Is this a common fallacy in real estate?

[theoakman]

That's a false paradigm though. Wages do increase. Maybe not at the same rate of inflation, but most of us make more money now than we did 10 years ago. In the '80's, heart surgeons made $150,000 per year.

Do you think that heart surgeons make more now? DO you think that the home he bought then is worth more now?

Well, wages don't really outpace inflation when inflation is significant. The point of inflation is precisely to rob wages and savings. So it's natural that they don't follow inflation. If you look at nearly every industry, you'll find that in the past 10 years, the average wage has increased nominally by about 20-25% since 1999. On the flip side, you'll find that the price of food and gas has doubled. The price of housing doubled (but it's coming back down). The price of health care, the cost of electricity, the cost of dirt, car insurance, everything....it's all up more than 25% the past 5 years. It's probably up more than 100%. The federal government spending was up 40% in the past 10 years prior to October. There's no question it's past 100% now and it's probably going to 500% by the time Obama is finished.

Wages have not kept up with inflation. They haven't even come close. Now, because it's all relative, you will see housing fall back in line with wages. This is unavoidable and it's also a good thing for Americans. The real danger is that things such as oil and commodities are traded and bought on the global markets. These things will end up costing Americans more and result in a decrease in our standard of living.

The point is, inflation has literally destroyed our real wages the past 10 years at a much faster rate than it ever has in American history. The real danger is, we haven't even seen the big inflation that is likely to come from our government's reckless policies in the next 5 years. It's not going to be pretty. At this point, the best thing we can hope for is the bankruptcy of our governments (similar to the bankruptcy of the USSR) and a nice structure reorganization of all governments (federal, state, county, and municipal) into much smaller governments.

We truly live in Bizarro world right now when Europe, Russia, and China are telling us that government spending and socialism are the fast track to poverty and economic malaise. We used to fight wars to stop the spread of communism yet we somehow peacefully embraced it here.

 

[theoakman]

thanks, even though it sounds like you just told me what I wanted to hear, much apprecaited, I will read this carefully again!

There are plenty of benefits to home ownership. Making money is not one of them.

There are also plenty of drawbacks. Maintenance and upkeep are pains in the asses. Oh yeah, and bad neighbors are a nightmare. The biggest drawback however, is the fact that states are realizing that they can turn every homeowner into a renter through property taxes. There's no easy solution to protecting yourself in this crisis when the government changes the rules every other month.

 

[enjerth]

I agree, they wont, and as I just pointed out, if the principle is low, interest rate won't matter.

If a house costs $10K, will it matter if interest rates are 20% a year?
If your cash call was $400, will it matter if the interest rates are 100%?

The rate always matters, much more than you're implying.

If housing falls by 40%, but the interest rate shoots up to 10%, that's effectively a trade-off.

If a house costs $10,000 @ 20% and your wages are so low that you need a mortgage (the only reason to get a loan), it's going to cost you $60,120 to pay off your $10,000 house in 30 years. A 15-year mortgage will cost you a total $31,680.

The interest rate has as much to do with determining the affordability of the house as the price does, and inflation is a real hazard that will drive up the cost (rate) of financing.

 

[The_Orlonater]

But I am still open minded to it.

I just think it's irresponsible and immoral to let inflation be the sole fear.

Can you afford it? Just out of curiousity, wouldn't it be best t o get a home if you have a family? Otherwise getting a condominium or renting and apartment is what I see as a good option.

 

[angelatc]

Well, wages don't really outpace inflation when inflation is significant. .

I am not saying they do. I am saying that historically, that you will end up with more money in your pocket at the end of the month if you choose fixed rate, rather than adjustable, housing costs.

 

[Mesogen]

I'm surprised no one linked to this.

http://media.lewrockwell.com/media/2009-03-23_108_youre_better_off_as_a_renter.mp3

Peter Schiff: You're Better Off as a Renter

 

[Josh_LA]

There are plenty of benefits to home ownership. Making money is not one of them.

There are also plenty of drawbacks. Maintenance and upkeep are pains in the asses. Oh yeah, and bad neighbors are a nightmare. The biggest drawback however, is the fact that states are realizing that they can turn every homeowner into a renter through property taxes. There's no easy solution to protecting yourself in this crisis when the government changes the rules every other month.

thanks. I agree too, that the government can at any time change rules to make it unfavorable for some to own houses. (assuming they don't outright make home owning illegal).

 

[Josh_LA]

I'm surprised no one linked to this.

http://media.lewrockwell.com/media/2009-03-23_108_youre_better_off_as_a_renter.mp3

Peter Schiff: You're Better Off as a Renter

OUCH! Not that I think Schiff is right about everything (but I have yet to find what I disagree with him so far on)

 

[Josh_LA]

I am not saying they do. I am saying that historically, that you will end up with more money in your pocket at the end of the month if you choose fixed rate, rather than adjustable, housing costs.

that much I agree.

