One Step Ahead

[santeeman]

"I'll buy wherever and whenever there is value. If there is a home in Temecula that generates free cash flow that produces 12% Return on Investment and carries a 25% margin of safety then great."

 

Good luck finding a property in Temecula (or anywhere else around here) that you can find profitable. The taxes/mella roos alone(not to mention HOA) in Temecula are probably half the rental price.

[one_muggle]

Raybyrnes , I don’t think one needs to be arrogant to think that it is the market that is nuts, and not oneself. In 2001 people were claiming a housing bubble in LA, simply because prices had gone up–which they hadn’t been doing for years. But one look at the fundamentals would show that it likely was coming out of a period of undervaluation.
Looking at those same fundamentals, the markets in SoCal are excessively overvalued by most every metric.
The only possible alternative to massive overvaluation is the emergence of a new economic model, and while this is possible as with the industrial revolution where manual labor was rendered ever less valuable, it is unlikely. To what does one attribute a completely new valuation for US RE? The internet? Globalization? Over the long term, both tend to drive prices down, not up, as better information and easier access to other markets brings efficiency.

The last time I heard that hundreds of years of business sense and economic theory was the old way of doing things was in the late 90’s stock market. Many people were making serious money day-trading without knowing what they were doing, while others that “knew better” were saying how crazy it all was. It turns out, it was crazy but some people still got very rich off of the insanity. In 1998 I was expecting it to crash, but over the next year or so, people were still raking it in–then it crashed. The same people that said the enormous P/E’s were justified due to the “new economy” become raving bears overnight, now claiming the market was dead!
The really interesting parallel here is that it took another 2 years for the market to bottom–and that is with highly visible, highly liquid assets (one may see the actual price of their Google stock whenever they choose–unlike houses, and may sell their shares whenever they choose for as little as $10, unlike houses) Still it took 2 years for the market to bottom. How can anyone expect that an illiquid, highly opaque market can find a bottom in less time is beyond me.

There are few positive surpises left, such as loose lending practices or low rates, huge inflow of foreign capital, to boost prices. Significant salary increases might do it, but businesses tend to see that as labor costs, which are inflationary. At the same time, several negative surprises are possible, such as natural or manmade disasters, increase in unemployment, high inflation, much higher rates, strict lending practices (already happening), slowdown in foreigners purchasing our debt or massive foreclsures as Wall Street pulls money out of mortgage backed securities (already happening).
It is true that no person knows what will happen, but in terms of mathematical probabilities the expected value falls heavily on negative rather than positive appreciation.
-one muggle

[Raybyrnes]

one_muggle

I 100% agree with everything you are saying here. Where I tend to disagree with the general audience is on this presumption that the market will bear fruit in 1 year or 2 years or whatever arbitrary timeline they are predicting. There are plenty of circumstances that buying today make sense for many people. They found the right house, they plan on staying, the spouse went back to work, the seller wants out and has cut prices. To arbitrarily say that you should buy or not buy and apply this to an entire audience is just nonsnese. Each specific situation needs to be evaluated on it’s own merits.

That is why I posted the reccomendation that money be borrowed against a home for MY FATHER 6 months ago and invested in the stock market. With good credit money could be borrowed for 5% on a 15 year mortgage. There was more upside in the market than his home, the tax deduction provided a margin of safety and if the market went in the opposite direct he had a huge reserve that allowed him to sleep at night. Posters lambasted this idea. It was not right for everyone but it was right for him. Market had a great return, leverage enhanced returns, and he now has a tax deduction to boot.

There are a lot of good posts wher people bring a lot of logic to the table and back it up. There are alos a lot of opinion that get thrown out as if they were facts and this is the arrogance that I speak of.

[PerryChase]

Buying now is still a bad idea regardless of income. You should not buy when you can rent the same house for 1/2 the cost. One house in my neighborhood went for sale and rent at the same time. An inhabitant would be nuts to buy when he can rent that very same house for 1/2. Guess what? Renters just moved in.

