Jealous of Saiselgy?

I wish I'd been less enraptured about the beautiful view and more realistic about what a pain it is to climb a steep hill every day.

Real estate markets are highly localized. Some markets have probably hit bottom, others (nicer areas, higher-end) are just starting to head south.

So nobody can give you very detailed advice on the investment angle (e.g. whether it's a good time to buy right now) without knowing exactly where you intend to buy and at what level.

But be prepared to put down 20% and make sure your credit is excellent, or you'll pay through the nose for a mortgage. The days when a bank would hand anyone a loan are long gone.

Owners of condos have to make maintenance decisions in concert with their neighbors. Talk to the head of the condo association to take the temperature. If the building is new or only partly sold, this is a pig in a poke, with worst case being that only some owners pay for upkeep of a poorly built new building, with no clear decision maker. Emergencies or major repairs generate "special assessments."

In terms of getting a mortgage, you're going to need a bunch of financial records - I would start compiling those now rather than waiting until you're "ready" because it'll make it easier in the long run. In my case, a friend bought an apartment about a year before I bought mine, but he gave me a list of the things his mortgage company required, so I started keeping detailed track of all of it so that when I went in, I had all of the paperwork ready (totally sped up the process). Baseline:

-Several years of tax returns
-proof of rent payment for at least a year (either receipts or a letter from your landlord)
-401K/investment statements
-bank account statements
-at least 1 year of pay stubs

I can't remember what else right now, but basically, they want proof of your income, your assets, and the fact that you make your payments in a timely manner. If you start compiling this stuff now in an orderly fashion in anticipation of buying something in 6 months-1 year, you'll have it all ready to go (I kept everything in a 3-ring binder).

You'll want to have a decent amount of cash in hand for all the various closing/processing/inspection costs that you didn't know existed.

I think mine came out to ~$5,000 when all was said and done.

WE got both our mortgages during the bubble, so we didn't have to provide nearly as much documentation. I don't recall what all we showed, but I'm certain we didn't come up with a years worth of pay stubs. I have never saved such a thing in my life.

I have felt strongly that while it's okay to buy so that you're not renting anymore, it's a bad idea to decide what to purchase based on what makes the best investment. That's like voting in the primaries based on electability.

This is probably mainstream logic at this point, but a few years ago I knew a bunch of people buying-as-investments and I tut-tutted a lot.

The rule of thumb I remember someone giving me is that if you're not sure you're going to live there for five years, it's a bad idea.

(We really don't have the money for it, but I'm fantazising about buying a foreclosed house in Queens and renting it out as an investment; prices are low now, and it's NY -- they're always going to come back. The not-having-the-money bit saves me the trouble of figuring out all the reasons why it's actually a bad idea.)

I have no professional expertise in such matters and so am speaking solely from half-remembered articles and gut feelings, but I wouldn't buy anything until next fall at the earliest, unless you find some sort of foreclosure superbargain.

LB turns slumlord! Yay!

I suggest you buy my house, which I am presently trying to sell. It may not be a condo, and is located probably a couple of thousand miles from where you want to live, but if you bought it my life would be much easier.

Enlightened slumlord, please. (There's an ancient Doonesbury strip from the 60s or 70s, where Mike is tutoring an underprivileged kid: when Mike asks what he wants to be when he grows up, his response is "An enlightened slumlord".)

But this is not, in fact, realistic.

Why next fall, Apo?

The first question I would ask is: Why a condo? Why do the pros/cons seem better than owning outright, or continuing to rent?

(My bias is that condos give you most of the downsides of ownership *without* the freedoms. But that's my own bias, and reflects my general level of surliness regarding being told what to do with my own property.)

And I would emphatically agree that unless you are a) planning to stay in the same geographic location for at least 4-5 years, or b) lucky enough to live in a region where there is always some demand for rental/sublet housing, then don't buy.

Why a condo?

They're cheaper than buying the whole house.

Why next fall, Apo?

That's what I've read most widely as the likely bottom for the housing market.

15: I agree. I was permanently turned off condos by the experience CA's parents had when they sold their big house and bought one. It's bad enough having assholes live above you when renting. (Their situation is particularly terrible since it is only a 3-unit building.)

The only person I know who bought a condo did so in Baltimore in 2002, and sold it in 2006 for a big profit. So I recommend doing that.

They're cheaper than buying the whole house.

Huh. Depends on the housing market, I guess. I've seen condos that cost $300K easily, in an area with beautiful old Victorian twins (aka semi-detached) and rowhomes that were $200K.

But that gets back to the pros/cons, and your tolerance for different kinds of risk. Risk in buying an old house: Have to expensively replace pipes, electrical wiring. Risk in buying a condo: Walls will actually be made of cardboard.

I have to second apo's advice not to buy anytime soon. housing prices have a lot further to fall, and though the decline has been swift in historic terms it seems slow to a would-be buyer. housing also never has a v-shaped recovery in which you might miss your chance to buy at the bottom. prices bottom out and then just bounce along at the bottom; you're not going to miss it. DC-area real estate particularly has been slow to decline but it's not immune. when I read MY's post I was kind of like, noooooo! not that it's a disaster for him or something, but if you haven't taken the plunge yet I would wait more. go lurk on the housing bubble blogs to hear why. look at a chart of average housing prices showing how they historically track inflation, and then you can see some ups in previous bubbles and then prices just ascend this dizzying narrow peak and then they go down...a bit...and that's where we are. we's going to roll the rest of the way down. LB, that goes for you too. your lack of money is helping you not lose money. there's 'come back eventually' and then there's 'be hundreds of thousands of dollars upside down on your mortgage for years.' I don't know, maybe there's some cashflow-positive investments to make in queens, but rents can decline too...

This is probably mainstream logic at this point, but a few years ago I knew a bunch of people buying-as-investments and I tut-tutted a lot.

If it isn't mainstream logic, it should be. Buy a house as a place to live (that is, a consumption item) and not as something to sell (an investment item).

I agree with everyone about condos; if you can hear people banging around overhead, you might as well rent.

Lastly, right now, there is no bottom to the housing market. It can take years to see a real bottom. That's not a problem if you intend to live in the same place a long time, but if you might have to move, that can be an immense pain. The DC market, from what I can tell, is still in bubbleland. That may change if Obama launches a general expansion of the federal government in the DC area. If the money (that he may support spending) goes out to the rest of the country, DC prices will continue to fall.

I think that amounts to, if you can't afford it the way things are now, you *really* can't afford it, when you take in consideration the long run.

max
['Which kind of sucks.']

There's condos and there's condos. I've owned a condo that was one of 72 units across two buildings, they hired a professional company to do management but getting anything done was still ridiculous- they had a Heat Committee to deliberate when to start the furnace each yet. Still, never had to pay for anything beyond monthly fees in the 5 years I was there.
What we own now, half of a two family house, is technically a condo but is completely different. We can pretty much do what we want because we get a long with the other owners (just had dinner with them last night and ate the pie I just posted to the flickr group.) But monthly fee only covers insurance, water, sewer, and minor maintenance. We're going to replace and enlarge our back deck, technically it's a "special assessment." Still, it's useful to only have to pay 60% of those kinds of things, whereas if we owned the whole house we'd have to pay the whole bill.

I would say the 4-5 year rule is a bare minimum, also. The market is, obviously, unpredictable. We bought our place 4.5 years ago and would not make some massive profit if we sold it today.

The thing you should do now is spend lots and lots of time looking at listings online to get a feel for the market in your area. Look at all kinds of listings, even for houses you don't want in places you don't want. We looked at it as indulging the desire for house-porn. There's so much to learn in order to have a sense of whether a price is reasonable that it helps to immerse one's self in it and real estate agents are very, very selective with the "comparables" they'll show you when you signal interest. It pays to go in with a sense already of how much houses in a given area generally cost. It also helped us to spot some problem houses in advance by realizing that a house shouldn't have been priced in our range when everything around it sold for twice as much. One of the best things Rah did was get me as hooked as he was on browsing online listings and reading real estate booklets we'd pick up in a restaurant lobby every time we went out to eat.

Don't just look at listings, though; spend some leisurely time getting to know the literal lay of the land. Anytime we liked a place Rah would look up the flood plain map, topographical map and crime report maps of that area. He also did a lot of the research on who owned what nearby - was the apartment complex around the corner likely to get torn down? Grow exponentially into our back yard? Get replaced by a Wal-Mart? For every house we considered he spent hours just seeing where the links would take him to get a picture of the neighborhood and its recent past. Before we had gone to look at the house we bought Rah already knew its back yard was the highest point in the neighborhood, it was outside both the 100- and 500-year flood plains and that the apartment complex two or three blocks away wasn't likely to expand anytime soon because it had just been remortgaged for renovations and it was owned by a family, not a real estate speculator.

and don't let people scare you about how interest rates may be higher in the future; prices will fall further if that happens.

also, clone rah and start going out with the clone, and get him to do it.

24 is awesome. Rah for HUD secretary!

Sure, falling in love with a man who is obsessed with all aspects of real estate could be a winning strategy for Becks, but what are we heterosexual men going to do?

Also: condo associations bring out the assholes like you wouldn't believe. Architects who do condo work pay higher insurance rates, because you inevitably get sued. Now, they can be a decent way of building equity without having a too-large home, and a new-ish one shouldn't expose you to too much building failure or entrenched assholes, but there's definitely issues that home ownership spares you.

And apo and alameida are totally right about the market. DC in particular is about to get weird, as 10,000 Republicans flee* and get replaced by 10,000 Democrats. Next fall has the additional benefit of being mid-cycle, so you're effectively alone on the market, not competing with a bunch of people with new jobs.

* This time K Street won't take (most of) them

Thanks everyone! I'm looking at condos because house prices are beyond ridiculous. And I am thinking about the 5 year thing and not just as an investment -- that's part of my problem. There are a lot of places I could live now but I want a place that will be able to grow with me. I can't be 35 years old and still living in a 350 sq ft efficiency.

24 is impressive. 24.3 is obsessive, but 24.2 is just smart. AB & I were looking (semi-casually) for 4+ months before finding this house, but we knew we wanted it before we even reached the 3rd floor. Once you've looked at enough places (both inside and just from the curb), you won't have to do a big cost-benefit analysis - you'll know*.

* Granting that you're not looking for a home forever, as we were. But still, you should be thinking in terms of 5+ years, and any big shortcomings will either make you miserable or drive you away prematurely.

Risk in buying a condo: Walls will actually be made of cardboard.

If we're talking DC here, and there are plenty of condos as old as anything else around. (My place is about to hit 100.) And pretty damn soundproof. The new construction that I've been in, though, yeah, total crap.

I've lived in a couple of DC condo buildings (well, one condo, one co-op), and the associations have been extremely accommodating and reasonable. That's not universal I guess, but I haven't heard too many horror stores from friends (compared to suburban/exurban homeowners' associations that won't let you replace a doorknob or plant a shrub without a series of public hearings). And if you own a house in a designated neighborhood, the DC historic preservation review board is like a condo association for a large chunk of the city anyway, and they can be a real headache. But definitely something to think about, to the extent you can get a real feel without actually living there.

A number of people I know around here have chosen condo over house for safety reasons: the probability that a house in an affordable (i.e., "transitional") neighborhood in DC will get broken into appears to be extremely high.

24 makes me feel inadequate.

We have some friends who bought a condo and noticed that the porch was leaning. Someone had filled the gaps between the porch supports and the building with old newspapers. Newsprint is non-structural.
Also, like Boston, DC is an old city with the curse of lead paint. But you already know that from the flophouse.

Any interest in urban pioneering? Plenty of cheap housing in DC, and presumably some of it will be reclaimed. The turnaround can be surprisingly fast - the neighborhood I'm at the edge of went from marginal* to out of our price range in 5 years.

I'm not suggesting this as a way to make a profit, but as a way to find a nice old rowhouse that you can afford. If you can sell it in 5 years for 3X your purchase price, so much the better.

I suspect that DC doesn't work quite this way, but if I'm not mistaken, isn't the Flophouse itself in a rapidly-improving neighborhood? Could you have theoretically bought there ~5 years ago and now be in good shape?

Of course, you've got a lot of shit going on other than being married to your house, so I understand why you wouldn't go that way. But I just wanted to throw it out there

* By which I mean, "on the other side of the margin

There are a lot of places I could live now but I want a place that will be able to grow with me. I can't be 35 years old and still living in a 350 sq ft efficiency.

When you're 30-35 you can rent a bigger place. Or you can rent a bigger place now and stay in it. Plus a condo may not be big enough to grow with you, particularly if you get married or have kids. A lot of people (single women particularly) seem to buy places because of nesting / emotional reasons, feeling disrupted whenever they move and wanting a safe, consistent place to call home. That's actually perfectly rational -- it's very important to feel happy and comfortable where you live -- but it's also true that there are lots of housing options besides buying.

I think that the DC market in particular has some distance to go down. But I don't think it will be an overwhelming drop, government will be big business the next couple of years. If you underbid by 10-20% now and end up selling say 5-7 years from now, by which time the market should be ticking up again, you could possibly break even after inflation.

32: Yeah, CA's parents' condo is, I'd guess, about 100 years old. With 15-ft. (more?) ceilings. But the women upstairs decided to put their workout studio (Yes. That is what they called it.) directly above what CA's mum used as her office. Plus they were trustafarians who could choose to run on their treadmills at any old hour. (It was in the contract that everyone signed that that sort of equipment had to be kept in the first-floor common areas. But they were athletes! And this was their lifestyle! What a mess.)

||

Why do early voters tend to be Republican?. I thought early voting was something our side was using to increase turn out. Part of my job at the local Obama office is getting our people to vote early.* I guess that's compatible with early voters tending Republican.

* With some effort, I have eliminated the temptation to say "vote early and vote often"

|>

Becks- start interviewing Realtors now. Find one you can trust. They are out there, just few on the ground (like honest lawyers). If you are so inclined, I would be happy to refer. Just email me.

Why do early voters tend to be Republican?

