I found this interesting, especially the bit about the condos since I am part of that trend (selling a SFH and moving to a condo unit).
The graphs of percentage-down payments looks exactly backwards from what I might have guessed had someone asked me just prior to reading this. In the run-up to the meltdown, most borrowers were still putting between 5 and 20 percent down. (I think that blue line to the left of the 5 value is "3.5%," or the standard FHA down payment.) My guess would have been that the far left of that graph would grow higher as 2008 approaches and then drop after. It doesn't; the 20% line stays as the overall winner, even though 5 and 10 percent down still collectively beat it.
I see that the post frames it as "so many low-down mortgages" but I look at it as "a whole lot of people were still putting 20% down." I wonder if some of this had to do with the appraised value...the value was seen as "high enough" so a higher initial LTV was acceptable because 5% was still sufficient skin in the game. (Oh, who am I kidding? Many loans made in the years prior to 2008 had only superficial relationships with reality.)
It's interesting how perspectives change. If you talk to older folks they will point out that even 20% down was 'low'. I think my father had to have something like half to get a mortgage (late 1960s).
I can't help but wonder if we would have much more affordable housing if it wasn't so easy to get such massive loans relative to their down-payments.
I don't think that's in question; The simple fact is money for housing is cheap right now, which means it requires more of it to convince owners to part with their assets as most of them still need to buy elsewhere after they sell a house.
If money was hard to come by, houses would be cheaper, but then you would also have more difficulty getting that money to start with. I'm not sure the affordability would improve, it's hard to say what other impacts a higher interest rate (or even more so, a higher % down requirement) market would create.
The only exception to all this are new houses and condo builds, but in those markets the reason they're more affordable comes down to a combination of location and risk, risk that the property may not actually be worth its selling price, so you get it at a 'discount' to the market if it were in a more established area.
> ... most of them still need to buy elsewhere after they sell a house.
This is one reason that I never understood people treating their first house as an investment. Yay, it went up 50%... And so did the house you'll buy after you sell it. You need to live somewhere. Your first house is covering a short position, not an investment.
It is a mistake to treat housing as an investment but that doesn't mean it can't be for the right circumstances, e.g., many who bought homes in Silicon Valley 20+ years ago have seen their home prices double or triple and they can easily go to other parts of the country where they can buy a replacement home of comparable quality for less than half the sales proceeds of their current home, pocketing the difference. This is most certainly an anomaly in the context of the broader housing market. But it is a huge benefit for those who do happen to benefit in this way.
Couldn't you apply that for anywhere in the market? Eg. my money is in index funds, but if the market collapses, the value of my index funds gets wiped out and I can't exactly buy a house on the cheap ...
If the market collapses, you're screwed anyway, but at least your index fund is diversified (I hope) and liquid, whereas your house is the most undiverse and illiquid asset you can buy.
I'm not quite sure what you mean. My point is that you need somewhere to live. It's like being short a stock and you need to cover. Covering a short is closing an investment position, not opening one. If you sell the house, now you're short again and need to cover. Once you buy your second property you are actually investing.
It also is highly leveraged. If you start at 20% down with a 3% interest rate, you won't have 50% equity until around year 14-15. Since most people move by then, you are spending most of the time with 2-5x leverage on the gains.
But where you had to scrape together 20% of your first house at (say) 100k, you then made payments for 10 years and now have $50k left on the loan for a house you can sell for $150k.
If your second house was originally $150k, now $225k, you now have a 44% down payment.
Do you know if there's a good calculator for this to determine what growth you need to make this work assuming moving within the same general area with similar market growth? Having trouble following your logic through to an actual model.
Any growth will yield this "amplification". The given numbers represent about 4% continual growth. This is basically the "forced savings" line of thought, but with numbers attached. The trick is that you are realizing the gains on the entire value of the house, even though you only actually own part of it. Of course, this works against you if the prices fall, as you also realize all the losses. Which is something many people found out the hard way when their mortgages went underwater in the 2000's.
EDIT: Here's the numbers with -4% growth instead. That $100k house is now worth $67k. You still paid $50k over 10 years, so you walk away with $17k. That $150k house is now $100.5k. So your down payment went from 20% to 17%.
To compare, if we simply had invested $20k into a -4% stock, buying $250 more a month ($30k / 120 months), we end up with ~$19.6k instead of $17k, so that extra $2.6k hit was the "whole amount" penalty paid.
A house is an investment. It isn't a liquid investment which is something to consider.
A house as an investment only pays off after a long term: if you live in the house for 30 years (doesn't have to be the same house, though trading will change the time), you have your mortgage paid off. Suddenly your monthly rent goes to near zero (only taxes and maintenance to pay) Better yet, odds are you are nearing a different phase of life (kids living on their own) and you don't need as much house so you can downsize and apply the difference to your retirement plans. (or if you decide the house is where you want to live for life a reverse mortgage might make sense - though this area is full of scams)
Note that real estate is very much about location location location. There are places and times where the difference between rent and a house payment is significant and it isn't always in favor of either one.
Also comparing renting and buying is NEVER an apples to apples comparison: owning vs renting nearly forces different life styles. Renting typically means you get a much smaller place for less money which means you have less room to have fun at home, but more money to enjoy the time on the town. Buying typically means a larger place to fill with the type of things you like to do with your small family. This lifestyle factor is very important, and not one that you can put a monetary value on
As a rental, sure. As a home? yeah, i'm pretty skeptical of that idea. There's no rate of return.
