Renters Gloat Over the Housing Slump

The Wall Street Journal Online/Yahoo! Finance ^ | December 29, 2006 | James R. Hagerty and George Anders

[Kenton]

What if you live in a rent controlled apt in a big city and are able to save a ton of cash. Is that building up equity?

Well, ya know, in that case you got me, at least if they are smart enough to hang onto that extra cash instead of, you know, just treating it like "extra cash". But I'm not really familiar with that concept because except for a few large cities on either coast, you don't see rent-controlled apartments, or at least I'm not aware of it. I dunno, maybe in places like Madison, Wisconsin...

I'm just curious, how does that whole "rent control" thing work? Who, exactly, subsidizes the lucky people who gain access to one of these apartments? Does it make it easier if you're connected to the local political machine? Seriously.

I can't imagine why any landlord subject to rent control wouldn't just dump the property.

[Kenton]

You know, I'm kind of getting an education here. I guess I've been reading too many of my own personal experiences into this.

I was a renter when I was young, and couldn't afford to buy a house. I struggled through college on the GI Bill, got my degree, got a job and eventually pulled enough together for a down payment on a house in the 'burbs.

For me and my wife, that was something of a rite of passage.

I guess I kind of forgot that a lot of people just prefer a more urban lifestyle, and apartments are a part of that. I'm surprised how riled up my comments about equity have gotten a few people, but if you've got money to buy, but live in an apartment by choice, that's different than what I was thinking about. I imagine your apartment is probably a lot nicer than the one I had not out of choice, but out of necessity.

So Happy New Years no matter where you choose to live, and may Saddam Hussein rot in Hell!

[VegasCowboy]

The note is a liability and the house is an asset. That is how every accountant would record the purchase of a house. Trying to claim that when you purchase a house, all you get is a liability is not accurate.

You are absolutely correct. If your tax-adjusted mortgage payment approximates a rent payment, you will clearly come out ahead by owning rather than renting even if prices don't rise. After 30 years of mortgage payments you will have an asset equal to the value of your home. 30 years of rent payments gets you nothing.

[VegasCowboy]

Only on paper...it's a myth.

Huh? So if you sell your home for more than your mortgage balance, and thus receive cash in excess of your initial investment, how is that not an asset? When you buy a home with a mortgage, you have both an asset and a liability. Your liability amount will generally go down as you pay down your mortgage and your asset will generally appreciate, thus creating value for the homeonwer.

[VegasCowboy]

Rent is money out of your pocket. So is renting a "liability" under your strange definitions?

Its actually an expense, whereas the cost to carry a mortgage is interest expense. Your mortgage is a liability, and your home is an asset. These are basic accounting matters, but cling to your definitions if it makes you happy.

[wtc911]

I'm a landlord. I have been for twenty years. I have never reduced rents and I have never had a problem finding tenants.

[Polybius]

Your ticking time bomb is not an accurate analogy. The only ones in trouble are those who took out 100% loans and then for some reason HAVE to sell when the market has gone down. That has nothing to do with interest only. It has to do with amount financed, length of time holding the property, and reason for selling.

Yes, those people are in trouble.

The other people who are in trouble are those people that paid highly inflated prices for a piece of property, took out an interest only ARM loan to barely make the monthly payment and, with the passage of time, now can no longer make the previously locked-in rate interest payments, plus the increase in interest rate that now kicks in plus the principal.

Add to that the fact that new buyers are starting to realize that “trees do not grow to the sky” and are no longer willing to be the next Greater Fool willing to buy a house priced at way more than can afford simply because they can afford the interest payments with ever riskier gimmicks and you have:

Home foreclosures increase 72%

Boston Globe: Suburbs flush with homes for sale Inventory rises 54%

If you took out a conventional loan and paid PITI for 2 years, you'd pay mostly interest, as you do for about 11-12 years on any home loan.

The interest only loan fad has artificially raised housing prices so much that most new buyers cannot afford the price with conventional loans.

In 2004, fully 50.4% of the mortgage loans issued for purchases of single-family homes in Georgia were to pay interest only…….. California was second, at 47.1%, Interest-only mortgages were designed for wealthy families who used the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds. .........Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public -- people who are struggling to get into a rising housing market and feel that they couldn't get the properties they want any other way. .......... even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. "In most of those cases, buyers have no idea how they're going to pay" the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes

If you had a 100% loan and had to sell, you'd be in big trouble if the market was down.