My 15-second skim of your link leaves me wholly unconvinced that they are. To wit:

Something to consider as one digests these early vote statistics is that the media consortium's exit poll conducted supplemental phone surveys of early voters in selected states with high proportions of early voters. These surveys found that early voters were more Republican in all states except Iowa.

My bias is that polling is IMHO almost useless on politics, except insofar as if you keep using the same methodology, you can sometimes see trends over time.

Wait... So in DC there are a lot of condos that are part of a 3-flat? I'm so used to those things being apartments in Chicago, except for a smattering of fancy-pants new construction in a couple recently-yuppified neighborhoods. I always imagined condos as being in high-rises.

And people vastly underestimate the wonderfulness of renting. It's quite peachy: very flexible, few extra hidden costs, and you get to be more cavalier about hosting parties with a bunch of friends since you know you won't be the one having to pay to recarpet the place. Plus, no real drawbacks at the moment thanks to the still-elevated house prices relative to historical price-over-median-wage and rent-yield ratios!

Jammies and I are doing similar thoughts in terms of whether in a few years we want to add on to our house, or move. If we add on, we know exactly what want, and it is super specific and would not pay for itself in housing value, so we are basically committing to spending the next few decades in this house.

If we move, then we don't live on a river lined on the other side by all these parks with a giant playscape and tubing and all these great outdoorsy paths and baseball fields and basketball and tennis courts. If we move, we could move back to Austin proper, where my heart is. But then my commute would be a giant pain in the ass. But Jammies' commute would be short. Etc.

Oh- and the condo vs. renting vs. house is usually a decision based on maintenance costs. HOA fees can really affect your monthly payment. Ditto dealing with the people on the HOA. Petty dictators, the lot of them.

This is starting to get scary.

If we add on, we know exactly what want, and it is super specific and would not pay for itself in housing value,

cork-lined room? Indoor water park?

Why do early voters tend to be Republican?

I have no idea, but that answers my question.

44: Buying a condo? The election? The movie you are watching?

Figure out what your budget for a monthly payment is (including condo fees, property taxes), and start putting away the difference between that amount and your current rent every month. This will give you a real sense of the lifestyle sacrifices you will need to make to be a homeowner. I have never, not even in my most desperate undergraduate days, felt as poor as I did in my first months paying a mortgage on a flat that we "stretched" to afford.

cork-lined room? Indoor water park?

We live in a flood plain, but ours is the only house built above the flood plain, so we want an addition where the lower level is intended to be "floodable" - with fake grass stuff instead of carpetting, for example, and screen walls, etc, and then the upper level is kids' rooms. It means making one of the regular bedrooms a thru-traffic room, and basically gives the house a strange layout.

Buy my house!

My general advice is if you are buying in a place where it rains, look at the lay of the land around the property very carefully. If it is the lowest or close to the lowest lot on the block forget it. If the sellers acknowledge they've had water problems but have fixed them - forget it. Either that or visit unexpectedly after some major rains and verify the basement is dry, and then forget it. Because water in the basement is a relentless problem that you will hate.

My second house was on a hilltop precisely because of the water problems with the first.

Hills may have high winds though, but I'll take howling winds during a blizzard over a flooded basement any day.

We live in a flood plain, but ours is the only house built above the flood plain, so we want an addition where the lower level is intended to be "floodable" a panoramic lookout so that we can survey the rising floodtide sweeping away our neighbors' homes, and laugh.

My fear of commitment has helped me stay a renter in the DC area. Plus, the "rule" that one shouldn't buy at more than 3 times annual income has intimidated me. I make good money but I cannot afford anything comparable to what I get renting—and I am partial to condos.

a panoramic lookout so that we can survey the rising floodtide sweeping away our neighbors' homes, and laugh.

God, this is actually one of my worst fears - that when the neighborhood floods, and we're high and dry, and that overwhelmed "too many people to help!" feeling of "HERE - throw your pets in this room! Put your furniture on the porch! Use our bathroom! Oh dear god!"

And people vastly underestimate the wonderfulness of renting. It's quite peachy: very flexible, few extra hidden costs, and you get to be more cavalier about hosting parties with a bunch of friends since you know you won't be the one having to pay to recarpet the place.

One problem with "flexibility", and IMO one of the main drawbacks of renting, is that it's 2-way. And moving is a giant pain in the ass, especially once you get married to someone who almost pathologically accumulates "stuff", or have kids, or worst of all both. It sucks being booted out of your apartment when the owner decides to turn it into a condo, decides to increase the rent exorbitantly, etc.

Also, you don't have to pay to recarpet if you trash the carpets? You've had generous landlords.

54: Start stocking up on barge-style inflatable rafts in the meantime. It'll only take one good flood for the investment to pay for itself though the home damage avoided.

especially once you get married to someone who almost pathologically accumulates "stuff"

Still haven't told your wife about the blog, have you Brock?

24 is impressive. 24.3 is obsessive, but 24.2 is just smart.

We spent well over a year looking, even though we didn't get a real estate agent until about halfway into that. We weren't actually spending every free moment at the computer, it was more a way to kill time at work and something we'd spend some time doing in the evening, etc. Spread out over a sufficiently lengthy period of time that obsessiveness - and I'm not taking issue with the term! - had the feel of a fun hobby rather than a burden of work.

We still sometimes grab the real estate books in restaurant lobbies to play "translate the ads."

Another thing to remember: do not make an offer on the first thing you see and do not let your agent rush you through three houses on Day One and expect you to make an offer right away. Our agent told us she doesn't allow offers on the first house a client sees because people are always head-over-heels for the first one they tour. It was true for us and I'm very glad she took a hard line.

Start stocking up on barge-style inflatable rafts in the meantime.

Will inner tubes do? We've got five or six of those already. They've got cup-holders.

heebie,

About a month after I took my first job after college the town experienced a 500 year flood. Luckily my apt was the upstairs of a little house. I helped the owner with his basement until the wall collapsed inward. It was pretty dramatic.

He let me put my car in his garage so it wouldn't float away. The water came up to the floor of my car, his house was on a little island.

The thing is that by the time the water got to flooding the houses, during the day, nobody was about to haul furniture out to the neighbors. They were just hauling it upstairs. If the water rose, say, to the tops of the houses I doubt they would be able to get their things over to your house without a big boat.

So at most you might be asked to help pump sewage out of a neighbor's house. I wouldn't worry about it too much.

It sucks being booted out of your apartment when the owner decides to turn it into a condo, decides to increase the rent exorbitantly, etc.

Eh, it's not anywhere near as likely to happen in the next 5-7 years as it was in the past 5-7, since there's no longer ginormous demand for condos, nor are there people clamouring to pay higher rents on overpriced digs.

And none of my friends have had to pay for anything worse than repainting when leaving their apartments (and we usually did it ourselves). While I'm sure one might end up stuck with recarpeting costs if you actively seek to trash the carpet, I'm more talking about the things like the occasional spilled beer that will stick in your heart as an owner but barely rate notice to a renter.

I wouldn't worry about it too much.

I dunno, even just the sight of everyone else getting flooded while we sit pretty would make me upset.

59: Throw in a 24-pack of Miller Lite, and that's all you can really do as a good neighbor. I'd say you're ready for the flood.

62: You could set your house on fire out of solidarity.

ooooooh taxes. I hadn't quite factored that in yet. See, this is why I need your advice!

64: And I'd feel responsible that the fire couldn't spread far.

66: You're good at this.

62. Like Emerson did
http://images.townnews.com/bismarcktribune.com/content/articles/2007/04/07/news/topnews/131550.jpg

h. This will give you a real sense of the lifestyle sacrifices you will need to make to be a homeowner.

Our first mortgage* was almost identical to the rent AB was paying for a 2 BR in a desirable neighb, and our second (since converted into a HELOC, used almost exclusively for home improvements) was almost identical to what I was paying for a 1 BR in a somewhat less desirable neighb. Our utility costs are probably about what our mortgage deduction saves us.

I might add that we refinanced at the near-bottom of the last interest rate cycle, and have a 15 year fixed - the house will be paid off 3 years before Iris goes to college!

* Including RE taxes and insurance

It means making one of the regular bedrooms a thru-traffic room, and basically gives the house a strange layout.

Not to be self-promoting, but you should really have an architect look at this before you do anything - I can't tell you how many times I've met with homeowners who had given a lot of thought to their additions and/or alterations and still been able to greatly improve their ideas - "I never thought of that." You can probably find someone who would come out and do a 2 hour consultation for ~$200. If nothing else, s/he'll have some clever little ideas that you won't think of, or will think of too late.

I dunno, even just the sight of everyone else getting flooded while we sit pretty would make me upset.

What, your windows have no shades or blinds?

I mean I've been accused of trying to save the world but even I have no pity for property damage during a flood in a flood plain where national insurance is available. Loss of life is a different matter but if you own property in a flood plain you really should be getting the available insurance.

I can't be 35 years old and still living in a 350 sq ft efficiency.

I'm going to be 35 years old next year and in all likelihood still living with three dude roommates who don't know how to clean a kitchen.

I do programming on a real estate web site (mostly the back end the realtors themselves use, but there's also a "search for homes" front end) and live about half a mile from the Flophouse. There's still a lot of room for prices to fall in DC. The problem is nobody wants to be the first one (on the block or in the building) to lower their asking price, so this is going to take a while to shake out.

Start looking now, and start saving now, and when you find a block or building you like start looking into previous sales going back about ten years (if the records go that far for the place you like, anyway). Beware of foreclosures because in the DC area (especially) they can come with extra negative equity of their own. If you want to buy a foreclosed property find a lawyer and agent who specialize in them and don't buy anything at an auction unless both of them have signed off.

Since you already live here you'll have a much better handle on which neighborhoods are still too "transitional" for your own level of comfort. I've been renting in Columbia Heights since the month the Metro opened, and it's gone from being mostly iffy blocks to being entirely out of my price range in that time, although I expect prices to sink by at least 20% in the next year. And despite the high prices there's still a lot of crime. Yay!

I'd love to be building equity but it still makes more financial sense for me to rent, and I'll be 38 next month. I'm in no hurry.

Not to be self-promoting, but you should really have an architect look at this before you do anything

Yes, definitely. All this is several years away - we're mostly having fun scheming in the meantime.

65: re taxes, make sure to count the mortgage interest tax deduction from your income. That's a huge advantage of buying, it often makes the difference when you do the budget comparison.

I've noticed a huge gender split in the desire to buy as a single person, with single women being much more likely to do so. Most of the single women in their 30s I meet who have lived here for any length of time have purchased, almost none of the men. That's showing up in this thread -- Fedward, Bave, md 20/400, and I are all single men 35 or over who have no problem with renting, but Becks seems to rule it out.

If it isn't mainstream logic, it should be. Buy a house as a place to live (that is, a consumption item) and not as something to sell (an investment item).

let me guess - you got this information on a site where people gather together to congratulate each other on being clever enough to buy index funds, right? A house isn't a consumption item - it's a capital investment which provides a stream of rents or imputed rents over time. It might be a good or a bad investment, but that's a different calculation.

Well, single except for the fact that my girlfriend moved in over a year ago, but since she's an actress with a part-time day job her desire to own our own place is weighted based on her ability to contribute to the mortgage.

It's still just my name on the lease and since I've been here so long I still think of it as "my apartment" at least as often as "our apartment" -- probably more often to a shameful degree.

I'm not ruling out renting at 35. I'd rather keep renting if the alternative is owning an efficiency. I don't want to own for the sake of owning of it's not somewhere I want to live.

I've noticed a huge gender split in the desire to buy as a single person

Back on the veldt, women wanted the security of territory that was clearly marked, thus scaring away other would-be homemakers who sought to encroach upon their well-researched, far-from-the-flood-plain-yet-close-to-a-water-source domains.

Look for something near Whole Foods.

A house isn't a consumption item - it's a capital investment which provides a stream of rents or imputed rents over time.

Point being, don't put any weight on appreciation. Cash flow, baby.

77: Of course it's a consumption item. It's also an investment, but if you're not interested in being a landlord, which most people aren't because it's a troublesome way to make money, you don't have a lot of options other than living in the house. And it's a consumption item with a huge capacity for making you miserable if it's badly chosen.

derauqsd,

Well, I think a house is a special case of a capital investment.

It is not very liquid, especially because if you are going to sell it you'll need to replace it with something. Unless you are dead or going to live on the street.

re taxes, make sure to count the mortgage interest tax deduction from your income. That's a huge advantage of buying, it often makes the difference when you do the budget comparison.

OTOH, make sure to recognize that in claiming the mortgage interest deduction, you will have to itemize and give up the standard deduction you are accustomed to claiming. The meaningful difference is the net of the two.

Also, once you reach the threshold for the AMT, you can kiss your mortgage interest deduction goodbye, but you probably don't have to worry about that just yet.

Point being, don't put any weight on appreciation. Cash flow, baby.

oooh, where did you do your MBA? If you buy an asset where the yield is higher than the cost of capital, what does that imply about the future path of the price of the asset?

It is not very liquid, especially because if you are going to sell it you'll need to replace it with something. Unless you are dead or going to live on the street.

or rent, which has been known to happen.

And further to 83, no. If it's a consumption item, why are there so many 100-year old houses standing around the place - they clearly haven't been consumed. It's a "machine for living in", as Le Corbusier said - it's a capital investment which produces a stream of "housing" over time. This is just unbelievably cut and dried, and this is the way in which housing is (correctly) entered into the national income statistics.

87: Well yeah, when I said replace it I meant with another house or renting or moving in with relatives or however else you put a roof over your head.

And houses may not always be consumption items but the neighborhood I grew up in has suffered a profound lack of maintenance and the houses are pretty much falling apart after 40 years. So essentially those owners have consumed those houses.

We're talking about houses as principle residence, right d^2? If someone is thinking that they will have significant appreciation in the value of a house over the next seven years, they are mistaken.

Single Family Residences are shitty real estate investments. Multi family is the way to go, if landlording is your desire. Market specific knowledge taken as a given.