Some people buy a big house to raise a family, and then downsize when the kids move out. I can kinda sorta see that as an investment, because you've got a planned future exit, and the value you extract from the extra space is more than the 1-2% rate of return.
Your cheap place to live is just a cheap place to live. Sure, in the long run, it's a good deal, but there's no rate of return. Is McDonalds for lunch is an investment, because it's cheaper that a fancier place?
What part of not liquid investment do you not understand. There is a rate of return on the house, it is just hard to realize.
Don't forget to subtract what you would have paid for rent over that time period from the cost of the house payment (plus maintenance): there is your real return, it isn't that I pay $300,000 over 30 years for a $100,000 house that is now worth $315,000. It is that I paid $500/month - minus $300/month rent = $200/month or $72000 for an investment worth $315,000. Of course all the numbers above are subject to debate. I used a 4% yearly price increase for the house, I didn't factor in rent increases (though I should). You will be hard pressed to find a good house for $100,000 today, but you also won't find a place to rent for $300/month.
Again, a house is a poor only investment. However as part of a consider portfolio it can be great for some.
> What part of not liquid investment do you not understand. There is a rate of return on the house, it is just hard to realize.
Well, i'd thought of not-liquid investments as something that's tougher to sell than, say stock. Perhaps a family run business or a matisse or a Toyota 2000. Something purchased with the explicit intention of making money. It might be risky, and ultimately be a loser, but the plan is to sell it for more than you bought it for.
Assets on the other hand are things you want or need without much regard for the rate of return. Sure, that comic book might be worth a lot some day, but people buy them because they want them. My coffee maker has a rate of return, i'm sure i could get a few bucks for it on craigslist or a garage sale, but i'm not going to pretend it was an "investment".
Sure, there exist some people that are pretty serious about their house as an investment. I have a couple of friends that bought houses right after school, paid them down, leveraged the equity to by another, and continue the chain.
Most people, call their house an investment but regard it as an asset. Neglecting basic maintenance can wipe out a decade of gains, a new roof, or minor flooding from a plumbing leak. It's easy to watch people blow $30k on a new kitchen. That's very rarely going to be realized in house value when it's finally sold.
Perhaps we're just talking past each other. I think there's a distinction between asset and investment, but i'm willing to admit that perhaps that distinction is inaccurate or wrong somehow. It just seems like people call assets investments to sort of feel better about how they're planning for the future, without actually planning for the future.
edit
Is it ok to invest with money you can't afford to lose? People put a sizable chunk of their salary into mortgages, and insure them to limit the risk. That doesn't seem like investor behavior.
I'm no financial expert, but I'm pretty sure your idea of an asset is wrong. An asset is anything that has value. An asset can be depreciating or appreciating or neither. An investment is just a place to put money. You can buy stocks in the hope they'll increase in value rapidly. You can buy gold hoping that it will outpace inflation. You can buy bonds with negative yields in the hope that they are at least safe. These are all investments. They are also all assets.
I see. I'd thought an investment was a separate and distinct thing compared to an asset, with the intention of having a higher rate of return compared to ordinary stuff.
Since an investment is simply a place to put money, there really is no distinction. Seems odd, but I suppose I can accept that as a common understanding.
I think the general expectation is that an investment will make you more money than holding cash. A new car and a gold chain are both assets but most people would not call then investments. But that's not a strict definition, because if you intentionally buy cars and gold chains with the intent of using them as a store of wealth, they are technically investments, just really bad ones.
Owning a home is functionally equivalent to renting from yourself. So if a rental property is an investment, then so is owning your own home.
I also don't understand how you can claim there's no rate of return. Home values have historically trended upward reliably. Does the stock market also have no rate of return?
> Renting typically means you get a much smaller place for less money
Sure, if you are choosing units at random, rentals are smaller (since there are, in most place, lots more small rental apartments, and not as many small places for sale), but people choosing own vs. rent aren't choosing to either rent a random available rental or buy a random property off the sale market, they are looking to meet their housing needs, and comparing rental vs. purchase options meeting those needs.
I'm pretty sure most people do indeed rent less than they buy. It's easy to justify buying larger. You might be thinking about starting a family. You're definitely thinking about being there for a long time. Renting, on the other hand, can feel temporary. If you outgrow it, it's easy to move. Dumping extra money into a home you own also feels a bit more like investing, because the additional square footage will appreciate even if you don't need it. Meanwhile buying a rental bigger than you need mostly feels like wasted money.
I'd be interested in seeing stats, but I bet the claim that renters choose smaller spaces (even after adjusting for income) holds up.
If you live in one house and buy a second to rent out, the second house is clearly an investment. If you rent an apartment to live in and buy a house to rent out, that house is also an investment property for all the same reasons as the second house in the first scenario. If you mortgage a house and live in it, this is actually the same as the second scenario. You just happen to be renting from yourself.
I also fail to see how your first house could at all be considered covering a short. Buying a house is a bet that the value will go up. If you want to short the housing market, you rent.
It sort of makes sense, if you choose to leave an expensive area and move to a cheaper one. But even then, other financial products could have helped you save that way.
Didn't read the article, but 20% is the magic amount where one of the insurance payments (essentially, insurance you take out against the risk of your defaulting) goes away.
