Here's some I've always heard or followed - before this current bubble of course, where as with all other bubbles, the #1 rule seems to be "hey, it's different this time"
Here's my list. What did I miss?
1) You should not buy a property for more than 150 times the monthly rent
Take the loft I sold in Arizona. It would rent for $1000 a month (1 bed, 1 bath, 1100 sq. ft). So a fair price would be $150k. I bought it for $170k in 2002. But sold for $315k. So the 150 rule would dictate it would need to fetch over $2000 a month in rent, and that's not even close. During this bubble, rent has no relation to price. Bottom line is if you can't rent your place out and break even, worry.
2) You should buy a home for a maximum of 3 times your monthly income
I'm hearing in California we're at 10 times income, Miami is 6 times income. Ouch. Here's the income gap by state - notice Arizona now has the biggest gap. During this bubble, this rule got shown the door by Mr. Interest Only.
3) Location, Location, Location
Always the top one I thought. But now I'm seeing in Phoenix new homes being built next to the hum of busy highways (including some nice $800,000 condos near me), under airport landing zones, 2o to 50 miles outside the city center, under power lines, in bad neighborhoods. I guess during this bubble, location, location, location ain't in effect
4) Your house payment should be no more than 28 percent of your gross monthly income
Do the math for your area - I think Phoenix, SF, LA, Boston, Miami and others are wayyyy over 28%. And the bartender buying that $500,000 condo on $50,000 in income? Not even close during this bubble. But no problem getting that loan
December 25, 2005
Question for readers on "the rules" - what real estate rules and truisms have been tossed out the window during the current bubble?
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3 comments:
All these rules still apply here in Texas, which has not experienced any home appreciation since the tech crash in 2000. That's when all the dot.com pimply-faced twenty-somethings bought mansions with their salaries and stock options until their jobs vanished and the stock options became worthless, leaving unoccupied homes and severe lob losses in their wake.
Today the jobs have recovered and real estate is improving, but you can still find in and around Houston, Dallas, Fort Worth, Austin, and San Antonio new homes with hardwood and tile floors, beautiful cabinets, granite countertops, decks, sprinkler systems, crown mouldings, stainless, jacuzzis, you name it, in wooded golf course communities, for under $100 a square foot.
I don't understand why someone wouldn't sell one of those Marin POS crack dens and buy one of these, and still have money left over for the Hummer or Lexus. Plenty of jobs in Texas and no state income tax.
Look at the state by state link on the post - texas has the best affordability #s.
But I got some good (or bad) news for you - hearing the investors fleeing Phoenix are heading to texas - austin especially
But if there's nobody to sell the homes to (besides other investors) wonder if they'll be able to create the same buying panic we saw here. I doubt it.
Rules number 2 and number 4 are strongly related. Rule number 4 is a guideline for lenders: lenders are not supposed to lend someone money if the monthly payment is more than 28% of their monthly income. If you want a loan that requires income documentation, that rule is still true.
Rule number 2 is somewhat interest rate dependent. Most buyers make decisions based on monthly payment, not total cost. At a fixed monthly payment, lower interest rates mean higher home prices and higher interest rates mean lower home prices. If a buyer plans to buy a home and live there for thirty years, this doesn't really matter. However, most buyers hold houses for less time, so overpaying may come back to haunt them.
Anyway, here's a rule that you left out: "the best investment that you can make is buying your home." Renting is now a much smarter economic decision in most locations.
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