Housing costs less than half compared to 2006

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Submitted by ninaprincess on October 25, 2011 - 10:39am

This house, sold for $630,000 and now sold for $400,000.

The 30-yr morgate rate in 2006 was 6.5%, now it is 4.2%. Assumming that the buyer was/is borrowing 100%. The payment is $3,960 vs. $1,949. The new payment is about half and we are not even factoring the 10% to 15% inflation that has occured in five years. I believe it costs about $2,100-$2,300 to rent a house similar to this right now so it is cheaper to buy than to rent right now even for houses.

http://www.sdlookup.com/MLS-110050901-74...

Submitted by FormerSanDiegan on October 25, 2011 - 5:51pm.

This is not an isolated incident, per Rich's year-end 2010 plots (example and link below)... Note that monthly payment to rent ratio was less than 1 at the end of 2010. Rents have risen, prices are flat and interest rates jhave dropped, so this is still the case.

Rich Toscano plotRich Toscano plot

http://piggington.com/shambling_towards_...

Also, note that payment-to-income ratios are well below half what they were at the peak.

Buy houses now. They are underpriced !

Submitted by outtamojo on October 26, 2011 - 10:07am.

[Shhhh, keep this quiet, I wanna get another rental some time next year]

Submitted by patientrenter on October 26, 2011 - 6:43pm.

ninaprincess wrote:
This house, sold for $630,000 and now sold for $400,000.

Maybe I am not as good at math as I thought, but 400/630 is 63.5%. So the house is now 36.5% cheaper than before. If you can't afford to buy the house, you can get financing, and the financing may have dropped in cost as well. However, the house price is down by 36.5%, not over 50%.

Submitted by sdrealtor on October 26, 2011 - 6:51pm.

Correct on price but part of the cost of buying a house is interest charges and including that its half.

Submitted by FormerSanDiegan on October 27, 2011 - 8:17am.

patientrenter wrote:
ninaprincess wrote:
This house, sold for $630,000 and now sold for $400,000.

Maybe I am not as good at math as I thought, but 400/630 is 63.5%. So the house is now 36.5% cheaper than before. If you can't afford to buy the house, you can get financing, and the financing may have dropped in cost as well. However, the house price is down by 36.5%, not over 50%.

Here is a clue:

1. Compute the total cost over 30 years for buying the 630K house in 2006. Call that A.

2. Compute the total cost over 30 years for buying that same house for 400K in 2011. Call that B.

3. Divide B by A, then multiply by 100.

Submitted by scaredyclassic on October 27, 2011 - 8:55am.

Interesting. My place would cost about 38 percent of 06 payment. I was excited About thistried to tell my wife this but she said who cares?

Submitted by barnaby33 on October 27, 2011 - 9:01am.

So you are all comparing current pricing to peak insanity with loan products that aren't available anymore and almost zero wage growth yet 15% cost of living inflation(using other posters number, not my own). Wow there is some VERY fuzzy math going on here. I'm lucky in that I've gotten a 3% raise each of the last two years. Most people who have a job, haven't.

Anywho, congrats on finding that payment that is half what it was at peak! What was your name? I thought I heard Harry Howmuchamonth.

Josh

Submitted by scaredyclassic on October 27, 2011 - 9:06am.

True. And yet, still interesting.

Submitted by AN on October 27, 2011 - 9:17am.

What's wrong with comparing monthly payment? Unless you're paying cash for your house, interest rate plays a big part. If you think money payment is FUZZY MATH, then compare total cost of buying that dwelling (P+I).

Submitted by sdrealtor on October 27, 2011 - 9:18am.

barnaby33 wrote:
So you are all comparing current pricing to peak insanity with loan products that aren't available anymore and almost zero wage growth yet 15% cost of living inflation(using other posters number, not my own). Wow there is some VERY fuzzy math going on here. I'm lucky in that I've gotten a 3% raise each of the last two years. Most people who have a job, haven't.

Anywho, congrats on finding that payment that is half what it was at peak! What was your name? I thought I heard Harry Howmuchamonth.

