The truth about Bay Area real estate appreciation (Redwood City, Mountain View: to rent, mortgage)
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Was nothing learned from the 2008 collapse? It's not exactly ancient history, so people can't claim to have forgotten it. I guess "this time it's different," as always.
"No money down" and "no doc" loans are in a different class than a 3% down with PMI, but it is clear that we're going in the wrong direction again. This "recovery" has not put any money in the pockets of the average joe - it's the massively wealthy that are snapping up real estate and renting it to the desperate. The banks are hungry to get any part of this run-up in prices, so they're trying to find ways that people can get financed within the current regulatory framework at the current inflated real estate valuations.
Historically there were always ways to put no money down. Second mortgages were the most popular. Now? Good luck. It takes some special voodoo to truly put no money down on a home.
I bought a home 3 months ago. And I did so after living in a one bedroom apartment for 6 years for a family of 3. I am single income earner and it was very difficult for us to save. I needed 10% down. I have a 15% HELOC and a 75% 7/1 ARM. For me, this is way more risk than I want to take on. If HELOC rates go up soon, I will be in a difficult situation. What I found during the buying process was that there is a LOT of attention to how you came up with your downpayment. There is a LOT of attention to how much you make. SO I think the banking system is cautious. What surprised me was the availability of the HELOC. Some bank gave me a HELOC for more than my equity in the house (their 15% vs my 10%). This is the real risk. And the payment on my HELOC is interest ONLY. There is a real danger that it could lull me into a false sense of positive cash flow.
I am afraid I bought at or near the top. But I could not afford to play the waiting game.
However, there is an interesting mechanic going on behind the scenes here. I'll give the example of my parents. They bought a 3,300 square foot, 4 bedroom house in 1989, then at the peak of a bubble, in a quiet Bay Area suburb, with a lake view. They paid $432,000. Now, in 2015, the house is valued at approximately $975,000. Most people would look at those numbers and say they won the real estate lottery and have gotten far greater appreciation than most Americans.
What those figures don't tell you is that in 1989, the average interest rate for a mortgage was 11.24%. Over the course of 30 years, with a down payment of $32,000 on a loan for $400,000, you would have paid $1,348,800 in interest and ultimately a total cash outlay of around $1.8 million by the time it was paid off.
But, nobody keeps a high interest loan forever. In reality, people re-finance as soon as they have the opportunity. The rates you refer to came down slowly until in five years they were 7-8% and then over the next few years, 6% and so forth, until you come to the QE policies of the last decade "ie, spend like a drunken sailor..its only Monopoly Money anyway!". And, its also a tax exemption, so while there is a lot of expense associated with double-digit mortgage rates, the true cost is far lower - especially if you were a high-income family in the Reagan-Clinton era with effective federal tax rates in the high 20s. BTW here is a good viewpoint on this, speaking of comparing 1989 to today:
-average federal tax rates for both the top quintile and the 1% are exactly the same
-everyone else's taxes are lower
Quote:
Originally Posted by sonarrat
The interesting thing about this whole dynamic, though, is that after 2 decades of falling interest rates, they're about to start going up again. The Fed rate is at zero and has been for years. This has kept interest rates low, and people who were fortunate enough to buy in 2011-2012 are going to be super happy for a very long time, but the Fed has signaled that it is going to tick upwards to prevent an out-of-control runup in the economy (even though that has already happened in stock valuations).
I don't see that happening anytime soon and certainly it isn't something that the FOMC is going to do in an election year - unless they really want to guarantee a GOP landslide. And they surely do not. BTW, the Fed discount rate is not zero, its .75%. And the federal funds (interbank) rate is .25%. So there is 1% right there. Anyway, there isn't really any argument to be made in favor of raising the rates. It doesn't change the calculus for the government, except they will get a lot less revenue with higher interest rates because borrowing will dry up and the economy will not grow. There is also no danger at all of the economy growing too fast as it has been basically in stagflation for the last 8 years - it hasn't grown nearly enough to compensate for the inflation during the same period.
Quote:
Originally Posted by sonarrat
My advice to anyone looking at this market is to carefully consider their situation and how conditions are likely to change within the next 10-20 years. I think it looks ugly. The prospect of rising interest rates without wage growth doesn't give me a lot of confidence in the future of the market. If you really just want to set down roots in a wonderful area with beautiful weather and are willing to ride out a period of turbulence and uncertainty, I won't go any further to dissuade you. If you are coming here chasing after capital appreciation and investment, planning for retirement etc., I would be extremely skeptical and hesitant to even think about the Bay Area real estate market.
