Buy or Don’t Buy?

[powayseller]

Hey Chris, as always, great commentary from you…On another thread, a poster argued that leverage can be used to your advantage to make money, and he gave some examples how he made money in RE using leverage. However, as you noted, people with money don’t use leverage. Look at Warren Buffett. He uses cash to buy billions of dollars worth of shares in the companies.

Anyway, great common sense advice. If you can’t buy it with 20% down, 15 yr or 30 yr fixed, at 30% DTI, you can’t really afford it.

[powayseller]

duplicate

[Anonymous]

I disagree that people with money don’t use leverage. In fact, people with money should be using leverage. If the bank is going to give you a 5% mortgage (or any other loan), a savy investor can easily make much more than 5% with other investments. Why should they pay cash for a house, that is stupid. I’ll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money.

The problem we are in now is that lower middle class people are leverging themselves. In the past, these ARMs and interest only loans were only used by speculators who had plenty of money, they were just taking advantage of the system. What’s happened in the last 5 years is that loan standards have decreased so much that regular people are using these products. The difference is that they are using these out of necessity because they can’t qualify for conventional loans.

So bottom line, leveraging is smart for people who have money and know what they are doing. But today most of these loan products are being used by people who can’t afford a conventional loan, that is exactly what is going to cause the house of cards to fall (I agree with your 40-50% prediction in san diego).

[powayseller]

Docteur made millions on his last deal, and paid off his house. I think it was a wise move. I bet Warren Buffett paid off his house too. My former neighbors are $10K away from paying theirs off.

Why do people who can afford to, pay off their homes? Because they can.

Besides, where else can you get a 5% return? Maybe in a CD, but after taxes, you’re easily down to 3.5-4%. In the stock market? Not risk free. You risk losing principal. As a matter of fact, many investment pros are now advising people to get out of the stock market (Bill Fleckenstein, Barry Ritholtz, Yakamoto Forecast, Zeal Newsletter, economist Joseph Ellis).

The days of the carry trade are over. No longer can you borrow at 0% from the Bank of Japan, or at 3% from your home, and hope to make more money in stocks. Interest rates on homes are high, and the stock market is overvalued.

I am curious though, where you can do better than the interest rate on your home, without taking on more risk?

[Anonymous]

You will never convince someone who is inclined to use leverage to the hilt, to be careful with it. Just like the people in 99 and 2000, that I told to go to cash in stocks.

There is a time in life for leverage. That time is not at the end of a 10 yr up cycle in pricing.

[hipmatt]

My humble $.02
RENT! RENT! RENT!
Theres no way that if you believe most of what we believe(on this board) that you could even propose the question without already knowing the answer. It is so dangerous to buy a home at this time, especially a 800k home with only 5% down. Rent for about 4-6 years, save up at least 20%(20%now=160k, in five years it may be only 80k) and pay much less for your home. If you decide to move, you won’t kill yourself.

[4plexowner]

Never mind

[Raybyrnes]

You could have put 30K in an I bond and it was paying 6.71% Tax free

[sdrealtor]

[quote=deadzone]I disagree that people with money don’t use leverage. In fact, people with money should be using leverage. If the bank is going to give you a 5% mortgage (or any other loan), a savy investor can easily make much more than 5% with other investments. Why should they pay cash for a house, that is stupid. I’ll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money.

The problem we are in now is that lower middle class people are leverging themselves. In the past, these ARMs and interest only loans were only used by speculators who had plenty of money, they were just taking advantage of the system. What’s happened in the last 5 years is that loan standards have decreased so much that regular people are using these products. The difference is that they are using these out of necessity because they can’t qualify for conventional loans.

So bottom line, leveraging is smart for people who have money and know what they are doing. But today most of these loan products are being used by people who can’t afford a conventional loan, that is exactly what is going to cause the house of cards to fall (I agree with your 40-50% prediction in san diego).[/quote]

Post number 2

“I’ll gladly accept that 5% from the bank and turn it around into the stock market. I bet that in the long run I can make 10-15% easily with stocks or other investments. That is basically free money.”

Did not get 5% money from the bank, did not make 10-15% a year in the long run with stocks

“So bottom line, leveraging is smart for people who have money and know what they are doing.”

Hurray! You got one! Too bad you did not take your own advice. But we all did!

[s_county]

Survivorship bias ? A lot of people were caught with their pants down in 07-09

They also got the 40% drop right- even today you can see homes bought in 2006 sell for just 100/200k more 15 years later

[Author]

Posts