Housing v. Renting Again!
Both synopses from the last post were very good and I will use both here even though it will make this a long post.
Part of the comment (unfortunately the links didn't stick) which our first anonymous at 9:04 AM said was:
real estate guru doing his or her best to be objective enumerated a few things -- all of which could be discussed more.
Part of the comment (unfortunately the links didn't stick) which our first anonymous at 9:04 AM said was:
There is also the advantage of *leverage*. If you make a downpayment of $100,000 and buy a $1,000,000 home, and if that home appreciates by 10% in one year, it looks like you've now got $200,000 where you used to have $100,000. It feels like you've doubled your money!
You made some mortgage payments, insurance payments, tax payments, not to mention some points and fees in addition to the first $100,000, however, which pro-home ownership folks tend to overlook.
A group of contrarians tried to take all those nuisance expenses into account, and the end up questioning the financial wisdom of home ownership. They've written about it at MSN, at get rich slowly, the Wall Street Journal, the Motley Fool, and and the housing crash blog.
They point out that you don't pay yourself when you buy a house, you pay a huge amount of mortgage interest to the bank, you pay the prior owner, you pay taxes, you pay insurance and maintenance and upkeep. And if you sell, you pay a whopping great commission - 5 to 7% on the full price of the house - to a real estate agent.
Usually you end up paying three times the value of the house over 30 years!
Whether or not you come out ahead depends on how fast the prices of houses rise, and what you might do with the money you saved by renting. Nationally over the 100 years from 1895-1995 homes did not appreciate at all relative to inflation. But Santa Barbara is different, and an unresolved question is... does Santa Barbara real estate rise at about 7% per year, or 10% per year?
real estate guru doing his or her best to be objective enumerated a few things -- all of which could be discussed more.
1. One conclusion can be drawn from all this it's that buying a house or renting and saving 10% each payday and investing it in the stock market both come out about the same and both make one financially secure after 30 years. And that BOTH buying a house or renting, saving, and investing in the stock market are the best investment that one can ever make in their life.
2. We all learned that the average person does not have the discipline or will power to save much more than 1% of their income and so buying a house is a forced way of saving and investing.
3. We have all learned about the power of leverage and it's existence in the investment of buying a house.
4. We learned that the monthly payments of a buyer are not a part of the investment but are allocated as his cost of providing shelter and are an expense equal to rent over 30 years.
5. we learned that rent increases 5% compound each year and that both stock investments and a house investment appreciate an average.
between 7% and 10% a year
6. We learned that neither buying a house or a stock investment is a sure thing and that both have risks.
7. We learned that both have bubbles and corrections but that history always repeats itself and so both the stock and the house go right back to appreciating mode after the correction is over.
8. We learned the the bottom of this housing correction may be an opportunity of a lifetime for anyone who wants to buy a house and that the prices of houses will never be lower over the next 100 years than they will be at this coming bottom.
9. We learned that the coming housing bottom is going not going to occur for at least one year and most likely will occur somewhere between 1 and 3 years from now.
10. We have all learned about the wonderful power of leaving an investment in for a very long time like 30 years.
11.We all learned about the rule of 72. ( one can find out how many years it takes for something to double by dividing the number 72 by the annual rate of compound growth. ( compound growth is where one leaves the annual increase in to grow the following year along with the principal.)
12. We learned that there is much more to life than money. and that money alone will not make you happy. But it is sure nice to have.
13. We learned how buying a house can provide for retirement by providing a paid for house with no monthly payments. and can provide a nice estate to leave your kids, or a way to refinance and help your kids buy their own house.
14. We learned how buying a house gives one the security of knowing your landlord can't evict you, and the freedom to have a dg or to paint a wall purple or even to knock it out.
15. But the most important thing we leaned is that our american free enterprise system has powerful and wonderful opportunities for ANYONE ( and i do mean anyone) to get ahead by investing and to do that one needs to SAVE. And using that savings to either invest in a house or invest in Stock market.
16. so everyone of you: Start saving a full 10% of your paycheck starting next paycheck. make a budget to live on 905 of your pay. do without some materialistic luxuries and live more frugally and invest your savings in EITHER a house or the stock market and you too are on the road to building SIGNIFICANT WEALTH.
Labels: housing, housing v. renting, real estate
posted by Sara De la Guerra | 12/12/2007 08:35:00 PM
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91 Comments:
The rent vs. buy debate is much easier if one knows how long one will "own" the property before selling it.
That entirely effects which option makes or loses money.
A 20% down payment on a modest $1 million home is a total fantasy for regular people in Santa Barbara who "only" have a household income of $75K per year and real life expenses to pay.
Still, the best thing that can happen to the overall social and economic fabric of Santa Barbara is for a major tank in the real estate market, so real people then have a glimmer of hope to afford some.
Such a market crash sucks big time for people who set themselves up to depend upon increasing real estate appreciation, but not for the rest of us still on the outside.
I lived in SB for decades & never thought I'd be able to afford a home in SB. When I found myself in the position to do so (a confluence of opportunities) I never in my wildest dreams saw such an increase in appreciation coming.
Just another perspective from a grateful resident.
reply to Sara's anon 9:04's blog
You say that one pays 3 times the value of the house over 30 years.
BIG HAIRY DEAL!!!
What you fail to grasp is that it's 3 times the initial purchase price, not 3 times the ending home value.
And this is significant and I'll show you why:
Since santa Barbara houses appreciate an average of 10 % per year they double in value every 7.2 years ( the rule of 72).
For our illustration purposes lets use 7.5 years.
1. end of year 7.5, doubles from $1,000,000 to $2000,000
2. end of year 15, doubles again from $2,000,000 to $4,000,000
3. end of year 22.5, doubles again from $4,000,000 tpo $8,000,000
4. end of year 30, doubles again from $8,000,000 to $16,000,000. ( also by now the house iis owned free and clear.)
So what if the buyer paid 3 times the original $1,000,000 for a total of $3,000,000.
In the process he got to live in a house that it would have cost $2,000,000 to rent.
( Thats because the initial $36,000 annual rent doubles every 15 years due to the 5% increase so the last year has doubled twice to $144,000 so the average is $72,000,000 annual rent times 30 years.
so his actual cost is $1,000,000 total paid out over 30 ,years and ends up with a free and clear $16,000,000 house.
Compared to your own calculations for the renting and investing in the stock market alternative one ends up with $3,000,000 which includes the total $1,000,000 invested and the $2,000,000 profit
So the conclusion is :
Buyer $15,000,000 profit (proven fact by the illustration above)
vs.
renter/investor of $2,000,000 profit (by your own admission)
Gee, I wonder which one of them did better?
