 and you live in an elementary
district that has precisely one apartment building or perhaps only one
(perhaps illegal?) private house rental.

The long term effects of financial devastation to the family are probably
worse than having to go to a different school "Well, you can't go to college
because we don't have the money anymore to help because we stayed in our
upside down house back when you were in 3rd grade; but on the bright side we
didn't have to move to the apartment complex on the other side of the
elementary school district"

The argument is identical to if you rent an apartment while going to
university, in theory you might have to drop out of that university and
transfer to another if you need to move and no one will rent to you. Very few
people indeed report this tragedy..

------
eloisant
Rent vs buy really depends (1) what's your down payment and (2) how long
you're going to stay in your house.

If you have a high downpayment, and in the extreme case buy your house in
cash, you don't have to pay any interest. You can take into account the
revenue you could have got from your capital, but nowadays you can't get much
without taking pretty big risks.

Then there's the long term. If you end up staying 30 years in the same house,
buying is cheaper. Depending on your local market, the number of years you
need to stay in house to make up for the purchasing fees (interests, taxes,
etc.) is different. It's this number you need to find out. Of course when the
real estate price was going up fast, the increase in value made it up pretty
quickly so buying was an easy choice. That's no longer the case, you need to
do the math.

So it's not whether it's universally better to buy or rent. It all depends on
your local market, your downpayment, and how long you're willing to stay in
your new house.

~~~
ctdonath
Discussions about "rent vs buy", and the corollary of "mortgage vs cash",
rarely address the problem of _you MUST make that payment every month_. Pay up
or lose it.

The notion of paying every month, pretty much for life, is deeply ingrained in
society to the point of _not_ renting/mortgaging seems downright weird. (It's
kinda like the recurring threads where living on $1/meal is met with outrage
by most, despite many doing so with great satisfaction.) Few start out with a
primary goal being owning home & property outright ASAP. This normalizes the
_dependency_ factor, reinforcing a social dynamic where people _can 't_ take
long vacations or high risks, and live in fear of financial devastation from
sudden unemployment or disability, precisely because that massive monthly
payment ever looms.

The normalization of rent/mortgage also means social expectation of costlier
dwellings. Where our culture(s) were satisfied by much humbler abodes a few
decades ago, we've now grown to expect vast variants on the McMansion theme as
a minimum - shocked at any suggestion that buying a brick shoebox (which our
[grand]parents were content with) outright might be financially sensible. I
expect downvotes based on "you can't expect anyone to live in _that_! cash
purchase of real estate is absurd unless you're _rich_!" Well yeah, if you
insist on buying multi-thousand-square-foot floorspace in quasi-urban settings
with lots of options, sure it's gonna cost ... but you can _choose_ to live
somewhere less expensive, in a smaller space, and own outright much sooner -
giving you the freedom to take a sabbatical, or risk investments, or not worry
about layoffs.

In retrospect, and stuck with a large mortgage (bought at the peak), I
_strongly_ suggest anyone entering the housing market focus on hoarding cash
until they can buy something, anything, outright. The freedom full ownership
bestows is remarkable. Pity society sneers at it.

~~~
lacksconfidence
This seems to miss a large percentage of the population which live in mega-
citys. People arn't putting out a million dollars for "McMansions". A million
dollars buys you an 800 sq ft 1 bed 1 bath condo. We are accepting the "brick
shoebox", and we are paying through the nose for it.

Edit: And, at least for me, moving far away where its cheaper is not an
option. My children _will_ know their grandparents, and not because they make
a 4 hour drive each way once a month or some such.

~~~
ctdonath
Oh, I'm not missing that scenario. My point still applies in full. Too
expensive is too expensive, not just in cost but in risk and lost opportunity.
Better maybe to talk the extended family into moving somewhere far less
costly.

------
debacle
I hadn't considered the impact of #3, even though I knew it was a reality.
Being in a position to buy a new house but _not_ take advantage of low
interest rates (because I don't want a long amortization on the mortgage), it
actually makes little sense to buy right now except maybe if I planned to
leverage a diminished equity in a different market.

#6 seems somewhat tinfoil-hatty.

Does anyone have some data to back up #7?

> Buyers should be rioting in the streets, demanding an end to all mortgage
> subsidies.

...and we went off the deep end.

#9 is incredibly specious. Why would retired people sell? Where are they going
to live?

#10 is very true, however it's so difficult to trust a new home builder. Even
if you know what bad construction looks like, it takes an immense amount of
effort to ensure that everything is done properly and you'll probably be
adding 20% onto your cost just to babysit the construction.