The advice used to be, if you can do 20%, do so, to save yourself that insurance expense (in the "used to be" markets, at least, where you ended up ahead, financially, by doing so).
P.S. Rereading my last sentence -- or, "sentence" -- I see that I definitely need one, or several, more cups of coffee.
I believe it's 'PMI' your referring to. You don't need 20% to avoid that anymore with a lot of programs, it's down to 5% or even 3.5% if your credit is high enough. 720 is the sweet spot right now where you should pretty much never have PMI.
There's also some incentives out there right now where the lender pays the PMI for you.
In addition, PMI was not originally tax deductible. They made it tax as one of those stimulus measures, I think around 2008 or 2009 (about 1 month after I paid mine off... not that I'm bitter or anything).
Since PMI is tax deductible now that makes it effectively less expensive, and avoiding it less advantageous/important.
You don't get something for nothing here. The low down payment loans that lack PMI generally have higher rates. Lender-paid PMI always comes with a higher rate. Even if your credit is well above 720 it can still be better to pay PMI than to have a higher-rate loan. The PMI eventually goes away; to get rid of a higher rate, you have to refinance.
The best choice depends on factors such as how long you will keep the home, but if you're putting less than 20 percent down, avoiding PMI is not a worthwhile objective. PMI might actually be the best deal.
I think I have to agree with my child co-commenters, that if they're waiving PMI in one sense, you're paying for it in another.
You always have to add up all the pieces -- over their respective lifespans -- and see where your total costs come out. As well, whether retaining more money up front and pumped into your own investments is going to outperform any additional eventual expense, allowing you net (and also considering taxes) to come out ahead.
Past a certain point, I'd say, make sure you're doing pretty well, financially, even if you end up leaving a couple of hundred or even a thousand on the table over the lifespan of the load. Instead, focus your remaining time and energy on having a good life. Worth far more than worrying about the last dollar.
Well I have two effects on their story first hand. The multiple loans to buy a home or such was what the buyer of my previous home did to get in the door. 80/10/10 however it was not because the values exceeded maximum loan values but they could not make the down payment but wanted in the area.
The second is the combining of credit scores for couples, good friends are currently renting as his wife's score is the pits. This is even after spending two years so far paying down here debts which were not education related. On his own he can land any house they want, together they have to accept loan rates that make it not worth the costs.
I figure the twenty percent rule saw a resurgence because that number was so ingrained into the minds of buyers and sellers.
I got a mortgage with just myself as the signer. And this was with a major bank; nothing shady or weird. Since my wife is on the title, all she had to sign was a single page indicating that she was allowing her half of the property interest into the mortgage. But my income and credit were enough to completely support the mortgage we got, so that's what we went with.
I did the same, with me as only applicant, mostly because it was slightly less paperwork.
One possible drawback is that you can't count two incomes, just the applicant income. Though "affordability limit" that bank calculates (at least in my experience) is very stretched, I wouldn't be able to pay the max bank was ready to loan.
It depends on the circumstances. I have a great paying job and good job security and just bought a condo. Had I waited to have 20% down, I would have had to wait at least 10 years, and in the meantime still pay rent somewhere. So I can either go in with very little down (in my case I actually walked out with a check) so that I can pay extra each month toward the principle, or I can save that down payment and essentially pay for somebody else's property. Many of my friends simply can't afford to save for a house because rent is so high that they just don't have savings. You can argue that they should move to cheaper housing (and they did) but at some point the balance between cheap and safe will tip away from safety.
I'm in the same boat right now - I'm paying >$2k/mo in rent. I could certainly wait to get the full 20% down payment, but it makes more sense to me if I buy a condo now, build the equity, and down the road I can keep saving for a nicer place once I outgrow the condo.
Sure I'll be mostly paying interest to start, but this way I'm at least seeing some sort of investment if I have to spend that much per month on living. I could certainly have found a roommate or a cheaper place but frankly, I've gotten used to what I'm paying now and I still have plenty leftover to contribute to a 401k, savings, and enjoy myself.
Probably, but from an economics perspective, i'm not sure who will push that position. There seems to be plenty of Lenders willing to take a chance with someone offering a lower down payments and in turn charge them a higher rate.
What would you do if property values declined such that you were underwater 20% on your condo? It seems like some minimum amount of equity is a stabilizing force in turbulent markets, the lack of which contributed to some of the unpleasantness in 2008.
Just remember - state matters heavily in that decision! If I had lived in a non-recourse state, I would have gladly performed a strategic default a couple of years ago and left the bank to pay the loss in value of my place.
People walking away from houses wasn't the problem. People walking away from houses they were underwater on was the problem. Besides, if you were underwater and could still afford the payments there is no reason to walk away. I am currently underwater on my car, but I can still, you know, drive it.
yes, but you make the assumption that you don't have to sell the house due to factors such as sudden job loss, unplanned events such as accident/injury causing disability etc. The point of 20% down is that you have enough equity even for a turbulent market and if you do need to sell quickly due to possible factors above, you still should be ok. Otherwise, you are assuming that nothing bad will happen and you can continue paying the mortgage.