It's also illiquid in that the transaction costs of buying and selling real estate are quite significant compared to investing in financial instruments. Even if you don't value your own time and attention at anything, closing costs are brutal.

If someone is thinking that they will have significant appreciation in the value of a house over the next seven years, they are mistaken.

No, they might be or they might not be, it depends on the house. Just as being invested in the stock market might or might not be the right answer at any given time.

when I said replace it I meant with another house or renting or moving in with relatives or however else you put a roof over your head

Renting a house is consumption; buying one isn't.

I'd also add that the transaction costs of buying and selling real estate are big compared to buying and selling stocks and bonds, but small compared to the costs of setting up or selling off a business, for example. The simple fact that something's an illiquid investment isn't a good reason to ignore the likely return on investment, or to put in rule-of-thumb zero-appreciation assumptions which might be terribly wrong.

(for example, as houses come down in price, they are going to reach levels at which the rent-buy total cost ratio goes below 100%. Does that mean that everyone should then buy one, because ownership is now a cheaper way to consume housing than renting? Not necessarily if you think prices will continue to fall).

I'm at the far end of the male pattern regarding home ownership. I hate the idea of home ownership. I'm willing to give up money for the privilege of not owning. The only one hurt will be my heir, but I'm just not going to organize my life in terms of the period when I'm dead.

I've always wondered how much of the financial advantage of ownership is sweat equity. If someone buys for $50 000 and sells for $120 000, a certain part of that is hundreds of hours and many dollars worth of maintenance and improvements, to say nothing of mental distress. It's not like buying stocks and bonds.

Crack houses and meth houses are the best investment. You can walk away with hundreds of thousands after only a couple of years.

I could also choose to be optimistic about buying the DC market: Becks almost certainly makes less than the median income and thus qualifies for an FHA loan (or other similar product of traditional lending rules) and will be in a great position to take advantage of all the tax credits available (itemized deductions will be higher than the standard deduction for a number of years, there's the DC homestead credit, etc). While actual deals will still be rare for the next year or two, they will exist as individual owners are forced by other circumstances to sell at off-peak prices, and those sales will in turn put downward pressure on the prices of neighboring properties.

If you have access to capital now (say, from family) and can get at least a 10% down payment ready (20% would be better, of course) and are prepared to jump, you could find yourself an owner within the next twelve months. Scrape together as much of a nest egg as you can, get all your docs in a row, and get a mortgage prequal before you do anything else. You'll know what sort of shape you're in and a realtor will be more likely to take the time to put you into the place you really want, instead of whatever gets them their commission most quickly.

Side note: from the data we can see on closings, the realtors who make the most money are the ones who work with anybody who asks, and not the ones who cherry-pick based on price or neighborhood. This is consistent in all the markets where we have franchises. Clearly the realtor you want to work with is the one who plays the long game, rather than the one out to make only the quickest, easiest buck.

From an investment only point, I've always though of home ownership as a poor leveraged investment offset by the ability to live there. Of course everything depends on local market etc. Over the last decades it's become such a message in the US that it's the right thing to do, few seem to think about when it doesn't make much sense.

Multi family is the way to go, if landlording is your desire. Market specific knowledge taken as a given.

I should have been more specific in 96; I was talking about single family, primary residence, only.

Crack houses and meth houses are the best investment. You can walk away with hundreds of thousands after only a couple of years.

I don't think the crack dealers pay rent on those houses, John.

Crack houses and meth houses are the best investment. You can walk away with hundreds of thousands after only a couple of years.

'ndeed.

I've always though of home ownership as a poor leveraged investment offset by the ability to live there

I've always thought of equities as a poor investment offset by the dividends.

Clearly the realtor you want to work with is the one who plays the long game, rather than the one out to make only the quickest, easiest buck.

The strategy of the Realtor is to build a stable of clients and referrals, and to leverage every relationship into an eventual sale. They are going to spend more time with someone with immediate need, but a good one will work with you to help sort out what you want. Figure out what you want, communicate it to the Realtor, and let them contact you when they find it.

99: Well yeah, there is that but he point I was trying to make was that typically your rent costs are a fair bit less than real costs of ownership, and it isn't crazy to ask if you could do a lot better with the difference as investment than you would with a house. Of course this assumes all else is equal (unlikely) and depends on local markets. This seems to be almost entirely absent from the discussion in (most of) North America, at least.

Kobe isn't a realtor, TLL.

88: My finance vocabulary sucks. Accepting your correction in terminology, then, my attempted point is that one stream of 'housing' isn't fungible with another stream of 'housing' -- it's not like money -- and you're very likely to be stuck consuming the stream of 'housing' produced by the house you've bought rather than a different one, so whether the individual characteristics of that stream of 'housing' are personally appealing to you is a huge deal from a consumption perspective.

This makes a house different from a purely financial investment, and makes choosing it on the basis of what you want to consume a necessary part of making a decision. The decision is a decision about your future consumption, not merely about financial returns.

Crack houses and meth houses are the best investment. You can walk away with hundreds of thousands after only a couple of years.

Why mess with distribution? Move crack in bulk, and you can walk away with hundreds of thousands after only a couple of days. Assuming sufficient seed money, natch.

A while back I had a discussion with a couple about the benefits of home ownership. Being lefty academic types, and renters, they found the tax deduction for mortgage interest as unfair. Further, they did not understand the American obsession with home ownership, pointing out that they were aware of families in Europe that had not owned real estate for generations.

There is something intangible about home ownership, and I don't think it is coupled with not worrying about rent increases. It has to do with ownership, and willingness to put down roots. As has been said, because of the transaction costs alone buying a house you do not plan to stay in for more than five years is a gamble at best, and most probably a loser. So, job, community, place to raise kids all come into play.

There was some wishful thinking along these lines in regards to the recent unpleasantness, in that home ownership leads to a more stable neighborhood. But if the "homeowner" has no buy in, then the virtuous circle doesn't get started. The means, not just the ends, are important.

There is something intangible about home ownership, and I don't think it is coupled with not worrying about rent increases. It has to do with ownership, and willingness to put down roots.

Feh, I say. My parents were no less stable and rooted because they rented throughout their marriage than if they'd owned real estate. I agree that there's a belief in the mystic power of owning a house to make people better citizens, but I think it's pernicious.

f it's a consumption item, why are there so many 100-year old houses standing around the place - they clearly haven't been consumed. It's a "machine for living in", as Le Corbusier said

Exactly. And why are there so many vintage clothes available for hipsters to wear? 90% of us get rid of clothes that clearly haven't been consumed. Especially when kids outgrow their clothes. They're really just "machines for keeping our genitalia hidden".

NYC is a special case.

HOA fees can really affect your monthly payment.

One of our first housing loves was an enormous townhouse in a great neighborhood in Chapel Hill. It was gorgeous and perfectly within our price range and I was crazy for it until I asked about HOA fees: an extra $150/month outside the mortgage payment and I'd have to do all my own external repainting on the two decks, one of which already needed it? No thanks.

There is something intangible about home ownership, and I don't think it is coupled with not worrying about rent increases.

For us it satisfied our deeply territorial natures in a way renting never could.

The strategy of the Realtor is to build a stable of clients and referrals, and to leverage every relationship into an eventual sale.

You haven't worked with that many realtors, have you? That might be the strategy of the ones who make the most money at it, but judging by the churn -- and contact records -- at our franchises they are greatly outnumbered by the ones who want to do as little work as possible but still pocket commissions with "regularity."

Our system allows clients to register and search for properties, and every new registration is a new lead for an agent. We allow agents to mark leads as "bogus" if the contact information provided was all false (this action moves the agent back to the top of the queue and they get the next new lead to come in so they're not penalized for a completely falsified registration). Experience shows us that about 5% of all registrations are, in fact, bogus, but about 20-25% of leads are marked as bogus by lazy agents. They actually get angry that somebody would register on the site if they don't intend to buy a property in the next 30-90 days.

The cherry-picking agents generally don't last that long or make that much money, but they easily outnumber the hard-working, big-earning agents.

108 to 107.

You haven't worked with that many realtors, have you?

If I recall correctly, this is un-possible.

the mystic power of owning a house to make people better citizens, but I think it's pernicious.

NAR will has put you on the watch list, LB.

Renters are not second class citizens. But would your parents have bought had their building gone coop? The advantage to renting is the freedom. Move when you want (within the terms of the lease, natch).

For us it satisfied our deeply territorial natures in a way renting never could.

Which is exactly what the propaganda about house ownership has been pushing here for 30+ years, anyway. Nothing wrong with that, but it doesn't make it clearly inherent.

The appropriate term is "durable consumable goods". In this sense, a home is just like a car, only far more durable. The fact that it's classified as "investment" in national economic statistics is entirely irrelevent for these purposes.

The advantage to renting is the freedom.

That's a big one, but hardly the only one. You're also isolated from a large number of unexpected extra costs, and more than a few lost weekends + general increase in upkeep tasks etc.

LB is quite right that there is a pernicious aspect to the attitude against renting. The socially acceptable reasons for renting in some areas/classes are quite restrictive.

fedward- our office has like 150 agents. You are absolutely correct about the numbers. Becks needs to find one of the good ones, and they exist. But our industry has way too many lazy agents. They will be gone in one year, as they starve.

LB is quite right that there is a pernicious aspect to the attitude against renting.

I don't have anything against renting. I think that if someone wants to rent they should rent. If someone wants to buy they should buy.

113: They'd have bought if they got a good deal as insiders, but not if they didn't -- that is, the decision would have been made on whether it financially made sense, not because buying would have made them more emotionally and socially invested in their community.

Home ownership is a big sacred cow. It has a lot to do with the attempt to build a middle class majority that thinks they're property-owners and have a stake in society. The tax structure is tweaked to home ownership. "Local schools" are tweaked to home ownership. De facto segregation is tweaked to home ownership.

If you're 50 years old and have $80k equity in a $120k home, you're about 24 months further away from homelessness than someone living paycheck to paycheck. Which is not nothing, but you're not secure. You're still dependent on your earnings to live. You're not a rentier or anything close to that.

I was wondering, given the sheer number of incredibly stupid economics discussions going on around the Internet, why this one -- which is pretty innocuous as these things go -- was raising dsquared's ire. Then it came to me: by his own prohibition against discussing the crisis, he is forbidden to participate in all of these other, much more wrong, discussions. The poor bastard.

the decision would have been made on whether it financially made sense

Of course, but that is the issue. The decision as to whether it "makes sense" would have to include things like rapid rental growth, gentrification or destabilization, etc. They liked the neighborhood, so they wanted to stay. If the conditions permitted the landlord to raise the rent 10% per year, owning starts looking better. Rent control is a drawbridge. Too bad, latecomers.

For us part of the emotional draw of owning was that we could make green improvements to a house we own that you can't find very often elsewhere and won't convince a landlord to make for you. Few landlords think paying for an energy efficiency audit is worthwhile, and I don't even know anyone who's tried to get their landlord to go solar.

In general, we like working on the house, and have idiosyncratic ideas about how that should be done.

Dsquared loves us with tough love.

I don't have anything against renting.

I didn't mean you personally, Robust. In general though, it exists.

Helpy-chalk is a boogiewazzy. Neener neener neener. A green boogiewazzy.

I was wondering, given the sheer number of incredibly stupid economics discussions going on around the Internet, why this one -- which is pretty innocuous as these things go -- was raising dsquared's ire.

Isn't he always like this? I thought "why is D^2 being sarcastic?" was a question like "why is D^2 breathing?"

Few landlords think paying for an energy efficiency audit is worthwhile, and I don't even know anyone who's tried to get their landlord to go solar.

Depends on where you live. A while back many apartments here were converting to solar water heating. I think there was a tax rebate. It really depends on how quickly the landlord gets the investment back in terms of higher rent or lower expenses.

115: I recall reading back when the bubble was just getting started that the design life of some McMansions is as low as 20 years. That doesn't mean they'll fall down in 20 years, but they'll require extensive refurbishment. A house built to those standards purchased as a long term residence is just a ripoff. It's getting towards tent territory in terms of durability.

I was wondering, given the sheer number of incredibly stupid economics discussions going on around the Internet, why this one -- which is pretty innocuous as these things go -- was raising dsquared's ire.

For a delightful moment when I read 86, I thought dsquared was yelling at himself.

I only bought a house because I knew I'd be living in the same spot for probably a decade, so it seemed like the cheaper option. I don't love home improvements qua home improvements, and I didn't mind renting.

120 -- And what's the 50 year old living paycheck to paycheck who rents have?

Checking, our current rent is less than 50% of the monthly repayments on a flat of a similar size in this location. So, I don't think we'll be buying for a while.

Even if we move to a bigger place, we'll still be 20-30% under the mortgage repayment level. Perhaps more.

I knew I'd be living in the same spot for probably a decade, so it seemed like the cheaper option.

Makes sense to me. One reason I've not done this is because I'm never sure where I'll be in 5 years.

My point earlier though was that this "buying saves you money" is often treated as a no-brainer, which isn't at all true. Even if you don't value your own time in the comparison. Assuming housing values would continue bubble-like forever might have made it true I guess, but that was a pretty stupid assumption, if made.

And what's the 50 year old living paycheck to paycheck who rents have?

Perhaps a big nest egg, if it were the same person.

My point earlier though was that this "buying saves you money" is often treated as a no-brainer, which isn't at all true.

There's absolutely no question that if we had bought here a few years back, we'd be well down on the 'investment'. We'd both have lost money month-by-month [hundreds and hundreds of pounds] but our investment would have been worth less [net costs] than we'd started with.

I bought partly due to the mismatch between who pays the acquisition cost and who pays the operational cost that Rob mentions in 123.

Another part was that my landlord was kicking me out, largely because he had to refinance his mortgage and ended up with hugely higher payments.

The final part was that deciding what to do with my money was causing me emotional stress and putting it into a house meant that I didn't have to think about what to do with it any more. It also motivates me to keep working.

On the downside, I'm now much less mobile. On the upside, I like where I live, and the industry I work in is very heavily concentrated in my immediate vicinity.