An inconvenient truth! So sorry to blow your argument, yet once again.
Nice try a.k.a. stock broker. Close but no cigar!
Better luck next time with your faulty arguments and your funny math.
You can't always get what you want
You can't always get what you want
But if you try some times
You might find
You get what you need
If you truly love living in Santa Barbara, you will buy anything you can get your hands around. Anything. And that is all that matters.
We also learned most people complaining about SB housing prices want a million dollar plus home for the price of a cheap condo. These chronic complainers want something for nothing, and that is not a problem the city council will ever solve and they should stop trying.
We learned if all you can afford is a condo, then that is what you buy if you want to live in Santa Barbara. Because plenty of other people can afford to buy whatever else is on the market at market prices; even if you cannot.
Get over your sense of entitlement picking one of the most desirable areas in the country to live in and then complaining you can't afford to stay. Buy what you can afford and welcome to the group that also learned that lesson well too.
I hate to tell you 10:37 but there is no such thing as easy money. The Santa Barbara real estate market is still inflated and the economy really does not support it. You equate the unrealistic bubble of the last few years with the future and unless the median family income goes up tremendously, you are going to have whole lot of for sale signs over the next few years.
Maybe prices will continue to go up, but I wouldn't count on it.
Also, what is the preoccupation with being rich? Take a look at your own posts! You are the most money grubbing, wannabees I have ever seen! A modest million dollar home?
In most places around this country, buying a home is a personal investment as a place to live and raise your family and provide SOME security for retirement. Unless you sell it, the value is unimportant. Also, from what I have seen through the heartland, people tend to live modestly, keep their mortgages affordable, and pack away money into investments for retirement. I have met some really well off people who don't owe anybody, have tons of money in the bank, a fat stock portfolio, and a modest home because they weren't trying to get rich. They were just prudent and lived within their means. These are families that make middle class incomes and live in middle class neighborhoods with homes that cost well under $200,000. If you want to read a good book on the subject, read "The Millionaire Next Door". It illustrates this concept exceptionally well.
I still say Santa Barbara money logic is skewed and would advise young families making under $100k to go east to make a better life in a truly family friendly, affordable community.
a.k.a. stock broker ( 5:11 a.m. on the other real estate blog )
you gave us a link to
the New York Times renting/buying calculator.
I clicked on your link to the above calculator in your post and entered in 5% per year rent increase and 8% per year house annual appreciation and SURPRISE SURPRISE: Your own recommended calculator said renting is only better for the first 2 years then buying passed it and went way ahead a much better investment by far for the last 28 years!
You can't even read your own calculator. ( You better take a course in BONEHEAD MATH.)
You just proved your own self wrong. AGAIN!
Don't you ever get tired of being proved wrong?
It's like taking candy from a baby.
Where is your pride?
Guess what, the millionaire next door may be a renter.
Lots of people make a lot of money off the perceived need to own a home. They're about as honest as the crooks who run the US Healthcare system.
Many of the best folks who care about this community are renters, although many own too.
There is no need to own. Financially it is no better, if you are careful and invest prudently.
And the affordable housing debate? Well, a big part of the lack of affordability is the mortgage interest and the 10% total fees and commissions the real estate folks take.
That's why the real estate industry squawks about affordable housing. They aren't getting their cut.
The only complainers I ever here in this town are homeowners, who drive their SUVs alone to anti-growth meetings and complain about traffic and pollution.
Renting makes you rich. And leaves you resources to truly help the environment without being a hypocrite. And let's mention the fact that for lower income people... well, the real estate industry has done its best to screw them over the past 10 years with no-check loans, ARMS, and the change in the bankruptcy laws that pretty much make you a domestic terrorist if you declare bankruptcy due the userers in the real estate industry.
Rent. Invest. Avoid the hoopla, and help the community.
6:26
Quit putting words in my mouth.
I never said there was easy money.
I agree with you.
There is no easy money IN EITHER BUYING A HOUSE OR THE STOCK MARKET. ( especially the stock market).
But you are changing the subject to get away from my just having proven you wrong. You didn't find any fault in my argument that proved you wrong because you couldn't. So consider yourself proved wrong.
Your act of changing the subject by saying there is no easy money does not change the fact that buying a house is simply a significantly better investment than renting and investing in the stock market.
You are right when you say that we are in a real estate correction. What does that have to do with our argument/
I already explained that ALL markets including BOTH real estate and the stock markets have regular cycles ( like an ocean wave) where they go up for a few years but always go up faster and more than they should and so naturally have to have a correction to bring prices back down to the historic average appreciation level. I already explained how real estate prices in Santa Barbara follow ROUGHLY a 10 year cycle, appreciating maybe 15% a year for 7 , or so, years and then correcting around 20% , or so, for around 3 years and then once they hit bottom they ALWAYS start going up again to repeat the cycle process over and over and over. This can be seen by going back 50 years. Each 10 year cycle including the run up and the correction the bottom of the correction is always around a doubling from the previous bottom.
you said before that you couldn't see this cycle when you looked at the last 50 years. I can see it because I have been working with this stuff we are talking about for 40 years now, and it IS there if you know how to look. the fact that you can't see it means nothing. Tt is there. History always repeats itself in financial markets. many of the real estate corrections correspond to recessions! Recessions also go in a cycle called the business cycle and if you don't know this then you have a lot to learn. Some corrections are flat like the 3 year correction in 1980 to 1983. also of note is the fact that Santa Barbara is somewhat immune to the national real estate corrections. ( but not this time due to our extreme appreciation between 2000 and 2005 where prices doubled. so from the peak in june 2005 the housing market has to have a 5 year long correction. But make no mistake the bottom will come and sooner than you think. The bottom should be Jan 1, 2009 or at the very latest jan 1, 2010. Now since there is a 505-50% chance that the country may be going into a recession in 2008 this would cause the bottom to be Jan 1, 2010. but if there is no recession it will be jan 1, 2009. As I said before it is likely that the bottom will be followed by 1 or 2 flat years where appreciation goes up only 1% per year. just like it did in 1982 and 1982 following the 1980 correction.
Now here's the important part.
I would absolutely bet my life and my entire net worth, which is in the millions, that after this coming correction is over that Santa Barbara house prices will start appreciating again and that once they start up that they will at least double over the following 10 years. This is a sure thing. the only thing that could stop it would for there to be a 10 year long national depression just as bad as the 1932 depression.