To your point I think that you just always have that risk. But I'd rather have that 20% I would have spent either invested in a 401k or a retirement fund or even using it for other things like getting another degree. Now I'm not saying those are necessarily the wisest options, but I like the opportunity. I mean this in the kindest way but all you're arguing against here is the risk/reward. In the same token, what I'd home values appreciate 30% in 10 years and all the while I'm renting the place and having somebody else pay the mortgage? Just different risk factors is all. If I find it impossible to get a job as an engineer doing the work I do, than the entire country is probably in another depression. I'm just betting against that.
I think together my fiance and I had about 8% down. Thing was, to rent our current house would be about $1600/month. Even a shitty 2 bedroom was $1200, mortgage with insurance and taxes is $1100. For some people it's not a matter of can we afford to, it's can we afford not to. Even if rent dropped 10% (that has never happened in my area, they were still going up in 2008-2009) it would be a better deal to have a mortgage.
Rents have to fall a lot to put us in a situation were that's a bad thing (we aren't moving for a long time), and then at that point we can just let the bank foreclose and move into a $500 a month 2 bedroom.
Sure. That's a real risk. There are probably much bigger risks to worry about, like the market crashing again or losing your job. The risk of interest rates going high enough to significantly push home prices down seems really small for the next several years.
Historically both real estate prices and interest rates are procyclical. Central banks raise rates when inflation becomes too fast (which is closely correlated to house price appreciation).
But of course you can sometimes have a local economic decline while the currency area is experiencing overheating and high inflation.
Fixed rate loans are only fixed for very short periods like 2-3 years, so how is this relevant? And they then usually turn into really bad interest rates when they expire, and you'd have to remortgage in a bad market.
You have to pay lawyers fees, surveying fees, taxes, realtor fees, etc. when you buy a house, if you only have it for 2-3 years you have to factor all those into the monthly costs too.
No, you can get fixed loans that are fixed for the life of the loan. And you usually should when interest rates are low, because ARMs in that case usually have little room to adjust down and a lot of room to adjust upward when indexes riser, which they are nearly certain to significantly when you buy near the historic bottom, so even with the premium on the starting interest rate, fixed rate loans are better in the long run.
Cars and houses are not the same thing. Cars depreciate in value from the moment you drive them out of the parking lot of the dealer. House values generally stay the same or go up.
Continuing to make payments on a house when you're underwater on the basis that you can still live in it is a really bad idea. Even if you can afford the payments, why would you want to overpay for something? That's why so many people walked away from their houses during the real estate crash: when you have no guarantees that the asset you're paying for will appreciate in value back to the original value, it's a much more financially sound decision to ignore the sunk cost and cut your losses ASAP.
you borrowed money and already made the purchase, just like a loan for a car. Car's depreciate quickly but people don't default on the loan because they are underwater based on ltv.
The debt is collateralized by the house - give up the house and let the bank pay for the risk they took on you. You're under no obligation to the bank to overpay for housing when things change - you're just not likely to get another mortgage either.
Yes you are. You signed a contract. This gives you an ethical if not a moral obligation. You have a legal obligation to pay in all states, which is why the lender can foreclose on you if you fail to do so. In some states, you also have a legal obligation to make the lender whole if they can't recoup their loss with the foreclosure sale.
I think it depends on your risk tolerance and world view. I think the world is just going to get more wealthy and property prices, even when there are downturns, will eventually always appreciate if you buy in the right area. I'm not saying I can predict that, but in the area I live in there were houses in the $600,000 range that sold for far less than that during the downturn, and now they're right back at the pre-recession value.
On the other hand there are areas that have never recovered. I think as a general rule if you buy a place in a mixed-used development neighborhood you'll be able to weather the storms. At least that's my opinion (and take that for what it's worth).
Well, unless I lose my job keep paying for it. There are always risks with every financial decision. I'm just accepting those risks right now and I feel like that's a good decision for me. It might not be for somebody else.
Yes, you personally are much better off with no money down (0% equity) and a long-term, fixed rate, tax deductible, low interest and non-recourse mortgage loan. You control the asset (the condo) but have very little downside risk. If prices fall 20%, even if you kept your job, even if you won millions in the lottery, it might be in your self-interest to walk away and let the bank foreclose. I don't think there's a moral dimension to that decision; it's a matter of contract law. But I am pointing out that this is a tragedy of the commons in that millions of people acting this way creates an environment in which downside risk is hugely amplified in the event of significant price declines in the housing market, which is what we saw in 2008 - the system beginning to feed on itself in a vicious downward spiral. When I read things such as your initial comment a little voice in my head says ''here we go again''.
> The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners.
You might be able to make an argument that the unpleasantness in 2009 onward (or, more specifically, late January of 2009 onward) was the fault of some conscious decision of the Obama administration, but as popular as it has been with the Trump campaign recently, pretending that the Obama administration is responsible for things which occurred before his inauguration is indefensible without some kind of strong evidence for the extraordinary claim of retrocausality.
(Also, factually, the administration decided to bail homeowners out in a variety of ways, though perhaps not as direct, universal, and significant of a bailout as some advocates -- myself included -- would have preferred.)
Same position as I was in 2006. My decision was either waste money renting a one bedroom, or just buy a house for a mortgage of about the same. Twenty houses, and two week later, I moved into a house, with zero money down. Granted 20% was in a HELOC, and the other was a 30 year. Five year later, refinanced to 15 year loan, and now I'm racking up $1000 equity every two months. 20% down is great if you can, but early on, I don't see how that's possible unless you're SERIOUSLY making bank.
Also side note, just got done watching The Big Short, as well as reading the book. So depressing what happened to all these people.