I bought a townhouse condo almost 20 years ago and have been happy with it so you can disregard some of the condo hate expressed above. I have never had any problems with noise or my neghbors or the condo association.

It depends on what you are looking for of course. I have zero interest in exterior maintenance or landscaping so I am happy to have the association handle it.

Around here they have a lot of open houses on weekends. If you go to a few you can get a picture of what the market is like.

When looking at units I would try to distinguish between problems that can be fixed (like the color the walls are painted) and problems that can't be fixed (like no sun in the winter or a bad location).

The biggest problem I have with condo living is a certain lack of storage space. I am a pack rat and could use an unfinished basement or the like to store all the junk I accumulate.

Also the unit was worth about 20% less after 5 years which would have been annoying if I had had to sell at that point.

127: But what about this little thread inspired ten dsquared comments? The man has vast reservoirs of sarcasm that he has been unable to tap in the midst of the biggest bull market for sarcasm that the world has ever seen.

Soup, we're using different definitions of 'living paycheck to paycheck.'

I take your point, of course. And it's obvious enough that whether you're going to make money on a house or not depends on a whole lot of factors, including timing and location. My brother got killed owning a home in San Diego in the late 80s early 90s -- if he'd hung on a decade more, he'd have been the one doing the killing. I bought my house in 2001 -- while it's not going to bring what the county thought it was worth in 2007, I really doubt it'll drop below about 2004-05.

I'd be interested, though, in how many any of those advocating renting rather than buying -- outside of NYC -- own homes.

But what about this little thread inspired ten dsquared comments?

People were talking about money. About which most of us really know shit all.

Like some people know shit all about, say, philosophy. [cough]

I'd be interested, though, in how many any of those advocating renting rather than buying -- outside of NYC -- own homes.

I own my place and still advocate renting. I own a condo in a large building, though, so it's closer to an apartment-like experience in that I have extremely little maintenance or upkeep to worry about. I almost can't imagine ever wanting to own a house with a yard after having grown up in one.

I'd be interested, though, in how many any of those advocating renting rather than buying -- outside of NYC -- own homes.

Do you think it's a little or a lot? Clearly someone who thinks that renting is a better idea than owning a house is not likely to buy one. They might still have one that they bought before they came to their conclusion about the relative merits, but I'd guess that's a small group of people.

I'd be interested, though, in how many any of those advocating renting rather than buying -- outside of NYC -- own homes.

I'm not sure I'd even advocate it much in many markets, partially because the system is stacked against it. What I do think is a shame is that people often have no idea what the comparison looks like financially, and nobody is encouraging them to look. That, and people are systematically encouraged to buy more house than they can really afford, which is a real bitch when an unexpected cost comes along. I've met three families financing roof repairs and the like on bloody credit cards. Absolutely insane.

As far as:
we're using different definitions of 'living paycheck to paycheck.'

It was a bit tongue in cheek, but point being the same person might not be check to check at all, without that debt load.

I am a pack rat and could use an unfinished basement or the like to store all the junk I accumulate.

Truly an illness requiring intervention. I periodically try to force myself to spend a day going through a room and purging all the crap that I've needlessly hoarded. I have to persistently remind myself: "You haven't seen that piece of paper in three years. You haven't looked for that piece of paper in three years. There is no plausible reason that you will even need that piece of paper again." And then maybe I can get rid of 40% of what I should. Having a basement is just enabling the pathology, IME.

I'm with daqseurd; while it might be problematic to have uneducated rubes evaluating the worth of investments, they are still investments, and can be evaluated as such. Also, what's with all the condo hate? You suburbanites got something against density? Me, I say go whole hog and buy a multifamily property, then live in a unit.

145: wandering through the house of an aged relative with the same disorder can do wonders for your resolve to get rid of stuff, I've found.

It was a bit tongue in cheek, but point being the same person might not be check to check at all, without that debt load.

Lots of people manage to live paycheck to paycheck without any housing debt at all. Frequently buying new cars and running up huge credit card bills (e.g. eating out every night) are the most common ways I've seen...

Also, what's with all the condo hate?

In my experience, some of the blame for this lies squarely on the shoulders of unscrupulous developers in the condo boom of the 80s. They built a lot of sub-standard stuff, and left buyers holding the bag. This may be a Pac. NW (& Pac. SW Canada) regional effect, though.

145 -- A distant cousin recently came upon a set of letters my grandfather's grandfather had written from the Iowa frontier in the 1870s. Nothing earthshattering, but an irreplaceable window into another time. Packratism should be encouraged.

Me, I say go whole hog and buy a multifamily property, then live in a unit.

This is excellent advice. Please contact me for all your multifamily investment needs. (See, fedward-leverage contacts!)

Lots of people manage to live paycheck to paycheck without any housing debt at all.

Which also completely misses that particular point. It was the same person we were talking about.

103

I agree with 103. The imputed or market rent may not be closely related to the value you get by living there. If you hate the place it is little consolation that other people would love it.

And as an investment the importance of the residual value depends on the price rent ratio and how long you live there. If you pay 15 times annual rental value then after 5 years the residual value accounts for 71% of the price. After 10, 15, 20, 25 or 30 years the importance of the residual value declines to 50%, 36%, 25% , 18% or 13% of the initial value respectively.

I'd be interested, though, in how many any of those advocating renting rather than buying -- outside of NYC -- own homes.

(A) The implication of this and 108 that NYC is someplace with no relation to the normal reality that everyone else lives in makes me cranky. Just noting, because you can't actually see my hackles, whatever anatomically a hackle is, from there. (B) I'm not clear what this is supposed to show -- when you put your money where your mouth is, you show that you really believe buying is better? There's social pressure to buy rather than rent as a badge of being a solid citizen; rental stock tends to be aimed at singles and childless couples rather than families for that reason -- someone might perfectly well be a homeowner and yet have a well founded belief that the prejudice against renting was harmful.

(As a disclaimer, we own, in the sense that owning a co-op apartment is owning. And we've made a bunch of money on it -- bought nine years ago, and if prices go down by 50%, we'd still have made a decent profit. But given that we're not planning to sell, that's not important.)

I agree that there's a belief in the mystic power of owning a house to make people better citizens, but I think it's pernicious.

Yes and no. We've had some wonderful neighbors who were renters and good citizens, and are now gone. The cycle for renters is simply much faster than for homeowners, and stability in a community is a big deal.

The street on which I live is, in many ways, Norman Rockwell-ish, with front porches and kids running up and down the sidewalks and the rest. We have a front row seat on it from our front porch, where we eat 99% of our dinners from May through September. We've seen it change a lot over the past 7 years, and almost none of that has been driven by changes in homeownership (1 family at the end of the block moved out, tried to sell, and has ended up renting out).

Positive change has been driven by a couple factors: as Iris has gotten big enough to go out and play, a critical mass of "neighborhood kids" has developed, which has knit together parents; some development issues in the neighborhood forced us into community action, which furthered both familiarity and a sense that we need to hang together. For the former, renter kids have been part of the group, but then they go away; for the latter, renters never got involved in the big development issue, although some come ot meetings about the park and community garden.

Negative change has been driven exclusively by renter/absentee landlord issues. On the one side, we've had good, bad, and ugly neighbors, including 2 different drug dealers. The landlord comes around (he's small scale), but doesn't give a shit. At one point, his front porch went 4 months without a joist at the one end (as in floorboards cantilevering out 2 feet). His property has never been a positive element in the street, and even the nicer renters in his building are isolated from community life (despite being on friendly terms with us, kids playing, etc.). The other rental properties on the street are comparable (with less dealing, AFAICT).

The point isn't about whether those renters would become better citizens if they owned; it's about the effect of separating ownership from community membership (not unlike the principal/agent problem, I think). Our favorite and best renter neighbor planted a garden and talked about tearing out the plastic and mulch "landscaping" in her front yard in order to plant grass, even though she wasn't staying. But she's gone now, and no guarantee that the next renter won't be problematic, or even just a non-entity on the street (the communal equivalent of a parking lot in a business district).

150: I think we can usefully separate the habit of keeping documents, memorabilia, family keepsake etc. from the tendency to collect, say, 1500 empty cardboard boxes just 'cause you never know when you might need that particular one.

New York is culturally different in a number of ways, and this is a big one. I'm not making a value judgment about it.

Maybe the people putting their money where their mouth is are the ones renting.

They're really just "machines for keeping our genitalia hidden".

I'll hide your genitalia, baby!

(Sorry, couldn't resist)

I am renting, do not live in NYC, and am living paycheck-to-paycheck. My only regret is my lease is as long as it, so that I can't move to a cheaper place.

156 -- Letters were to a first cousin. At some point, someone was keeping letters from his/her great grandfather's cousin. That'll fall below plenty of radars.

they are still investments, and can be evaluated as such

But the problem is that they're not so great of investments. And certainly they make no sense as a substantial portion of an individual's investable portfolio. If one were to assess real estate purchases as a pure investment vehicle, people would probably still be better off to rent, but invest the remainder that they would be paying toward a mortgage into a portfolio of well-run, low-cost REITs and REOCs. It would probably take less work to identify good potential investments, you'd get far less idiosyncratic risk due to the instant diversification benefits, the management fees of the investment would probably be less than the labor costs of your time spent fixing up a property you own and maintain yourself, and the mortgage interest deduction is a wash since businesses get to write off their interest expenses anyway.

Which all brings us back to: if you're planning on buying an individual property to live in, clearly you have priorities above its investment potential. If you're not happy with it as a home qua home, it's a stupid fucking decision to buy it as an investment unless you're planning on becoming a property manager (and have good reason to believe you'll be particularly profitable at such an endeavour).

Shorter 155: Emerson's

It has a lot to do with the attempt to build a middle class majority that thinks they're property-owners and have a stake in society.

Is simply the negative spin on the positive story about homeownership. Leftists view American attempts to get social buy-in from hoi polloi as co-opting of the oppressed*; traditionalists see the same thing as the actual point of society.

"Mom and Dad, you just want me to study so I'll stay out of trouble and become a productive member of society!"

"Yes."

* Caricatured wording used for brevity, not rabble-rousing

155: Isn't this partially an effect of the stigma of renting? Because renting is socially disfavored, in lots of areas (other than NY, a.k.a, the surface of Mars) only insolvent or transient people rent. And sure, insolvent and transient people tend to make bad neighbors. But if renting were something normal stable citizens did, you might have some renting neighbors who stuck around for longer.

Negative change has been driven exclusively by renter/absentee landlord issues.

This is one reason many condos have cc&rs about renting in what would otherwise look like an apartment. Many bank loans go into technical default when a building exceeds a certain renter/ owner occ ratio. Check before buying.

re: 159

I know very very very few people who aren't living paycheck to paycheck. I could probably count on the fingers of one hand the number of people I know who could go with no income at all for more than a month or two [without running up debt].

This always strikes me on Unfogged, everyone talks about their savings and investments, but almost no-one I know has any. Most people earn decent money but their wages have been going into a combination of hugely expensive property [rental or mortgage] and paying off student debts, basic living expenses, etc. Obviously this is skewed by the fact that most of my friends are 30-something and are living in an incredibly expensive part of the country.

165 was me.

and stability in a community is a big deal.

But this is begging the question. In areas where house ownership is not the rule, there are still stable neighborhoods, based on long term renting. There is no inherent reason that wouldn't work here, but there is social and policy pressure against it.

Hell, for that matter the current model of suburban/exurban nuclear family living is also sometimes extremely effective in trashing the idea of neighborhood. This isn't every sub/exurb, of course, but they certainly exist. Loads of people who have no idea who their neighbors are due to a combination of commuter lifestyle, nothing other than housing in the area, and the fact nobody is there for more than 5 years until they can afford to move a slightly upscale version of the same thing.

Also, IME, the supposed benefit of having someone else be responsible for things going wrong in a rental is at best balanced by being at the mercy of someone who, ultimately, doesn't give a shit whether or not my home is functioning properly.

Being a renter didn't mean that, when the AC blew a fuse one super-hot July 4, I didn't have to go find my own goddamn replacement fuse.

In a world of perfect landlords, I'd be a lot more enthusiastic about renting.

But if renting were something normal stable citizens did, you might have some renting neighbors who stuck around for longer.

But even in that case, what is the point of renting, if one truly intends to stay put long-term? I guess I'm missing it.

Which also completely misses that particular point. It was the same person we were talking about.

Of course. I can't read.

If a person owns 2/3rds of their house and is living paycheck to paycheck, they can refinance their remaining balance into a new 30-year loan and cut their payments by over half (property tax and maintenance staying fixed). Or they can suck it up for five more years and have the place paid off.

Depending on how much they paid for it, that is.

The forced savings part of owning a house is real, or at least was until the advent of second mortgages and "putting your equity to work".

re: 169

In some places it's cheaper. By a lot.

Obviously in some places it makes total sense financially to buy but that's not everywhere.

169: If it's cheaper, and you can live just as well, and put the money you save into better investments. That's the point, that it's not always and automatically a better financial decision to own than to rent.

171: sure, of course. I thought we were assuming that away.

I don't disagree at all with 167, except to note one thing:

In all of the recent pro-rental discussion in the blogs, a big argument for renting is the instability - the fact that renters can chase work more effectively than homeowners. So I think it's a bit rich to suggest that this factor doesn't apply except as question-begging. Either renters move more often, and so there's less dead-weight loss to the economy, or they're as stable as homeowners, and the jobs market is unaffected.

132: Nothing, as opposed to nothing much. But he's saved himself the wear and tear of home ownership. He gains time at the expense of net owrth.

My opinion is that if you like ownership, maintenance, remodeling, etc., and vastly prefer owning to renting, you should own. If the day-to-day advantages of owning don't mean much to you, and if the day-to-day responsibilities and costs of owning annoy you, you shouldn't buy.

LB, I don't get why your shackles are raised. Isn't NYC such a unique housing market in so many ways that truisms for that market don't generalize very far? I thought it was like asserting that one doesn't need a car to get around.

165/166: Is retirement saving mandated there? I have no choice about 6% coming off my paychecks, and I know a lot of people are in similar positions. Even if you don't have it forced by state regulations or whatever, there are a lot of tax benefits set as policy.