~~~
rhplus
_#9 is incredibly specious. Why would retired people sell? Where are they
going to live?_

If a person is physically able, then a smart option is to move to a small
apartment in a location close to services and shops. Downsizing reduces
unnecessary energy costs, taxes, maintenance, yard work, etc. Based on my
city, the equity in a median suburban home could easily pay 15 years of rent
without investment, maybe 25 - 30 with really good investment.

If there's physical support required, then an apartment in the massively
booming "Retirement Living" industry might be a good choice. Here's an example
that costs ~$4,500/month, meaning you could probably pay 10 - 15 years after
good money management from the sale of a median suburban house in these
markets: [http://www.retirement.org/financial-info/home-cost-
calculato...](http://www.retirement.org/financial-info/home-cost-calculator/)

The other option is to sell the house now to investors and use the equity to
support living and healthcare costs. Then you simply move out at a more
convenient later date (i.e. when you die):
[http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_...](http://en.wikipedia.org/wiki/Reverse_mortgage#When_the_loan_comes_due_3)

------
encoderer
Trulia has published a great analysis on this that really contradicts what the
author claims: That you can get better homes for the same price by renting.

[http://trends.truliablog.com/2013/06/mortgage-rates-rent-
vs-...](http://trends.truliablog.com/2013/06/mortgage-rates-rent-vs-buy/)

Moreover he claims you can get as nice of house in the same good neighborhood
cheaper by renting. That's only true if you assume home prices will fall. Even
if you just assume they will stay constant, backing out the principal you pay
from your payment, the remainder most certainly does not buy a home of the
same quality in area's I have a first hand knowledge of. Often homes that make
it to the rental market are less desirable IME even if just because they are
not cared for to the same standards.

------
badman_ting
The part about high price/low interest rate vs the opposite was really
helpful. I am trying to figure out how to think about this so it's well-timed.
Thanks.

~~~
minimax
I have seen this argument (that higher interest rates will lead to lower
prices), but it would be nice to see some historical (or at least anecdotal)
evidence of it. I think at least one problem is that it assumes wages will
remain flat. If wages start improving, home buyers will be able to spend more
money on their mortgage each month which would tend to prop up prices.

~~~
dxhdr
The data is out there, but really it's common sense. On the margin, a buyer
purchases a house with a monthly payment he/she can afford. The monthly
payment is determined based on the purchase price of the house and the
interest rate. The higher the rate, the higher the payment. If rates raise,
the margin buyer will no longer be able to purchase the same priced house.
Prices must fall to clear the market. Yes, increased wages could help make up
for the gap. Wages do not have to rise with interest rates (stagflation).

~~~
minimax
I understand the theory, but when I look at the data it looks like:

[http://research.stlouisfed.org/fred2/graph/?g=mth](http://research.stlouisfed.org/fred2/graph/?g=mth)

The last real period of rising mortgage rates was in the 70s. You can pretty
clearly see that home prices were rising in spite of rising financing costs.

~~~
VLM
More like very early 80s.

On the other hand, the price of everything more than doubled in the 70s due to
stagflation.

------
chrismealy
He's mostly right about low interest rates, but you can wait decades for
interest rates to do what you want them to do.

------
kfk
As we are on the topic, which percentage of your salary going to pay up rent
would you consider "sane"?

Edit: I mean post tax. It's a cultural thing, in Italy we don't ever consider
the gross salaries.

~~~
randlet
As a side note, when people say "percentage of your salary" are they referring
to pre or post tax? This is never clear to me and I wish people would state it
explicitly.