The reason why its a sure thing is because inflation is a SURE THING. Over the last 100 years and over the next 100 years there has always been and there will always be an average of around 3% per year inflation. This inflation causes money to be worth less and forces wages to be increased around an average of 5% per year. Thats why rents go up 5% per year.
over the last 100 years there has been a correlation between rents and home prices. It is simply a fact that over the long term as rents go up home prices also go up. what you don't understand is it's the fact that home prices went up too much faster than rents during thee 2000 to 2005 run up that caused the current correction that will force home prices to come back down to the historic relationship[ to rents. Home prices had gotten exactly 305 too high and so have to correct 30%. Home prices have already corrected 20% (10% per year for 2 years) so only have another 10% to go ( which can and will happen in one year).
After that the next cycle will start up all over again when inflation goes up, the price of gold goes up, the price of oil goes up, wages go up, rents go up and yes, my friend, you guessed it, home prices will go up.
I know all this because I have been studying it extensively for 40 years now.
Now the fact that you just don't get it has absolutely nothing at all to do with the reality of what's going to happen in the future. The future is going to happen with or without you or me or our opinions. Going back 100's of years history always repeats itself in financial markets. So, if one is intimately familiar with the past like I am it is easy to predict the future. I also chart the stock market extensively and have learned that history repeats itself in the stock market in exactly the same way that it does in the housing market. i.e. there is a wave action of cycles. There are clearly there, but only if you train yourself how to see them like I have.
Bottom line . You all can take it to the bank that in around 10 years or so home prices will be around double of what they will be at the bottom of this current correction which is coming in a couple years.
Those that trust in history repeating itself will be rewarded and those that don't will see the opportunity of a lifetime pass them buy . OH WELL.
All I know is that in 2 years I am going to buy 6 more rental houses here in Santa Barbara and let my tenants pay my payments while I watch them double. and 20 years after that I will have just made yet another $5,000,000. Its really quite easy. All one has to do is simply trust that history will repeat itself and the natural market forces will do the rest for you.
I wish you all the very best.
6:26
I agree with everything you just said. Especially the part part about how a young middle class family will have a much better life by moving from Santa Barbara to a more affordable community. Santa Barbara has essentially become Beverly hills and is now a resort town for the wealthy to move here to retire. Do I like that? No, not one little bit. I wish i could change it but I can't. all people have to learn to live with reality. and reality is that Santa barbara is a VERY expensive place to live and is going to get much much worse. in 10 years the tract houses are all going to cost $2,000,000. and it is going to take a salary of $300,000 a year to buy one. All I am doing is teaching people, who are interesting in pursuing it, how to take financial advantage of that fact and reality that is going to come. Nothing more! I am really not trying to talk anyone into anything!
What you don't understand is that this discussion is about a very narrow topic of the question of which is a better investment between buying a house or renting and investing in the stock market.
It is only about the numbers and finding the correct answer, and nothing at all with advice on how to lead ones overall life.
It's intended only for use after one decides what's important to them, what their goals and aspirations are, and how they want to live their life.
It's not at all intended as a sales pitch for people to buy houses, here or anyplace else.
I fully agree with you that life is a lot more than about money and money will not buy happiness. One should have a well balanced life and there is no place in it for greed. In fact greedy people always lose money. Both in the stock market and in buying houses.
The important advice is that everyone should live frugally and save 10% of everything they ever make. The only way that I got ahead was by living extremely frugally. It wasn't easy, and there was some risk, and it was surely not a sure thing . But my own success came from having the guts to take action and to follow a plan.
This discussion about saving 10% has absolutely nothing at all to do with either the stock market or buying a house. It is up to each and every person to decide for THEMSELVES what is the best way for THEM to place their savings. Some will put it on the bank savings account at 1% interest which actually loses capital after the 3% per year inflation rate. I put my own savings in buying platinum bullion bars. They have appreciated way more per year than either the stock market or houses. Gold and silver have also done better than houses or the stock market. I would buy oil if I had some way to store it. But there is no leverage and I cant live in it or rent it out to help pay for it. . Thats the only reason real estate is such a good investment.
There are lots of us in SB/Goleta who bought real estate within our means. I wanted to own a home for emotional reasons, not financial reasons. I have never looked at my property as a means toward "making money" or funding my retirement. If it helps, great, if not, it was never my intention anyway. All those people who complain about not being able to afford property are not willing to sacrifice in order to do it. You might have to reduce you living and entertainment expenses, get a roommate, get a second job, or buy outside the area and move back in later. But most important you need to be realistic about what you can afford. Yes, you might be able to afford a 2000 sq. ft home in the midwest but in SB that might only get you a 1 BDR condo, well that's what you need to set you expectations on.
I have seen many people in income brackets much lower than $100,000/yr buy property in this area. All of them, including myself, have sacrificed in other areas of life to make this work. You can too if you get creative.
A long time ago, I thought that I had made the decision to be a renter and live in Santa Barbara rather than be a home owner living somewhere else. Then I got lucky (the early 90's housing market and a couple of rapid promotions at work) and lo and behold I am a home owner in Santa Barbara. I fully acknowledge that at least one-third (maybe more) of my good fortune is just that, blind luck. My point in this post is, I had decided I like this place well enough to forego home ownership and rent the rest of my life. I was at peace with that decision. People must set priorities based on their values and then act accordingly. Complaining about economic and social factors that are beyond our control is simply a waste of time and energy.
When I came to SB over 30 years ago this was primarily known as a retirement community. The city general plan listed "pensions and tourism" as its primary economic base.
This was not a town of young families and the 30 Something age group was a huge void. Restaurants closed early and the symphony was a sea of purple haired ladies.
This was all really okay and I would be happy to see it grow back to that kind of town. Young families mean schools and juvenile crime. Who needs to waste our tax dollars on this age/income level group.
This town did just fine being a tourist draw and a heck of a nice place to retire. And the sooner it gets back to those basics and stops falsely reinventing itself as a young family, middle income town the better.
The above fraud is brought to you only by the developers who want to put in another Goleta so they can retire here with some one else's money. Sorry, no can do. No land. No will. No need. Go away.
It is time for SB to become a sleepy little town again.
The pro-rent guys overlooked one thing... you should include the possibility of the homeowner investing too.
Although rent starts out cheaper than mortgage+expenses, and the renter can invest the difference, eventually rent rises above mortgage+expenses. Rent rises at 4 or 5% a year, while mortgage payments are fixed for all time (for a fixed interest mortgage), property taxes only escalate at 2%, and other expenses escalate at rough the inflationary rate of 3%. So homebuying costs don't rise as fast, and eventually, rent exceeds homebuying costs.
At that time the homeowner should be able to start investing the money that fills the gap between monthly home ownership costs and renting.