The forced savings part of owning a house is real

Indeed. It may just underperform relative to having put the same money into something else.

But even in that case, what is the point of renting, if one truly intends to stay put long-term?

see prev.

173: I'll assume you away!

No, I won't, really.

Further to 155: NYC is unique in that people are long-term renters there in a way I've almost never seen anywhere else. Maybe this is just my ignorance, but the point about turnover holds for me. My experience is very similar to what JRoth describes, with less drug dealing and more student housing.

People can't be part of a community if they're moving every two or four years. Tradishun!

172: oh, sorry. I thought you were making a different point. Obviously it's not economically advantageous in every case. (Or maybe that's not obvious? It should be.)

176: it isn't unique. Plenty of older (mostly east coast) cities are the same way.

165: This always strikes me on Unfogged, everyone talks about their savings and investments, but almost no-one I know has any.

The Unfogged demographic is pretty UMC, but a big part of this is driven by retirement savings. An American without retirement savings is expecting to eat pet food when they stop being able to work: Social Security benefits are small enough that living on them alone means real poverty. And a lot of jobs have matching programs, where if you put part of your salary into a tax-sheltered investment account, they'll put in some more, and if it's at all possible to take advantage of that, you'd be crazy not to.

I have 'investments' in the sense of having tax sheltered retirement accounts, then, but not 'investments' in the sense of invested money that either brings in income I could consume now, or that I could choose to cash in for current spending. I think this is a little socially/emotionally different from the way it sounds to you.

But if renting were something normal stable citizens did, you might have some renting neighbors who stuck around for longer.

And indeed, some of our neighbors have rented here longer than we have, and I see no reason to think they're going anywhere. Some of my best friends are renters.

I guess the crux of this particular biscuit is that there are certain bad effects from renters/absentee landlords that virtually never apply in homeowner situations - smack dealers don't buy houses.

I honestly have no problem in principle with renters on my street - if I would wave a wand to get to 100% ownership, I wouldn't. I just feel the need to object to the notion that renter/absentee landlord effects don't actually exist.

179: So, where renting isn't stigmatized, you get stable renters. Doesn't that suggest that if renting wasn't stigmatized elsewhere, that renters wouldn't exclusively be unstable?

176: The hackle-raising bit is that differences between NY and the rest of the country couldn't possibly be informative or useful -- NY can be dismissed because it's just different from everyplace else. Bunch of urban freakazoids.

NYC is unique in that people are long-term renters there in a way I've almost never seen anywhere else.

Except, say, huge chunks of Europe.

I think we may be running over way-things-are vs. way-things-might-be distinctions.

I (and LB I think, but not to put words in her mouth) wasn't saying that in most of this country buying isn't the usual way to go. I was pointing out that a) it doesn't need to be this way and b) some of the typical reasons given for *why* it is this way are complete bullshit. Others are more reasonable.

I suppose if you're feeling particularly cynical you can look at the rising in particularly (lower-) middle class home ownership stakes in the US as a spectacularly successful wealth redistribution from those same demographics to the already wealthy (particularly with the rise of 2nd & 3rd mortgages, etc.)

Indeed. It may just underperform relative to having put the same money into something else.

Absolutely. But given people's typical disinclination to save, disguising savings as a housing cost can be useful, from a social perspective.

NYC is unique in that people are long-term renters there in a way I've almost never seen anywhere else.

San Francisco, too. I think the very high land values you see in big cities push things toward multi-unit housing with at least quasi-professional management, hence more renting. And if people with money rent, there's less of the "bitter renter" bullshit.

But JRoth, you are describing renters in a homeowner environment. The vast majority of renters are in apartments, so the maintenance, etc. issues are different. God knows there are slumlords, even in good neighborhoods, but they tend to be driven from the market by either regulation or decreased rents.

Here's some more advice I have.

After owning a home I had a temporary assignment renting a house in England. I thought "Oh goody, now I don't have to fix anything."

Well, yeah, except that meant things didn't get fixed. So consider that. The disadvantage to a house is you have to arrange to get things fixed, or DIY. The disadvantage to renting is you have to rely on someone else with a lot less incentive to get things fixed.

Second, in a growing community you will want to live on the edge with a view of the country. So will everyone else. Hence the edge moves. IMHO it is better to buy property surrounded by other desirable houses, because chances are they will stay there and nobody will build a road or bar or whatever you don't want behind your house. Yeah, they can condemn and build a road through a neighborhood but that is less likely than building it next to a neighborhood.

Third, I will never ever own another house on a well and/or septic. YMMV of course, but septic tanks have a lifetime and wells get polluted. At least in town everyone shares the cost of these.

So, as I said, YMMV. These are just some lessons I've learned.

The forced-savings aspect is real -- I'd say that if a coldly rational financial analysis said that buying and renting were precisely financially equivalent, most people would be better off buying, because they'd be likely to spend rather than investing their savings from renting. (This sentence got tangled, and I can't figure out how to fix it easily, but what I mean should be clear.)

Long term renting, for many families, is only feasible in a place with rent control. A lot of New Yorkers (including some of my relatives) were able to create stable, wonderful, 20-year plus lives in beautiful apartments where they knew all of their neighbors, etc., but that's largely because they were in effect receiving a state subsidy that allowed them to keep that beautiful apartment at well below market rents. Even if you're not in a hugely-appreciating market, without rent control the price fluctuations can be hard to swallow for most families, as is the prospect that the landlord could turn you out in the next year based on a fluctuation in prices.

That's not to say that buying is a good financial decision, because it may well not be -- it's just that if your goal is to "put down roots" with everything that implies, owning is usually pretty important in a non-rent-controlled market.

Or maybe that's not obvious? It should be.

This was pretty much my original point, Brock. It should be obvious, but as far as I can see huge number of people have bought the "must own a home to be successful" that they never even consider this.

But given people's typical disinclination to save, disguising savings as a housing cost can be useful, from a social perspective.

I'd rather see an expansion of the opt-out 401k type plans, which assume that people want to save 3-4% of their salary in a fairly conservative (typically indexed) investment portfolio but then allows them make that a larger or smaller amount if necessary, and modify the investment decisions if need be. But it's true, getting people to save and getting them to choose halfway decent investments are non-trivial problems.

Second, in a growing community you will want to live on the edge with a view of the country.

Huh?

Don't underestimate the downsides of buying if you are not certain of being able to stay in the house indefinitely. Having to come up with $50,000 to sell my house was rather unpleasant. (Back in the early 90s. And it would have been worse had I held on to it longer.)

But given people's typical disinclination to save,

That's a separate but related problem. If the same sort of propaganda campaign had been run over the last decades promoting savings as the one promoting maximal consumption (& home ownership), I suspect people would be more inclined, don't you?

It also used to be that in order to get a mortgage you had to get your household finances more or less in order and save up a year's worth of housing costs for a down payment. These are things most people should be doing anyway.

196: right. One of the reason Canadian banks haven't really been hit by the mortgage crisis is that people put down 20% or so there as downpayment.

Either renters move more often, and so there's less dead-weight loss to the economy,

this is pretty conclusively shown in the econ literature now, as I understand it.

As a renter I've never had a significant negligent-landlord problem. As far as changing fuses goes, I've had to do that kind of thing. I'm talking about things like reroofing, repainting, rewiring, carpenter ants, foundations settling, etc. Not all of which can be avoided at point of purchase.

On net worth questions: suppose that a renter, instead of buying, invested the down payment. And then for the next 20 years, instead of maintaining a house, invested $1000 a year, and worked 5 hrs. or so a week and invested the pay.

I'm not saying that he'll come out even, necessarily. But the net worth difference has to be balanced against the quality-of-life difference, which is plus-minus different between home-haters and home-lovers.

JRoth, I'm doubting that the "stake in society" is really very real.

I bought a townhouse condo almost 20 years ago and have been happy with it so you can disregard some of the condo hate expressed above. I have never had any problems with noise or my neghbors or the condo association.

I hear that, in some condos, you have neighbors who will seem reasonable and thoughtful one day, then be all rightwing crank the next. Caveat emptor.

189: But what if they're not equivalent. I agree on the forced-savings aspect, but does that balance against a 2% loss? 5%?

Also, LB apparently never had a dog. Hackles are the area between a dog's shoulders, which are raised when it sees another dog, a threatening stranger, a renter, etc.

If the same sort of propaganda campaign had been run over the last decades promoting savings as the one promoting maximal consumption (& home ownership)

Income from savings are taxed. Can't have the idle rich living off savings. Do away with the mortgage deduction (heh, good luck) and ownership patterns will change. This is America, founded on saying fuck you to the tax man.

183.2 doesn't necessarily apply if widened to "pot growers" and/or "meth manufacturers". Really it doesn't apply at all, except in areas with a relatively high rental penalty.

Thinking about renting and getting things fixed, we should really bear in mind that landlord responsiveness is highly correlated to the neighborhood and demographic of the rented property. In an area where renting skews heavily downmarket, obviously you may run into responsiveness problems. On the other hand, one of the things that higher end renters are paying for is being able to have some maintenance guy show up an 11pm on sunday to fix your fuse, or whatever.

Also, LB apparently never had a dog.

I've got a dog, I just don't know what all the parts are called.

Income from savings are taxed.

Roth IRA. There are obviously policy ways in which this behaviour can be shifted through penalties and incentives. My earlier point wasn't that I know what the right balance is, but that pretending there isn't a balance (and policy effects) is silly. There is nothing inherent about this stuff.

Preventing the idle rich from living off savings is in fact a good policy goal to have.

117, 151 - Ah, I see I took disingenuousness for naïveté. My mistake.

JRoth, I'm doubting that the "stake in society" is really very real.

I strongly suspect it's self-reinforcing - good neighbor types end up buying (because that's what good-neighbor types do, in America), and so causation is difficult to discern. I was a good neighbor* as a renter, and am now a good neighbor as a homeowner.

OK, now I have to go replace a windowpane that's been filled with a piece of drycleaning plastic for a month. Homeownership, bitchez!

* In the sense of friendly and respectable; I'm not claiming that anyone liked me or anything.

207: And regular IRAs, and 529s, and 401ks, and 403bs, and HSAs, and Keoghs... There are huge numbers of tax-exempt vehicles for various savings purposes and income sources. We just need to start putting people's money into them in the first place. Also, removing the mortgage interest tax exemption would be fantastic.

I could field-stripand reassemble my dog it in 3 minutes. LB is an irresponsible, incompetent dog owner. And anti-American.

because that's what good-neighbor types do, in America

Which circles back to the pernicious part LB was talking about.

Also, removing the mortgage interest tax exemption would be fantastic.

Exactly correct.

If homeownership means "forced savings" + "being tied down in one place", it may be a good thing for Society, but not otherwise very appealing. If you add on "votes mostly based on property tax rates", there's another problem.

Preventing the idle rich from living off savings is in fact a good policy goal to have.

If savings are a good thing for society, who is it too say that one person has acquired too much. Green eyed monsters, that's who.

If one were to assess real estate purchases as a pure investment vehicle, people would probably still be better off to rent, but invest the remainder that they would be paying toward a mortgage into a portfolio of well-run, low-cost REITs and REOCs.

oh so cuuuuute! baby financial planners! Can I take one home, pleeeeeeease?

Absolutely not. (coughs, hitches up trousers, begins the lecture).

1. There are no worthwhile residential REITs and never will be (unless one day they get some bizarro tax break). It's been tried backwards, forwards, sideways and down and the structure doesn't work. The overhead kills them, and the discount to NAV does the rest. They are the second worst investment going, apart from the open-ended real estate fund.

2. This is another species of the diversification argument for index funds, and is just as wrong. If you own your own house, you can select it and maintain it. Importantly, you can make improvements to it which raise your imputed rent (ie, things which are valuable to you, if not necessarily to a tenant). There's any number of reasons to think that you would expect a better total return from owning than from the rent/REITs portfolio that you suggest.

3. Finally and most importantly, the residential mortgage is the only way that most of us can invest with leverage. Since most of us are in general credit-constrained, the ability to take on a big debt in order to invest is extremely useful. You can call this "forced saving" if it makes you feel better about doing it, but gearing up is what it is, and it's basically the main way to acucmulate savings.

Which is not to say it's always or currently a good time to buy - but there are, regularly, good times to buy property, and missing out on them through excessive risk-aversion can be a really costly mistake.

216: It's for me to say. I can have business cards printed up to that effect, if necessary.

Emerson: it's not just LB--a lot of dog owners in cities are irresponsible like that. They buy a dog for protection, but then never really learn how to use the thing. Which creates a dangerous situation--did you know that more dogs bite their owners or innocent neighborhood children than bite intruders? Sad but true.

Really it doesn't apply at all, except in areas with a relatively high rental penalty.

Because drug dealers have a year's worth of income stubs to show the bank? WTF? 60% of Americans own their own homes; are 60% of dealers working out of their owned homes?

Furthermore, as I outlined above, in my region, there is no penalty either way - rents are pretty much a wash with ownership, it's just a matter of preference and coming up with a downpayment.

IME, drugs are not retailed by homeowners out of their domiciles, but ME is pretty limited. It probably is reasonably common to have dealers use their parents' or grandparents' houses, so there is that.

On net worth questions: suppose that a renter, instead of buying, invested the down payment. And then for the next 20 years, instead of maintaining a house, invested $1000 a year, and worked 5 hrs. or so a week and invested the pay.

Unless you started this experiment in an unusual year like 2007/8, he'd come out miles behind because of the leverage effect. If you started at a peak year, miles ahead (assuming he didn't invest it in Lehman Brothers shares) for the same reason.

And LB already told us she wouldn't eat the dog, if it came to that. Too old and stringy, she said. Only pureed puppies for her.

the residential mortgage is the only way that most of us can invest with leverage.

This can't be right. Leverage is dead easy to come by these days, ime.

I should note that in my earlier statement about this I was considering the possibility of replacing the leveraged investment in a home with another leveraged investment as one of the things people ought to at least run the numbers on. Or at least be aware the numbers exist for.

