67 Responses to “My REBUTTAL to “the Automatic Millionaire””

1. SiliconValleyGeek
   February 14th, 2006 19:28
   1

   Great comment Socal.

   I agree the fundamentals are way against buying.
   I’ve posted this link before, but anyone interested in a rigorous mathematical evaluation, here it goes: http://www.economics.pomona.edu/GarySmith/BuyRent/BuyRent.html

   No fluff, just pure logic.
   As always, the sheeple will get slaughtered with the likes of this smooth talk.

2. Moominoid
   February 14th, 2006 19:31
   2

   Most of the article is flat out wrong from the perspective of basic economics without going into any actual numbers…

3. Moominoid
   February 14th, 2006 19:35
   3

   To Silicon Valley Geek

   Seems that model on that website doesn’t account for the opportunity cost of capital tied up in the house? That is one of the errors in David Bach’s article.

4. desidude
   February 14th, 2006 19:43
   4

   is the seminar free? is it possible some of us get into the seminar and ask some ‘interesting questions’?

5. betamax
   February 14th, 2006 19:44
   5

   I think you covered all points very well.

   This guy is no great financial expert; he just takes a lot of ‘common sense’ financial advice (i.e. don’t spend your entire paycheck; save money; etc.), which generally works in an a growing economy; but the RE market is tanking and his advice couldn’t be more wrong.

   I speed-read his book in the bookstore, and when I saw quotes like: “the average homeowner is 34 times richer than the average renter” (it’s in the book also) I knew immediately that he wasn’t very perceptive if he couldn’t distinquish between simple cause and effect.

   He rediscovered some simple principles and, much like Suze Orman, made a fortune peddling those principles to the otherwise clueless masses. But he’s no financial wiz; his knowledge of economics is limited to short-term past experiences; and his predictions are based on unexamined premises which are unlikely to hold in the next several years.

6. SoCalMtgGuy
   February 14th, 2006 19:49
   6

   desidude…

   The events are free…

   Here is the link:

   https://www.exl.carlson.com/TravelRegistration/Filter?controller=Attendee&command=NewLogin

7. SiliconValleyGeek
   February 14th, 2006 19:52
   7

   Moominoid said :”Seems that model on that website doesn’t account for the opportunity cost of capital tied up in the house? That is one of the errors in David Bach’s article.”

   The total NPV hurdle rate accounts for the opportunity cost. That is why you should have a base rate plus risk rate as the total hurdle rate (discount rate NPV 8, VPV 10, NPV 15 etc..) in the formula.

8. Moopheus
   February 14th, 2006 20:04
   8

   I’m no finance wiz, but isn’t his “OMP” example (making 20K profit on a 40K investment) leaving out something, namely the cost of financing the investment, i.e. interest?

   Also, the fact that the national median price hasn’t gone down in the past 50 years ignores the fact that in localized markets fluctuate significantly. And local markets is where we buy our houses. Highly overvalued markets could lose a lot, at least in the short term, even if the national median doesn’t.

9. drwende
   February 14th, 2006 20:15
   9

   Give me a time machine, wisk me back to 1997 with today’s money in my hands, and I have a *fabulous* plan for creating wealth by buying houses!

   I love how the real estate bulls do it. If local numbers are bad, use national numbers. If national numbers are bad, remind everyone that real estate markets are local. If all numbers are bad, make some up!

   We pay $1300-ish for our apartment. When we moved here in 2003, less-nice units had already hit $400,000. We could move all the way to the far ‘burbs of San Francisco, 90 miles out (say, Sacramento!), and $1300-$1400 in rent would still be a $400,000-ish house. The house would just be bigger. (And that’s why people take on 90-mile commutes. It’s those extra bedrooms, the yard, and the garage.)

   The only way we could conceivably “own for less than the cost of renting” would be to buy a similar apartment in a much cheaper town in rural/suburban California — assuming we somehow moved our jobs at exactly the same salaries and commuting costs! Not bloody likely, as many Bay Area transplants to the Central Valley have discovered.

   If I could *buy* a $200,000 house here for roughly what we pay to rent, I would have bought it already!

10. Nikolai
    February 14th, 2006 21:10
    10

    Well, if housing appreciates at 6% per year on average and a market has gone up 200% in the last 3 years, how many years of negative growth does it take to normalize to the 6% average for that market?

11. Talon
    February 14th, 2006 21:57
    11

    Thanks for the excellent dismantling. I saw that article this morning and I was like wtf? It was as bad as that Bloomberg guy declaring, “Oil crisis over!” in another outburst of unsubstantiated optimism.

12. Pat
    February 14th, 2006 22:30
    12

    Well, just using this guys examples, here’s how I see it.

    If you use his historical rate of appreciation 6.3% per year for homes.

    To double your value would take 12 years.
    To Triple your value would take 18 years.
    To Quadruple your value would take 23 years.

    And according to him, all of this was accomplished in a mere 5 years.

    Best case scenario, we’re 7 years ahead of the norm.
    Next best, we’re 13 years ahead of the norm.
    Worst case, we’er 18 years ahead of the norm.