I bet if you include this potential homeowner investment in the stock market, the homeowner comes out ahead of the renter.
-7:53am-
"History always repeats itself" (as do many of our bloggers buddies)
The future is going to happen with or without you or me or our opinions.
(What makes you so sure? See our spring discussion about existentialism)
"Santa Barbara has essentially become Beverly hills"
(You know that gives me a great idea for a TV show. Anyone know of a screen writer looking for work? I'm gonna call it "The Riviera Hillbillys")
"Santa barbara is a VERY expensive place to live and is going to get much much worse.
(or much better if you's a homeowner already, if I read this right)
"But make no mistake the bottom will come and sooner than you think"
(Bottoms never come sooner than I think. They're always one more date away)
"Each 10 year cycle including the run up and the correction the bottom of the correction is always around a doubling from the previous bottom...blah, blah, blah..."
(I swear, you must be a professor or a lawyer)
What he's really trying to say is:
When I get to the bottom I go back
To the top of the slide
Then I turn and I go for a ride
Till I get to the bottom
And I see you AGAIN!
Yeah, Yeah, Yeaaahh
Helter Skelter my babies
Peace Out
(And That's the Word)
10:37pm you took the investment proceeds from the $260,000 sales price in 1987.
For a $1,000,000 sales price today, after 30 years the renter has $9.7 million in proceeds, spends $3.1 million in rent, and has $6.7 million which they retain $5.6 million after capital gains.
The value of the owner's home escalates to only $8 million because Santa Barbara real estate escalates at 7.2% per year, not 10% as you assume. Then they spend $3.2 million on mortgage etc, gross $4.8 million, and keep $3.8 million after capital gains.
Renter wins. However, rent spoiler has a point and I'll have to look into that.
The NY Times calculator omits investment proceeds.
The last downturn on the South Coast lasted from 1989 to 1998. Including inflation, prices fell 35%. This downturn is sure to be worse, due to all the credit scamming at places like Countrywide and on Wall Street. This time we'll fall 45%, I think. Probably means 15 years of flat prices, until inflation squeezes out the 45%.
11:08
That sounds more like it. I owned my home in SB during the previous recession and it was painful. Sorry RE guru and others but I hope you don't have to sell your overpriced properties in the next few years. I still think it will be a while before incomes rise and home prices fall enough so that things will be in balance (for SB,) but those who advocate waiting it out and buying near the next low are right on. For those who bought at the highs, all you can do is what I did in 1990, hunker down, live on beans and rice and muddle through.
For those who advocate buying in any market, you people are nuts. You obviously don't understand real world economics or you wouldn't advocate pushing overpriced homes in a declining market. It makes bad economic sense to buy in a declining market. It is really a marketing ploy to prop up the artificial values promoted by the local real estate interests. For those families determined to buy a home in SB, wait a while, watch the markets, go to open houses and look for sound financial advice. Do not buy in impulse and stay away from interest only and negative ARM loans.
As far as my previous post was concerned. I was right on subject. Prudent investing requires diversity. In SB, you can buy a home or rent and invest. Both will give you returns over the long run, that is a obvious from the posts. Your best returns are going to come from moving to a economically sound area and using a combination of strategies. If a family makes $75,000 a year and buys a home for $200,000, they can easily afford a 10-15 year loan, plus maximize their investments in stocks etc. In 10-15 years their home will be paid off. They can live in it mortgage free giving them more money to invest, use equity to buy investment property or sell and buy a McMansion with a huge downpayment. You all assume that homes in other places don't appreciate but that is a fallacy. That $200,000 home may only be worth $400,000, but they have doubled their money, paid it off in 1/2 to 1/4 of the time, and made a bundle in other investments.
Ok, numbers crunchers, do the math on this scenario, and I bet that couple who made the move will come out ahead of those who stayed. Also, I bet this family will have a higher, yes higher quality of life because they can afford to live comfortably without the weight of a SB mortgage and provide for their future.
For families making over $100k, or for those who don't mind the stress and eating beans and rice for years and years to have a SB zip code, more power to you. For those open to other options, take a look around this big country and what you see may surprise you. There are plenty of wonderful, welcoming communities that will offer you most of what SB does and some things that SB doesn't, without the high price tag.
What is my credibility here? I am not a RE agent or stockbroker. I am just a middle class working stiff who owned 3 homes in SB and then moved away. I have what so many of you don't have, a wider perspective.
11;08
Your argument is STILL faulty. the buyer ends up with more. You failed to take into account that the buyer can start investing at the 15 year point when his payments are less than the renters but he has the same income as the investor so if the investor has enough income to be able to pay his now higher rent and still invest the buyer does also. this adds another $5,000 to the buyers profit.
You are so quick to point out the housing bubble . how about the stock internet bubble where stocks fell 75%. some $100 tech stocks like Sum Microsystems fell from $100 a share down to $3 a share. Same exact thing for JDS Unisystems ( who make fiber-optic components). I know because I owned the,m both. it had been the equivalent to what to Apple is now, --look it up.
lastly you are all wet when you say houses are going to fall 45% just what are you basing that on/ I know---your guess. Your guess has no validity. Just which one of us is the housing expert here? I have spent the last 40 years of my life analyzing and following real estate and it's trends. I say Santa Barbara real estate is going to fall 30%. My informed prediction is worth a whole lot more than your guess, especially when your goal is to make real estate look as bad as possible. And its already fallen 20% so has has only 10% and 2 years more to go.
It is not inflation that squeezes out the 30% just like it was not inflation that squeezes out the 75% drop in stock market prices.
My friend you just don't know what you are talking about so none of your arguments are valid or worth a damn.
It is the market economic forces of supply and demand that cause the prices to correct, not inflation. You better take a class in basic economics 101, as you obviously don't understand how markets work.
in all markets including stock market and real estate market there are the economic forces of supply and demand at work. It is only these forces that run the prices up and down. it is a fact that all markets do not go up in a straight line but in a wave pattern. it is a fact that during the run up times, when demand is greater than supply, that the prices are driven up to levels that are higher than they should be and are unsustainable so there HAS to be a correction. This correction is not caused by inflation. The correction has to occur to bring prices back down to the line of their historic average appreciation. During this correction it is not inflation that brings prices down but the act that the demand is less than the supply ( more sellers than buyers). the correction is over once the prices are brought down by supply and demand to their long term true value line based on their historic average appreciation. it's like drawing a line up from all the bottom of the price chart over time to determine the long term 30 year trend line
here is another thing that moves in cycles and that is the economic business cycle. not a straight line but booms and recessions. It is true that both the the stock market and the housing market corrections correspond in time to the economic business cycle, although at different times. The stock market leads the economic cycle by 6 months. The housing cycle follows the economic cycle by 6 months. Also the inflation rate goes up and down in cycles and the Fed raises and lowers interest rates in cycles.
