Ethics of Real Estate Investment, NIMYism and the Housing Crisis

ProDarwin said:

Duke said:

ProDarwin said:

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Except that sooner or later a mortgage would be paid off.  Rent is never paid off.

I don't see how that factors into this? 

Because if you have equity that's money you no longer have to borrow.  If you stay living in the house, you no longer pay mortgage or rent.  So you're keeping that money.  Or if you reinvest that equity in another house, you are either paying a smaller mortgage or buying outright with cash.

If you're renting the rent may fluctuate a little, but it never goes away.  Ever.

ProDarwin said:

Duke said:

ProDarwin said:

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Except that sooner or later a mortgage would be paid off.  Rent is never paid off.

I don't see how that factors into this?  A mortgage is paid off the second I sell the house and walk away with the equity.  Both sides are calculated assuming you choose that point to walk away.

You can keep extrapolating and generally home ownership does make sense the longer you own, but even then sometimes it does not make sense.

 

It factors in if the alternative is renting - your mortgage may be paid off when you sell the house, but now you have to pay rent. 

But like pretty much every large financial decision, do the math yourself with at least 2 scenarios of a conservative return and average return on your money, for both the alternative investment and the home value.  

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

It's not exactly what you asked, but as of 2017, 37% of American homes were mortgage free

And this breaks down those who've paid off homes demographically. Unsurprisingly, older people and those who live in areas with cheaper real estate are more likely to have mortgage free homes.

It sounds like the general consensus is that our mortgage requirements and interest rates needs to go up, and that in fact, denying more people the ability to own would be a good thing?

That just seems to me like it favor more of the people with money and less of the people without. 

I asked the question recently to a bunch of small business owners - how do we raise wages? Both in small business and in large corporations?  Many blame health insurance costs, either to them or their employees as the main reason why they aren't able to pay more.

Thing is, in my small town, we've got high housing costs and low wages, and we really struggle with determining if its the chicken or the egg that needs fixing. If housing costs were cheaper, people wouldn't demand as much income. If income were higher, the cost of housing wouldn't be such a big deal. How do you rectify that?

Sure, it may boil down to supply and demand and we just need more supply, but if that supply is so expensive that only outsiders can afford it, what good does it do at the local level?

mazdeuce - Seth said:

I think one of the concerns is that rent is a lot less fixed than it used to be in many areas. It's rising a LOT faster than incomes. There is a monetary risk factor to buying, but there is also a monetary risk factor to renting. 

Good point.  Though interestingly, I think there's a 2nd layer here.  Many of the "young professional" mega apartment complexes are having higher vacancy rates.  In a free market, this would push rent prices down.  But because everything is financed to the max these days, they're on a commercial note, usually 5 year with a 30-yr amortization.  Their refi's are all about the occupancy rate, and the market rent.  If they let rent prices go down, they cannot finance the same amount.  So they'll push a 15 month lease with 3 free months of rent at the higher $/month they were getting last year.  So the rent hasn't "gone down" on paper. 

It's a good short-term solution to cover lean times, but if those lean times last longer than a year or two, I can see the 0%/easy financing frenzy cooling a bit, and then it becomes musical chairs like in 2008 to see who gets caught with the bad debt. 

Flynlow (FS) said:

In a free market, this would push rent prices down.   If they let rent prices go down, they cannot finance the same amount.  So they'll push a 15 month lease with 3 free months of rent at the higher $/month they were getting last year.  So the rent hasn't "gone down" on paper. 

There is it again. This notion that not just primary home owners, but big banks and property management companies and investors can somehow hang onto to vacant property and not budge their sale price or rental prices. This is messing with the "corrections" that we should expect to happen. 

Everyone was waiting for the COVID recession to lower housing prices. HA! Never happened. 

COVID has created a building boom in the burbs and rural areas.

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

zero. When the mortgage is paid off you still have property taxes. 

pheller said:

Flynlow (FS) said:

In a free market, this would push rent prices down.   If they let rent prices go down, they cannot finance the same amount.  So they'll push a 15 month lease with 3 free months of rent at the higher $/month they were getting last year.  So the rent hasn't "gone down" on paper. 

There is it again. This notion that not just primary home owners, but big banks and property management companies and investors can somehow hang onto to vacant property and not budge their sale price or rental prices. This is messing with the "corrections" that we should expect to happen. 