Well, the market IS down, the buyers who paid more that they should have cannot afford the greatly increased monthly payments now that grace periods are beginning to expire and, with suburbs sprouting dozens of For Sale and Foreclosed sign and the supply of Greater Fools willing to ignore value has dried up.

Those who took out a 100% no interest ARM loan are the lucky ones. Those who put down a 20% down payment and took out an 80% no interest ARM loan face losing not only their house but also their down payment.

Worse case: let's say you have an option ARM and are adding $5,000 a year to the principal because you are paying the lowest payment. In 5 years you would add about $25,000 to the principal. In that time, your home may have gone up 20%. A gain of 80,000 on a 400,000 home. The net: $55,000.

In other words, trees DO grow to the sky and the buyer must not consider concepts such as value since there will always be a Greater Fool to take the investment off your hands at a 20% profit in 5 years.

If you buy and hold, the value will increase and you'd be well in the clear.

I can buy and hold. You can buy and hold. You and I are in the position of using interest only loans as cash flow tools as they were intended and, in the very worst case scenario, we can write a check for the entire principal.

The problem today is the buyers using such loans have no such means and can barely afford the interest only grace period payments.

The difference is that you want to pay more to the bank, while I'd be buying two-three more homes.

That is one way of looking at it. The other way to look at it is that my rental income and the money that I would otherwise have given to the bank has been mine to invest in whatever other investments I chose whether it be real estate or not.

You chose to concentrate on real estate and I chose to diversify.

Plus, if I die tomorrow like my father died when I was 16, my family can keep 100% of the real estate we own instead of losing the house like my family did. There is a value to peace of mind.

I have four homes now with about 900,000 in equity. I could have paid off my one house and had $350,000.

Or, if you had not paid attention to value, you could have had one hell of a negative cash flow plus a couple of foreclosures.

Would you care to buy a $600,000 condo on Miami Beach to add to your real estate portfolio?

It is nearing completion and one of my relatives is a little nervous about having to feed that mortgage if he is not able to sell. And, no, renting it out will still leave huge negative cash flow.

I help people figure this out for a living and how to avoid being upside down. I know it works because I have done it personally and helped a few dozen others do the same thing.

It works if you buy good value.

The problem up to now is that too many new buyers were paying ridiculous real estate prices made possible only with risky loan gimmicks that they will never be able to pay off.

The same thing happened in the 1980’s during the Japanese Real Estate Bust. That brought about the Japanese Banking Crisis that followed. Here in the U.S., the situation may well bring on Savings and Loan Taxpayer Bailout Revisited.

It is an oversimplification to say that interest only should be for the wealthy. If the factors are right, anyone can reasonably take advantage of these loans and come out well ahead on their investment. That's what I help my clients figure out.

The way that article used the word “wealthy” is to mean someone who had enough assets to pay off the principal of the no interest loan if need be without losing the property to foreclosure.

Would you advise a young, two income working couple who want to have a baby in three years to buy my relative’s $600,000 Miami Beach investment condo because, after looking into an interest only ARM loan that allows negative amortization payments for the first two years, they have discovered that they can actually afford the monthly payments for those two years on their Burger King manager salaries.

I think not.

You teach clients to use mortgages as cash flow tools and they can be great cash flow tools.

The problem is that many new buyers are now using these gimmick loans to pay highly inflated prices that they simply cannot afford in the long run and the supply of Greater Fools willing to take the mistake off their hands has dried up.

[carolinalivin]

I do not dispute that some people are in trouble and people like you are adept at collecting news articles about them.

I spent some time this morning and once before explaining how to avoid trouble and make even more money that you did. I can see the impact that has on someone who can only see the idiots and not the successes.

I make my living advising people how to do this and I have been successful with them and my own family.

You can list all the newspaper articles you want. When my clients show up in them, let me know.

Best Wishes!

[100-Fold_Return]

yep, renting is an expense and liability. what;s so "strange" about that?

and in accounting the house is a so-called asset, but it's money out of your pocket and thus it "strangely" actually a liabiliy cuz mortgage and taxes are attached to that property

[100-Fold_Return]

only if/when it sells--then the house bought next is most likely more costly then the next house becomes your liability

[100-Fold_Return]

while yout $100,000 home will have cost $3-400,000 over that 30-years only on paper could any one dream such is an asset not liability

[Always Right]

while yout $100,000 home will have cost $3-400,000 over that 30-years only on paper could any one dream such is an asset not liability

The Note cost you $2-300K, the house cost $100K, and after 30 years that $100K house would be worth several million dollars. Of course in your warped accounting having a $1 million plus house debt-free is only a liability.