    Wonder if he’s ever heard the term “reversion to the mean”?

    And on a “cash” gain basis, these figures don’t include cash out expenses for interest payments, taxes, insurance, maintenance or capital improvements. After you factor in these realities (oh and don’t forget your years worth of gain blown on sales commission) I suspect the 6.4% clockwork-like return is even harder still. It’s probably something more like 4% per year after factoring in the above.

    And this supposed 6.4% is worlds apart from the relatively riskless TRUE return you’d get on a good corporate or municipal bond, which would be accurate to its “face value”, i.e. coupon.

13. exhedra
    February 14th, 2006 22:36
    13

    I’m not sure that a 5% annual rent increase is such an unreasonable assumption, at least in southern California. I had a look at the BLS CPI figures for “Rent of primary residence” in “Los Angeles-Riverside-Orange County, CA”. Here they are (increase is for the stated year over the previous year):

    2005 = 6.3%
    2004 = 6.4%
    2003 = 5.3%
    2002 = 5.7%
    2001 = 5.4%

    This is pretty much in line with other rent surveys I’ve seen written up in the newspapers from time to time. The 20-year average is more like 3.6%; the 30-year average, 5.4%.

    Of course, your mileage may vary. My rent increase last year was 3%, in line with L.A. city rent control. Before that I was an owner

    Cheers,

    exhedra

14. Anonymous
    February 14th, 2006 22:39
    14

    On the NNJ Bubble site a blogger located that author on shark property as having bought a condo for $2m in 02′…no wonder he wants everyone to believe his bs

15. Gorillatron
    February 14th, 2006 22:57
    15

    I can’t beleive those assumed figures of $200K and $1,500. Bach is dick! I feel bad for the uninformed that take these pop-financial advisors types advice. I can just bet that because of this article someone was pushed over the clif of financial ruin.

16. Robert Coté
    February 15th, 2006 00:52
    16

    From the article; You take the $220,000 you got for the house and repay the bank its $160,000. That leaves you with $60,000

    This is great! The author/real estate agent is offering to perform every RE transaction in the nation pro bono! And refund past taxes! And as another reader points out, refund the nondectible prtion of interest payments and/or any other differences between renting for two years versus owning.

    Also from the article;U.S. real estate values have been going up steadily for nearly four decades — an average of 6.3% a year since 1968.”

    Steadily? What hog wash. -IF- the statement were true houses that sold for $110,000 in 1968 would all go for a million today. The miravle of compunding and make no mistake it has to be a compounding issue or else it would only apply to whether it was a good idea to buy in 1968. What really happened is 6.3% of the original purchase price not any of the intermediate price fluctuations. Personally I’d be a tad upset at seeing a meager 63% gain on the original purchase price of my primary residence bought 10 years ago. The word steadily in this context is an outright lie that needs correction. Given the nature of this advertorial posing as news article (it is in the articles not opinion section) it demands a retraction.

    Another reader wanted to have a reversion to mean calculation. If prices have doubled over the past 4 years as is common in the bubble zero zones then reverting to the mean (6.3% per year not compounded) will take…are you ready 12 years of flat prices. Can anyone say Japan? Of course my prediction is -20% right now and -7% per year thereafter. That reverts us to the mean in -only- 5 to 6 years. Haven’t we heard he experts predicting 2011 as well?

    Finally reader exhedra mentions the CPI “rent of primary residence.” This is the IMPUTED rent calculation used to measure inflation, it is not realistic and doesn’t even pretend to measure either actual rents or true costs of ownership. Indeed at 23% of the CPI it appears that for 2005 we had deflation in everything else ex imputed rent equivalent! Take out food and energy as well and were the reported inflation anywhere close to reality they must have been giving away cars and plasma screen televisions to make the inflation numbers as low as reported. Of course the truth is that the government is lying about inflation just like the original author is lying about the rent/own mathematics.

17. Larry Littlefield
    February 15th, 2006 05:10
    17

    (U.S. real estate values have been going up steadily for nearly four decades — an average of 6.3% a year since 1968, which is when the National Association of Realtors first started keeping track.)

    Mistake here. This is the median price of homes that sell. Well, new housing is much larger and fancier than the housing that existed in 1968, and a large share of the nation’s housing stock has been built since then. I doubt that the average U.S. house THAT ALREADY EXISTED in 1968 has appreciated that fast. If it has, I assume LOTS of money has been reinvested in its reconstruction.

    But the bigger mistake is to bank on appreciation for the value of homeownership. Yes, owning makes more sense than renting in a NORMAL market. That is because you have a low-risk income return — you get to live in the house while saving the rent you don’t have to pay, and your costs are fixed. Because of that inflation protection, it may be worth paying somewhat more to own than to rent.

    But when you are overpaying by so much going in, your costs are fixed at too high a level. Instead of an income return, you have an income loss, possibly a massive one in “bubble” markets. Banking on appreciation will likely lead to disaster.

    Moreover, what happened to the value of most urban housing from 1950 to, say, 1980? As that housing reached 50 years old, and competing housing was built in the suburbs, its value collapsed. In the late 1970s my neighborhood was redline. If you wanted to buy, you paid cash, and if you wanted to sell, you had to sell for so little that someone could pay cash.

