Prices around here keep going up. Townhouses with no garage are now selling for $429,000 and up. Houses in our neighborhood start around $690,000. Even small, small houses in some questionable parts of town are at least $300,000.
see thats exactly what I'm talking about. Did the majority of people in your area suddenly strike it rich? Are there secret mountains of gold that these houses are being built on? How on earth can normal people, i.e. avg household income < $100k, afford these houses? Makes no sense to me.
Anubis
No Lifer
I've been wondering this for years. How the hell can people, for instance in California, even afford a home? They can't all be wealthy.
not everything costs 50% less in alabama. For instance, computers, televisions, fine dining, electronics, clothes, just and sht you want to buy, will still cost the same in any state.
So no, 50% paycut is not an option.
Who says they have to be wealthy. Let's say you and I are the only home owners in California. In the year 2000 I decide to buy your house for $300,000 and you decide to buy mine for the same. In 2001, we decided to buy each other's houses back, but at $400,000. In 2005 we decide to swap again and for the hell of it sell it to each other for $1 million, making us "millionaires." Our incomes may not have increased that fast, but our homes are now worth $1 million.
I imagine most Socal homeowners previously had owned homes and saw their home values rise. Then they decide to "trade up" bc of the equity they built or the salary increase they received. You get the picture.
However, it screws over new homebuyers bc they don't have an original home whose price shot up to start with. Those people are stuck buying condos or townhomes at outrageous prices.
Supply of real estate = fixed + Demand increases as population increases. = housing prices goes up. Pwned.
IMO the reason why house prices appreciate so much are as follows:
- the stock market has given mediocre return after the crash. So the money is taken out of the market and dumped into real estate. This money will go out as soon as the market picks up.
- people are catching to this real estate craze.. and they are able to buy houses because interest rates are historically low. People take out ARM interest only loans... even though realistically there is no way they can afford this. They are banking that house prices will keep appreciating, while in fact it wont.
- The economy has not really picked up. So people's income havent really increased. Why real estate demand is this high puzzles me.
Vic
Elite Member
- Jun 12, 2001
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It's an investment when you buying investment properties, NOT when buying your own home.
I'm not saying that appreciation is not a good thing (I certainly wouldn't want depreciation), but that this rapid unchecked appreciation IS a bad thing. Value increases 4 and 5 times and more past the overall rate of inflation are economically unhealthy, as what it really represents is sky-high inflation in the housing sector that is steadily pricing people out of the American Dream, based solely on irrational speculation.
Make no bones about it, the bottom of the housing market are first time homebuyers like the OP, and just the OP they are dropping out. And for the same reason -- why buy when renting cost less than half as much with none of the risk?
Vic
Elite Member
- Jun 12, 2001
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Same thing in my area. Rental vacancies are at an all-time high right now. Last year, homes purchased as rentals went to an all-time high, more than 30% of all home purchases, and double the rate of any year before that. A high percentage of these homes are now sitting empty. These speculators are a double-edged sword, both inflating prices through their speculation and pulling homes off the market and out of the reach of first-time homebuyers.
Unfortunately, this type of market condition is always self-correcting.
Vic
Elite Member
- Jun 12, 2001
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They're not first-time homebuyers. The buyers are 40-to-60-somethings who paid ~$50k for their first home back in the high-rate/low-value days of the 70s and 80s and have been transferring their equity ever since. With low interest rates and income increases, most of them only borrow between $250k to $350k to buy those $750k homes, and their down payment is all equity transfer.
my theory is that most of the home market is dependent on the first time home buyer that is buying their starter home.
Couple buys a starter home. 10 years later they cash out the equity and buy a bigger home. They sell to another couple just starting out. The original couple cannot trade up to a bigger home without someone buying their home. I think that most RE transactions of people trading up and buying bigger homes is just numbers on paper. The real cash comes into the market via the first time home buyer.
You should really think about buying sometime
If you buy a home then someday between the day you close and 30 years from now you will pay it off and own it outright. Then you will only be responsible for the prop taxes and in a lot of places you get a 75% discount if you are retired. If you buy in a high rate environment then you can refi in the future and lower your payment.
If you rent then you only build equity for your landlord and you will have to pay rent until the day you die. The rent will only go up and no one will care if you can't work to make money to pay your rent.