~~~
brown9-2
It should be post-tax, but I think a lot of people forget that their nominal
salary is not all take-home pay.

~~~
randlet
I agree that it should be post tax, but nobody uses post-tax figures when
stating how much money they make so it's often not clear which "15% of income"
they are referring to.

------
ajays
"Because the housing bubble was not driven by supply and demand." .... except
in San Francisco. Everyone wants to live here, and Facebook, Twitter, etc. are
turning out paper millionaires by the bushel. Expect the house prices to tick
up again once Twitter IPOs. There is some construction now[1] (just walk down
Market street from the Castro), but I think the number of techie millionaires
being minted seems to exceed the number of dwellings under construction.

Plus: there is the externality of outside money. I've heard of buyers from PRC
paying cash down, sight unseen, for properties in desirable neighborhoods [2]
[3]. A lot of the analysis such as the one in this article assumes a somewhat
closed market; but outside money flowing in can change the dynamics
significantly.

[1]
[http://sf.curbed.com/archives/2013/07/25/the_40_most_notable...](http://sf.curbed.com/archives/2013/07/25/the_40_most_notable_new_developments_currently_under_construction.php)
[2] [http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-
to-...](http://www.forbes.com/sites/kenrapoza/2013/07/10/chinese-to-spend-
billions-on-american-real-estate/) [3]
[http://www.sfexaminer.com/sanfrancisco/chinese-real-
estate-b...](http://www.sfexaminer.com/sanfrancisco/chinese-real-estate-
buyers-flocking-to-peninsula/Content?oid=2184205)

~~~
talmand
I would say the housing bubble was driven by supply and demand, just not
traditional home-buying supply and demand. Houses were being treated as day-
to-day commodities, which is bad for people who wish to actually live in
houses and not make money off of them.

I was in Vegas during the start of the housing bubble and all I saw were
investors buying houses to flip immediately for big profit selling to other
investors who thought the same. Anyone who actually wanted to buy a house to
live in was required to get caught up in a risky mortgage option that left
many of them in serious problems when their house was suddenly worth less than
half of what they owed on it.

We looked at a house at the start of the decline and offered $50,000 less than
asking. They laughed at us and we stopped bothering to look. Less than a year
later the same house was for sale for more than $100,000 less than our offer.
The realtor who showed us houses later moved out-of-state so she could earn a
living.

Someone I knew told me about his friend that bought a house, did bare updates
to it, and sold it within a month for nearly a $100,000 profit. He was gleeful
at the idea you could do such a thing. I told him that was good for his friend
but incredibly bad for everyone else in the city. About a year or so later I
was shown to be correct beyond my worst doomsday predictions.

I'm seeing the same things I saw in Vegas starting again.

------
kyllo
So you're supposed to put at least 20% down on a house that costs no more than
3x your annual salary, and only buy when interest rates are high, home prices
are low, and rents are high.

Easier said than done!

------
untilHellbanned
Think this is all true, but when will any of these points be recognized by the
masses? Never? 5 years?

~~~
DamnYuppie
Hopefully not until after my house sells ;)

------
penguat
I don't believe this to be correct:

"the renter - if willing and able to save his money - can buy a house outright
in half the time that a conventional buyer can pay off a mortgage"

I don't think this is taking into account the rent that a renter pays. If a
renter can just afford to pay a mortgage, then using the figures given (3% pa
to rent, 8% pa to own) - that's 5% of the house value they're gaining p/a. At
that, they can buy outright in 20 years. Is a typical mortgage 40 years?

~~~
karl_gluck
You assume the 5% per annum is going entirely to equity. Consider that
property taxes, HOA fees, utilities, mortgage interest and maintenance all
contribute to the ~8% figure, and your p/a equity looks closer to 3%.

Now let's compare if you were to purchase stock/ETFs with that equity
investment instead of investing in your house.

Let's do a housing-optimistic comparison. Let's say you get a 2% dividend
(nothing special) on the stock and the stock price declines at 0.5% per year.
For the house, let's say you gain 3% equity per year and the home price stays
flat. Rent costs are 20% higher than your expenses for the house, so you can
only gain equity in the stock at 80% the rate you do in the house.

Over the same time period that you would pay off your mortgage and get 100%
equity in a $100,000 house, thanks to compounding interest, your stock is now
worth $107,000. That means that you have 7% MORE value in stock--even though
you paid 20% more rent for the entire period of investment AND the stock price
tended to decline (slowly) over time.

If we adjust to something more balanced (3% equity per year, 3.5% dividend,
stock price stays flat, rent costs are 15% higher) the result is even more
dramatic: 53% more value in the stock option.