    Well, in the next 50 years the housing stock in early suburban America will be reaching 50 years old. Either it will receive massive reinvestment (tear downs) or it will decline in value, and if the neighbor’s house declines in value even the reinvestment in your house will not help. In many markets, existing homes could be caught between the urban revival (for the young and empty nesters) and new housing on the exurban fringe. Or perhaps people will decide, once prices drop, that the exurban fringes is too far away.

18. Robert Coté
    February 15th, 2006 06:45
    18

    Larry Littlefield is correct to remention the changing nature of the product offered. The average size of new houses increased from about 1,100 ft2 (100 m2) in the 1940s and 1950s to 2,340 ft2 (217 m2) in 2002. In 1967, for example, 48% of new single-family houses had garages for two or more cars; by 2002, that figure had jumped to 82%. In 1975, 20% of new single-family houses had 2.5 or more bathrooms; by 2002, that figure had increased to 55%. In 1975, 46% of new houses had central air conditioning; by 2002, 87% had it.

19. groucho
    February 15th, 2006 07:16
    19

    Year 2010 : News article by David Bach. ” How homeowners became poor and renters remained poor.”

20. Katy
    February 15th, 2006 07:17
    20

    I just can’t believe how many “experts” use the saying “real estate prices have never declined since the NAR started keeping track in 1968…” Never is a long time, and 2 years before I was born is not all that long ago in terms of history. Americans have an awful shot memory. Take the long view - civilizations rise and fall, depressions, wars, natural disastors, panics, and disruptions of every kind have happened in our past, and will happen in our future.

21. ocrenter
    February 15th, 2006 07:51
    21

    Overall we got a pretty generalized article reminding us that over the long term it is better to own than to rent. And that long term equals 30 years or longer. The overall premise of tax breaks and benefits and appreciations are generally true. But to use these generalizations to push potential buyers from the sideline into the minefield of becoming just another F’d borrower to substain the current price run-up is simply unethical.

    The math has already been done, the writing is on the wall, we are at the peak of a cycle. Renting is cheaper than owning (for now).

    Has he not heard the #1 key for wealth building is Buy Low and Sell High? #2 key is keep that overhead low (ie. keep the mortgage cost as low as possible) so you can continue to save.

    Why bother publishing an article, or actually a book, at the peak of a run up in prices using LONG TERM projections of 30 years and an example of a $200,000 home (which in some market actually is the down payment these days)? Why is he trying to to persuade people to move away from the two keys to wealth building and convince them that Buying High with High Overhead (aka mortgage burden beyond 50% of your income) will make each of them an Automatic Millionaire?

    For if he is in real estate, and he is smart enough to write a book, then he knows things are cyclical and we are looking at the beginning of the fall. So why the book? To continue the current boom that has served him and his colleagues so well for just a bit longer. This is not just the action of a self-serving man. This is pure and simple unethical immoral behavior.

22. Wes
    February 15th, 2006 07:53
    22

    If your answer is 10%, you’re mistaken. You take the $220,000 you got for the house and repay the bank its $160,000. That leaves you with $60,000 — or $20,000 more than the $40,000 original down payment. In other words, you made a $20,000 profit on a $40,000 investment — which amounts to a 50% return.

    Who pays the realtor commission in this case? Wouldn’t that 6% wipe out $13,200 of this guys $20,000 gain? Oooh….now the profit is down to $6800 on the $40k investment, which is 17%, not 50%.

23. Larry Littlefield
    February 15th, 2006 07:54
    23

    Again, all you have to do is look back to my ggeneration’s Northeast housing bubble in the late 1980s, as a blogger did here http://www.youdovoodoo.com/80sbubble.htm, to see real estate falling in value.

    The selection of summaries of New York Times articles is great, as it takes you from the beginning of the upturn in 1981 (when the New York area’s homes were stupidly selling for less than the national average — the un-bubble), through the peak in 1987, and through the eight years of pain afterward. How could this have all been forgotten? I’ll bet someone could do the same with SoCal for that same era.

    Those who bought before the bubble did great. Those who bought after the bubble did great. Those who bought at the top got killed. I knew many victims personally — they eventually recovered, but it was a life diminishing financial disaster to have bought from 1985 to 1989.

24. equitymykingdimforequity
    February 15th, 2006 08:13
    24

    OT, This morning while searching on blogger I came across thereisnohousingbubble.blogspot.com. He is a bigger nut than this guy.

25. Blissful Ignoramus
    February 15th, 2006 08:30
    25

    Those who bought before the bubble did great. Those who bought after the bubble did great. Those who bought at the top got killed. I knew many victims personally — they eventually recovered, but it was a life diminishing financial disaster to have bought from 1985 to 1989.

    You can’t say that. It was different then. It was difficult to buy something you couldn’t afford then, and while many of those people got screwed, I think the vast majority were just fine. If they held onto those properties, they could have refinanced at lower rates 10 years later, and then they would have seen prices exceed their late 1980s purchase price. The many people who bought in the late 1980s and sold in the early 2000s did quite well, by and large.