Josh

Josh
What makes it all interesting and puts it into context are the graphs on Rich's post from last February "shambling Toward Affordability" which weas written when both prices and rates were higher.

BTW got an amazing wine event in a few weeks if you want to drink amazing California cabs from early 90's.

Submitted by FormerSanDiegan on October 27, 2011 - 10:10am.

barnaby33 wrote:
So you are all comparing current pricing to peak insanity with loan products that aren't available anymore and almost zero wage growth yet 15% cost of living inflation(using other posters number, not my own). Wow there is some VERY fuzzy math going on here. I'm lucky in that I've gotten a 3% raise each of the last two years. Most people who have a job, haven't.

Anywho, congrats on finding that payment that is half what it was at peak! What was your name? I thought I heard Harry Howmuchamonth.

Josh

Josh -

There is nothing fuzzy about this. Housing is the cheapest it has been on a relative basis by almost any fundamental metric (price to income, price to rent, payment to income and payment to rent ratios) since maybe the 1960s.

If you look at those fundamentals it reminds me of 2004, when clearly things had swung too far in terms of fundamentals. But, momentum was still up, psychology was still too positivs, and the economy was still creating jobs at a reasonable pace. So, we had to wait another year or two for some spark to set off the reversion to the mean.

Well, here we are in 2012 (almost) with price ratios that are well-below long-term averages, momentum is negative as is sentiment and the economy is not creating enough jobs. Very few can see a price ratio reversion to the long-term mean. There is no obvious mechanism to spark that reversion and the vast majority do not expect it.

This is the exact time when those that are contrarian should position or protect themselves against that reversion. It may not happen for another year or two, but it will happen.

Submitted by scaredyclassic on October 27, 2011 - 11:03am.

That was a great comfort to me during escrow, normal people telling me I was doing something dumb.

Submitted by barnaby33 on October 27, 2011 - 11:04am.

FSD, I posted because I disagree. Housing is only cheap because of unrealistic financing. Housing will be fairly priced when we return to historic norms for ALL the important aspects of how housing is priced, including incomes AND interest rates. Its only cheap if you ignore risk. Risk is NOT intangible. Unemployment is high and probably going higher. Interest rates are driven to lows only because our govt is buying all the mortgages and subsidizing risk at a huge level. Costs for everything basic are surging MUCH faster than increases in income. Its nuts to say housing is affordable.

I've had this argument with Rich several times over dinner. I suppose the way I view it is that in order for housing to recover it has to be fairly priced. In order for fairly priced to occur, employment must be on the rebound or at least stable. Lenders must also be accurately compensated for the risk of lending money. One other often overlooked issue is rising taxation. Too many of the unspoken assumptions in this and many other threads are that none of the fundamentals have changed radically. If nothing else this period of instability should point out that many of those either no longer are true, or are due to be changed in the near future.

If you just look at the statistics of rent to own in aggregate I'd agree that things aren't awful. Of course, again you are making assumptions that the rest of the "market" is functioning normally as well. One of those assumptions is that rent to own ratios encompass a very broad swath of society. In the US where unemployment hovers near 10% I don't think that's a valid claim. If unemployment were close to average sure. So now there are two problems I have with that metric. One it covers a much smaller group of people than it used to. Second there is no compensatory stat for those who aren't covered and probably aren't working. That's just one of the traditional metrics that people use. There are of course others.

Submitted by jstoesz on October 27, 2011 - 11:48am.

barn,

spot on.

Submitted by FormerSanDiegan on October 27, 2011 - 12:14pm.

Josh -

I diagree that housing is only cheap because of cheap financing. The ratio of price-to-income or price-to-rent rent are belwo long-term lows... independent of rates.

And, despite low rates, availability of cheap financing really is not pervasive.

I do agree that the other factors you discuss are key: jobs, economy, and rtaxation.

But, I would view jobs as one of the key potential levers that can act as a trigger to allow prices to revert back to norms. ... when that happens is anyones guess.

Submitted by sdrealtor on October 27, 2011 - 1:05pm.

Josh
For prices to drop substantially around here we would need to see high rates...much higher interest rates and the payments would likely be higher than today as prices would most likely not drop by as high a percentage as rates rise by. In that scenario are you personally any more capable of a buyer? Do you have a big pile of cash set aside?