You claim that real estate prices will remain flat for 15 years. this is patently ridiculous and absurd! it that were the case why didn't the stock market stay flat for 15 years until inflation squeezes out the 75% fall.
Just look at the history of any market over the last 100 years. None of the markets, or cycles, whether the economic cycle, the business cycle, the interest rate cycle, the inflation rate cycle, the price of gold cycle, the stock market cycle or the real estate prices cycle has EVER stays flat at the bottom. all markets and all cycles move in a wave pattern only, this is a fact. once a bottom is reached it starts curving up into the next run-up. History always repeats itself. Thats why investors like me who understand cycles can look at a chart of the price activity over time and see the pattern and thus predict the future price TREND with a great degree of accuracy. it is true that the exact prices and the exact timing depend of the general economy, and the inflation rate is but one factor of the economy . but it is never inflation that squeezes out the corrections but other forces taking place--mainly the forces of supply and demand set the price. also investors don't wait for things to get better but they anticipate the next run up and buy in advance, thus driving prices up by their demand
also in housing the product is land and they're not making any moire land, so as the population of California increases by 1,000,000 people per year this increase in population creates a huge DEMAND for 400,000 new housing units. (2.5 people per house). This demand alone causes the price of both rents and house prices to appreciate greatly. This population growth has absolutely nothing at all to do with the 3% per year inflation, but is a totally separate factor.
Bottom line the 25 years of flat prices that you say will actual not be flat at all but a slow curve where prices are relatively flat for a couple years but are actually appreciating 1%-2% per year for a couple years until the current mini-recession is over in 2 years at which it will go back to 10% per year appreciation.
11:08
Some of the things you say are right on, like your advice to not buy until we see the bottom of the market in a couple years, and the wisdom of diversity.
But you are wrong when you said that those who move to another market will do better.
it is a undisputed FACT that real estate prices appreciate at different rates in each and every city in the country! The national long term average is around 5% per year. some appreciate at 3% per year while others appreciate at 10% per year or more.
here is another fact: The places where real estate appreciates the most is where the wealthy live (and want to live). Santa Barbara is the most beautiful and most desirable city in the country. So out of 1000 cities Santa Barbara has the highest appreciation rate in house prices. For example i used to own a house in the midwest. I sold it for $15,000 for it in 1970 and it is now worth $150,000. I moved to Santa Barbara and bought an equivalent house here for $30,000. this house is now worth exactly $1,000,000.
This means that a person who could now buy a $800,000 house here with $80,000 down and have it appreciate to $1,600,000 in 10 years for a $800,000 profit can move away, either out of state or to a cheaper town like Fresno, and invest his $80,000 in a $400,000 house that will go up to $600,000 over 10 years because it no longer is in a luxury high end resort beach town.
Now lets compare the two scenario;
1. buy in Santa Barbara Invest $100,000 and made $800,000
2. move and buy elsewhere . invest $100,000 and made $200,000.
Even if they put $50,000 as a down payment and $50,000 in the stock market they would only add another 10% of $50,000 or $5000 a year profit from the stock market for a $250,000 total profit.
Renting and investing may be better than buying anywhere else in the country but there is simply nothing that can beat buying a house in Santa Barbara for long term appreciation and maximum. profit
Here's numbers from the last real estate downturn here...
1989 median condo sales price, south coast... $203,000
Use BLS CPI calculator to compute inflation for this unit... just inflation taken into account, the median is equivalent to $263,000 in 1997 dollars.
Real 1997 median price... $180,000 for condos on the south coast.
That is a 32% downturn spread over 8 years.
The current downturn will be worse, because of all the credit scams that Countrywide used and the foreign lack of faith in the dollar, CDO's and SIV's. Also, the work of Shiller indicates that home prices have been flat for 100 years until the recent bubble; to go back to their historical level, we need a 45% correction.
I agree with rent spoiler that a homeowner can also invest, and I did not account for that. I need to do so. The interesting point here is that you pay a lot more upfront to own a home, and the renter can exploit the time by investing early and letting their money compound longer. But I don't know yet who wins.
Who to believe in the blogasphere? Those who provide references and links. Anyone could say they have a Nobel Prize in economics and used to serve on the Fed, and were Warren Buffett's guru. Can't believe any statement of qualifications here, and those who make them are just puffing up like lekking birds.
well, until gangbangers take over and start shaking down the rich here, and that's the road we are heading down here.
Casinos and rich in walled estates and downtrodden immigrants doing all the work and joining gangs cause that gives them a sense of belonging that our community denies them. The vision of SB real estate folks is: no middle class, tycoons who made their money selling ARMs and beanie babies and in divorce settlements and no middle class.
Real estate guys here are pissed off we aren't still part of Mexico, where the rich really know how to screw the poor and the poor are so uneducated they can't tell. That is the ideal of the real estate guru... no middle class and illegals working 18 hours a day to clip the lawns in the compounds that double in value every few years (but no more property tax because of Prop 13!).
Eventually the illegals will fight back effectively. Viva Zapata!
I will really worry about this when I have that $80,000 cash down payment.
Until then, for most people who service the wealthy property owners and leisure investors, we will be eating rice and beans, and paying high rents so the wealthy can continue to become more wealthy.
RE Guru:
If you make enough money in SB to save for a decent downpayment and can afford to make the payments for 30-40 years as you suggest, and feel SB is the end all of places to live, then go for it. It has worked well for you.
For those who don't have rich relatives or can't save enough for a downpayment because they don't make enough money to pay rent, save and raise their kids, leaving is a viable and sensible option.
For a family making under $100k and just getting by, what you offer is a pipe dream. I know how hard it is to make a $1200 payment on a $220k mortgage, plus property taxes (based on a 1987 purchase), maintainence and raise 2 kids on $50k a year. How do you expect what would be considered the median family making under $70k to be able to aford double that or more?
If you buy somewhere else and pay off that house, you can purchase more property which would also appreciate using the equity from house #1. You could do that three times in the 30 years you owned that home if you paid off a 10 year note each time, plus do the same on your investment property. Your original $200k home would create a nice returns on the investment and you wouldn't even have to move or sell it unless you want to. You couple your real estate options with your other investments and you would be both real estate and investment rich.