26. BigDaddy63
    February 15th, 2006 09:09
    26

    I welcome him coming down to my area ( S. Florida) and buying me a home for $200,000. (cough) Hell, I’ll take FIVE at that price.

    Owning is cheaper than renting? Sure, if you do creative financing using an I/O or a teaser arm with a huge downstroke. Look at my site and others that have some current offerings at even $350,000… You will pay WELL over $2,000 a month when you include the mortgage, taxes, insurance, etc. on an asset that is probably 30-40% overvalued.

    He reminds me of a car saleman that says, ” I can get you into this Merceded for only $299 a month”, and leaves out the details.

27. JR in NorCal
    February 15th, 2006 09:09
    27

    His rent/buy comparison makes the simplifying assumption of buying and living in a property for 30 years, as if that is even remotely normal these days. Speaking for myself, I do not know a single friend/acquantance/coworker under the age of 35 or so that has lived in the same place for the last 10 years. There is no way any of them will ever live in the same property for 30 years - it just isn’t going to happen.

    The transaction costs of selling a property and moving every 3-5 years will eat up a lot of equity, assuming there is equity to be eaten in the first place. For those that end up moving every several years, renting makes even more sense. IT costs next to nothing to move when you are renting.

28. Larry Littlefield
    February 15th, 2006 09:12
    28

    (If they held onto those properties, they could have refinanced at lower rates 10 years later, and then they would have seen prices exceed their late 1980s purchase price. The many people who bought in the late 1980s and sold in the early 2000s did quite well, by and large.)

    No so. The big damage in the 1980s was in the Co-op/Condo market, which had a demographic hurricane blowing against it as the baby boom moved out of the singles & couples phase and into the parenting phase.

    The first half of the baby boom, which sold their apartments at the peak and bought houses, did OK. My generation, at the back of the baby boom, bought those condos and eventually had to sell at a loss, saving for years while living in a one-bedroom with two kids just to bring money to the closing and end up with nothing. After additional years of saving, they finally got their house.

    Of course, this time the demographic hurricane is going the other way. It will be interesting to see if apartments or houses tank more in the bubble areas.

29. Roy
    February 15th, 2006 10:02
    29

    Let the debunking continue!

    Assume you’re renting a house for $1,500 a month. Now let’s say you stay put for 30 years, during which the landlord increases the rent by 5% a year.

    In St. Paul. MN, my rent has stayed the same over a three year period. 3br/2ba/basement/garage = $900.00

    
    Now let’s imagine that instead of continuing to rent, you buy the same home for $200,000.
    Median house price with same amenities = $236,000
    ….I must be in a “overheated market”

    3. Homeowners Get Tax Breaks, Renters Don’t

    The best way to stay poor is to pay more than you have to in taxes. When you rent, you get absolutely zero tax breaks on your housing costs. But as a homeowner, you get the mortgage-interest deduction, which can effectively reduce your monthly mortgage payment by 30 percent or more.

    In Minnesota, (up to $50,000) can deduct rent. THats right, your rental company or private owner has to issue a tax statment declaring the percentage and total amount that you are allowed to DEDUCT as a renter. For myself, that was 19% on total rent. Though you cannot do this for your federal filing does not mean that tax benefits are null and void for renters.

30. Robert Coté
    February 15th, 2006 10:09
    30

    Rents reflect (imperfectly) owner costs. When taxes go up my renters pay more. If the interest deductibility goes away their rent goes up. Renters get the tax deduction, they just don’t realize it.

31. Dan
    February 15th, 2006 10:14
    31

    SCalMtgGuy,

    Let me understand this….you have been in the mortgage business for how long and you rent…..you are about as qualified as this Automatic Millionaire guy to give the sheeple advice.

    This country is truly f@cked with all the advice coming from people with little to no experience in what they are actually talking about. I am a mortgage banker in Tucson, AZ and have been in the business for 12 years. You remind me of the realtors I work with who rent.

    I just don’t understand people like you.

    Dan

32. invest3
    February 15th, 2006 10:23
    32

    SoCal,

    “Again, I’m not talking to people who already own, and I’m not telling people to sell. I’m trying to educate the person who wants to buy a home by any means necessary in any of the areas that have seen abnormal appreciation the past few years.”

    Why not take it to its ultimate conclusion though? During the tech bubble as in the RE bubble today “sell” was considered a four-letter word. The people that did bet against the crowd and got out early were able to pick up the pieces later, in some cases @ 5 cents on the dollar.

    Good analysis overall.

33. Juanita de Talmas
    February 15th, 2006 10:45
    33

    “…the government is lying about inflation…”

    I have the same suspicion.

34. Peter
    February 15th, 2006 10:45
    34

    Dan (February 15th, 10:14),

    Do you mean that someone living in a rental cannot make a good financial analysis? You whole argument seems to be built on a negative answer to that question. Remember, SCalMtgGuy didn’t write about home maintanance but the pure financial aspect of home ownership versus renting. Or do you think, because you are a homeowner, you couldn’t write about the financial aspects of renting?