Everyone was waiting for the COVID recession to lower housing prices. HA! Never happened. 

 

https://www.housingwire.com/articles/fhfa-extends-foreclosure-and-eviction-moratorium-to-jan-31/

If it really was a free market, maybe it would have had a chance to lower prices. It hasn't had that chance, at least not yet.

Not a comment on if that is right or wrong or yellow or purple. Just pointing out that foreclosures and evictions aren't happening like they would in a "normal" recession. 

Robbie (Forum Supporter) said:

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

zero. When the mortgage is paid off you still have property taxes. 

Property taxes don't just go "poof" though. They pay for police, schools, fire, road maintenance, parks, etc. Property taxes are just the fee we pay to be "tied" to a certain area. Many of those things protect our investment so long as we put our sweat equity in maintaining our homes. Don't want them? Move someplace with less services, less stuff, less protections. 

I've recently noticed a "school free" movement, where snowbirds or retirees actively fight new schools, or any schools for their area. The justification? We don't want to pay for something we don't use. 

mazdeuce - Seth said:

Robbie (Forum Supporter) said:

Renting is great if you have a very fixed cash flow need. For example, if you can afford $1k/month but cannot take the risk of needing to replace the roof at $10/20/30k all at once. 

Renting is a higher monthly price, but it is much more predictable price. Just like insurance, and a whole plethora of finance solutions for business supply chains, there are people who are willing to pay more for more predictability (less risk). And there are people who are willing to take on the risk for a profit. Choosing to take the risk for a profit means you must have access to capital. This is true whether you are a landlord or a bank or anything else. 

And of course, there are people who are outliers who take the risk and get lucky. (like never paying for insurance and never needing it either). 

I think one of the concerns is that rent is a lot less fixed than it used to be in many areas. It's rising a LOT faster than incomes. There is a monetary risk factor to buying, but there is also a monetary risk factor to renting. 

true, but also just like insurance and the other financial products mentioned, the rent is only fixed for as long as you sign the contract term. If you need longer term stability then you ideally would push for longer rental contracts. but you should expect to pay more since you are taking on less risk. 

Robbie (Forum Supporter) said:

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

zero. When the mortgage is paid off you still have property taxes. 

But my property taxes just passed $1k a year last year. For the 18 years prior to that they were between $700 and that $1000, so between $60 and $80 a month. I've never had a mortgage on this house and paid off the small personal loan that I took 18 years ago. I get the whole "renting from the government" angle, but that's a LOT different than renting from the bank, and the government, at the same time. That expense is much easier to figure into a fixed income in retirement. 

Purple Frog (Forum Supporter) said:

I think some are giving "flippers" a bad rap.

Let me go through a typical senario.

Lots of hours researching properties, driving through neighborhoods, talking to banks, and realtors.  Searching through public records.  When you find a property you need to pop with cash.  Banks won't lend money against the value of the POS you are trying to buy.  Then you roll up with your trailer full of $20K of tools... Congrats.  You now own a house that no one in their right mind would live in.

Dumping fees for all the 50 year old carpet, and meth residue.  Lead paint abatement.  Asbestos abatement.  Black mold abatement. Builder's insurance.  Surveys.  Structure repairs.  Inspection fees.  Utility hook up fees.  Termites. Roofing.  Insulation upgrades.  Window upgrades.  A/C and heat upgrades.  Plumbing upgrades.  Bathroom upgrades. Electric brought up to current codes.  Paint.  Walls.  Flooring. Trim. Lighting.  Cabinets.  Appliances.  Decks.  Porches. Driveways.  Landscaping...    Try to do it in 3 months because of the cost of money. You'll be in at least $100K not counting your labor.   No sweat.  

When you are done you have a home you would be willing to move into.  So...get it on the market.

All the while hoping it doesn't get so expensive that it exceeds the "comps" for the neighborhood so a buyer can qualify.

When you get a sale... start paying:  the realtor, closing costs, doc stamps, the accountant that does your now complicated taxes, and oh yeah... pay the IRS taxes on the short term capital gains   $$$.

Then... wonder if you shouldn't just get a job at Home Depot...

Rinse and repeat.