Adjustable is another sucker for people who wishfully think banks are stupid.

 

[Josh_LA]

Can you afford it? Just out of curiousity, wouldn't it be best t o get a home if you have a family? Otherwise getting a condominium or renting and apartment is what I see as a good option.

Currently no.

But I won't buy a house unless i see myself paying it off in 10 years.

Yes, having a house is better than not if you have a family.
And I thank God every day I have nobody else to feed but myself.
Talk about freedom?

 

[Josh_LA]

The rate always matters, much more than you're implying.

If housing falls by 40%, but the interest rate shoots up to 10%, that's effectively a trade-off.

If a house costs $10,000 @ 20% and your wages are so low that you need a mortgage (the only reason to get a loan), it's going to cost you $60,120 to pay off your $10,000 house in 30 years. A 15-year mortgage will cost you a total $31,680.

The interest rate has as much to do with determining the affordability of the house as the price does, and inflation is a real hazard that will drive up the cost (rate) of financing.

I don't think we disagree.

The point is
1. Don't stretch it out to 30 years, make it in 10, or 15, ASAP
2. If you know right away you can pay it off in 10 years realistically, THAT should tell you whether you can afford it.

 

[enjerth]

I don't think we disagree.

The point is
1. Don't stretch it out to 30 years, make it in 10, or 15, ASAP
2. If you know right away you can pay it off in 10 years realistically, THAT should tell you whether you can afford it.

I think we do disagree.

The point is:
1. What you can afford is determined on a monthly basis, which the interest rate has a lot to do with. I can afford a 30 year mortgage for $120,000 at 5% because my income is below median and I expect that if I lose this job I can find another one that pays just about as well or better.
2. Yes, it's stupid to take a 30 year mortgage if your income is greater than $80k, but that is not true for most of us. Above median jobs should be seen as having a greater risk of losing your income, and so such a person should be more careful when pledging themselves into debt.
3. You should stop giving advice on buying a home, since it was only a week ago you didn't even know how interest accumulated on a mortgage. I think there are plenty of people here who have studied the issue longer and understand it better than you.
4. Inflation is real and it's going to have it's effect on how affordable houses are. Home prices will drop, but interest rates won't make it any more affordable. Jobs won't keep up with inflation, but interest rates will. It's not a hedge against inflation, this is just the best time to buy. Ever. You will never see rates this low again, and to top that off, low rates on the front end of an inflationary depression. If we see anything like the Wiemar Republic, you'll be able to pay off a $200,000 in just a few months. But $200,000 will be gone by then. The opportunity is now.

Lots of people will lose everything, but the big winners will be the ones who took advantage of opportunities BEFORE the shit hits the fan. Not that everyone who takes an opportunity will not lose everything. All bets are off, but one thing is sure, people who don't take any opportunity will not secure anything for their future.

 

[Met Income]

I don't think we disagree.

The point is
1. Don't stretch it out to 30 years, make it in 10, or 15, ASAP
2. If you know right away you can pay it off in 10 years realistically, THAT should tell you whether you can afford it.

Where are you getting this 10-15 yr limits from? If the interest rate is low enough, it makes sense to go longer. The math supports it, you just have to crunch the numbers.

 

[Josh_LA]

I think we do disagree.

The point is:
1. What you can afford is determined on a monthly basis, which the interest rate has a lot to do with. I can afford a 30 year mortgage for $120,000 at 5% because my income is below median and I expect that if I lose this job I can find another one that pays just about as well or better.

So how can you commit to a long term loan if you need a monthly basis to know what you can afford?

2. Yes, it's stupid to take a 30 year mortgage if your income is greater than $80k, but that is not true for most of us. Above median jobs should be seen as having a greater risk of losing your income, and so such a person should be more careful when pledging themselves into debt.
3. You should stop giving advice on buying a home, since it was only a week ago you didn't even know how interest accumulated on a mortgage. I think there are plenty of people here who have studied the issue longer and understand it better than you.

I am not giving any advice, I'm running numbers and I am seeing what doesn't make sense to me, if people want to pay more for what they might not need to, I wouldn't advise against it at all.

4. Inflation is real and it's going to have it's effect on how affordable houses are. Home prices will drop, but interest rates won't make it any more affordable.

I think that's exactly where we disagree on.

Houses can drop from $500K to $250k to $120K

5% 8% 10% interest rates won't be relevant if you can buy a house at $120K rather than $250K. (assuming you can buy it and pay if off within 10 years)

Jobs won't keep up with inflation, but interest rates will. It's not a hedge against inflation, this is just the best time to buy. Ever. You will never see rates this low again, and to top that off, low rates on the front end of an inflationary depression.