    Regards,

    Peter

35. SoCalMtgGuy
    February 15th, 2006 10:49
    35

    invest3,

    The main purpose is to help the people that want to ‘own’ so badly they will do anything possible.

    There are a million different situations for people that already own. Some may want to sell and move elsewhere, some will be content to stay put because they have lots of equity, can afford where they live, and don’t care to move.

    I have friends that sold and moved away. I have many more that have been in SoCal their whole lives, and they don’t care. They aren’t tapping equity, and can easily afford their mortgages/taxes. They are staying put no matter what.

    Again, none of us know where housing prices are headed…we can make our best educated guesses, but nobody has a crystal ball. We DO know that somebody making 40k cannot really ‘afford’ a 400k home.

    SoCalMtgGuy

36. DannyHSDad
    February 15th, 2006 10:59
    36

    SCalMtgGuy, I hate the fact that Mr. Bach doesn’t disclose all the downsides. Beyond what you’ve mentioned above, I can think of:

    1) tax rates go UP! If the home value goes up, so does the taxes. Not all states have Calif’s Prop. 13.

    It can even go the other way: Here in Austin, TX, we had our rates jacked up just to make up for lower appraisals right after the dotcom bust. Property tax can increase even if your home values go down. What a deal: More fed income tax deduction on your way for home owners! [Note I’m being sarcastic here: you’ll end up paying more local taxes.]

    2) Down side to capital gains exclusion of primary residence is that losses cannot be deducted. There is a 250K cap on gains but no limit to the losses: all losses are eaten by the homeowner. I’m no CPA but here’s my understanding: if after living 2+ years in a home and I sell, say, in Jan for a profit of 300K, I only have to pay taxes on 50K (about 7K). However, if I buy another home in Jan, and then sell in Dec for 300K loss, I still end up with tax due of 7K (rather than 0) — since I can’t wipe out my earlier profit from the year since losses are on me:
    http://www.irs.gov/publications/p523/ar02.html#d0e684

    [I’d love to hear a CPA correct me on this.]

    3. If you have HOA, chances are good that it’ll go up at least once or twice over the 30 years.

    4. And when has hazard insurance not gone up yearly?

    Plus all the normal maintenance as well as the deductibles you’ll have to pay for any insurance covered repairs. And don’t think that new homes are exempt: we bought a new home and our AC broke down at least twice in less than 3 years: the first time (or two) was covered under warranty by the builder but the last time it broke, we had to pay for the labor (since parts were still covered).

37. Larry Littlefield
    February 15th, 2006 11:22
    37

    (“…the government is lying about inflation…”

    I have the same suspicion.)

    The government doesn’t include asset prices in its measure of inflation. Just what the good being sold — in this case housing — really costs — as measured by rent. Economist magazine, among others, has blasted Greenspan for ignoring asset price inflation in his interest rate policy, focusing on the inflation rate instead.

    How about Helicopter Ben? He agrees with Greenspan that asset prices should be ignored, and inflation should be targeted. If he stays true to his monetary creed, he may end up raising rates because rents have begun to rise — even as housing prices tank!

38. txchick57
    February 15th, 2006 12:13
    38

    You can buy a decent house in Houston or Dallas for 200K. You can buy the house I’m renting right now on a 1 acre lot less than 5 miles from downtown for about 240K and it’s a damned nice house. (Don’t anyone ask me where it is, lol). This little enclave is still underpriced for a reason that is about to go away. I’ve seen a few bottom feeders knocking on doors trying to see if anyone will sell out cheap.

    But all in all, that is a good analysis. That article is simply kitty box liner.

39. SoCalMtgGuy
    February 15th, 2006 12:15
    39

    txchick57

    Just out of curiosity, what would one of those houses rent for? I know there are still places with decent homes for 200k, but not many, and certainly not in many of the areas they were doing seminars.

    NOTHING in Ca in the 200k range… Maybe a few studios or 1 bedroom condo’s, but that would be about it.

    SoCalMtgGuy

40. CalGal
    February 15th, 2006 13:23
    40

    I agree with your analysis of the article. While owning a house is generally a good thing, I agree that it all depends on the specific circumstances, and especially not in most of today’s market. I’m disappointed that Yahoo would front-paged such an simplistic article. But come to think of it, they have Robert Kiyosaki and Suze Orman as their regular columnists so it’s not too surprising.

41. ocrenter
    February 15th, 2006 14:02
    41

    this is somewhat off topic. for those of you who know about my site, besides the every 10 days inventory update on bubble markets, I also had a series on Extreme Flippers, flippers who over-leveraged with Other People’s Money in hope of becoming Automatic Billionaires. Anyhow, I’ve just updated two previously featured flippers, both of which just recently entered into foreclosureland.