Also, there are various risk levels in the stock and bond markets as well as real estate, so you don't have to go high risk and can still make a good return on your investment over the long term. The point is, in SB you would have to pick one option or the other which means NO DIVERSIFICATION. If either market goes down, your investment goes down with it. By having a truly diverse portfolio of stocks, securities, real estate etc., you will always be able to have a positive investment to draw from or move your investments around more freely. I think most serious financial advisors would agree that over the long term, it is the most sensible and secure way to invest money. They will generally tell you that it is dangerous to put all your money in just one thing. Are there any out there that would like to comment on this?
For more on the RE decline, here is an article from CNN today. It lays out much about what we have been talking about regarding the affordability gap being created by the sub-primes.
http://money.cnn.com/2007/12/14/news/companies/fannie_annualmeeting/index.htm?postversion=2007121413
11:12
You have an excellent point.
But this particular discussion (argument) is not about that part of the housing issue, but is about for those who DO have the $80,000, whether it's better to buy or to rent and invest.
It is true that the rich get richer and the poor get poorer.
The half about the rich getting richer is o.k. They build companies and factories and provide jobs, and they need an incentive and a reward for doing so.
The part thats NOT o.k. is the part about the poor getting poorer.
Now an excellent idea for a blog topic (are you listening Sara?) is ideas for how the poor can build up their financial net worth and how they can have a high quality of life and happiness.
All my previous arguments have been concentrated on the narrow question of whether its better for the middle class to buy or rent, for those who COULD afford to do so.
Some will be surprised to hear me now say that its much better for the poor to move away from Santa Barbara to a city where they CAN afford to someday save up and buy their own house. It is their free choice to stay here and be exploited by the rich and provide 'service' for them. Nobody is holding a gun to their head. This is a free country where anyone is free to move to any town they want. So my advice to the poor is to get out of Dodge. The poor can have a truly high standard of living in many States especially the midwest heartland of america where a nice house only cost $150,000 and condos $100,000. (rents are only $800 per month for a real nice 3 bedroom house and $500 for a nice 2 bedroom apartment.) This is truly a great country and is truly the land of opportunity. The sad fact is that Santa Barbara is NOT the land of opportunity for the poor and it is the mistake of a lifetime for the poor to stay here.
I started out poor. I moved to Santa Barbara with $1000 to my name. I rented a $300 house on mesa Verde lane. After one year I borrowed $3000 from my parents to buy my first house and my house payments were $400 per month, only slightly more than renting, and that house, (even though I sold it long ago and traded up) is now worth $1,000,000.
If I were poor and had $1000 to my name I would move to the heartland in a second where the opportunity still exists to easily make something out of oneself financially, and I could easily repeat the process there that I did here, but which is no longer possible here due to the to the outlandish prices.
Also what is "poor" here suddenly becomes middle class in the heartland.
P.s. I would still buy a house a year after I got there! That alone is worth moving for.
8:03am... Santa Barbara Prices have already fallen 17% from their peak in the 4th quarter of 2005, according to OFHEO statistics. Including inflation.
Paul Krugman in the NY Times - no stockbroker - predicts another 30% fall from current.
So a total of around 45% fall. That brings the prices in line with history.
13th Amendment ended slavery in the US. No one is forced to work for anyone unless they want to. And looks like some people like working.
And (gasp) those very same people who think are being exploited actually end up buying houses in Santa Barbara themselves and sending their kids to college.
You see how it works? Work pays for things like houses and things and no work is beneath them when it buys the things people want.
Quit your complaining and ditch your class envy and get your own hands dirty so you too can enjoy the American Dream. Nothing wrong with working service jobs if they buy you what you want. And they do buy what a lot of people want and this is why they keep doing them.
Because no one is forcing anyone to work here in Santa Barbara. People work here because they like their jobs and it works for them.
Regular Working Stiff -- you need to move away instead of being so bitter about your life here. I am a blue collar worker. I saved and bought a house and I am happy here.
Your own brand of class envy will take a toll on your health. You really need to think about moving away where you can be happier and stop thinking all you are is a regular working stiff. Drop the attitude because no one feels sorry for you. Nor should they.
Lots of us work long and hard and have sacrificed to get that down payment. But it made us happy, not petulent and envious. Something is wrong with your life agenda. Fix it.
If you don't love what you do, find something you do love and some place you can afford and take the rest of your time on earth to feel happy, rather than deficient. It is an inside job.
11:18 How long ago did you accomplish that task? Do you also have kids to support? What do you consider a blue collar income? You may have a trade/tech job, but that doesn't mean you have a blue collar income. I will agree, buying a home in SB takes dedication and sacrifice, but from these posts I have found more than a few people have upper middle class incomes and think they are middle class due to the fact that the cost of living in SB is so skewed. The true middle class and lower middle class is pretty well locked out of the market. Remember the median income for a family of 4 is under $70k a year. Most of the people buying homes make over $100k.
11:13 Working hard has nothing to do with it. You carry around your dedication to a mortgage like a badge of honor. You obviously made enough money to support your family and save so you either worked 2 jobs and were never home for them, or made enough money to pay living expenses and save. Not everyone makes enough to do that. Doesn't mean they don't work hard, they just don't have the education and/or techical experience to get a high paying job. I know plenty of people that work 2 jobs just to pay rent and basic living expenses and what you say insults them. I agree it is their choice to stay in SB, but your comments insult those who work hard but don't have the extra money it takes to save for that big downpayment.
The rich conduct a class war on the non-rich here. The rich are the ones who should cool it.
I'd be real impressed if one of the rich with a 10 acre Montecito or Hope Ranch estate assessed at $400,000 because of Prop. 13 stood up and said, `You know, this is wrong. People in 1-room condos pay more in property tax than me. I'm just going to ask the assessor to reassess my property to market value, because, you know, it is simply the right thing to do.'
They don't. They are conducting class war and they hate the government because from time to time the government does try to be fair to everyone.
Look at the most recent bailout proposed by Paulson for the mortgage lenders. Does the bailout in any way help the actual folks in houses who got swindled by banks to take inappropriate loans? No way. In fact, the bailout screws families that work hard to stay up on their monthly mortgage payments, and helps those who have missed a few payments.
Why? If you are diligent and poor the rich want to keep the yoke on you. Doesn't matter that rich swindlers put the yoke on you in the first place.
And if you are poor and flake out on your mortgage payments, the rich want to cut you a break to get the yoke back on you.
There is nothing wrong with eating rice & beans. I did so for years as a single parent raising my child on a meager income. I still love my burritos & tacos above most other food choices!
I was able to put myself through school thanks to the state cc system. Then started working at a low paying job, worked really hard & as a result my responsibilities & income increased (as a woman I truly did have to work twice as hard for half the pay).