With the state of rental rates at the moment, if you can scrape any kind of down payment together, it's worthwhile to buy rather than rent. Even if you are on a 3.5% down FHA loan, the mortgage + taxes + PMI is considerably less than renting the equivalent property.
If you're smart, buy a duplex, and basically get your tenant to pay the mortgage for the whole building.
That very much depends on where you live. I have a pretty thorough spreadsheet for modeling this kind of thing.
Even if I had a 20% down payment, fully accounted for tax deductions, payment against principal, etc, and ignoring costs like maintenance, my lease in Seattle is significantly less than the monthly cost of a mortgage for the same place.
This is true more often than people expect. Many landlords are not covering a mortgage payment as large as yours would be, or any mortgage at all, with your rent check. Their cost basis is not your cost basis so it is not unexpected that the market clearing price for rent is below the monthly cost for many people to buy the same property.
> Many landlords are not covering a mortgage payment as large as yours would be
Why not? I can understand already owning the property, but do property-management companies just get better mortgage rates or something? Does that mean I could theoretically save money by buying a house as a company and then renting that house to myself as an individual?
At least where I live, many landlords have no mortgage at all, because they just buy properties with cash. Another scenario would be a landlord making a very large down payment, and thus, financing a much smaller amount, and thus a much lower monthly payment.
There are a number of reasons beside owning the property outright. They can make a bigger down payment than you can, so the total debt is lower. They bought it at a much lower price many years ago. Their total capitalization is much larger than yours, which drives interest rates toward zero. Their tax basis is different than your tax basis would be.
It is straightforward financial math. If they have more capital than you or a different tax basis, they can have a lower monthly cost basis than you.
What's the likelihood your rent in, say, five years will still be less than your mortgage would be now? Your mortgage payments won't appreciably increase. In high demand areas, though, rents will.
If renting is cheaper than buying right now, a better question is whether rent will increase faster over the next five years than an index fund portfolio funded with the difference.
There are calculators for this, NY Times and Washington Post have them. Your anecdotes can be played around with variables on their data visualizations.
The break even point is typically 11 years in NYC and SF. Find and play around with the calculators yourself.
This is very interesting to me, because the median rent in Seattle just crossed $2K while the median condo price just reached $410K. Since you said your ignoring all the extras and just talking about payments after 20% down - that means with the current median 3.28% interest rate in Washington for 30 YR loan you would only be paying $1,433 a month way lower. Sounds like either your math is bad or you just have a good deal :)
Typically HOA fees don't exist in rentals where as in condos that's an extra fee you're paying every month in addition to your mortgage. The $400k condo is going to have a substantial HOA fee.
I only have knowledge of my local area, but for condos around the $200k price range here have HOA fees around $500/mo. That would put him right back at a wash for monthly price if they didn't put any down payment on the condo.
I agree (which is why I live in a single-family), but to be fair, the HOA/condo fee also typically pays for things like the outside maintenance, snow removal, common area maintenance, roof, painting, landscaping, pool/tennis court/gym/what-have-you, trash removal, insurance and other expenses relating to the shared/public areas.
For some condominiums (especially apartment-style, many-units-in-one-building condos), HOA fees often largely go to maintaining common areas and shared structure.
This is often less true with detached, single-family homes with HOAs.
Great point! Just looked it up and the last information I could find showed just below $500 as the average HOA in Seattle. In theory based on the original guidelines you still end up ahead - but it's very close. I recently bought a SFH in Seattle and it ended up way in my favor over renting for things people choose not to include in the other direction (having to pay for parking, having to pay per pet, etc)
Depending upon how well / poorly managed the HOA is, HOA fees for $200k condos can easily exceed $500 / mo. The condo I sold for a substantial loss in the Seattle area in 2010 at $175k had a $280 / mo HOA due for a pretty terrible set of amenities due to a lawsuit that was eating up all the funds. As the HOA dues go up, it can further suppress gains. Then comes some special assessments like new roofs. As such, I consider HOA dues not too dissimilar of a hit on an investment like expense ratios / management fees in a fund, except I've heard of few HOAs that could improve your property value the more money you paid in unlike something like a unicorn actively managed fund.
You are making many improper assumptions. My case is not "median", the distribution of rents and prices are often not the same, and the relationship between rent and price can vary significantly between locations within Seattle at any particular point on those distributions.
The breakeven mortgage based on my rent by my best calculation would be around $700k, depending on a number of factors. For better or worse, places like I rent sell for much more than that. Having been looking at condos all over Seattle, the relationship between price and rent vary significantly by location.
Your right I'm making assumptions in your favor, it just so happens the size of places people buy tend to be much larger then the ones they rent. In fact it's hard to even find many 2 bedroom rooms for rent in Seattle while they are the norm for condos. As someone who's recently bought in Seattle I've looked in most of the in demand areas (Fremont, Ballard, Capital Hill, Green Lake, Wallingford, Revenna, and Belltown) - and across the board it's significantly cheaper based on your guidelines to buy. So unless your talking about the same exact building - or maybe only new building I would be very surprised to find out otherwise. (
We started with a 30 year fixed, but refi'd to an ARM after we got over the conventional wisdom and noticed how much lower the rates were. We paid it off before the rate reset and ended up saving thousands.
It really depends on your financial situation. If you've got the resources to pay off an ARM before the reset, then absolutely you should do that. Why not?