The flippers in my neighborhood are looking for old people with paid off mortgages who don't realize that the house they paid 50K for 30 years ago is worth 250K today. One old lady down the street from me took 30K for her house and moved in with her daughter. The house was well maintained and needed nothing. They actually have wholesale flippers here who low ball the original owners and then flip to the fixer upper types without lifting a hammer. A realtor selling one across the street told me about that one. After about five years of this crap most of the low hanging fruit has been picked off and now the flippers keep calling me again and again and again and again......  Not picking up the phone doesn't stop them. They send letters. Sometimes lengthy handwritten ones introducing me to their family and telling me about how their kids are going to learn carpentry from flipping my house. Why should I care? They leave long voice messages and text me. One guy texted me 63 times telling me at length about how the market is going to change and that he, a Real Estate Professional, can help me get rid of my "Problem Home".  All of these guys are smarmy and creepy and pretend to be your best friend right away. I hate that. 

About 10 years ago when my sister was dying, a flipper, finding out from the courthouse that her home had just gone into foreclosure, kept ringing my cell phone trying to get to her in order to make a make a "cash offer" for her house. Did I mention being in the ICU at the time and having to turn of the phone, only to see a bunch of messages from the same guy with I left the hospital? The same guy when finding out my sister was in the ICU asked me who would be handling her estate if and when she died. 

The guy who flipped the house next door to me made lowball offers on my Motorhome and my 914, telling me that "you never know when you might need the money, especially at your age". I was so creeped out I moved the 914 to the other house and put a cover on it. 

Buzzards waiting for me to die so they can get my stuff cheap. 

I hate flippers. 

pheller said:

Flynlow (FS) said:

In a free market, this would push rent prices down.   If they let rent prices go down, they cannot finance the same amount.  So they'll push a 15 month lease with 3 free months of rent at the higher $/month they were getting last year.  So the rent hasn't "gone down" on paper. 

There is it again. This notion that not just primary home owners, but big banks and property management companies and investors can somehow hang onto to vacant property and not budge their sale price or rental prices. This is messing with the "corrections" that we should expect to happen. 

Everyone was waiting for the COVID recession to lower housing prices. HA! Never happened. 

 

I'm not sure that significantly lower housing prices are really a normal thing after a recession (barring 2009 which started in the housing sector):

Particularly when the FED drops interest rates to their lowest ever, and Federal, State, and Local government won't let anybody be evicted or foreclosed. If (big if) there's going to be a drop in home prices as a result of this most recent recession, it's not going to come until months after the foreclosure/eviction moratoriums have ended. And the super low interest rates will offset or delay the drop somewhat too.

STM317 said:

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

It's not exactly what you asked, but as of 2017, 37% of American homes were mortgage free

 

And this breaks down those who've paid off homes demographically. Unsurprisingly, older people and those who live in areas with cheaper real estate are more likely to have mortgage free homes.

I was mostly wondering what percentage of owner occupied houses were mortgage free. I know more people who own rental houses outright than people that own their own houses outright, but I admit that's not a great slice of normal demographics. 

pheller said:

Robbie (Forum Supporter) said:

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

zero. When the mortgage is paid off you still have property taxes. 

Property taxes don't just go "poof" though. They pay for police, schools, fire, road maintenance, parks, etc. Property taxes are just the fee we pay to be "tied" to a certain area. Many of those things protect our investment so long as we put our sweat equity in maintaining our homes. Don't want them? Move someplace with less services, less stuff, less protections. 

I've recently noticed a "school free" movement, where snowbirds or retirees actively fight new schools, or any schools for their area. The justification? We don't want to pay for something we don't use. 

No, there is no difference between property taxes, mortgage payments, and rent in the point I was making. Which was you never get to live on a piece of land for free. Doesn't matter whose pocket you are lining. 

I think a lot of people could argue that money paid to the govt is more likely to go "poof" than money paid to a bank or a landlord... But again, it doesnt matter in my point at all. 

ProDarwin said:

Duke said:

ProDarwin said:

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Except that sooner or later a mortgage would be paid off.  Rent is never paid off.

I don't see how that factors into this?  A mortgage is paid off the second I sell the house and walk away with the equity.  Both sides are calculated assuming you choose that point to walk away.

You can keep extrapolating and generally home ownership does make sense the longer you own, but even then sometimes it does not make sense.

