October 20, 2008

HousingPANIC Stupid Question of the Day

Who's better off?

Guy A: Buys a house today for $200,000, that fell 50% from the peak, puts 10% down and finances with a 30 year 6% mortgage. House has negative $500 a month cash flow if rented.

Guy B: Buys an exactly similar house for $150,000 a year from now, that fell another 25% versus today, puts 10% down and finances with a 30 year 8% mortgage. House has negative $500 a month cash flow if rented.

Guy C: Rents house from Guy A or B

53 comments:

Owner Earnings said...

Guy D who bought the house for $200,000 5 years ago, took a HELOC out for $200,000 and put the money in the bank. Then defaulted on the loans.

Anonymous said...

Guy C, but only if he invests the income he has saved by renting instead of buying into a stable investment (which is hard to find nowadays).

Snarky answer: Both guys A & B because they will be bailed out by guy C using all the money he saved by being conservative and renting & saving.

keyser soze said...

Keith...did you read the letter from Ladhe, the hedgie who is dropping out, ala Timothy O'Leary?
Great, funny stuff.
Don't bong me, bro.

Anonymous said...

In the long run, Guy B, his entry point is lower than A's. B also has the opportunity to refinance at a lower rate in the future (when short memory bankers forget the lesson they just learned). Give it another 15 years, it will happen all over again.

keyser soze said...

Between A & B, I've always favored B in this age-old question. It's just in my nature to prefer owing less and waiting for a drop in rates. That said, I've been living my life as C, not really caring who is my landlord as I don't collect too much junk, so can move quickly if needed.

Anonymous said...

Guy D. He waits until 2011, and pays for it in cash.

Anonymous said...

I heard that under Obama, Guy C is going to get the shit taxed out of him/her.

What I was told is, Obama's "not raising taxes on people under $250K" is based upon tax deductions for people who own homes.

nke514 said...

I'll vote for the Guy D as well..but possibly with the caveat that he used other people's identity to do this 10 or 12 times.

Anonymous said...

A or B since their mortgage amount will be $75K once the federal government renegotiates it for them.

Your boy wonder O'Bama will make sure nobody ever loses their homes. First there is the 90 day foreclosure moratorium. Then that 90 turns into 180. And soon enough foreclosures are banned altogether in favor of the government allocating housing units for all citizens. Just like in the Soviet Union.

I can't wait.

Anonymous said...

What I was told is, Obama's "not raising taxes on people under $250K" is based upon tax deductions for people who own homes.

October 20, 2008 1:52 PM

=======

How racist of you to point this out.

michael said...

if guy B has a family, the monthly payment is 25% of his gross income and he plans on staying there for 15 years then I like guy B.

Anonymous said...

It can't be Guy A....if there are any 90% LTV non-owner occupied loans available you certainly can't get them at 6%.

wc said...

Guy C for as long as renting makes more sense than buying. Though I would be thrilled if I could buy a house and only have an $1,131.21 payment. Of course if there were even a $250K house worth living in near where I live I would probably buy. The problem is even though guy B paid less for his house - I bet his taxes stay the same as guy A no matter how far down the value goes for either one.

gotts said...

Assuming that the value of each house stays the same over time, the winner is Guy C, but only if he rents the house that Guy B would have bought.

keith said...

What inspired this post is some idiot realtor (isn't that one and the same) arguing I think on bloodhound or maybe it was realtytimes that people should buy homes now even though they're going to tank in value because their payments would be about the same as interest rates go up

Again proving that realtors never showed up for their Econ 101 classes.

I never understood this fascination with monthly payments. Same thing drove the bubble. Why does nobody care about the price of the asset?

Are people really this dumb?

Anonymous said...

keith said...

Are people really this dumb?

October 20, 2008 3:01 PM

Yes, they are. Millions of them.

Thus endeth the lesson.

Miss Goldbug said...

Guy C!

Who wants to catch a falling knife next year too?

Bob Reno said...

I also vote for Guy D, the one who waits two years (renting cheaply, saving every cent) and pays $75,000 cash and doesn't have a mortgage.

Anonymous said...

If A and B are black, then A or B since THE MESSIAH will make sure his bruthas be tooken car of

Anonymous said...

Guy D who sold his primary resedence and all his FL ivestment properties in 2006 ($800.000.00profit), invest in gold ($480/oz-$500) renting now and willing to buy in 2011-12.

Anonymous said...

Keith,
Regarding (A) and (B), please provide an amortization table or (shudder) an equation so that your readers can make an informed decision.

Anonymous said...

All three guys are idiots:

A&B- For buying homes that had -500cash flow when rented

C- Just because he's still a renter

Anonymous said...

What I was told is, Obama's "not raising taxes on people under $250K" is based upon tax deductions for people who own homes.