True if you rent and don't save. But I added a nice amount to my brokerage account last year, in addition to my 401k contributions. That money is in VFINX shares (S&P 500 index fund) which have historically grown 8-10% a year.
I probably will buy a house eventually, but I might do it somewhere where a 3-BR isn't $400K.
As Vic has pointed out the first time buyers are being priced out of the market. What this means longterm is that we will likely experience an extended period of stagnation in the housing market as rent and wages play catchup with housing prices. It's just the nature of the beast, the real estate market has been booming for a long time but I remember pretty well some periods of extreme stagnation (70's and early 80's). Interest rates will continue to rise to combat inflation, that energy prices are going to inflict on the economy, this will only exacerbate the damage the rapid runup in prices the low interest rates have caused. I wouldn't be entirely supprised if real estate prices stagnate for 10 years in some markets, particularly california.
DrPizza
Administrator Elite Member Goat Whisperer
Since I've just recently become a landlord as well as home-owner, I welcome the stagnation in property values. I transferred the equity from my 1st house to my new house; by re-mortgaging the first home, rather than selling it. The rent I collect on home #1 exceeds the mortgage, taxes, etc. on that property. Mortgage on home #2 is quite low (350ish). 23 months from now, I can pull the equity from home #2 by refinancing it, and use that equity to purchase home #3, keeping the first two. Home 3 will be exclusively a rental property - I'll probably buy either a duplex or something with 3 or more apartments. And, again, rent>mortgage and taxes. Stagnant market means it'll be more affordable to do so.
While the mortgage rates are low, you could just take out a 30yr fixed and ride out stagnations. Or, if you're feeling lucky, you can go with a 5 yr ARM and pray that the market will still be crazy by the time you're ready to sell.
Triumph
Lifer
- Oct 9, 1999
- 15,031
- 14
- 81
This is my investment game plan for the future. A very stable investment with steady income, plus I just like the idea of maintaining houses better than watching stocks all day(although I will definitely do both). I'm going to have to move out of my area to do this, though. Rent < mortgage around here thus making this a bad idea. I gotta move out of this place!
Last year I was looking at ARM's and my math said that to break even the rates would have to go to 9% after a few years. Anything less and I would be ahead dollar wise. I also bought my place almost 2 years ago and it's a small enough part of my income that I didn't need an ARM to afford it.
I don't think ARM's are bad it's just that they are being misused. ARM's and interest only loans have traditionally been for people that can afford a 30 year fixed loan, but don't want to pay the higher rate since they know they will only be in a home for a few years. These days the underwriters will push people into ARM's and interest only loans just to close a loan and make money. Banks don't care since it's not their money that is at risk.
I don't think ARM's are bad it's just that they are being misused. ARM's and interest only loans have traditionally been for people that can afford a 30 year fixed loan, but don't want to pay the higher rate since they know they will only be in a home for a few years. These days the underwriters will push people into ARM's and interest only loans just to close a loan and make money. Banks don't care since it's not their money that is at risk.
BlueWeasel
Lifer
- Jun 2, 2000
- 15,944
- 475
- 126
Living in Mississippi sucks sometimes, but the generally lower cost of homes makes it worthwhile. My fiancee and I (getting married in May) close on a 2200 SF (3 BR, 2 bath) home in a few weeks and the principle on the loan will be 135K after putting 5% down.
Demon-Xanth
Lifer
- Feb 15, 2000
- 20,551
- 2
- 81
As far as the "take a 50% pay cut" thing goes, consider the following scenario:
A person makes $50,000/year, buys a house in California for $250,000. He brings home about $3000/mo, pays out about $2000/mo on a mortgage, that means that he has $1000/mo to live on.
A person makes $25,000/year, buys a house in Ohio for $45,000. He brings home about $1500/mo, pays out about $350/mo on a mortgage, that means he has $1150/mo to live on.
The latter can afford a higher standard of living with half the income.
A person makes $50,000/year, buys a house in California for $250,000. He brings home about $3000/mo, pays out about $2000/mo on a mortgage, that means that he has $1000/mo to live on.
A person makes $25,000/year, buys a house in Ohio for $45,000. He brings home about $1500/mo, pays out about $350/mo on a mortgage, that means he has $1150/mo to live on.
The latter can afford a higher standard of living with half the income.
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