If you can make the payments on the 30 year easily, then an ARM could be a good bet to save some money, but there's some moderate risk. If you're a bit stretched making a 30 year, then an ARM is probably too risky because a rate increase could push you into default. If you are able to make the payments on the ARM but not the 30 year fixed, then you probably shouldn't buy at all (at least not that property).
Watching the loan value increase makes me realize I won't be able to afford even a dumpster with shutters. I hear about all these people buying houses without much down payment and it makes me feel uneasy.
I find figure 7 very interesting, "Share of newly mortgaged homes by property type". I seems like a very large shift in what types of homes that are mortgaged (e.g. condos going from ~19% to ~43%).
Anyone with deeper insight in this trend? As an outsider European I was not aware of such a strong urbanization trend in the US, or are there other mechanisms in play as well?
One thing they didn't mention is that jumbo loan rates have tumbled, and are, in some cases, cheaper than conforming loans. I don't know how or why that is, but it sure makes paying PMI less attractive!
Here's the pertinent section in case anyone is hit with the paywall:
Conforming loans have become more expensive because federal officials, in a bid to reduce the outsize footprint of Fannie and Freddie, have raised the fees those companies charge to lenders, which translates into higher mortgage rates.
Meanwhile, interest-rate volatility has driven up yields on mortgage bonds issued by Fannie and Freddie as investors brace for a slowdown in the Federal Reserve's bond-buying program, which has included those mortgage bonds. That has boosted rates on conforming loans.
Jumbo mortgages, meanwhile, are increasingly kept on banks' balance sheets, which means prices aren't usually set by bond markets. "Banks have more deposits than loans today, so the desire to put that money to work, as well as the fact that it's at a very low cost, allows us to make [jumbo] loans at a very good interest rate," said Mr. Blackwell.
"If two people wanted to buy a home together, only the lower of their two credit scores would be factored into important calculations like the mortgage’s interest rate."
"Mean down payment on new mortgages by credit score tier"
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[ 3.4 ms ] story [ 202 ms ] threadThe graphs of percentage-down payments looks exactly backwards from what I might have guessed had someone asked me just prior to reading this. In the run-up to the meltdown, most borrowers were still putting between 5 and 20 percent down. (I think that blue line to the left of the 5 value is "3.5%," or the standard FHA down payment.) My guess would have been that the far left of that graph would grow higher as 2008 approaches and then drop after. It doesn't; the 20% line stays as the overall winner, even though 5 and 10 percent down still collectively beat it.
I see that the post frames it as "so many low-down mortgages" but I look at it as "a whole lot of people were still putting 20% down." I wonder if some of this had to do with the appraised value...the value was seen as "high enough" so a higher initial LTV was acceptable because 5% was still sufficient skin in the game. (Oh, who am I kidding? Many loans made in the years prior to 2008 had only superficial relationships with reality.)
I can't help but wonder if we would have much more affordable housing if it wasn't so easy to get such massive loans relative to their down-payments.
If money was hard to come by, houses would be cheaper, but then you would also have more difficulty getting that money to start with. I'm not sure the affordability would improve, it's hard to say what other impacts a higher interest rate (or even more so, a higher % down requirement) market would create.
The only exception to all this are new houses and condo builds, but in those markets the reason they're more affordable comes down to a combination of location and risk, risk that the property may not actually be worth its selling price, so you get it at a 'discount' to the market if it were in a more established area.
This is one reason that I never understood people treating their first house as an investment. Yay, it went up 50%... And so did the house you'll buy after you sell it. You need to live somewhere. Your first house is covering a short position, not an investment.
edit: in nominal terms.
If your second house was originally $150k, now $225k, you now have a 44% down payment.
EDIT: Here's the numbers with -4% growth instead. That $100k house is now worth $67k. You still paid $50k over 10 years, so you walk away with $17k. That $150k house is now $100.5k. So your down payment went from 20% to 17%.
To compare, if we simply had invested $20k into a -4% stock, buying $250 more a month ($30k / 120 months), we end up with ~$19.6k instead of $17k, so that extra $2.6k hit was the "whole amount" penalty paid.
A house as an investment only pays off after a long term: if you live in the house for 30 years (doesn't have to be the same house, though trading will change the time), you have your mortgage paid off. Suddenly your monthly rent goes to near zero (only taxes and maintenance to pay) Better yet, odds are you are nearing a different phase of life (kids living on their own) and you don't need as much house so you can downsize and apply the difference to your retirement plans. (or if you decide the house is where you want to live for life a reverse mortgage might make sense - though this area is full of scams)
Note that real estate is very much about location location location. There are places and times where the difference between rent and a house payment is significant and it isn't always in favor of either one.
Also comparing renting and buying is NEVER an apples to apples comparison: owning vs renting nearly forces different life styles. Renting typically means you get a much smaller place for less money which means you have less room to have fun at home, but more money to enjoy the time on the town. Buying typically means a larger place to fill with the type of things you like to do with your small family. This lifestyle factor is very important, and not one that you can put a monetary value on
As a rental, sure. As a home? yeah, i'm pretty skeptical of that idea. There's no rate of return.
Some people buy a big house to raise a family, and then downsize when the kids move out. I can kinda sorta see that as an investment, because you've got a planned future exit, and the value you extract from the extra space is more than the 1-2% rate of return.