Tax deduction is over-rated. You need income to deduct from. Many middle income families with kids don’t fully take advantage of their interest deductions. Retirees usually don’t benefit from the mortgage interest deduction. The “potential” tax break is what Realtors like to propose. But I’m willing to bet that it’s never that for most buyers.

[Raybyrnes]

Your argument about the income tax deduction being over rated is the same old garbage that every other person on this forum has already stated. What if I have 3 kids getting ready to go to college smarty pants. That mound of cash gets fully incorporated into the Financial Aid formula and I get little or no assistance. Real estate on the other hand does not . So I can be house rich and cash poor and now my educational costs get cut in half. Combine this benefit with the tax deduction and things start to make more sense. I have yet to see enyone mention this as a benefit. Oh I guess that everyone has just been super planners of the world and fully paid for there kids college tuition by funding the 350 a month in their kids 529 account and have been fortunate enought to get 10% year over year rate of returns. The tax deduction being overrated is garbage. It is a component that is extremely important. It is like saying that taxes are unimportant when buying and selling stocks. Is it the only variable to consider. Of course not. Is it important. Over time you bet.

There is something new for you. Now tell me financial aid is overrated and start complaining about how your kids are being deprived because you are doing well.

[PerryChase]

I’d say that planning to be cash poor but house rich by the time your kids reach 17 is bad idea. But that’s just me. I have no kids.

In order to be house rich (i.e. have a large mortage) you have to have pretty good income. If that’s the case, your kids are unlikely to get grants. They’ll get loans which they’ll have to pay back. Better to teach your kids so they are smart and get full scholarships.

[Chance the Gardener]

Financial aid is overrated. Show me a college student, or worse a graduate student, who has actually done the math and figured out whether the debt service is worth the increase in income. Some of this country’s biggest problems have their root in the obsession with the 4-year college degree and the MBA. Where are our future tradesmen, craftsmen, artists? No wonder why everything new is built of ticky-tacky and it all looks the same. Go to college if you can pay cash. Reserve financial aid (in the form of grants) for kids who are smart enough to realize that they need to pay cash for the difference. No cash? Take up a trade. Live under your means. Save. Then go if it still makes sense.

[PerryChase]

I’m not saying that tax considerations are unimportant. But the extra tax deduction from buying is not Interest + Property Tax. It’s that amount less the standard deduction. Because of the standard deduction ($10,300 for married filing jointly), the tax savings from buying for modest to middle income families is not as great as advertized.

For example, if a 60k/year family at a 20% tax bracket were thinking of buying, and they were contemplating paying $20k/year in mortage int + property tax; their tax savings would be $9,700*.20=$1,940 (and not $4,000 as often advertized by agents).

I’m pretty sure that for many families, if they did their tax returns with standard deductions and compared those same returns with Interest and Prop tax deductions, they’d see that they didn’t save as much money as they expected.

[Raybyrnes]

Perry,

You are an extremely misguided soul if you think that teaching your kids is going to get them a scholarship. I graduated forma college where the average SAT was 1500. There are tons of smart kids out there are very few scholarships so the idea that I am going to cross my fingers and hope that they get scholarships is rediculous. With respect ot being cash poor I think you are writing your statement far too fast. Maybe you need to digest what I am saying and think a little harder about it. I don’t propose that you carry a huge mortage for financial aid purposes. Infact I would say quite the opposite. As the kids approach the college years I might be looking to accelerate my mortgage payments. Worst case scenario if I have planned accordingly I would have an equity line to withdraw form in an emergency situation. I hold nothinbg against against those who use creative mortgages but I am going to have something to put down when I buy.

With respect to kids having student loans I firmly believe that this is one of the best things in the world. They are exposed to financing at a young age. They get a sense of ownership in their own education. They get super low loan rates. They learn how to budget. Do I once again advocate this for everyone. NO. If you are looking to be a dental hygenist or a lower paying occupation then you need to way out the payoff. If you are thinking of being an Investment banker it might be worth stretching for.

[Raybyrnes]

Chance the Gardner.