Obviously, even if your residential mortgage looks lousy as a straight investment, it's going to be harder to beat it without leverage.

Leverage is dead easy to come by these days, ime

kidding, right? What kind of souped-up brokerage account is going to let you gear up ten times, at prime +1%?

JRoth: fwiw, one problem in some markets isn't the selling of drugs, but the producing. A while ago people figured out that spreading out grow operations particularly, over rented houses all over a city, spreads the risk.

I guess in that case, fire is the only real increased risk in the neighborhood. I've heard these days they even keep the yards up nicely, to reduce the scrutiny.

oh so cuuuuute! baby financial planners! Can I take one home, pleeeeeeease?

Dsquared, go fuck yourself.

OK, you promise to stop giving crap investment advice, I'll go and fuck myself and we'll both come out winners.

Dsquared, I've already declared my willingness to pay good money in order not to own. I'm just trying to figure out how much I'd be paying, and pointing out that it isn't quite as simple as just "pouring rent money down the drain" vs. "gaining net worth".

224: I don't really know much about availability. Judging only by the way people were falling over each other to offer it to me, and I'm no-where close to the profile I would have expected they're looking for.

also
it's going to be harder to beat it without leverage.
doesn't mean impossible.

spreading out grow operations particularly, over rented houses all over a city

There was a court case as to whether the cops could use a thermal scan to detect a grow operation: unreasonable search? Fourth Amendment sez: YES!
http://www.fbi.gov/publications/leb/2001/october2001/oct01p29.htm

228: Well, the good news is that you can start not-buying-a-house today! For no money down! And this is possibly a once-in-a-lifetime opportunity to not do so! As I say, leverage works both ways, and right at the moment, your example works really well.

I'm not aware that marijuana growers and users are a threat in any way, though some of the big time middlemen are. Police like to bust marijuana growers, because they're mild-mannered compared to meth cookers and pretty much any other kind of crook.

225: Yeah, I'm not sure a grow operation would bug me much. The second dealer deals in the park, which is better when I'm on my porch, but worse when I'm in the park. But it's the traffic, and people getting high in their cars after scoring, that bugs me more than anything.

A couple weeks ago, I walked home and noticed some guys up on a ladder between my house and the dealer's. I figured they were hooking up illegal cable or something, and walked in my door. Turned out they were stealing the actual, physical cable (for some reason there was ~75' of extra cable looped there on the box). But because my neighbor is sketchy, I assumed the sketchiness was his. Apparently not. I didn't feel like such a good neighbor. Also, they didn't have a ladder - the fuckers took my under-porch lattice and used it as a ladder (100-y.o. house - good, solid lattice).

Feel the burn, PoMo! No pain, no gain.

further to 229:
I know you weren't referring to me with the `financial planners' crack, because I have in no way suggested anything is the right way to do it, just curious about the way people are steered in this stuff, and how few seem to consider their options that broadly. In my experience people mostly buy a house as soon as they can afford it, unless there are overriding reasons not to (job moving around). Also, in my experience, essentially none of the people I've known to do this could tell me how it compares on paper. It's just assumed to have been the right course.

So that makes me curious.

Of course, my plan is to immediately cash out my leverage in leisure time and second hand books. I was speaking hypothetically.

It's just assumed to have been the right course.

In fairness, though, it usually is (outside of a few urban areas where prices vastly exceed rental costs).

Getting back to DC-specific real estate, I've heard from several women that when they were single and living in Mt. Pleasant the pot dealers made sure they got home safely, because increased police activity was bad for their business. Compared to the alternatives pot dealers were seen as desirable, as they were stable and didn't really bring violence with them (unlike, say, crack dealers).

the fuckers took my under-porch lattice and used it as a ladder (100-y.o. house - good, solid lattice).

This was the penalty for your un-neighborliness. You probably wouldn't help Kitty, either.http://en.wikipedia.org/wiki/Kitty_Genovese

I'm not aware that marijuana growers and users are a threat in any way

The only real problem with this is fire risk. So we should provide incentives for better wiring in grow houses. Seriously though, the only other thing people typically complained about was the houses appeared abandoned, because they nearly were (that's the whole point). These days, the growers figure it's worth investing in the upkeep, from what I've heard.

In fairness, though, it usually is (outside of a few urban areas where prices vastly exceed rental costs).

Right, and I said that earlier. But there seems to be an air of inevitability about this, which I think is wrong. It's `the right thing' in a lot of places for a combination of reasons, but some of those are social and policy -- in other words, quite reasonably changable.

JRoth's point about community stability definitely holds true in areas with volatile property values. We (and several of our neighbors, I suspect) couldn't afford to live where we do if we didn't own the house.

Looking at all the good advice on this thread, I marvel at my luck when I bought the place. I didn't evaluate realtors—mine was a shady but shrewd guy I met in a bar—and I jumped at the first house I seriously considered. Not recommended, but it worked for me.

Jesuses have good luck right up until the very end.

229: for real? I'm not saying it couldn't happen, but it seems pretty amazing to me. Were there any limits on size? Thinking about this as well, mortgages don't have margin calls and are term money rather than call, which would also make a difference.

and further to 235: I think everyone operates off something like an implict rent-versus-buy equation, which nine times out of ten is going to give you a reasonably good steer (the one time out of ten being near the peak of a boom when someone's offering a negative-amortisation or front- discounted product to make the buy cost look artificially lower).

227: Christ. I spent about four minutes writing something up, then realized I'd just be arguing on the internet. With some guy whose entire schtick is being a dick on the internet.

243: I think you may have missed the last bit of the story.

And then after the very end, they get even better luck.

244: Yeah, the lack of a margin call on a house is a big deal, too. As for the margin availability, I forget the details of my current account (as there is no way I'm risking a call at the moment, I haven't been leveraged at all since last year). My first would go 5:1 anyway, if not 10 (I can't remember exactly). And I was just a kid with a decent (but not amazing salary wise) job but no assets or family money or whatever. Hell, I was a one time high school drop out. Every place I talked to when I figured I ought to put a bit aside was pushing a margin account, so I figured it couldn't be that unusual. Maybe I'm wrong?

248: wow, that's a lot more aggressive than I thought they'd ever offer. Ahhhh, margin accounts.

Mind you, I've just calculated the leverage implicitly available in British "spread-betting" accounts and it is actually insane, so I now think you're right (although the size is limited and the daily margin does matter a lot)

There's something about this leverage/mortgage argument that doesn't add up for me. Is it laid out in detail somewhere?

The only way I can make sense of it at the moment is that if a house a capital good, then by buying a house is a good investment because you are, directly or indirectly, increasing the production possibility frontier (or whatever economists call it). But the same thing is true when you rent a house, right? Someone has to buy the house. So the buy/rent decision is just a question of who bears the risk from income volatility. But that doesn't sound like the argument being made.

249: Maybe I should add that `decent job' may not have been very high salary, but it was a tech job in the bay area during the 90's boom. So aggressiveness may have echoed general crazyness of the time, and expectations. No idea how someone in the same boat would fair today. Upon thinking about it, I'm pretty sure that first one was 5:1 and about 150k limit. Would have been unlikely for me to be able to go in the hole more than 50k or so, that way.

217

Finally and most importantly, the residential mortgage is the only way that most of us can invest with leverage. ...

Actually it isn't. It is easy to buy stocks on margin. True this is 2-1 not 10-1 but you can buy stock in companies that are themselves leveraged making your effective leverage greater. And if that isn't enough risk you can buy options or futures. How do you think Hillary Clinton turned $1000 into $100,000? Of course if you do this and aren't playing with loaded dice you are quite likely to lose all your money, but that's how leverage works.

250: Ah, that sounds like a sensible comparison to find boundaries, at any rate.

If our currency were pegged to the turnip we wouldn't have to be having this discussion. It's fiat money causing all these problems.

So the buy/rent decision is just a question of who bears the risk from income volatility

It's more a case of who bears the risk of asset price volatility, which is a very nice risk to have if house prices are going up (and a very nasty one if they're going down).

253: Per discussion with sb, I don't think you can achieve anything like the same gearing through brokerage accounts that you can with a mortgage, also margin loans have lots of very nasty repayment properties.

200

I hear that, in some condos, you have neighbors who will seem reasonable and thoughtful one day, then be all rightwing crank the next. Caveat emptor.

Actually I think living in a condo selects out a lot of the jerks since they are the ones who worry about oppressive association rules.

I'm thinking about the margin account analogy. I thought the whole reason to use a margin account was because you imagined you had some stock picking ability. If you don't have some advantage like that, then going into debt to invest should just change the shape of your payoffs.

There's something about this leverage/mortgage argument that doesn't add up for me. Is it laid out in detail somewhere?

I'm sure it is, but the basic gist is that if you only put 20% down when you buy a house, you're playing with a highly leveraged investment (mostly the bank's money). Suppose you buy a $100,000 house with $20k down, and it appreciates at a measly 2% annually. 2% growth on the $100,000 price is a $2000 gain, that's yours to keep on the sale (minus transaction costs). But $2,000 represents a 10% rate of return on the $20k of equity you put down. So even if your alternative investment options are returning 8%, you're better off buying the house, which is making you more money even though it has a much lower nominal rate of return.

Putting down 10% or 5% or 2% obviously only compounds this effect.

This is vastly oversimplified but you get the idea, I hope.

Of course if you do this and aren't playing with loaded dice you are quite likely to lose all your money, but that's how leverage works.

a simple consideration of the fact that the vast majority of people who buy houses with mortgages do not, in fact, lose all their money is useful here, as it shows that margin accounts aren't the same as mortgages - speculation financed with long-term committed money is very different from speculation financed with overnight call money - but here I am getting into talking about the current crisis, which I said I wouldn't do.

With respect to buying a house, you just have to remember Will Rogers' advice on the stock market "Just buy yourself a few good stocks, wait till they go up, then sell 'em. If they don't go up, don't buy 'em". It's basically the same with real estate.

I don't think you can achieve anything like the same gearing through brokerage accounts that you can with a mortgage,

Yes, or at least in my limited understanding, it's hard to achieve without another significant asset (a position many/most home buyers are in). Of course this has to be balanced against the return, but I can certainly see how in many cases the house wins if you've got reasonable terms on the mortgage. And, as you note, the repayment can be quite nasty.

257 makes me think you just like arguing on the Internet.

On re-reading it ocurred to me that you may have been asking a vastly more sophisticated question than 259 answered. If so, I'm not quite sure what you're asking, but sorry for the elementary explanation.

258: If you could take out a 30-year, fixed-rate loan to buy stocks, then they would be the same. But a margin account is settled daily. In practical terms, this means that the long-term upward drift of both stocks and real estate prices helps you out a lot more in the mortgage case than in the margin account case. So with a 20% downpayment mortgage, as long as you can make the payments, you can survive even a 40% fall in peak-to-trough prices and hang on until it's made back. With a 5:1 geared margin account, a 20% decline will wipe you out unless you have substantial other savings to keep making the margin calls from (and if you have substantial other savings, obviously, you're not really leveraged, plus where did you get them from). Leverage is always risky, but it's a lot riskier when you're taking liquidity risk as well.

It's more a case of who bears the risk of asset price volatility, which is a very nice risk to have if house prices are going up (and a very nasty one if they're going down).

under the old bankruptcy laws, I think there was a big difference in your upside vs. downside risk. Upside you kept all the profits / capital gain (OK, some taxes out, but not so much -- a lot of gains on house values are tax exempt). Downside, you got foreclosure and bankruptcy, but under the older bankruptcy laws you probably wouldn't pay anything near the entire capital loss.

The new bankruptcy laws are different, but personally I don't think the more stringent bankruptcy laws are going to survive this crisis.

in 265, I meant you *could* get foreclosure and bankruptcy, those are obviously not guaranteed.

Second, in a growing community you will want to live on the edge with a view of the country.

Huh?

Around these parts (flat farmland with few trees for the most part) people like to look out over the countryside. It is a nice view. The problem is that to get that view you've got to be on the edge of town, and the edge keeps moving.

True story, some idiot home-buyers were trying to sue someone when they found out the view of the countryside that they had bought became the view of an apartment complex built next door. They bought houses next to a big vacant lot that was zoned as multi-family residential. Who's fault was it when the apartment building went up?

I suppose this problem is unique to growing cities. Many people want to own big spaces, and if they can't do that they want to see big spaces.

259 is helpful. I find a lot of this discussion about houses as investments profoundly counterintuitive. I'm not sure if it's something to do with non-rational understanding of the value of a thing or if it's that economics is at some level not very good at handling the realities of human cognitive weirdness or if those are really just different ways of saying the same thing or what.

If I'm not guaranteed foreclosure *and* bankruptcy, I'm walking away from this agreement right now.

they want to see big spaces.

And yet they resist high-rise apartment living. Go figure.

I suppose this problem is unique to growing cities.

Not really. You can find interior areas that suddenly become popular, there is a rush of buying, and then the new owners realize there are things they don't like about the neighborhood or zoning etc., and start lobbying for change. `If you don't like hearing trains at night, why the hell did you buy a house a block from the tracks?'

Many people want to own big spaces, and if they can't do that they want to see big spaces.

This is true, and I have a simple solution for these people. Look up!

Oh, yeah... first they need to go outside. Then ...look up!

And yet they resist high-rise apartment living. Go figure.

The rules:

i) People are not rational actors.

ii) ...

258

I'm thinking about the margin account analogy. I thought the whole reason to use a margin account was because you imagined you had some stock picking ability. If you don't have some advantage like that, then going into debt to invest should just change the shape of your payoffs.

No it can increase your expected return (at the price of greater volatility). Suppose the risk free interest rate is 3% and you expect stocks to return 6% on average. So if you invest $100000 in an index fund you can expect a one-year return of $6000 (6%) as compared to $3000 (3%) in interest. Suppose instead you borrow $100,000 at 3% and invest $200,000 in the index fund. Now your expected return is $12000 less $3000 interest paid or $9000 (9%). So as long as stocks are expected to do better than the rate at which you can borrow you can increase your expected return (with greater risk) even without any stockpicking ability.