Of course, all these numbers would be better if backed up with real-world
statistics, but it's something to think about.

~~~
penguat
I don't make any assumptions about that 8% - I used the figure and the
assumptions from the original article.

If you rent, and put the difference into a savings account, then using the
assumptions from the article, you'll be able to buy a house outright in 20
years.

I think you're pretty much agreeing with that..?

I am of course assuming that interest rates (or other return on investment),
house prices, inflation and salary increases are all sensible, going in the
same direction at the same rate, or near enough.

If you put your money in a pure tracker (e.g. tracking the Dow Jones, FTSE
100, or similar index), then you'll probably be better off in the long term,
perhaps able to buy outright in a little less time.

------
snowwrestler
There's a lot of good technical advice here on pricing real estate, but it's
colored by an absolute dislike/mistrust of debt.

Ultimately you have to ask yourself whether you see debt as a form of slavery,
or as a financial tool that you can use to your advantage. If it's the former,
you probably should not buy a house. If it's the latter, it _might_ make good
sense to buy a house (even an expensive one) depending on the conditions.

------
adaml_623
I don't know the US housing market very well but I think anybody discussing
the national market as a whole is talking through their hat. Different areas
are massively different and are going to react differently to stimuli like
rate changes.

~~~
300bps
_Different areas are massively different and are going to react differently to
stimuli like rate changes._

I agree with the first half of your sentence and disagree strongly with the
second half. In many ways, a house works like a bond. The price moves
inversely with the interest rate.

This is because, for most people, what determines affordability is the monthly
payment. There are two factors involved in monthly payment:

1\. Amount borrowed

2\. Interest rate

Consider someone that can afford a monthly payment of $2,000 per month. That
means that they can afford:

$541,097 borrowed @ 2.00%

$474,328 borrowed @ 3.00%

$418,922 borrowed @ 4.00%

$372,563 borrowed @ 5.00%

$333,583 borrowed @ 6.00%

$300,615 borrowed @ 7.00%

$272,566 borrowed @ 8.00%

You can see how the price of the house someone can afford is pushed down as
interest rates go up. And here's the thing - the affordability population is a
bell curve. Once you get above a certain payment per month, there aren't
enough people above to replace the people disappearing below. That is, there
are fewer people that can afford a $3,000 per month payment than can afford a
$2,000 per month payment.

The bottom line? The article is spot on. You don't buy a house when interest
rates are low and expected to go up.

~~~
kjackson2012
You likely won't get high interest rates like 8% unless you have higher
inflation rates. So someone who makes 2000/month right now, by the time the
Interest rates increase to 8%, their salary would have Also increased.

~~~
300bps
I happen to be an expert on this topic (i.e. I work as the technology person
on a fixed income trading desk managing $28 billion of assets including a few
billion in mortgage backed securities).

 _You likely won 't get high interest rates like 8% unless you have higher
inflation rates_

This is completely wrong. The only thing preserving low interest rates is the
Fed purchasing mortgage backed securities (see
[http://www.newyorkfed.org/markets/mbs_faq.html](http://www.newyorkfed.org/markets/mbs_faq.html)).
When that stops, interest rates will go up dramatically. You could argue that
the Fed will only stop doing that once inflation kicks in but that is not
true. The Fed is on extremely thin ice as it is now. They're only supposed to
purchase and sell Treasuries for their open market operations
([http://www.federalreserve.gov/monetarypolicy/openmarket.htm](http://www.federalreserve.gov/monetarypolicy/openmarket.htm))
and manipulating the mortgage market is significantly outside of their
charter.

 _So someone who makes 2000 /month right now, by the time the Interest rates
increase to 8%, their salary would have Also increased._

There are literally millions of possibilities that could happen that don't fit
your theory. Never heard of stagflation?

My goal is not to write a dissertation in an HN comment so that's enough for
me.