When the opportunity to buy a teensy tiny home presented itself to me in the mid 1990s, I borrowed the money & committed to home ownership which was a dream of mine that I never thought I'd ever be able to achieve.
For those who are bitter about working & renting there is always the option of improving your lot in life by going back to school. Here in SB, we have an excellent college (SBCC) that is realatively low cost to attend.
And maybe just maybe when you are in the financial position to pay a montly mortgage, you might find a similar opportunity to buy your own home in SB.
If it can happen for me, it can happen for most anyone who has the desire & fortitude to improve their life.
3;50 p.m.
You faultily say that prices will drop 45%.
It's obvious that you are not basing this claim on your own knowledge or experience, but you are finding some article written by someone who says that in his opinion prices are going to fall 45%.
You never give a detailed and accurate analysis to justify the 45% or the number of years that it will take for the correction to occur.
It is a fact that on every single economic market issue, whether stocks or real estate, there are always some expert economists with opposite opinions or forecasts. So there is a 50%-50% chance that the writers you cite and your opinion is wrong and a 50% chance that my sources and my differing opinion is wrong.
Now my opinion is based on history repeating itself and your opinion is based on something occurring that has never occurred before in the last 200 years.
Therefore its much more likely that the house correction will be in the range of 30% rather than 45%.
But the amount of correction is not the main thing that you and the writers you cite are wrong. You are both wrong about the time it will take for the correction to occur. All market corrections, whether the stock market or real estate, do not correct at the rate of the 3% inflation rate. If that were the case a 50% stock market correction like the one we had 5 years ago where the NASDAQ index dropped from 5000 to 2500, would take 17 years to correct.
it is a fact that all corrections in all markets including stocks and real estate occur at the historic AVERAGE appreciation rate of that market. Since the stock market long term appreciation rate is 10 % a year a 50% correction will take 5 years. The average long term rate of appreciation of houses in Santa Barbara is 7.2% a year. But the runs up and the corrections do not take place at this rate but a faster rate. The run up years are at 18.5% up per year for 7 years while the down years are 3 years at a 10% down per year for the 30% drop back.
So the houses appreciate 130% over 7 years and since this puts the prices now at 30% above the 100% long term appreciation for each 10 year period they have to correct 30% over the next 3 years so that at the end of 10 years they are at normal prices which are 100% than the price 10 years before.
so even if you were right in your 45% it would still only take 4.5 years to make such a correction at 10% per year. it is a fact that the prices have fallen 10% per year over the last 2 years. this proves that i am right and you are wrong. If you were right the prices would only have fallen 3% per year each of the last 2 years.
Lastly the authors who you get your information from are talking about the national home prices. they are NOT talking about Santa Barbara housing market. it is a FACT that Santa Barbara housing market is quite different from the national housing market. yes condos in florida are going to drop a full 50% . That has absolutely nothing at all to do with Santa Barbara which is our discussion.
Also, the journalists who wrote the articles you cite, whether stock brokers or not, all have one thing in common. Before they even started to write their article they had a biased goal of trying to make buying houses look as bad as possible. So they slant their argument to make their point stronger. Journalists also have a goal to make their stories shocking, scandalous, and dramatic and newsworthy and exciting. Where is the drama, excitement , or shocking newsworthiness of writing an article saying that house prices are going to fall 30% over 3 years. No big deal right. Business as usual and history repeating itself. Ho Hum. So they twist the facts and exaggerate a little bit, use 'funny" math like claiming that a correction will occur at the 3% inflation rate, ( maybe someone will buy that, right Mr. stockbroker) and come up with a truly "newsworthy" and shocking "story" that hose prices are going to fall 45% and the correction is going to last 15 years. Better buy stocks. YEAH-- RIGHT!
We bought a modest home here in Santa Barbara 10 years ago for $400,000. . Our hispanic family consists of my wife and I and our son. My wife, a blue collar clerk, makes $30,000 a year, and I am a blue collar draftsman making $50,000 a year, for a total $80,000. At the time we bought 10 years ago we were making a combined $60,000. We scrimped and save every penny for 10 years and now had the $40,000 10% down payment
Everyone, including the real estate agents, told us that we needed $120,000 a year (exactly twice our $60,000 salary then) to buy a house so that our payments would fit the national average of 25% of our income.
We wanted to own our own home so bad that we decided to sacrifice and budget our money so that we live frugally on 50% of our income and we bought a modest house here and our $2500 payments and taxes are exactly 50% of our income. In order for us to do this we had to get a "stated income-no documentation loan". In the last 10 years since we bought our house for $400,000 it has now gone up 250% in value to currently $1,000,000 ( it was $1,200,000 2 years ago at the peak), and we have made $600,000 profit on our $40,000 investment.
It was the best thing that we ever did.
Our house payments and taxes and insurance are only $2500 a month and the house we had been renting for $1800 per month when we bought now has its rent increased to $2500 a month which is exactly the same as our payments. So now we are in a position to start saving and investing money again just like the renter. Now we can fulfill our lifelong dream to own our own mexican restaurant by refinancing our house and pull out enough money for us to start our own restaurant business, and keep our house. Now we can finally be in business for ourselves instead of being blue collar workers (servants) for the for the rich. The United States of America is truly the land of opportunity.
The only difference between us and all those who are poor and do nothing but complain is that we took action and are making something of ourselves. If we, as blue collar Hispanics, can do it, anyone can do it.
10:35 - well said. CC has 2 year courses in cosmotology and auto tech and both can earn up to $100K in a few years. Good return for a two year education right here in town. Today's NP says prison guards base salary is $70K.
I still get the impression those here with class envy who only look at Montecito and Hope Ranch don't have a clue what the rest of the homeowners in town do for a living and that they too bought houses.
Let's see... 1989-1997 was an 8-year downturn in *Santa Barbara* housing prices of 32%.
That time, there was no crazy mortgage lending by Countrywide, no international marketization of debt, no CDO's or SIVs.
THis time it will be worse, 45% over 6-10 years, IMO.
Sure, it is all speculation. But according to OFHEO we've already fallen 17% in 2 years. Never see the local real estate industry quote the OFHEO numbers, BTW, they stick with the median, which is skewed by all the Hope Ranch and Montecito sales.
Let's see, at 8% a year, it will take 5-6 years to reach a 45% fall.
2 of those have already gone by.
Wait until 2011 to buy!
Don't buy now... particularly condos.
Well done 12:43, but remember you paid $400k, not the $1,000,000 it is now. With your income, it was a push but possible. You couldn't do it now, because even with stated income, the payments would be more than you make.