 

Again, not saying its dumb, just saying it shouldn't be advertised as some magical wealth building technique.  You can accomplish the same thing by simply investing extra income.

this is true, but would require that rent offers some cashflow advantage over buying, so that your total cost of living is lower when renting, so that you have the extra income to invest. For example, if cost of living in a rental is the same (add everything, rent, utilities, parking, lawn service) as owning a home, then owning a home where you're gaining equity over time as you make payments is like setting up an automatic deposit into your 401k with every paycheck. It's an investment you're making without having to take any action. 
 

the challenge is that rents come very close to the same cost as buying a house with a mortgage these days in most places, so its difficult to financially justify renting on a long term timeframe. 

In reply to mazdeuce - Seth :

You've picked a property that feels (to you) particularly cheap to rent from the government. I suspect that fact was considered when you picked the property in the first place... ;)

mtn (Forum Supporter) said:

It factors in if the alternative is renting - your mortgage may be paid off when you sell the house, but now you have to pay rent. 

Its just another way of doing the math.  If you are going to value having no mortgage, than you don't count equity in the equation, because you have traded equity for no monthly payment.

The correct way to compare the two options A/B is to caculate change in net worth (we are talking about wealth-building) from beginning to end, regardless of whether or not the mortgage is paid off at that point.

I would rather have a house with a garage full of projects and a backyard for a couple of dogs than a tiny apartment and a bunch of stocks and bonds. It's a lifestyle decision, not a financial one. Of course rent is stupid expensive where I live so you might not be investing a whole lot after your rent is paid. 

In reply to ProDarwin :

Are you saying that a paid off house doesn't count towards net worth? You would count that equity because if I have a paid off house I can sell it and go buy another house of similar value in cash, and have another paid off house. 
 

A paid off house is the return for all the payments that led up to it. What is your return for all the rent payments? I'd say it depends on what value you put on flexibility to leave at the end of your lease term if you want to, offset by the risk of increasing rent. 

Strizzo said:

In reply to ProDarwin :

Are you saying that a paid off house doesn't count towards net worth? You would count that equity because if I have a paid off house I can sell it and go buy another house of similar value in cash, and have another paid off house. 
 

A paid off house is the return for all the payments that led up to it. What is your return for all the rent payments? I'd say it depends on what value you put on flexibility to leave at the end of your lease term if you want to, offset by the risk of increasing rent. 

Buying or selling a house is 'ideally' a transaction that has zero net to your net worth. 

if I have $2 net worth and buy a $10 house with 2 in cash and 8 in loan, I'm left with 10 in assest and 8 in liabilities which nets to 2 in net worth. I think that is ProD's point. 

Robbie (Forum Supporter) said:

mazdeuce - Seth said:

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

zero. When the mortgage is paid off you still have property taxes. 

If you're paying rent, you're paying property taxes.

Just not directly to the government once a year.

Strizzo said:

In reply to ProDarwin :

Are you saying that a paid off house doesn't count towards net worth? You would count that equity because if I have a paid off house I can sell it and go buy another house of similar value in cash, and have another paid off house. 
 

A paid off house is the return for all the payments that led up to it. What is your return for all the rent payments? I'd say it depends on what value you put on flexibility to leave at the end of your lease term if you want to, offset by the risk of increasing rent. 

Yeah, I'm missing his point too.  He's applying a highly specific filter but I don't understand what he's showing us with it.  Of course if you ignore equity value then living costs over a given time frame are similar whether renting or buying.

Robbie (Forum Supporter) said:

Strizzo said:

In reply to ProDarwin :

Are you saying that a paid off house doesn't count towards net worth? You would count that equity because if I have a paid off house I can sell it and go buy another house of similar value in cash, and have another paid off house. 
 

A paid off house is the return for all the payments that led up to it. What is your return for all the rent payments? I'd say it depends on what value you put on flexibility to leave at the end of your lease term if you want to, offset by the risk of increasing rent. 

Buying or selling a house is 'ideally' a transaction that has zero net to your net worth. 

if I have $2 net worth and buy a $10 house with 2 in cash and 8 in loan, I'm left with 10 in assest and 8 in liabilities which nets to 2 in net worth. I think that is ProD's point. 

Except once you pay off the $8 loan, you have $10.

After you pay $8 in rent, you still only have $2 net worth and you're still going to have to come up with another $8 for rent.