Many people want to own big spaces, and if they can't do that they want to see big spaces.

This is true, but of course totally unfeasible on a large scale. And it seems to go hand-in-hand with a kind of intolerance that you don't see when people are used to living in closer proximity to each other, and so it irks me.

275: the ghost of ezra pound haunts the internet.

I suppose somewhere or other we should have made the point that particularly recently, a hell of a lot of mortgages were signed that made the prime + 1 look, ah, remote. So there is that.

Many people want to own big spaces

Huge tracts of land?

True story, similar to Tripp. Mr. Neuvo Riche Jackass, (not his real name) builds a McMansion on a hilltop overlooking the orange groves. Then is dismayed to find out he has not bought in greenbelt and view may not be preserved forever. Also very dismayed when informed that there is a distinct possibility that trees will be pulled out to save on water costs. Lawsuits threatened; presumably his attorney informed him he is not entitled to dictate what happens on other's property.

272 is brilliant.

279: That's why it's great to like looking at lots of people. Unless you buy a house in a declining Midwestern rustbelt town, chances are that those people will still be there in 20 years.

spent about four minutes writing something up, then realized I'd just be arguing on the internet. With some guy whose entire schtick is being a dick on the internet.

Deraqued's shtick is being a dick *who is right* on the internet. Much more difficult and challenging.

264

If you could take out a 30-year, fixed-rate loan to buy stocks, then they would be the same. But a margin account is settled daily. In practical terms, this means that the long-term upward drift of both stocks and real estate prices helps you out a lot more in the mortgage case than in the margin account case. So with a 20% downpayment mortgage, as long as you can make the payments, you can survive even a 40% fall in peak-to-trough prices and hang on until it's made back. With a 5:1 geared margin account, a 20% decline will wipe you out unless you have substantial other savings to keep making the margin calls from (and if you have substantial other savings, obviously, you're not really leveraged, plus where did you get them from). Leverage is always risky, but it's a lot riskier when you're taking liquidity risk as well.

This is not a fair comparison. With a house it is a lot harder to keep the amount of leverage constant. As your equity increases you can't buy 20% more house. But this is easy with a stock margin account.

Deraqued's shtick is being a dick *who is right* on the internet.

It's an advanced technique, not to be tried lightly.

280: Thank you for the affirmation!

284: Let's face it -- no one has ever been wrong on the internet.

Let's face it -- no one has ever been wrong on the internet.

Just right to a different set of readers. The lurkers support me on this.

Let's face it -- no one has ever admitted beening wrong on the internet.

282: Jesus fucking Christ. You're going to make me rewrite the big response to 217, aren't you?

Bear in mind that's he's also the guy who wrote about how fabulous Budweiser is. On the internet. He's been right about a decent number of things in this thread, most notably the substantial value of the long-term lock-in on the payment terms for mortgage borrowers. But 217 and 227 were infuriatingly patronizing, especially considering that I never even suggested REITs and REOCs as optimal investments, just investments that are likely to be about as reasonable as one's investment in a home for the average individual.

I know some people choose to live near something undesirable (trains, livestock, airports) and the complain about them.

I'm talking about the people who choose to live near something desirable and then have that change outside of their control. At least around here the view is something that frequently gets changed because of new construction. Here is something else that has changed.

The law in MN is that every lake is public - meaning, for example, you cannot own a lake even if you own all the land around it. You own, I think, ten feet into the lake and that is it.

For flood control (after that 500 year flood I mentioned above) against future floods the state forced some farmers to sell some of their land and a stream was dammed with an earth dam to make a reservoir that could help hold and slow down flood waters and save the city if that came to pass. The farmers were told this would not be a lake, it was a reservoir owned by the state and managed by the DNR.

Then somebody stocked the reservoir and people started fishing on the reservoir, using the tiny stream that fed it for public access. Cars were parked alongside the road in ditches. The farmers were pissed.

The farmers (and the township) want the earth dam opened and want to buy the land back. The city wants flood control. The county wants to put in a real parking lot for safety. Some people want to use the lake for recreation.

What a mess.

And yet they resist high-rise apartment living.

I got to see an amazing 27th-floor apartment on Houston St. yesterday. Damn, you could see everything. The bridges over the East River looked like little models. Amazing.

I have been wrong on the internet. I am also a below average driver.

AND I RENT, MOTHERFUCKERS!

I'm talking about the people who choose to live near something desirable and then have that change outside of their control.

Ok, but consider this: you see a similar effect a lot in gentrification. People move to a hip/cool/arty area, and five years later complain because all that's left is yuppies and multistory developments (having knocked down the `cute' houses in the area as land value rocketed). It's a very close parallel to your situation, but moving into the area they are contributing to driving away the very attributes of the neighborhood that attracted them.

Mmm. I love my eighth floor apartment, which is visually higher because it's on a hilltop (I can see a whole lot of Bronx), but my "If I were rich" daydream is something really high up.

In college, I once waitressed for a private dinner party in a billionaire's apartment (Sam Zell. I think 'billionaire' is right. Very rich, in any case.) that was in a wildly tall building. Just beautiful, but I couldn't gawk because I was working. And then I broke the sideboard trying to get the dessert-plates out, and was instantly convinced that Zell would have me quietly killed for it -- billionaires are allowed to do that, right?

But 217 and 227 were infuriatingly patronizing,

He really is the most effective troll on this blog.

How do you live with yourself, Otto? You poor, poor, bastard.

Sam Zell is a billionaire- from real estate, no less! Until he bought the LA Times, anyway.

To not traduce Zell, not only did he not have me killed, there were no repercussions whatsoever for breaking the latch on the sideboard, and the pay for the evening was great.

How do you live with yourself, Otto?

Well, I run a successful crack dealing operation out of my apartment, and this does lend me a small measure of self -worth.

Ah, well then, carry on!

294 - When I finally achieve the wealth to which my awesomeness entitles me you can have a suite in my Zeppelin.

295: **sniff**

302: Oh Emerson, c'mere. You know Rob only meant when we're not talking about philosophy or marriage!

But 217 and 227 were infuriatingly patronizing

You mean you find being called a "cuuuuute baby financial planner" patronizing? Aren't you being a little oversensitive here?

He really is the most effective troll on this blog.

I'm with Emerson: a great troll is a wonderful thing. A troll whose opinions you have to consider and respect is a true mindfuck.

Hey, do the leverage benefits of home financing mean that you are ill advised to buy homes for cash (this has come up with wealthier friends of mine...)

there were no repercussions whatsoever for breaking the latch on the sideboard,

Cuz you were a cute college student, not a reporter.

http://gawker.com/5002815/exclusive-sam-zell-says-fuck-you-to-his-journalist

was instantly convinced that Zell would have me quietly killed for it -- billionaires are allowed to do that, right?

that would make a good book or movie. (You'd have to be honest to the fact that unlike most Hollywood scenarios, billionaires cannot actually kill people already). Tag line: "He could buy every pleasure BUT ONE..."

302, 303: I agree with John far too often to consider him a troll.

Given what he's done to the LA Times, an entire city would have appreciated it if you had accidentally slipped some arsenic into Sam Zell's glass. Ah well, just another missed opportunity for a good poisoning.

You mean you find being called a "cuuuuute baby financial planner" patronizing? Aren't you being a little oversensitive here?

Considering that he and I are both finance professionals, yeah I'd say it's patronizing. I'll admit that I'm younger than dsquared, and almost certainly cuter, but I don't think those were his two main points in the statement.

Po-Mo would have accepted one less u in "cuuuuute". Five is right out.

309: we'll have to agree to disagree. I think he was just hitting on you. I mean, he did ask if he could take you home. I thought that was pretty transparent.

309: I think we've made it into the death-spiral of misunderstanding sympathetic sarcasm here: I don't think any phrase including "cuuuuuute baby" could reasonably be interpreted as anything other than condescending, and of course you're not oversensitive for reacting to it as such.

PGD,

I don't have any friends that wealthy, but if I ever won the Powerball the first person after my wife I would tell is an attorney who's job would be to get me another attorney who would tell me all the ins and outs of what to do with a huge sum of money.

I'd want all that locked down tight as a drum before I claimed my prize.

Go on then, since we financial professionals should all be hanging together in these troubled times, otherwise bastards like Emerson will surely hang us separately, you may have one of my infrequently delivered apologies for the "cuuute" remark. Frame it, sell it on eBay do with it what you will. Sorry. Are you happy now? I maintain my view that the actual advice was wildly crazy, even as a joke, but in retrospect I may have got carried away with chuckling at the "baby financial planner" line and not really taken sufficient care in calibrating its offensiveness.

Sure, he's a dick.

But ere his points about the crappiness of residential REITs and being able to cheaply increase the imputed rents of the house you own wrong?

It seems really odd to say this after something from dsquared, but nonetheless:

Comity!

Hey, do the leverage benefits of home financing mean that you are ill advised to buy homes for cash (this has come up with wealthier friends of mine...)

Wouldn't that depend rather a lot on the tax implications, and hence depend?

you are ill advised to buy homes for cash (this has come up with wealthier friends of mine...)

How wealthy? Many of the super- luxury ($10 mil and up) are bought cash, by movie stars, etc.

Aw shoot, Here I went and got all busy at work and apparently missed a kerfuffle.

Stupid work. Dang it! Can anyone recap?

Go on then, since we financial professionals should all be hanging together in these troubled times,

You misspelled "hanged".

Impaled, Dsquared. You will be impaled together on a large version of one of those quaint thingd people used to put paid bills on.

Bodkin

As for the second part of 304, that all depends on the financial state and risk-averseness of your wealthier friends. A mortgage provides a sizable loan at a good rate, but the steady payment of principal amount makes the amount of leverage differ greatly.

There's a good point that the lack of daily clearing will allow you to survive temporary events that would otherwise wipe out your capital in a leveraged investment, but it's a very rare occasion when a 2x leveraged investment in a properly diversified portfolio could be wiped out. Plus, a portfolio of exchange-traded call options on indexes could provide 2x-4x leverage under most circumstances while preventing the chances of a complete equity wipeout. The trading costs would be fairly high, but the imbedded borrowing costs are extremely low (marginal investors are typically institutional) and the trading costs on houses are pretty damn huge as well.

I'm not suggesting either form of leverage as a great idea. I'm generally risk averse enough that my assets, while nearly fully-invested, are entirely unleveraged. I'm just saying that house buying and mortgages aren't really all that and a bag of chips.

312: darn, LB, I was trying to keep the ball rolling with 311, and you stomp in all literal-minded and ruin the fun.

Also, I think anything which makes D-sq tone down his offensiveness is a net blog loss. I say this as someone who he has told to fuck off several times. Let's not have some kind of politeness epidemic break out here. The occasional times when one feels the sting should be taken as the personal contribution toward a common good. Like paying taxes.

I'm generally risk averse enough that my assets, while nearly fully-invested, are entirely unleveraged.

Likewise, these days. But I was always pretty risk adverse. An acquaintance gave me all kinds of ribbing on this a few years ago, after going insanely leveraged on something I suggested to him, which paid off about 20x. I of course threw a few dollars at it I was happy enough to lose, is all.

D-sq tone down his offensiveness

Heaven forfend. But mixing up the levels of abuse makes everything more entertaining; I'm just regretting that personal finance is an area where I know so little I can't possibly argue with any vehemence. (But I can bristle when people say things I interpret as slights on NYC, so that's something. In fact, I'm bristling right now, thinking about it. Regardless of where my hackles may or may not be located.)

The occasional times when one feels the sting should be taken as the personal contribution toward a common good. Like paying taxes.

Watch it, Bub.

New York is just like Portland, Oregon, except bigger.

Spindle. Financiers will be spindled.

Is that before, or after, being folded an mutilated?

314: Thanks, dsquared.

As for REITs and REOCs, I honestly am interested in finding out why you think they're so poor as an investment relative to purchasing property for one's self.

1) In terms of general poorness as an investment, American REITs (as proxied by the MSCI REIT index) produced annualized returns of 12.4% for the 10 years through 9/30/08, and that even includes the big recent drop. It could fall a ways further and still come out ahead of most developed-world stock indexes. Sure, this isn't a superb case for them, but it suggests that someone dismissing them out of hand should give a pretty good reason why buying REITs or REOCs on the stock market (as opposed to at initial offering, so you don't have to worry about the stock immediately trading at a discount) is a bad idea relative to other forms of property ownership.

2) Residential REITs almost certainly hold a different section of the housing stock than we would tend to own ourselves, but I'm not sure that's such a bad thing. REOCs probably have some exposure to the higher end of residential housing through the suburban land some of them develop, plus the stakes in multi-unit and commercial properties are part of the diversification that I think would benefit most investors relative to just owning a huge chunk of one house.

3) Most people do not have alpha in their investment choices. If anything, they've got negative alpha. This suggests to me that people will probably not add value to their investment through judicious property selection, and certainly will not do so on average. As for adding to their property value more cheaply and efficiently than a professional management company, that seems to ignore any potential economies of scale, and seems to assume that the companies which make all their money off increasing rental values would be worse at it than individual homeowners with idiosyncratic tastes whose choice of home improvement probably won't match the market-value-maximizing choice.

4) REITs and REOCs seem like they should have access to debt terms that are as good or better than individuals. Now, I'll admit this is an area I don't know so much about, since I'm only familiar with the capital structures of some of the better run investment trusts and operating companies. There may well be a fair number with poor investment ratings, costly debt, and a lot of short-term debt that will screw them in a liquidity crunch. In fact, I'm certain there are a fair number, since some of the better-run companies have been picking up decent properties on the cheap from massively-cash-constrained REITs who used a lot of short-term debt. But, a well-run REIT or REOC can lock in a large amount of long-term debt at reasonable rates, with covenant terms that shouldn't be too onerous relative to those faced by an individual. And they can also keep their leverage fairly constant over time. Now, given the difficulty of identifying a good home investment and the ability to buy a large diversified index of REITs and REOCs at reasonable cost, I think the typical individual is less likely to duff up the latter unless there's a particularly good non-investment reason to want to buy the house (put down roots, be able to do whatever you want with the property, etc.).