Submitted by AN on October 27, 2011 - 1:53pm.

sdrealtor wrote:
Josh
For prices to drop substantially around here we would need to see high rates...much higher interest rates and the payments would likely be higher than today as prices would most likely not drop by as high a percentage as rates rise by. In that scenario are you personally any more capable of a buyer? Do you have a big pile of cash set aside?

Totally agree. Unless you're an all cash buyer, total cost of purchase (P+I) is more important than just the price.

Submitted by scaredyclassic on October 27, 2011 - 2:14pm.

Still, no one likes to be called Harry howmuchamonth. What is his opposite? Neil kashkarry?

Submitted by UCGal on October 27, 2011 - 4:23pm.

walterwhite wrote:
Still, no one likes to be called Harry howmuchamonth. What is his opposite? Neil kashkarry?

Love your wordplay, WW.

(for those that didn't get it - look him up with his name spelled right.)

http://en.wikipedia.org/wiki/Neel_Kashkari

Submitted by patientrenter on October 27, 2011 - 5:06pm.

sdrealtor wrote:
Correct on price but part of the cost of buying a house is interest charges and including that its half.

Interest charges play no part in the cost of buying a house - unless you happen to be unable or unwilling to pay the purchase price with your own money.

Americans have become so used to stratospheric prices for homes, way beyond what they can afford, that they assume financing is an automatic part of the purchase process.

Submitted by barnaby33 on October 27, 2011 - 5:36pm.

For prices to drop substantially from here all we'd need is any one of a number of things to go differently. Not even wrong, just different.

For instance one of the major banks could be forced to divest itself of its foreclosures to raise capital. Flooding the market with inventory seldom raises prices.

Another for instance is the economy worsening at a rapid pace, something I feel is pretty likely. Less buyers, same number of houses, falling prices.

On the interest rate front, I'm guessing as the presidential race heats up Foney and Fraudie are going to come back up. Putting them in run down mode would almost certainly lower prices.

A blow-up of the Euro while nominally good for the dollar would actually probably be good for prices. So see there is something to look forward to.

Back to the intent of the OP, payments! The only reason why prices haven't fallen more and payments risen is because the govt is subsidizing risk. Almost every person who buys now is gambling that they will be able and willing to keep doing so. Hell I'd buy if I could find something I'd want to live in for ten years that I could afford. However still being in the top 20% of the income bracket and debt free doesn't seem to get me there. That more than anything else tells me we haven't seen bottom.

Enjoy your low monthly payment sir, it comes at an evil cost. When the govt is incentivizing you to do something, its usually not a good idea.
Josh

Submitted by sdrealtor on October 27, 2011 - 6:09pm.

patientrenter wrote:
sdrealtor wrote:
Correct on price but part of the cost of buying a house is interest charges and including that its half.

Interest charges play no part in the cost of buying a house - unless you happen to be unable or unwilling to pay the purchase price with your own money.

Americans have become so used to stratospheric prices for homes, way beyond what they can afford, that they assume financing is an automatic part of the purchase process.

Huhh? Unless you pay cash the financing costs are part of your costs. It is really that simple and most primary homebuyers do not, never have and never will pay cash. You are arguing a loser case.

Submitted by patientrenter on October 27, 2011 - 7:34pm.

sdrealtor wrote:
...most primary homebuyers do not, never have and never will pay cash....

Make that most modern American homebuyers.

It is sad that a practice - financing - designed to allow some people to temporarily stretch beyond their means to buy a home has become so ingrained that modern Americans think it's normal. If home prices were not inflated by a host of government interventions, and the practice of home financing were not subsidized in any way by the government, home prices would drop to a level at which many buyers could actually pay for the homes. By "pay", I mean handing over one's own real money... you know, the stuff you have in the bank, that's not borrowed temporarily from someone else.

I agree, paying real money for homes at real prices is now an alien concept to most Americans. Home financing makes Wall Street - and existing homeowners and real estate agents - so rich that they have completely integrated it into our system and culture.