    Here’s the links

    Extreme Flipper I, Update III

    Flipper in Trouble, Update II

42. dohntelefon
    February 15th, 2006 14:19
    42

    What the author forgot regarding leverage is when prices go way below purchasing price. Let’s assume you buy a 300K house with 30K down. Buying shares for 30K and seeing their value drop to zero means you lose 30K. That’s it. Seeing your house value drop from 300K to 200K means you are 100K underwater. If you sold then you would get 200K and have to give the bank their 270K back (excluding fees and interest). That leaves you with losing 70K on a 30K investment. Leverage does work the other way, too. It’s like buying stock on margin or trading futures.
    Another point: assume a flat housing market. A house that’s been lived in does NOT keep its value even in a flat market. A new house might sell for the same price, but after living in a house for 10 or 20 years, you actually have to put a lot of money and effort in to make it look new again. That also takes some money away. It’s just like owning a car for 5 or 10 years - you cannot expect to get your initial money back.

43. Blissful Ignoramus
    February 15th, 2006 15:01
    43

    No so. The big damage in the 1980s was in the Co-op/Condo market, which had a demographic hurricane blowing against it as the baby boom moved out of the singles & couples phase and into the parenting phase.

    Condos are one thing, but you made it sound like it was a “life diminishing financial disaster” for most everyone. I really don’t think this kind of hyperbole is necessary to make your case.

    Anyway, a lot of people didn’t have to sell anything at a loss. My brother, a back-end baby boomer, didn’t lose anything on the condo he bought in ‘88. If he had tried to sell it in the mid-90s, it would have been a disaster, but he waited until 2001 and did just fine.

44. NurseLiz
    February 15th, 2006 15:01
    44

    I totally agree with you SoCal! These idiots that purport such nonsense will be eating their words (and bookcovers) soon enough!!

45. In At the Rise
    February 15th, 2006 15:35
    45

    Funny how ‘most people codemn howe owners that bought before the peak, at the peak and top of the peak but in reality most of these bashers here are all wanting a piece of the same pie. Schadenfreude baby! SoCal do you own a home?

46. Blissful Ignoramus
    February 15th, 2006 15:40
    46

    Where I live you can buy a respectable house for $200K, although that’s below the median in my town. I’d guess that my house, which I paid $280K for last summer, would rent for $1500, about my mortgage payment.

    My impression is that prices are inflated everywhere, to the point where rents are lower than mortgage payments in most situations. However, in most (geographic sense) of the country, I don’t think the difference is that huge.

47. Blissful Ignoramus
    February 15th, 2006 15:45
    47

    NOTHING in Ca in the 200k range… Maybe a few studios or 1 bedroom condo’s, but that would be about it.

    What are you talking about, SoCalMtgGuy?

    http://tinyurl.com/7v3pt

48. SoCalMtgGuy
    February 15th, 2006 15:48
    48

    In At the Rise,

    I have said before…I do not own. I rent.

    I also do not condemn those that own homes. Yes, many people here want to own, they are just not going to take out neg-am loans, interest-only ARMs, or state unrealistic income to do so. Last year in Ca, 82% of the purchase loans were I/O or neg-am.

    Spend some time reading the archives and you will see that this site is NOT about bashing home ownership. It is about making a good financial decision when doing so.

    Thanks for reading.

    SoCalMtgGuy

49. Will
    February 15th, 2006 15:49
    49

    Requiring home ownership to comment on mortgage practices is like requiring flying ability to become an aeronautical engingeer. The inability to find a better argument is indicative of the lack of thinking skills that would cause someone to use an I/O to buy an overpriced closet.

50. SoCalMtgGuy
    February 15th, 2006 15:54
    50

    Blissful Ignoramus

    HA HA! I knew there would be something way out that might fall in the 200k range. You have to go to the border of Az, but it’s there…$199,500 3bd/1ba in Blythe. I like this part: it says “area: out of area”. Out of area is right…that is one heck of a commute to LA/OC/SD!

    thanks…

    SoCalMtgGuy

51. In At the Rise
    February 15th, 2006 16:53
    51

    SoCal
    Sorry but I have been reading you blog for a while, I hate to say this, but the initial early posts and vibe here were laced with poking fun on buyers for being stupid, even those that just wanted a piece of the American pie. It was an all’renter’ blog sort of speak. It wasnt until a small percentage of current educated homeowners (not FBs) started to post, that most realized that not all recent homeowners were FBs. I noticed you slowly started changing your own tune of ‘look at this stupid FB I am about to blog about hahaha’ to ‘I am just here to educate the masses by showing you examples of this FB I am about to post so you wont end up in his shoes’. Sorry, but the reality is that if you were a homewowner, your views would totally be different and so would the vibe of this blog. But I am glad you are not because this blog wouldnt exist and it is quite entertaining. Thxs.

52. Ted
    February 15th, 2006 17:18
    52

    It is a misrepresentation to characterize renters as wannabees. There are a great many people who sold their homes into this bubble and are now renting waiting it out. Some sold too soon and regret leaving cash on the table, but it takes a MORON to think the renters won’t win this game starting from today’s stats.

53. betamax
    February 15th, 2006 17:53
    53

    “Funny how ‘most people codemn howe owners that bought before the peak, at the peak and top of the peak but in reality most of these bashers here are all wanting a piece of the same pie. Schadenfreude baby! SoCal do you own a home?”