I'll admit this is an area I could easily be wrong about, since, as I said, I haven't looked into many REITs or REOCs apart from a few that have been singled out as particularly well-run. I just didn't see anything convincingly damning in 217. Dsquared or anyone else would need to be a bit more detailed in why they're such a poor idea.

I like TICs better than REITS, because they are tax advantaged. Unlike REITs, TICs have liquidity issues, but the tax advantage outweighs, in most cases. YMMV.

To add to 331: The biggest actual point in 161 is that housing is a pretty mediocre investment. It certainly should not be anywhere remotely near as big a part of an optimal portfolio as the hypothesized investment in 161 would entail.

Dsquared makes a good point about the special loan terms that housing enables, but there are a lot of very tricky issues in assessing the benefits of that loan and the leverage it provides versus the cost of tying up so much potential investment capital in illiquid real estate. It's tempting to write up a decent program to try and weigh those costs (and another one to assess the approximate value of avoiding daily margin calls on the potential volatility of an investment portfolio), but it would involve a lot more research on housing prices than I would like to commit to at the moment.

333: which was sort of the point of 96.

As for adding to their property value more cheaply and efficiently than a professional management company, that seems to ignore any potential economies of scale, and seems to assume that the companies which make all their money off increasing rental values would be worse at it than individual homeowners with idiosyncratic tastes whose choice of home improvement probably won't match the market-value-maximizing choice.

Imputed rent, not property value.

I could give a shit about a super-fancy kitchen and don't mind carrying laundry up and down stairs, but I think it's bitchin to have a garage with four motorcycles in it and workshop with air and power tools in the adjacent room. So I can leave the ten year old appliances and ugly countertops in place, put the washer/dryer next to the water heater in the basement, and use the 220V line for the old dryer to power my tools. This is worth easily $100/month to me, will cost $2k, I'll be here at least five years, so I do it. $4k of housing value has been created.

Landlords can't accomodate idiosyncratic tenants, so they spend $10k redoing the kitchen in an inoffensive manner, have their house vacant when it's being worked on, and end up with a tenant who values the new kitchen at the same $10k that was spent on it.

There are some motherfuckers around here who need to learn the meaning of the word troll.

[I go away for awhile, and...]

let me guess - you got this information on a site where people gather together to congratulate each other on being clever enough to buy index funds, right?

Not ever having read such a site, I can say definitively: no. And also, fuck off, Daniel, you cunt.

A house isn't a consumption item - it's a capital investment which provides a stream of rents or imputed rents over time. It might be a good or a bad investment, but that's a different calculation.

If it's a bad investment, it might as well be a consumption item. There aren't that many 100-year-old homes in the US still standing (I've helped tear down a couple), and the homes they build these days may very well not last 20 years.

At any rate, having lived through the S&L bust at ground zero, I got the opportunity to watch all the Make Money Fast real estate schemes played out before the peak. (Including the blossoming of late night infomercials about getting rich in real estate.) Then I got to watch real estate prices fall by about half or more over the course of five years. (Rents fell by about a third.) In the interval before the bottom, lots of people kept running on at the mouth about what a wonderful time it was to buy, since I could walk down a street near to where I lived where every 3rd or 4th or 5th house was a HUD house.

That's without talking about condos; I knew people who dropped 300k on condos (in a horizontal city like Dallas, where suburban condos don't make much sense), and then shock. Horror. They were pretty much underwater forever, since the condos in question were likely to be all ratted out in short order. They all argued they were making an excellent investment at the time, because RE prices always go up, doncha know.

I have sat through this movie before, including the bits with the late night infomercials pimping get rich in real estate packages. I don't remember the foreclosure rates being this bad, so I would be suspicious about any proclamations of a bottom. (The economy was that bad in Texas in the 80's since the Texas economy was mired in an oil bust before the RE peak.)

And further to 83, no. If it's a consumption item, why are there so many 100-year old houses standing around the place - they clearly haven't been consumed. It's a "machine for living in", as Le Corbusier said - it's a capital investment which produces a stream of "housing" over time. This is just unbelievably cut and dried, and this is the way in which housing is (correctly) entered into the national income statistics.

Unless they don't properly enter inflation or expenses into GDP; then it becomes a mechanism for inflating the statistics.

Which is not to say it's always or currently a good time to buy - but there are, regularly, good times to buy property, and missing out on them through excessive risk-aversion can be a really costly mistake.

Sure. But if you're going to be living on ramen noodles and water to afford the mortgage payments on the 500k condo in DC that used to be a basement in a three story house... in a recessionary down market, I'd say you might very well have a few loose screws. If, on the other hand, you make a million dollar per year salary as lobbyist, then dropping 500k on aforementioned basement might very well make sense as an investment in working tools. (Getting more than you paid for it afterwards would be nice, but optional.)

LB - 154: The implication of this and 108 that NYC is someplace with no relation to the normal reality that everyone else lives in makes me cranky.

Well, NYC is a the most vertical city in the US (and there's nothing wrong with that!), so if buying a condo makes sense anywhere, it would make sense there. So if condos aren't moving in NYC, you know you're in bad trouble, RE-wise.

max
['Yeah, yeah, late.']

and there's nothing wrong with that!

Beyond that, there is something wrong with horizontal cities like Dallas and Houston. But that's another thread. Which I'm sure we've had. Probably a few times.

since the condos in question were likely to be all ratted out in short order.

what does it mean for a condo to be all ratted out? is the Mob involved?

There aren't that many 100-year-old homes in the US still standing
Are you nuts? That's easily 80% of the housing stock where I live, and you often have to go blocks before you find anything else.

337

... in a horizontal city like Dallas, where suburban condos don't make much sense) ...

Condos don't have to mean high rises. Westchester is pretty spread out and I am in a townhouse condo. These are 4-6 units per building (side by side so no one is above or below you) with about 25 buildings on about 20 acres.

There aren't that many 100-year-old homes in the US still standing

Agree this part is insanely localized. Some places are full of 100 year old stock.

||

Cheer up, folks.

|>

JE, I know that you are a cheerleader for American decline, but who is going to take our place? China will have its own problems

http://www.nakedcapitalism.com/2008/10/chinas-growth-slows-to-9-below.html

As will Russia

http://www.strategypage.com/htmw/htatrit/articles/20081020.aspx

Doom all the way down, TLL.

Oh, all right then.

Any news on the Dear Leader? There was supposed to be an announcement today.

http://www.jpost.com/servlet/Satellite?cid=1222017544741&pagename=JPost/JPArticle/ShowFull

"I'll inspect your military unit any time, baby", Kim was reported as saying.

My condo will be 100 in 2012.

274: Suppose instead you borrow $100,000 at 3%

Suppose you borrow a baby unicorn, and it loans you the money.

Seriously, where are you getting a margin loan for only $100,000 at 3%? Fast Eddie's Discount Stocks and HVAC? The only margin loans I've seen at 3% (and I've seen 'em all over the world) are for substantially larger sums of money for clients who have substantially more money that their broker would like to get his greedy little paws on. Would you buy stock in a brokerage that loaned money out at the same rate as a T-bill to all and sundry? It's ridiculous.

Furthermore: 264: With a 5:1 geared margin account, a 20% decline will wipe you out Not in this country, buddy. The minimum equity requirement for all-equity portfolios in the US is 25%, per the Federal Reserve. I suppose you could find some fly-by-night operation that would be willing to loan you money at a 20% requirement to buy junk bonds, but otherwise there's no way to make this an investment strategy. (If you're borrowing any significant amount of money at margin interest rates against investment-grade bonds, you're either stupid, or using it as bridge-financing, and probably paying 1 or 2% more than you should for the convenience value.)

[All of the above assumes you have sufficient SMA to take your account down to minimum maintenance levels.]

Some 60 percent of homes in the city and 31 percent of homes in the county were built before 1940, according to the 2000 census.

Why would they build new homes, when more people are moving away than moving to the area?

I eagerly await the coming of the turnip economy. Turnips always retain their value.

Turnips always retain their value.

Until you eat them. Then they turn to shit.

You can build a turnip house, and then when it gets warm, eat it.

See, it's use value as opposed to exchange value. Turnips have use value, both as food and for construction purposes. Our currency has to be grounded on something real. There has never been a turnip bubble.

Tulip bubble, yes. That's why I specified turnips.

John's drunk, isn't he?

On turnips.

John's drunk on love. The love of sweet, sweet turnips.

Ma petite chou, come with me to ze pig farm.

349

It was a hypothetical example. If you can't borrow money for less than the expected return on stocks you shouldn't be buying on margin.

but who is going to take our place?

Brazil & South America.

It was the refuge in the last two wars. It certainly has problems, but seems like the most stable continent.

No, not hypothetical at all. A real turnip economy. I'm ahead of my time, obvs.

It certainly has problems, but seems like the most stable continent.

I don't think things will get that bad here, bob. But then again, your charismatic leadership may inspire your minions to achieve what is currently unthinkable. Never say never.

These investment threads always make it clear to me that my only good option for retirement is marrying rich.

365: That's funny, my reaction is always, "Yep. Gonna die poor."

365 to 365.

And don't give up on your dreams, LB!

364: Connecticut's the wealthiest state per capita in the nation.

Turnip bubble.

365

That's funny, my reaction is always, "Yep. Gonna die poor."

Which is silly since you have less reason to die poor than 90% of the population.

LB is an achiever, James, who sets goals for herself. She never says never.

Do you really need a reason to die poor? Why not just try it on a whim!

Yep. If I die poor, there's really no excuse for it.

OT: Poor McCain really can't get a break.

373: but nobody's likely to demand one of you, if you're dead.

Connecticut's the wealthiest state per capita in the nation.

Yeah, but there's probably more millionaires per square foot in New York City.

Problem is, I find I'm allergic to most rich people. Must get one of the hypoallergenic ones.

And how awesome is this, from NPH's link:

Obama's sister, Maya Soetoro-Ng

If you get a hairless one, they have less dander. Bathe it frequently and you should be fine.

376: I'm sure you can specify a hairless billionaire at the adoption agency.

That's funny, I usually pwn Apo like that.

378, 379: Howard Hughes, perhaps. Unless Bave's also allergic to dead.

380: apo doesn't cotton to hairless billionaires.

Bave's billionaires are best when bald as a boiled egg.

Bravo, bumpkin!

On the off chance dsquared is revisiting this dead thread... checked my decade-old records and max allowed exposure was 4:1 not 5:1, and 200k (not that it mattered, small potatoes was I). Still pretty aggressive, considering.

Late to the conversation, but I can't help but add that I pay $270 a month to live in urban-ish Charlottesville, in a three-bedroom bungalow.

The social costs include living with an anarchist married couple who are in the tank for Ron Paul and global financial collapse and a dude who vomits drunkenly with some frequency but never on anything of importance.

Score one for renters!

But that return's going to be blown out of the water by the return on mortgage-financed residential housing over the same period, isn't it? (Also, it's a roughly 2x levered return, so I would guess that apples to apples, it's not that different from the stock market).

Yeah, when you include the 2x leverage, it's not that different of a return from the small-cap and mid-cap portions of the US stock market. But over the long-run I would expect real estate to lag the stock market for equal amounts of leverage, since house prices seem to roughly track median income and stock prices somewhat outpace the economy as a whole.

It's a good point about REITs probably not outperforming a mortgaged property. I took at look at the Case-Schiller (which admittedly probably has its problems, but seemed as good a proxy as I know of), and it provided an annualized return of 5.8% for the decade through June 2008. The REIT index over the same period returned 10.6%. Given that mortgages probably average something like 3x leverage (assuming one starts at 5x), that's some definite outperformance for the mortgaged property. Still, levering up a REIT index investment 2x shouldn't be too difficult, and would even things out in terms of return. That just leaves the question of why on earth anyone should invest so much in real estate (and of course all the questions of relative risk/volatility that I didn't bother analyzing, but fuck grabbing return series, I'm finally being productive at work this morning).

387

It's a good point about REITs probably not outperforming a mortgaged property. I took at look at the Case-Schiller (which admittedly probably has its problems, but seemed as good a proxy as I know of), and it provided an annualized return of 5.8% for the decade through June 2008. The REIT index over the same period returned 10.6%. Given that mortgages probably average something like 3x leverage (assuming one starts at 5x), that's some definite outperformance for the mortgaged property. Still, levering up a REIT index investment 2x shouldn't be too difficult, and would even things out in terms of return. That just leaves the question of why on earth anyone should invest so much in real estate (and of course all the questions of relative risk/volatility that I didn't bother analyzing, but fuck grabbing return series, I'm finally being productive at work this morning).

What do these numbers mean? If your house is returning 5.8% mortgaging it at say 6% reduces your return (ignoring taxes).

To bring the thread full circle, Sausagely probably should have just bought Iceland.

Despite the "early voters tend to be Republican" link above (38), fivethirtyeight says:

Zogby gives Obama a 21-point lead nationwide among people who have already voted, and SurveyUSA and Civitas peg his advantage among early voters in North Carolina at around 20 and 30 points, respectively.

As I predicted, the Swedes, Danes, and Russians rescue Iceland. It's a good advance base for the Danish invasion of Canada. I now support the Danish defense of its occupied territory of Hans Island, but expect the Canadians to cave in and join the Arctic Alliance almost immediately.

I say, give them Alaska!

This is really bad, unless Alaska's state ethics rules are VERY different from those of more civilized states. The accompanying tax problem is also glaring, although surprisingly under-covered as compared to John Edwards' dodgy self-employment tax reporting.

392: Why do you hate Palin's kids? Do you think that she should have aborted them?

393: Nah, but now that she's got them, she should either pay for their tickets herself or feed them to your hogs. I don't care which--I'm pro-choice.

Sexist. Do you expect the nanny to take care of the kids while their mom travels? Cheaper to go with. Family values and economizing in one package.

Eat the kids, duh.

Trying to get the last word on some old threads, Sifu?