Your cheap place to live is just a cheap place to live. Sure, in the long run, it's a good deal, but there's no rate of return. Is McDonalds for lunch is an investment, because it's cheaper that a fancier place?
Don't forget to subtract what you would have paid for rent over that time period from the cost of the house payment (plus maintenance): there is your real return, it isn't that I pay $300,000 over 30 years for a $100,000 house that is now worth $315,000. It is that I paid $500/month - minus $300/month rent = $200/month or $72000 for an investment worth $315,000. Of course all the numbers above are subject to debate. I used a 4% yearly price increase for the house, I didn't factor in rent increases (though I should). You will be hard pressed to find a good house for $100,000 today, but you also won't find a place to rent for $300/month.
Again, a house is a poor only investment. However as part of a consider portfolio it can be great for some.
Well, i'd thought of not-liquid investments as something that's tougher to sell than, say stock. Perhaps a family run business or a matisse or a Toyota 2000. Something purchased with the explicit intention of making money. It might be risky, and ultimately be a loser, but the plan is to sell it for more than you bought it for.
Assets on the other hand are things you want or need without much regard for the rate of return. Sure, that comic book might be worth a lot some day, but people buy them because they want them. My coffee maker has a rate of return, i'm sure i could get a few bucks for it on craigslist or a garage sale, but i'm not going to pretend it was an "investment".
Sure, there exist some people that are pretty serious about their house as an investment. I have a couple of friends that bought houses right after school, paid them down, leveraged the equity to by another, and continue the chain.
Most people, call their house an investment but regard it as an asset. Neglecting basic maintenance can wipe out a decade of gains, a new roof, or minor flooding from a plumbing leak. It's easy to watch people blow $30k on a new kitchen. That's very rarely going to be realized in house value when it's finally sold.
Perhaps we're just talking past each other. I think there's a distinction between asset and investment, but i'm willing to admit that perhaps that distinction is inaccurate or wrong somehow. It just seems like people call assets investments to sort of feel better about how they're planning for the future, without actually planning for the future.
edit
Is it ok to invest with money you can't afford to lose? People put a sizable chunk of their salary into mortgages, and insure them to limit the risk. That doesn't seem like investor behavior.
Since an investment is simply a place to put money, there really is no distinction. Seems odd, but I suppose I can accept that as a common understanding.
I also don't understand how you can claim there's no rate of return. Home values have historically trended upward reliably. Does the stock market also have no rate of return?
Sure, if you are choosing units at random, rentals are smaller (since there are, in most place, lots more small rental apartments, and not as many small places for sale), but people choosing own vs. rent aren't choosing to either rent a random available rental or buy a random property off the sale market, they are looking to meet their housing needs, and comparing rental vs. purchase options meeting those needs.
I'd be interested in seeing stats, but I bet the claim that renters choose smaller spaces (even after adjusting for income) holds up.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
If you live in one house and buy a second to rent out, the second house is clearly an investment. If you rent an apartment to live in and buy a house to rent out, that house is also an investment property for all the same reasons as the second house in the first scenario. If you mortgage a house and live in it, this is actually the same as the second scenario. You just happen to be renting from yourself.
I also fail to see how your first house could at all be considered covering a short. Buying a house is a bet that the value will go up. If you want to short the housing market, you rent.
Renting, 0 houses owned = short
Normal homeowner, 1 house owned = neutral
Investor, >1 house owned = long
You gotta live somewhere!
The advice used to be, if you can do 20%, do so, to save yourself that insurance expense (in the "used to be" markets, at least, where you ended up ahead, financially, by doing so).
P.S. Rereading my last sentence -- or, "sentence" -- I see that I definitely need one, or several, more cups of coffee.
There's also some incentives out there right now where the lender pays the PMI for you.
Since PMI is tax deductible now that makes it effectively less expensive, and avoiding it less advantageous/important.
The best choice depends on factors such as how long you will keep the home, but if you're putting less than 20 percent down, avoiding PMI is not a worthwhile objective. PMI might actually be the best deal.
I think I have to agree with my child co-commenters, that if they're waiving PMI in one sense, you're paying for it in another.
You always have to add up all the pieces -- over their respective lifespans -- and see where your total costs come out. As well, whether retaining more money up front and pumped into your own investments is going to outperform any additional eventual expense, allowing you net (and also considering taxes) to come out ahead.
Past a certain point, I'd say, make sure you're doing pretty well, financially, even if you end up leaving a couple of hundred or even a thousand on the table over the lifespan of the load. Instead, focus your remaining time and energy on having a good life. Worth far more than worrying about the last dollar.
The second is the combining of credit scores for couples, good friends are currently renting as his wife's score is the pits. This is even after spending two years so far paying down here debts which were not education related. On his own he can land any house they want, together they have to accept loan rates that make it not worth the costs.
I figure the twenty percent rule saw a resurgence because that number was so ingrained into the minds of buyers and sellers.
Sure I'll be mostly paying interest to start, but this way I'm at least seeing some sort of investment if I have to spend that much per month on living. I could certainly have found a roommate or a cheaper place but frankly, I've gotten used to what I'm paying now and I still have plenty leftover to contribute to a 401k, savings, and enjoy myself.
Or you can try to walk away in some fashion and leave the bank with the problem. As you say, that contributes to instability.
Bubble alert!
http://www.bankrate.com/finance/mortgage-rates-history-0112....