I don't want to see interest rates low again. Because they can keep contracting money and keep killing the real estate marketing, I'll just wait for the time to buy.

If we see anything like the Wiemar Republic, you'll be able to pay off a $200,000 in just a few months. But $200,000 will be gone by then. The opportunity is now.

If that's remotely true, I'll trade a few ounces of silver for a house.

Lots of people will lose everything, but the big winners will be the ones who took advantage of opportunities BEFORE the shit hits the fan. Not that everyone who takes an opportunity will not lose everything. All bets are off, but one thing is sure, people who don't take any opportunity will not secure anything for their future.

I agree.
And right now a house isn't the biggest thing I need.
Some people "own" a house without even "owning" a car, that's why they end up to live in tents rather than cars.

 

[Zippyjuan]

I am not saying they do. I am saying that historically, that you will end up with more money in your pocket at the end of the month if you choose fixed rate, rather than adjustable, housing costs.

Adjustable rates are only temporarily lower than fixed rates. You save money in the long run only as long as interest rates stay low. If rates go up then they can quickly get higher than a fixed rate meaning you can end up paying more. That is why we have been seeing some of the defaults on adjustable rate mortgages lately- the rates have gone higher than what people thought they could afford.

If an adjustable rate is offering 3.5% and fixed rates are 5% they do not have to go up much to exceed what you were getting on a fixed. Today rates are down to historically low levels and the probable direction in the future (certainly in ten to 30 years) is up. If they are high and you have a fixed rate mortgage and rates go down you can refinance. Fixed locks you in- on your interest rate and your payment size.

 

[Josh_LA]

Where are you getting this 10-15 yr limits from? If the interest rate is low enough, it makes sense to go longer. The math supports it, you just have to crunch the numbers.

No it doesn't make sense to go longer.

Being out of debt means you can later keep 100% of your paycheck and invest it elsewhere.

10-15 year is arbitrary, because I know most people can't pay it off right away, and 5 years seems too short, but 20-30 years seems too long (and that's all my opinion).

Hey, you're the one who's debating whether to buy a house!

Do you disagree the cost of the house is what matters most?
What matters second is your job/income?
Then comes the interest rates?
Then comes the tax deductions?

 

[Josh_LA]

Adjustable rates are only temporarily lower than fixed rates. You save money in the long run only as long as interest rates stay low. If rates go up then they can quickly get higher than a fixed rate meaning you can end up paying more. That is why we have been seeing some of the defaults on adjustable rate mortgages lately- the rates have gone higher than what people thought they could afford.

If an adjustable rate is offering 3.5% and fixed rates are 5% they do not have to go up much to exceed what you were getting on a fixed. Today rates are down to historically low levels and the probable direction in the future (certainly in ten to 30 years) is up. If they are high and you have a fixed rate mortgage and rates go down you can refinance. Fixed locks you in- on your interest rate and your payment size.

What difference does it make if interest rates go up, if you can't afford it anyway?

Let's say banks today loan you money at ZERO INTEREST.

If you don't have your job and can't make your payments, who cares if your neighbor 10 years later pays 20% interest? You either CAN make your payments, or you CAN'T, or you borrow from elsewhere to fill this hole.

 

[Zippyjuan]

If you can't afford it, then all the other points are irrelevant.
I don't see the point of this reply.

 

[Josh_LA]

If you can't afford it, then all the other points are irrelevant.
I don't see the point of this reply.

I agree.

And my whole argument was, affordability should consider how soon you can be free from such debt.

And we're always hearing "you can't afford to rent for 20 years and own nothing" when the fact is, if you can't afford it, you just can't afford it, what difference does it make?

 

[Met Income]

No it doesn't make sense to go longer.

Being out of debt means you can later keep 100% of your paycheck and invest it elsewhere.

Why not? You don't keep 100% of your paycheck when you're still paying rent.

10-15 year is arbitrary, because I know most people can't pay it off right away, and 5 years seems too short, but 20-30 years seems too long (and that's all my opinion).

Seems too short, seems too long. This is supposed to convince me? It's not what it seems, it's the math. Net Present Value, interest rates, and all that good stuff.

Hey, you're the one who's debating whether to buy a house!

Do you disagree the cost of the house is what matters most?
What matters second is your job/income?
Then comes the interest rates?
Then comes the tax deductions?

I've always subscribed to the theory that if I believe I will be in the area for at least 5 years, am committed to the responsibility of owning, have an emergency fund for repairs and can afford the payments while still saving for retirement, it makes sense.