-------------------------------

i suppose you also believed bill clinton when he said he would lower taxes in his first term.

Anonymous said...

I never understood this fascination with monthly payments. Same thing drove the bubble. Why does nobody care about the price of the asset?

Are people really this dumb?
--------------------------------

yes, they are. the auto industry has been using "monthly payments" justification for a long long time now.

Anonymous said...

How about guy E who has cash sitting in the bank earning 4%. Would he be better off buying all cash and renting to guy C?

DOPES 2 said...

GUY D YOU TOOLS!!!!

HE SOLD HIS CRAP TO THE KNIFE-CATCHING DOUCHE KNOWN AS GUY A!!!!

TOOLS!!!

DOPES!!!

eric in vegas said...

"I never understood this fascination with monthly payments. Same thing drove the bubble. Why does nobody care about the price of the asset?

Are people really this dumb?"

-------------

Yes, why do you think the first thing a car salesman asks is how much you want your monthly payment to be?

Paul E. Math said...

I am Guy C and he's the guy that wins.

However, between Guy A and B, I would much rather be B. Sure, you're still living in the same house and paying the same on your mortgage. But if you want to move, Guy A owes thousands whereas Guy B at least breaks even.

I'm staying put as Guy C for the next year.

Anonymous said...

Wouldn't Guy B also be enjoying a larger tax deduction since a greater percentage of his payment is going to interest as opposed to principle?

Anonymous said...

Guy B would also have the advantage of saving $500/month($6,000 for the year) instead of bleeding that $500 per month like Guy A would. Assuming this is a long-term investment, the $6,000 could best be used to buy down points on the mortgage maybe bringing his effective interest rate closer to Guy A's. In this case, Guy B would clearly be in a better cashflow situation.

Anonymous said...

Lame. The problem isn't just rent vs. buy it's the endless push to spend as much as you can and get as much as you can on housing. I'll take (d), the 500/mo rent for a place near where I work where the houses are all half a million but there are cheap apartments available, and (e), the all-cash cabin on land away from the city where you can have a nice, livable place with water, power, etc. for 50k total. I'd rather not pay for a yard, 1500-5000 square feet, a basement, a driveway or a garage at any price, and I don't view housing as an investment. Ever. People keep putting out false dichotomies of renting vs. buying expensive houses, without questioning the need for such a house, and now you're doing it to. That's part of what got us in this mess!

Lady Di said...

Guy C (A or B rent to C). Since we are talking rental propery,
$500.00 is too much of a monthly hit for a $200,000 - $150,000 rental home. At that entry point, it should he at least breakeven.

Anonymous said...

None of the above, unless it is a duplex/tri-plex or apartment. Those are INCOME properties. Single-family residences were rarely bought/sold for their income production prior to the boom.

Makes no sense in a true market, and even less in a volatile one.

Anonymous said...

I'm with paul e. math.

The landlord came by over the weekend to turn on the heater; I don't even have to put a match to the pilot light. I told him I'd be staying another year. Made him happy. Then he climbed up on the roof and drained the swamp cooler.

Today the maid came so I had to get out of the house. Bought a Blu Ray DVD player and got a really sharp deal on an Oriental rug.

Too bad I am just a lowly renter. I wouldn't buy this place with YOUR money. What in the world for?

My only problem these days is that I am not getting a realistic return on my cash.

Thank you Keith and thanks to all the other Bubble bloggers. This is the one and only time I was ahead of the herd.

Kent said...

Better to worse - C, B, then A. C is free to move at will, gets the property at the lowest cost, and has no net worth hit due to "asset" vs. loan. A&B have equal cash flow in a year but A's net worth is $50,000 worse in a year compared to B.

Anonymous said...

Keith,

You forgot to mention that guy C is one of those flippers that lost their homes.

Dny

Stuck in So Pa said...

Are people really this dumb?
--------------------------------

yes, they are. the auto industry has been using "monthly payments" justification for a long long time now.
-----------------------------------
Yes, why do you think the first thing a car salesman asks is how much you want your monthly payment to be?

-----------------------------------
I stopped into the local Chevy dealership to pick up some parts for the company trucks and made the mistake of walking the pickup rows. I know what chum in the shark pen feels like now. The place was dead and the salesmen were hungry. Since it was my last run of the day and it was my time, I let the kid give me the whole pitch. I finally gave up trying to keep him updated with the fact that IF I bought, IT WOULD BE CASH!
I lost track of how many times he wandered back to monthly payments.
Used to be that the ability to pay cash got you favored treatment, No More! The salesman makes more commission on the note he stakes you thru the heart with, than the actual truck sale. Oh well, I can wait. There are TONS of late model PU's on front lawns right now. Too many in fact! Its great to be able to pick and choose. Too bad that most of the trucks for sale on front lawn sales are soooooo far underwater the owners might as well plant flowers all around and turn them into giant lawn ornaments!

lensam369 said...