[Polybius]

I do not dispute that some people are in trouble and people like you are adept at collecting news articles about them. I spent some time this morning and once before explaining how to avoid trouble and make even more money that you did. I can see the impact that has on someone who can only see the idiots and not the successes. I make my living advising people how to do this and I have been successful with them and my own family. You can list all the newspaper articles you want. When my clients show up in them, let me know. Best Wishes!

You are defending your consulting line of work and I am pointing out the vast number of people that are making foolish choices because they do not consult somebody like you.

As I posted before, I am sure that you advise your clients to take value into consideration and a property in a certain location in North Carolina may be a totally different animal than a condo on the glutted and overpriced Miami Beach condo market where a very large number of condos are owned by flippers, like my relative, who are now sweating bullets. (Are you sure you don't want to buy that Miami Beach condo from my relative?)

Remember the days when you could buy an investment property at good value with fixed rate financing without having to bid against the Burger King manager that was bidding $600,000 that he could never hope to repay because that amount of money was made available to him by irresponsible gimmick loan instruments?

That artificial inflation of selling prices drastically affects whether or not real estate is good value in many markets.

My real estate equity exceed yours and accounts for less than one third of the net worth of my total investments. Once real estate returns to being a good value instead of being a Ponzi Scheme in the markets I am interested in, my real estate holdings will increase.

The current irresponsibility by lenders and by the average buyer with gimmick loans is making real estate more of a gamble than an investment. That goes for you, for me and for your clients.

Making money in the game and having clients make money in the game is not a measure of the soundness of the game. When Charles Ponzi's scheme was collapsing, Ponzi paid out $2 million in three days to nervous investors and those lucky dogs made a great profit.

Only the suckers holding the bag at the end of the game lose the money that everybody else won in the game.

In many real estate markets where prices have been artificially and drastically inflated by gimmick loans, the early sellers will make a profit, the real estate agents and advisors will make a profit, the last buyers holding the bag will have the properties foreclosed and the banks that traded good money for grossly overpriced real estate (as Japanese banks did in the 1980's) will cry like stuck pigs to Uncle Sam for another Savings and Loan Bailout.

So, the last sucker that that will end up paying for the game will be:

The U.S. Taxpayer.

[MediaMole]

Around here, rental properties have gone begging. Landlords have been forced to lower rents to get renters. The more affluent tenants have bought homes, leaving thousands of duplexes in search of decent tenants. A few years ago, you could purchase a duplex, pay the mortgage with the rent from the other flat and live cheap. Now, the combination of a flat rental market and high real estate costs have changed the economics.

I'm paying less than I was in 2000. ...and yes, I'm putting the difference in my 401k.

[Mr. Jeeves]

The money that goes towards rent goes NOWHERE.

It buys you the flexibility to move quickly, the freedom to make career choices you couldn't make as a homeowner, and the freedom from repair bills and maintenance.

It's a choice, but it's hardly a waste of money to rent - mortgage company propaganda notwithstanding. ;)

[Leftism is Mentally Deranged]

Disgusting how the biased leftist media painted this as a disaster, instead of housing now being more affordable. The media always referred to it as a "slump".
Let's see how the media treats the same phenomenon when/if there's a democrat president!

[SamAdams76]

Well the renters might gloat now but the owners can always raise the rent if they have to.

[NittanyLion]

while yout $100,000 home will have cost $3-400,000 over that 30-years only on paper could any one dream such is an asset not liability

That would be approximately an $1100 per month mortgage. So what would be your rental payment each month?

And incidentally, at the end of that period you'd have (even using a very conservative 5% rate of appreciation) a $300K asset. When renting, you have only the difference between the mortgage payment and rent payment, which will likely be far less than $300K.

[VegasCowboy]

Something cannot be both an expense and a liability as they are conceptually totally different things, but I guess that's besides the point. The point is that both renting and buying cost you a monthly payment. However, when you buy you can build equity in your home (i.e., wealth). In other words, there is definitely an asset involved in buying a home. Is there risk? Absolutely. But when you rent your monthly payments are guaranteed to never build any wealth for you.

[VegasCowboy]

How much would you have wasted in rent over the same 30 years with nothing to show for it?