------
creativestuff
Considering the interest rate is lower than the inflation, what would be some
other items to invest $100k to generate some guaranteed income? (except stock,
where you could also lose money)

~~~
karl_gluck
You make a pretty big assumption here: that anything you can invest in to earn
money passively CAN be guaranteed. What you mean by "generate guaranteed
income" is "to allow me to grow my investment". After all, investing $100k in
a house that loses 10% of its value is worse than just keeping the $100k in
dollar bills. In fact, if it is still worth $100k nominal down the line means
you lost 2-3% per year on your investment. So after mortgage, property tax,
maintenance, and everything else, your renters would have to cover about 7-9%
of your home's value every year for you to make a 2-3% margin.

What I've found is that the reward is always proportional to the risk--
otherwise people invest in it until it isn't proportional anymore.

Please investigate this for yourself, but personally, I take a two-way split-
risk strategy to grow my investments:

\- Very high risk, very high reward investments that I thoroughly research and
believe extremely strongly in, using money I can afford to entirely lose.

\- Very conservative investments in indexing ETFs that have rock-bottom annual
fees and decent dividends.

Here's an article you might find interesting:

[http://www.npr.org/2013/06/05/188306471/resisting-the-
tempta...](http://www.npr.org/2013/06/05/188306471/resisting-the-temptation-
to-win-when-investing)

------
sAuronas
Nice post...I wish you had talked about market disruption and the failure of
cities as agencies of change.

The realtors' lock on transactions and the lack of transparency in the
marketplace is one issue.

The antiquated and closed-source zoning standards are another.

And the building industry in general, hindered by trade unions, et al, is yet
another.

Just like disrupting Hollywood would (might) get us better movies, disrupting
the RE industry will (might) eliminate overbuilding (and under-building, where
applicable) and stabilize prices.

------
gigawhat
I read this on patrick.net years ago-- a lot of it is quite outdated now.
Basically the housing market nationwide is quite strong. Whether it will last
is another question.

Just one example of the article's outdatedness-- the jumbo mortgage market is
doing great now:

[http://www.bloomberg.com/news/2013-07-03/wealthy-going-
big-t...](http://www.bloomberg.com/news/2013-07-03/wealthy-going-big-to-save-
as-jumbo-mortgages-are-cheapest.html)

------
pathikrit
I bought a 1-bedroom condo for $500k in downtown SF and put 20% down payment.
The monthly mortgage+HOA+tax is around $2500 and I am renting the place out
for $2650. So you can say it is paying for itself and 15-years later I will
own the place without paying anything but the down payment. Not bad?

------
Semiphore
Unless it's in NYC and you got the rates right when they were at the bottom.

Article is very useful, but it's one of those that gives 'here are x reasons'.
Yes, but come up with determining how to make a decision instead

~~~
BetaCygni
Did you read the article? It actually has some nice rules of thumb on how to
compare the price of a house to the rent.

------
jpadkins
a low probability, high impact tidal wave could be the switch to remote
working. If remote working catches on in corporate america, it will wipe out
the value of a lot of homes in higher priced areas.

------
laurent123456
Shouldn't the post be renamed "10 Reasons it is a Terrible Time to Buy an
Expensive House, _in the US_ "? It sounds like a general article but it's
really only about the US.

~~~
VLM
If you research housing bubble related issues, its currently worse outside the
US "in general". Canada, China, Europe, India especially, Dubai, Australia...

------
codex
It's a fantastic time to buy an expensive house. Interest rates are so low due
to the Fed that money is essentially free. I will be keeping my 30 year
mortgage for the next 30 years.

------
samstave
0) I have no money.

------
taopao
If you can pay off the mortgage quickly, the low interest rate discount works
in your favor.

------
seuhong
No time is a good time to buy a house, never buy.

------
corresation
There are a perilous lack of actual facts backing this up (and some red flags
disclaimers like "in expensive areas". What does that even mean from a
statistical perspective). For instance I would instant call bullshit on the
rent versus owning notion based on basic economics (when rents are less than
the price of the mortgage, _people don 't rent out houses_. The notion makes
absolutely no sense).

Even more indicting is the description of the nationwide market as a singular,
when there are _enormously_ different realities across the nation.

~~~
AnIrishDuck
> when rents are less than the price of the mortgage, people don't rent out
> houses. The notion makes absolutely no sense

So they're just going to let the house sit empty? Buying/selling a house is a
long term proposition because of transaction costs. Partially covering a
mortgage payment temporarily is better than not recovering it at all.

If the rent payments can't cover the mortgage, they're probably going to take
a hefty loss on sale, if they can sell the house at all.

~~~
corresation
Awesome, so show me (I don't literally demand that you do, but rather mean
anyone) actual data of rents that are lower than corresponding mortgages.
Anecdotal evidence is very, very much to the contrary.

~~~
AnIrishDuck
Examples are rare, because they require a perfect storm of market conditions.
I'm not challenging that, just the notion that it "makes no sense".

If you don't have enough equity to cover your loss on a sale, it absolutely
can make sense to take a small hit on recurring mortgage payments.

------
tootie
He kinda ignored supply and demand.

~~~
nilkn
Point 6 in the article is about supply and demand.