Guy B!
Tax Deductions, and you earn more equity (%-wise) by prepaying a bit more each month.

-FutureShock- said...

No one wins. We are all screwed.

Anonymous said...

a & b are both idiots for using single family houses as investment vehicles.

a & b are both idiots for "investing" in something that takes money OUT of your pocket.

Nick said...

Both Guy A and B will be better off because in the end the government will end up lowering their mortgage to reflect it's current market value at the expense of Fucked Savers. You HP'es may not like it, but that will be the end result of this housing mess.

JDallas said...

Guy C is the winner. He gets to rent and can choose when he wants to move into the market to buy a house. After Guy C , its Guy B. His buy price was lower, so he can sell sooner at a lower price than waiting for the market to fully recover.

wc said...

I have to argue that the monthly payments on a house would make sense - even with all that interest - if you were paying significantly less than you would by paying monthly rent. In 1995 I bought a house where my piti payment was only $973 for a 4 bdrm house. The rent for even a 3 bdrm apartment was ~$1,400 at the time. If you compared it to a monthly rental payment because you have to have a place to live - I think it made sense to buy then. If I had kept the house - today - 3 bdrm apartments in that area now go for $2,200-2,500/month but my monthly payment would only have gone up a little due to taxes. It would be great if everyone could buy a house with cash. Today if prices came down enough - I could. But back then - it made sense to take on a mortgage rather than paying higher rent and it was nice knowing that even though taxes and insurance would go up slowly over time - my mortgage payment would stay exactly the same.

borkafatty aka the pig said...

Guy C is in the best shape even if he pisses away that $500 a month on frivolous consumption (though i would never recommend that) since he's getting a better standard of living on the same money.

Bonus points if buys a house when mortgage rates peak and houses stop falling in value and maybe even start to appreciate again. The best time to buy a house in recent history was 1981 in the middle of a major recession with astronomical mortgage rates. I will be buying houses hand over fist when this happens again and it will. History perpetually repeats itself.

Nick said...

Both Guy A and B will come out ahead. The government will eventually bail them out. While poor Guy C is still renting out his shit hole apartment hoping for real estate prices to collapse. The government will do whatever they can do stop prices from deflating. So far, I feel vindicated in my judgment. Listen up HP'ers, this October 15th was TWELVE FULL MONTHS of me not paying my mortgage and now my lender is begging me to sit down and work out a deal. I won't be satisfied until they lower my mortgage value and then we will talk.

Anonymous said...

Guy B!
Tax Deductions, and you earn more equity (%-wise) by prepaying a bit more each month.


This "tax deduction" myth is a lie. First of all you need to itemize on your tax return to get the deduction. Do you pay enough interest per year on a $200k or even $300k mortgage in order to be worth taking the deduction? Don't believe it? Use any online mortgage calculator to check what I'm saying.

INTEREST DEDUCTION = BIGGEST LIE

Anonymous said...

Is this a tricky question?

Signed, Obama voter

redondo_beach_dude said...

Guy C at least through next year.

In hindsight,
2009 will look better than 2010,
'10 better than '11,
'11 better than '12,
and so on... until the bottom in '12 or '13 when we enter a protracted bottom, not a V.

I wonder if savers will be rewarded finally by deflation. At least, no hurry to buy as bargains will be available for years. Interesting that here in the Los Angeles county beach zips like Redondo, Hermosa, and Manhattan the prices are finally softening. Speculation is that these folks are as leveraged as anyone else, and that those holding out will get hurt the worst.

Anonymous said...

I didn't understand the questions, so I should not have to pay my mortgage.

I don't speak English, and I am not a US citizen, so I should not have to pay my mortgage.

No one else is paying their mortgage, so why should I pay my mortgage? Only the racist USA would expect me to pay my mortgage when so many others are not paying theirs.

My name is Jose Rodriguez. Just see if you can find me.

Anonymous said...

Guy D who bought the house for $200,000 5 years ago, took a HELOC out for $200,000 and put the money in the bank. Then defaulted on the loans.

--------

Then demanded that they "show me the paper". Then gets to live forevermore for $0.00 in a million dollar house while laughing at guys like poor keith et al renting and waiting for houses to become affordable for net surfing doom-boosting burger flippers (not house flippers):):)

Anonymous said...

These people that think investor property owners are going to get any break are out of their minds.

I have yet to hear of any program that does not limit relief to owner-occupied property.

Get ready for that $150K 1099 tax hit that will hang around your neck like a boa constrictor.

Anonymous said...

That's a racist question.

Signed, Obama voter

Anonymous said...

I would say B. C isn't getting the benefit of a tax deduction for Mortgage interest. (I'm assuming that is not part of your negative cash flow assumption.)