    Whether or not someone owns a home should not affect their comprehension of current market conditions; if it does, then they are merely choosing to believe what agrees with their own past decisions - a common human trait, but a bad investment strategy.

    I’ve owned before but am renting now for the simple reason that I don’t want to pay more than I should for anything I buy, whether it’s a car, house, or cup of coffee.

    No one is condemning home owners per se, but we certainly criticize uneducated buyers who took on excessive amounts of debt to buy at peak, or near peak, prices.

    As for revelling in schadenfreude - I would express similar disdain for someone who, for example, borrowed $30k to purchase a 1986 Toyota Corolla. Stupid is as stupid does.

54. Blissful Ignoramus
    February 15th, 2006 18:16
    54

    SoCalMtgGuy, you can do even better in places like Alturas, or Trona! The dream of homeownership in California is not dead!

55. SoCalMtgGuy
    February 15th, 2006 18:53
    55

    Blissful Ignoramus…

    CalTronaMtgGuy does have a nice ring to it!

    Plus it’s close to Death Valley…

    Alturas does have an airport though…

    decisions, decisions…

    Too bad I had to zoom in really far on MSN maps to see any ’streets’ other than the highway. Oh well…I can ‘develop’ the surrounding area!

    Thanks for the laughs…and for proving me wrong…I guess there are some 200k homes in CA. I stand corrected

    SoCalMtgGuy

56. 42
    February 15th, 2006 18:57
    56

    Trona… snort. a desert paradise set amongst the meth labs.

    maybe he meant “there’s no place in CA under 200K where any sane person would actually want to live”.

57. Sunsetbeachguy
    February 15th, 2006 19:53
    57

    I generally come down on the fun side of schadenfreude. There is nothing wrong with enjoying some knucklehead’s commupance.

    However, people who consciously sold RE at bubble valuations solely to lock in profits during the bubble most likely directly created an FB. They have have some culpability. Unless they are an unabashed Malthusian.

    Many people need mobility for career purposes and have been frozen out of RE by an unwillingness to embrace toxic loans and excessive transaction costs.

    No one should be faulted for buying RE a long time ago and not selling ever. Thank you my current landlord, I am getting a great rent in a great neighborhood.

58. RoadTripBoy
    February 15th, 2006 22:15
    58

    In at the Rise/Dan et al.:

    I admit I have not been reading this blog that long, only since Nov/Dec 2005. But I’ve been reading it faithfully and I don’t agree that this blog has taken a pejorative tone regarding FBs.

    Moreover, it’s been very illuminating for me as a renter who would like to buy but has been shut out of the market by the skyrocketing prices in Northern NJ. I’ve always suspected that the run up in home prices has been investor driven and to a degree that is correct. But it has also been driven by the average Joe who appparently has been jumping into home ownership uninformed and who leverages himself to the eyeballs to pay these stratospheric prices as well as by the plethora of “funny money” mortgages available to allow him to acquire so much debt. And he does this to achieve the good ole’ American Dream of home ownership, without fully understanding the risks and costs involved. And it appears there are plenty of unscroupulous people who profit from these situations and unabashedly nudge the naive and vulnerable to the financial precipice.

    Learning about how many people in this country are in real trouble financially has allowed me to take heart and feel optimistic—at some point in the not too distant future I will be able to capitalize on the increased housing inventory and the sellers’ increased need to sell–quickly– to get out of a bad financial situation. What, you say? Take heart at someone else’s misfortune? Not at all! It’s not personal, it’s business. Price drops are the only way I’ll get into the housing market. I don’t want to see people go into financial ruin; I just want prices to come down so i can afford a house.

    I agree that if SocalMtgGuy was a homeowner, his views might be different. But what does that prove? If I remained in Michigan rather than moved to NJ 15 years ago then some of my financial or world views might also be different. So?

    Actually , I think that the renter is in a better position to be less biased. Since he has less personal financial worth bound up in the decision, he doesn’t have to worry about Cognitive Dissonance influencing his opinions.

    I’ve personally noticed a bias in those that I know (understandably a biased sample!) who are homeowners. They tend to think that there is no housing bubble and they encourage me to buy something now. I keep reminding myself that my friends have all purchased housing in NYC recently and are understandably loathe to consider their property values decreasing and will not appreciate my exuberance at seeing evidence that there is a bubble and it is collapsing.

59. Bubble Butt
    February 15th, 2006 22:36
    59

    Roadtrip, Blissful, Dan, and Socal:

    I was a homeowner. I sold last year in August with the intention of buying a larger home (went from 3 bedrooms, trying to get 4). Unknowingly, got priced out of the Laguna Niguel area where I was trying to buy (kept on getting outbid / multiple offers ) and eventually couldnt afford the home we wanted unless we went Interest Only. Coming from a Finance related job I said NO WAY!

    Well, I am now renting and waiting it out and can only thank the blogs like Socals and Bens from keeping me informed and giving me enough ammo to show my trigger happy home wanting wife that it is not time to buy…

    Yeah, I’ve personally noticed a bias in those that I know who are homeowners too ( I still cant convince my father in law even though he has read the articles - some kind of emotional thing like the dotcom irrationality). Others I speak to regularly with homes do understand, like my carpool friend who just put his home on the market.