I think you are right. Ther are not enough quality tradesman. This should be great for those who are in those ocupations as there trade becomes more valued. If you pick up the book The World is Flat you see that there is no way to outsource this type of skilled profession. But you seem to have a very negative impression of education. Me thinks you have envy for those who do have a degree.

Using cash to pay for an education when the government is going to write the check is foolish. Three years ago you could ahve borrowed money through the Stafford loan program at 2.77 % and turned around and fixed the rate for 2.875. With differnt lender incentives the rates got down to 1.625% Paying cash would have been foolish. Get a clue before you make such a ridiculous statement that one should take up a trade if they don’t have the cash.

[TheBreeze]

Raybyrnes, you sound like every other misguided buyer out there. Run a spreadsheet with a 4% depreciation every year for the next five years and see if your tax deduction saves you. I’ll think you’ll find that it doesn’t. However, it sounds like you make your financial decisions based mainly on emotion, so no amount of logical reasoning is likely to sway you. Good luck in your journey to FBdom.

[TheBreeze]

Chance, you are right on the money. I’ve got six years of schoolin’ post high school, and my buddy who didn’t even graduate high school makes almost as much as I do. He’s in a union. That’s six years of lost salary for me that I’ll never be able to make up. Not to mention the student loan debt. Of course, the smartest kids don’t looks for jobs at all, they start their own businesses.

On the plus side for college though, there was a lot more tail at my school than there is in my buddies union. In fact, I’m sure I had more fun during my six years of college than my buddy had during his six years on the job. It’s tough to put a dollar value on the overall college experience.

[Raybyrnes]

Breeze

Re-read my passage. I am not advocating the tax deduction as a the reason to buy. From your passage it appears you are the one making decisions on emotion. Timing a market is fairly ridiculous. There are properties today that can be bough right now that will see very little or no depreciation. I don’t work in real estate so I am not devoting my every waking second looking for them but I am failrly confident that there are people who make a living doing it. As for working a spreadsheet you could equally say that if you did not buy 7 or 8 years ago and elected to rent it would have cost you a whole lot more than your example of 4%.

What I am suggesting is that there are reasons outside of these discussions boards that are factoring into buying decisions. Maybe with your situation not so much. either way I don’t go berating people or call them dumb for buying. Itend to think it more sound to simply asked what factored into their decision to buy.

[sdrealtor]

TheBreeze,
One of my brother in law’s was a Master Electrician. I say WAS a Master electrician. He made more money than his friends who went to college and entered white color professions for about two decades. Then he fell off a ladder and now he is disabled. Not quite earning what he used to.

The returns on a college education for the average graduate are long term and gained through hard work. It’s not a free pass. Your buddy most likely got where he is through hard work as well.

SDR

[PerryChase]

Raybyrnes, I don’t understand your planning tactics. You think that people should micro-manage their lives to arbitrage the spread between a Stafford loan and personal savings. You’re willing to consider convoluted tax implications, but you don’t think that people should rent at 1/2 the cost of carrying a house.

Most people can’t even manage their own finances, much less arbitrage interest and tax rates. Shifting some financial management responsibilities to teenage children is a bad idea.

Rent vs. buy is simple math — carrying cost is $3000/mo vs. rent of $1500/mo. I’m not talking about timing the absolute bottom of the housing market but waiting until it makes financial sense.

Rent/lease vs. buy is the first financial planning analysis any household or business should do. Ask any financial planner/CPA worth his money. Any person who doesn’t at least perform that analyis prior to buying is dumb for sure!

Sure, if you bought already, then you have to find ways to make the best of what you already own.

If you could have $1 today wouldn’t rather bank it rather than spend it on mortgage interest then stress about how to recover it tomorrow, at the expense of own sanity, personal integrity and by involving your children? I don’t have kids, but I did, I wouldn’t want to put them through financial-aid screening appointments every quarter to get something that is intended for students in need. Those are the wrong values to teach your kids. Think about how they’ll feel about their dad’s tactics.

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