I agree with this wholeheartedly. Real estate shouldn't be viewed as an investment unless it actually is an investment (not owner occupied) and is cash flow positive. The kinds of appreciation we have seen in the high-end areas of the Bay Area are unique because they are a response not to monetary policy or tax policy, as real estate growth often is, but rather just a gross excess of demand and temporary capital enabled by the stock bubble. While the outlying areas have had appreciation in line with inflation, the Bay Area proper is indeed a good example of a true housing bubble. When that does crash , it will wipe a lot of people out completely - because they will lose their entire investment (not hard to do when you have so little equity and the prices are so high). In fact, a 25% decline in housing prices would put most people who have purchased homes in the South Bay in the last 5 years under water. That's a precarious position to be in, and a lot of buyers are in that position. Even if they were able to put down 25%, they will still be under water because they can't get out of the property without large sales costs, and the taxes will lag the actual collapse of the bubble, since it takes time to trigger re-assessments. Look at Cupertino for instance...average tax bill is over 20K a year for the average property purchased in last two years. That's a lot of money to absorb when you don't have income or appreciation - which when the market turns, will be the case.
"I'll give the example of my parents. They bought a 3,300 square foot, 4 bedroom house in 1989, then at the peak of a bubble, in a quiet Bay Area suburb, with a lake view. They paid $432,000. Now, in 2015, the house is valued at approximately $975,000. Most people would look at those numbers and say they won the real estate lottery and have gotten far greater appreciation than most Americans."
Location, Location, Location!
I don't believe that your parents house bought in 1989 at 432K, and now only 975K.
From that period, there at least 3 times at make the housing prices move.
1-Dot com era 1999-2000
2-House boom era 2004-2006
3-Current era...
If your parents bought at 432k in 1989. Now it should be worth at least 1.4-1.5M
You'd expect that, but its probably just in an outlying area or commute inconvenient. Its not in Santa Clara County (or if so, really remote, like up in the Los Gatos mtns...or Gilroy/Morgan Hill), or perhaps in Marin, Contra Costa, or Solano county. Places where if you wanted to get to Silicon Valley, it takes two hours in the morning. The appreciation in places like that will usually lag that in "hot" areas like Cupertino or Mtn View/PA, etc.
But here's another way to look at it - adjust for inflation. That property purchased for $432K in 1989 would need to be worth at least $813K just to break even....if you exclude transaction costs. If you include the transaction costs then it needs to be worth another 3-5%, or another $25-40K. Plus think about the cost of maintenance and improvements. At $975K, there is really very little true appreciation - who hasn't incurred some major expense like a roof or remodel of a kitchen or bathroom since 1989? If anything this just demonstrates that residential real estate continues to be, on average, a rather poor investment. Its fine for a place to live. Its just not a very good investment.
My HELOC was from TCF. Very few banks do this loan. I have a history of predatory behavior from TCF. So if you are in the same boat as me , you will go with one or two banks that do the HELOC. The primary in my case was sold to freddie Mac. I found this arrangement through the builder's lender broker. Other lending brokers also had similar products. It goes without saying , you pay a pretty high premium to get financed. I have 3.675 ROI for a 7/1 ARM which is a good 0.5 % above what you would get with 20% down.
Quote:
Originally Posted by king408
aramax,
Where did you get the HELOC from? I cannot find any local banks that will go over 80% LTV. You can send me a private message if you prefer.
In fact, a 25% decline in housing prices would put most people who have purchased homes in the South Bay in the last 5 years under water. That's a precarious position to be in, and a lot of buyers are in that position.
I certainly am right dead center in there. I would be wiped out. I try to make my plans with the assumption that this scenario will unfold. i.e diversify my risks in investment not tied to the fortunes of the bay area tech. I have bitten the bullet, so now I must persevere.
I certainly am right dead center in there. I would be wiped out. I try to make my plans with the assumption that this scenario will unfold. i.e diversify my risks in investment not tied to the fortunes of the bay area tech. I have bitten the bullet, so now I must persevere.
Yah, good strategy. I personally just don't view owner occupied housing like an investment. It is great to be able to enjoy enough appreciation to keep ahead of inflation, of course, but expecting some kind of a gain, is really just not realistic.
Now, oddly enough, tax policy in the US does not actually reward homeowners through the mortgage interest deduction the way that the Left always alleges, because the gains are factored on a raw basis - and not adjusted for inflation . So you basically wind up paying the government for their horrible monetary policies - its actually a big penalty, that I think you will see is not offset by sheltering the mortgage interest from taxation. Because even though you might have a big paper gain, the cost basis doesn't get inflation adjusted - so you wind up paying 25% or more in cap gains even if the entire gain is illusory, and due only to inflation. So you actually need to have a lot of actual appreciation to make up for that. Nobody is "cheating the system" or not "paying their fair share" just by using the mortgage interest deduction.
I don't view my house as investment. But I do have most of my money tied to it. Thats a shame.
It is a place where I live and play and sleep. I would be ecstatic if the thing even holds its value 5 years from now. BUT It really comes down to timing from the looks of it. I graduated in 2008 and the memory of the downturn is pretty heavily impressed upon me.
You may be right about the illusory gains in real estate, but there is a 10x or 5x leverage that is pretty powerful, whether it moves against you or for you. That and the discount on the mortgage combined with the capital gains exemption in sale are very strong incentives, IMO.
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