    Do yourself a favor and THINK about what is really going on right now. You are witnessing the biggest credit bubble of all time. You and all your friends will remember these years of irrationality. Probably will tell your grandkids one day.

    Good luck to us all.

60. Chuen
    February 15th, 2006 23:11
    60

    In remote Modoc County, the median home price just passed $100,000 — and this only six-and-a-half hours from San Francisco.

    “Modoc is California’s only county where the median price of a home has stayed so low for so long. It is the least expensive nook in one of America’s priciest states, a place where home buyers live out the pluses — and many of the minuses — of that elusive concept, ‘affordability.’”

    “In Los Angeles County, $100,000 will just about cover the traditional 20 percent down payment for a median-priced house–certainly not the whole building, yard and garage. In Orange County, it’s about 80 percent of a down payment, and in Marin County, the most expensive housing market in the state, it’s less than two-thirds of what’s needed.”

    http://www.chicagotribune.com/classified/realestate/realestate/chi-0602050202feb05,0,1364792.story?coll=chi-classifiedrealestate-hed

61. DannyHSDad
    February 16th, 2006 06:20
    61

    As pointed out in Ben’s blog by TXchick57 of:

    http://philip.greenspun.com/materialism/early-retirement/where-to-live

    read about the homeowners vs renters part: the former are BORING!

62. Danielle
    February 16th, 2006 06:22
    62

    High risk, high reward.

    People seem to forget that if great returns are a sure thing, it implies 0 risk. IMPOSSIBLE.

63. trakz
    February 16th, 2006 10:42
    63

    Well, well, well. Where to begin with this crap!

    Ok, here goes. Yes, statistically homeowners are better off than renters, for the simple reason that disciplined renters who save money eventually buy into the real estate market, have some equity, and thus become the aformentioned homeowners!! Since it’s human nature to want to become a homeowner, and not a renter, this nugget is completley bullshit.

    Secondly in the most overheated markets SF Bay Area, NY, etc, there is a little thing called rent control. I just looked at the approved rent increases over the past 5 years - and guess what 3.6% max! In fact the 2005 allowable rent increase is only 1.9%! http://www.oaklandnet.com/government/hcd/rentboard/index.html So where the 5% number comes from I’ve no idea.

    If you were to invest the difference between the crazy 5% rent increases this dude refereneces, and the allowable increase of 1.9% (and assuming the annual rent increases remained around 2%) you could easily afford a home with substantial equity in a very short period of time. Thus making you one of the rich homeowners - specifically by renting!!!

    People who pick fairy numbers and present them as reasoned arguments make me sick, since it’s basically a shell game and genuine people will get hurt.

64. ocjohn
    February 16th, 2006 14:17
    64

    Anybody notice Davic Bach was a speaker on the Millionaire Conferecne? That was the first time I’ve heard of him. Got a package twice to “comped” $149 tickets for an all day affair with a bunch of other get-rich-quick-with-no-work type speakers. The confercne was giving away copies Automatic Millionaire for free for attendess. Of course I didn’t bother to attend. Wasn’t planning on wasting any part of a full day, and it was scheduled during the work week too.

    A BBB site on the East Coast warned of aggresive pushing of expensive follow up seminars by the speakers. To his credit, David Bach supposedly was the only speaker not pitching anything (besides his free book). The negative Amazon reviews on his book basically said it wasn’t any new advice. The automatic thing was his angle. He doesn’t appear to make up stuff like Kiyosaki, but as the dissection of his recent Yahoo article shows, he seems to be really naive.

65. Gary Anderson
    February 16th, 2006 19:42
    65

    In at the Rise you say: “Sorry, but the reality is that if you were a homewowner, your views would totally be different and so would the vibe of this blog. But I am glad you are not because this blog wouldnt exist and it is quite entertaining. Thxs”

    But it doesn’t matter Rise, because if people were telling the truth, they would be stating what is being stated here regardless of whether they own or not. If you own a home and hope it keeps its value but it isn’t going to what are you going to do? Lie?

    Are you going to do what the realtors do, and try to paint a rosey picture while RE agents sell houses with interest only loans knowing that the guy who buys will likely get screwed? Or will you do the right thing and warn the guy that he is getting in on the end of a federal reserve sponsored ponzi scheme?

66. Fred
    February 20th, 2006 10:47
    66

    Yes the article is pretty idiotic, my wife and I thought so when we first saw it. He says rent makes sense over owning in a few special situations. Around here it’s a not so special situation. We sold last fall, due to the belief that the housing market had topped, insecurity over my job, and wanting to get out of the house regardless. The house was already worth less the day the buyers walked into it.

    Now all that money is earning interest in treasuries, we’re paying less on a cash flow basis to live in a house about 100 times better than the old one. We had wanted to sell the last few years and buy a better house, but the market went up so fast we got priced out of upgrading, and in disgust just sat tight and now, will wait it out. Life is good, Mr. Bach …

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    July 11th, 2008 04:34
    67

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