When China finally becomes a country with a normal level of saving, the glut of global savings will dry up. When that happens, a lot of the extra financing we take for granted today will shrink. Until then, we live in a world of inflated asset prices, held there by a wall of money from Chinese savers, mostly loaned to US institutions (like the govt) that then funnel it to the US asset markets.

Submitted by outtamojo on October 27, 2011 - 8:35pm.

patientrenter wrote:
sdrealtor wrote:
...most primary homebuyers do not, never have and never will pay cash....

Make that most modern American homebuyers.

It is sad that a practice - financing - designed to allow some people to temporarily stretch beyond their means to buy a home has become so ingrained that modern Americans think it's normal. If home prices were not inflated by a host of government interventions, and the practice of home financing were not subsidized in any way by the government, home prices would drop to a level at which many buyers could actually pay for the homes. By "pay", I mean handing over one's own real money... you know, the stuff you have in the bank, that's not borrowed temporarily from someone else.

I agree, paying real money for homes at real prices is now an alien concept to most Americans. Home financing makes Wall Street - and existing homeowners and real estate agents - so rich that they have completely integrated it into our system and culture.

When China finally becomes a country with a normal level of saving, the glut of global savings will dry up. When that happens, a lot of the extra financing we take for granted today will shrink. Until then, we live in a world of inflated asset prices, held there by a wall of money from Chinese savers, mostly loaned to US institutions (like the govt) that then funnel it to the US asset markets.

I read this and immediately thought of this somewhat racist and sexist piece (Tongue-in-cheek, of course)
http://tntstocks.blogspot.com/2011/10/wh...

Submitted by equalizer on October 27, 2011 - 9:05pm.

Josh,

For San Diego, the rents have been somewhat stable over the last few housing crashes. For many condos, it is breakeven to purchase or rent, minus the 20%, but with banks paying 0% it sure it enticing for many to lock in fixed 30 year payment. If inflation continues, rents will not go down unless unemployment keeps going up with the accelerated decimation of the middle class.

2,000 people a day may think about leaving San Diego (reference to pithy "2,000 people a day are moving to FL" catchhrase, circa 2005 ), but not that many do. Canadians and other foreigners with money are purchasing some places here.

Even a Republican President would not dare to upset the entrenched housing subsidies.

Submitted by scaredyclassic on October 27, 2011 - 9:07pm.

governments don't like rapid changes.

it's socially disruptive.

Submitted by hslinger on October 27, 2011 - 9:51pm.

patientrenter wrote:
sdrealtor wrote:
...most primary homebuyers do not, never have and never will pay cash....

Make that most modern American homebuyers.

Are you making a case for returning to the financial systems of the 1920's and earlier? Can I borrow your time machine?

Submitted by sdrealtor on October 27, 2011 - 10:30pm.

It seems to me that the house my parents bought 50 years had a mortgage as did all of our neighbors. Would that be Modern home buyers also?

Submitted by FormerSanDiegan on October 28, 2011 - 9:32am.

patientrenter wrote:
sdrealtor wrote:
Correct on price but part of the cost of buying a house is interest charges and including that its half.

Interest charges play no part in the cost of buying a house - unless you happen to be unable or unwilling to pay the purchase price with your own money.

Americans have become so used to stratospheric prices for homes, way beyond what they can afford, that they assume financing is an automatic part of the purchase process.

Do people pay for a lifetime of rent in a lump sum ? No, we pay as we go in N-months-at-a-time payment plans based on future earnings.

Buying a house with borrowed money is not that much different, just a different set of risks in the short/long term.

Submitted by patientrenter on October 28, 2011 - 8:41pm.

hslinger wrote:
....Can I borrow your time machine?

Sure. It just needs an anti-gravity drive right now, so bring a spare one of those :)

As for the analogy with rent, well that's the difference between renting and buying. Renting is paying a little every month, for the use of the property every month. Buying is paying everything up front for all future use of the property.

Financing is the process of borrowing money to make buying feel a little closer to renting. Modern Americans, especially in the worst bubble zones where prices have become unaffordable, have come to rely so heavily on financing that they think that buying is the same as financed buying.

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