If your interest rate doubled, could you afford to? Do you know how much you'd have to pay?
But of course you can sometimes have a local economic decline while the currency area is experiencing overheating and high inflation.
You have to pay lawyers fees, surveying fees, taxes, realtor fees, etc. when you buy a house, if you only have it for 2-3 years you have to factor all those into the monthly costs too.
Continuing to make payments on a house when you're underwater on the basis that you can still live in it is a really bad idea. Even if you can afford the payments, why would you want to overpay for something? That's why so many people walked away from their houses during the real estate crash: when you have no guarantees that the asset you're paying for will appreciate in value back to the original value, it's a much more financially sound decision to ignore the sunk cost and cut your losses ASAP.
Yes you are. You signed a contract. This gives you an ethical if not a moral obligation. You have a legal obligation to pay in all states, which is why the lender can foreclose on you if you fail to do so. In some states, you also have a legal obligation to make the lender whole if they can't recoup their loss with the foreclosure sale.
On the other hand there are areas that have never recovered. I think as a general rule if you buy a place in a mixed-used development neighborhood you'll be able to weather the storms. At least that's my opinion (and take that for what it's worth).
Banks were bailed out. Large businesses were bailed out. Ordinary homeowners caught up in a massive housing bubble, reviled and sent down the river.
You might be able to make an argument that the unpleasantness in 2009 onward (or, more specifically, late January of 2009 onward) was the fault of some conscious decision of the Obama administration, but as popular as it has been with the Trump campaign recently, pretending that the Obama administration is responsible for things which occurred before his inauguration is indefensible without some kind of strong evidence for the extraordinary claim of retrocausality.
(Also, factually, the administration decided to bail homeowners out in a variety of ways, though perhaps not as direct, universal, and significant of a bailout as some advocates -- myself included -- would have preferred.)
Bush was president for 100% of the year 2008.
Also side note, just got done watching The Big Short, as well as reading the book. So depressing what happened to all these people.
If you're smart, buy a duplex, and basically get your tenant to pay the mortgage for the whole building.
Even if I had a 20% down payment, fully accounted for tax deductions, payment against principal, etc, and ignoring costs like maintenance, my lease in Seattle is significantly less than the monthly cost of a mortgage for the same place.
This is true more often than people expect. Many landlords are not covering a mortgage payment as large as yours would be, or any mortgage at all, with your rent check. Their cost basis is not your cost basis so it is not unexpected that the market clearing price for rent is below the monthly cost for many people to buy the same property.
Why not? I can understand already owning the property, but do property-management companies just get better mortgage rates or something? Does that mean I could theoretically save money by buying a house as a company and then renting that house to myself as an individual?
It is straightforward financial math. If they have more capital than you or a different tax basis, they can have a lower monthly cost basis than you.
Rents are set by the market not the interest rate.
The break even point is typically 11 years in NYC and SF. Find and play around with the calculators yourself.
With an amortization period of how many years?
I only have knowledge of my local area, but for condos around the $200k price range here have HOA fees around $500/mo. That would put him right back at a wash for monthly price if they didn't put any down payment on the condo.
This is often less true with detached, single-family homes with HOAs.
The breakeven mortgage based on my rent by my best calculation would be around $700k, depending on a number of factors. For better or worse, places like I rent sell for much more than that. Having been looking at condos all over Seattle, the relationship between price and rent vary significantly by location.
I'm always curious to see how others have modeled this decision.
We started with a 30 year fixed, but refi'd to an ARM after we got over the conventional wisdom and noticed how much lower the rates were. We paid it off before the rate reset and ended up saving thousands.
If you can make the payments on the 30 year easily, then an ARM could be a good bet to save some money, but there's some moderate risk. If you're a bit stretched making a 30 year, then an ARM is probably too risky because a rate increase could push you into default. If you are able to make the payments on the ARM but not the 30 year fixed, then you probably shouldn't buy at all (at least not that property).
In retrospect, that was a sign.
(of course, I didn't learn my lesson, and bought a house in the Valley 2 years ago)
Anyone with deeper insight in this trend? As an outsider European I was not aware of such a strong urbanization trend in the US, or are there other mechanisms in play as well?
Here's a WSJ article¹ explaining the reason behind this weird inversion, for anyone like me who was wondering: "how is that economically possible?"
¹ http://www.wsj.com/articles/SB100014241278873238930045790552...
Here's the pertinent section in case anyone is hit with the paywall:
Conforming loans have become more expensive because federal officials, in a bid to reduce the outsize footprint of Fannie and Freddie, have raised the fees those companies charge to lenders, which translates into higher mortgage rates.
Meanwhile, interest-rate volatility has driven up yields on mortgage bonds issued by Fannie and Freddie as investors brace for a slowdown in the Federal Reserve's bond-buying program, which has included those mortgage bonds. That has boosted rates on conforming loans.
Jumbo mortgages, meanwhile, are increasingly kept on banks' balance sheets, which means prices aren't usually set by bond markets. "Banks have more deposits than loans today, so the desire to put that money to work, as well as the fact that it's at a very low cost, allows us to make [jumbo] loans at a very good interest rate," said Mr. Blackwell.
"If two people wanted to buy a home together, only the lower of their two credit scores would be factored into important calculations like the mortgage’s interest rate."
"Mean down payment on new mortgages by credit score tier"