Flutterby™! : Buyer's bubble 2005-09-26 14:44:07.163212+00

Buyer's bubble

2005-09-26 14:44:07.163212+00 by Dan Lyke 6 comments

Ahhh, that wacky Bay Area real estate market: Why own when you can rent?:

From my knowledge of real estate prices, I knew I'd pay at least $500,000 to buy the place. My taxes alone would be $500 a month. My monthly payments, if I put no money down and got an ultra-attractive 5.1 percent interest rate over 30 years, would total $2,700. With $500 a month for maintenance and another $150 for insurance, my total carrying costs would be close to $4,000 a month.

That's not bad, but I can rent the whole place for $1,600 a month. That's a cash savings of $2,400 a month.

Yea.. that savings of $2400 per month can earn you good money elsewhere. What was left after buying my place is in conservative long term mutual funds making just under 30% per year. I figured buying a below market distressed property for cash with no interest, and fixing it up was a no-brainer for a long term investment. But if I had to make payments, I'd have to work a real job. :)

The other side of the whole 'buying a house (with "help" from the bank)' thing is so many people become 'house poor', and have no money for other things. They over-buy, evaporating their 'disposable income' and then have no funds for other things. Then, as just happened to a friend, they lose a job or have to change jobs, and they sell their house cheap and quick, losing equity, because they can't make the payments.

The "American Dream" of owning a home, especially the big ones with a large yard, is a farce promulgated by the Real Estate Industry including banks and lenders at the cost of other things. Ranting on: Many of the homes I'm seeing built nearby (250k+) remind me of 'stage props', weak facades of marginal construction quality that require lots of maintenance, utility costs, and creative financing.

We should be looking for better quality, features and livability rather than the current trend of micro-mansions... most of which is wasted space. Done right, these features should also cost less in the long run (less painting, roof replacements, energy costs..) allowing you a much better overall quality of life and financial options.

Me? I'm exploring 'lifetime/permanent' roofing systems 'cause I got to replace a 16 year old roof...

I've been thinking similar thoughts here in Seattle. I rent my studio apartment for $700/month; a comparable condo would cost at least $1200/month, depending on interest rate, condo fees, and property taxes, and that includes the federal tax credit. I've been hearing for years that property is the first investment anyone should make, that it's financial foolishness to throw money away on rent when you could be building equity instead, but the numbers just don't add up for me. Ignoring continued bubble-driven price inflation, which I am not willing to bet on, I'd make just as much money dumping the difference into a mutual fund every month, and I'd still be able to turn on a dime if circumstances changed. Screw that - I'll look at property again when the bubble is popped nice and flat.

The bubble is bursting? Oh please. Not here it's not. Maybe out in nowheresville, but not in the Bay Area.

Yeah, I was blown away to see them building new houses on Mare Island. Sure, it's got some nice spots, but they were building expensive new frame houses, right next to large concrete weapons storage bunkers and huge warehouse/construction buildings that are also being used by companies. Housing issues are insane in the bay area.

Diane, think of housing in the Bay Area as stuffed animals. Think of real estate ownership in the Bay Area as Beanie Babies brand stuffed animals.

Housing in the Bay Area is very desirable, but rents have been falling for the past 5 years. To go back to the analogy, stuffed animals got more expensive when Beanie Babies started their rise too.

I don't think that's necessarily news that you should sell, long-term the Bay Area is a desirable place to live and I've been proclaiming gloom and doom for years, but if you treat real estate as a market timeable commodity... well... the people I know who have rental properties are selling them off.