There lies the bigger issue, what was possible 10 years ago isn't possible now. Middle income families are in essence, shut out of the market. Hopefully the badly needed correction will reopen some of those doors closed by the bubble.
If you look at the county recorder office listing for sales of houses, you see a lot of hispanic surnames. Shall we assume with blatent racism these might be blue-collar workers still due to known demographics by surnames? .
I also know of a hardworking dual income family that ran a cleaning business, legal immigrants from Guatamala, paid after deductingtaxes, medicare etc, all above the board and they bought a crummy little house at an estate sale, which they slowly fixed up.
Judge even laughed when he saw the price because it was so low due to the condition, which was unkind because these people wanted to take part in the American dream and made it work for them.
Their little house that they bought for $130K at the time is now worth at least $600,000-700,000 which they paid for cleaning houses and holding their heads up high.
Is this a great company or what? Recent immigrants sure think so. Too bad too many of our own native born think someone needs to hand them something for nothing these days instead.
2;42 p.m.
The whole point here is that almost everyone can do what 12;43 a.m. did. It's their ( your) absolute last chance. So don't let this upcoming opportunity of a lifetime pass you buy. Go for it! All it takes is a little sacrifice and a little budgeting discipline.
10 years from now, in 2018 when this very same blog is repeated about how nobody can afford to buy a house, then YOU can post your story about how you bought a $700,000 house in Santa Barbara in 2009 at the bottom of the market and it's now worth $1,400,000. Then others will write in, just like they are now and say: " It was barely possible then in 2009 at your salary, but its not possible now at 2018 at $1,400,000.
Get the point?
2;14
Much of what you say is correct, (especially when you say do not buy condos. Condos are very bad), except the housing prices did NOT fall 32% between 1989 and 1997. During those years prices were nearly flat abut went up a little.
Houses are NOT going to drop 45% in Santa Barbara. Florida yes,
2:48 p.m.
You are right on! Nobody could have said it better.
The housing problem is only a problem for the LAZY, who expect things to be handed to them on a silver platter.
I met some latino immigrants who leased a service station in Duarte ,CA. ( near alhambra) ) from the major oil company who owned it , and the whole extended family worked in that station. Over 40 years their kids married and had kids, and they were able to ALL buy a house in L.A. just from that one gas station. I think the total number of houses purchased for various extended family members over the years was something like 10 or so. When the original father died at a young age his 3 son's took mover the business and expanded to a second station. They worked hard but look what they accomplished , starting with nothing.
So I don't want ANYBODY to dare tell me that it's not possible. The are literally 1,000's of such stories. It's the American way. (except for the lazy poor white trash.)
OFHEO data... our Metropolitan Statistical Area is 42060. OFHEO follows the same home sales to avoid the `value creep' that afflicts the median... that is, homes get fancier over time, and also in rough times super expensive stuff keeps selling (like right now). For our MSA:
3Q 1990 OFHEO Index - 114.98
1Q 1997 OFHEO Index - 101.41
That is a fall in price, not a stagnation. Now add inflation to it:
CPI
3Q 1990 CPI Index - 132.7
1Q 1997 CPI Index - 159.6
So, including inflation, the 3Q 1990 Santa Barbara MSA OFHEO index translates to 138.3 in 1Q 1997.
Actual index was 101.41.
(101.41/138.3) = 0.733, or, Santa Barbara Housing Index fell by 26.7% between 3Q 1990 and 1Q 1997, including inflation.
Can do a similar exercise for median prices on the South Coast, using data presented at breakfast meetings by the UCSB Economic Forecast Project.
Median prices of South Coast condos fell in the 1990-1997 time frame by 24%, and single family homes by 19%.
This downturn simply has to be worse. The boom before 1990 lasted 7 years and home prices doubled. The 1995-2006 boom has seen prices quadruple. This boom was fueled by really crazy lending practices, and also foreign investors bought commodotized packages of US mortgages in CDO's and SIV's on the theory that they mortgages would not all fail at once.
So the last 11 years boom has been fueled by exceptional financial factors that have never been present before. That is the main reason why the crash this time will be longer and go lower than ever before.
Foreign investors are already pulling out of US markets. To coax them back, we'll have to raise interest rates. Current rates still at historical lows... back in 1990, mortgage interest rates were up at 10%. In the future the US is going to have to raise interest rates to lure back international investors.
That will exert even more downward pressure on home prices, and also, there will be more foreclosures from all the folks in adjustable rate mortgages.
According to the OFHEO cited above, we have fallen already 17% since the peak in 2005. Paul Krugman says the housing market will fall another 30%; he is a respected MIT economist. He does not hate housing or real estate.
That means the total fall this time will be about 45-50% from the 2005 peak.
We have 30% left to fall over about the next 4 years. Don't buy until 2011 at least!
Rent and invest your money in something like Vanguard's STAR Fund until then. Stockbrokers dislike Vanguard because Vanguard has never had a scandal and because their fees are the lowest of anyone's. Only 0.35% for STAR, compared to 5% for a real estate broker.
2:42 Are you a used car salesman? You obviously do not understand the relationship betweeen income and home ownership. SB reached the breaking point and I don't care how good you think SB incomes are, they are not rising as fast as the cost of housing. Couple that with the bad lending practices and this correction will last a while and is very necessary. During the 80's when inflation was high, incomes went up fairly quickly, but incomes have risen far more slowly at around 2-3% in the last few years. You are talking about homes quadrupling in value since 1990 but incomes have gone up by less than double.
Also, interesting that all the examples of people buying homes are homes that were bought before the big boom of the last few years. Think about it. What was possible just 6-7 years ago for a middle class family, isn't now. Where is your perspective? There is a huge difference between a home costing $400k and one costing $900k and I bet your income hasn't doubled in 6 years either unless you sold real estate during that time!
The laws of economics apply, even if skewed, to Santa Barbara. If the prices rise to a point that people cannot afford to buy, there will be fewer and fewer buyers that will force a correction until things are balanced. Yes, prices will go up again and yes, there will probably be another bubble some day. But until incomes rise and prices drop to a more equalizing point, the market will be slow, or at best stable. This is a process that may take several years but hopefully it will give new families opportunities for home ownership. For those who bought at the top, I hope you are in it for the long haul and weren't planning to "flip" your house anytime soon. You will come out ok, you will just have to wait it out like I did back in the 90's. That is how a free market economy works, even in SB.
I redid my scenario of renter v. homeowner.
Renter - pays $3,000/month today.
Homeowner - buys $1,000,000 home, $100,000 downpayment, fixed interest 6.82% mortgage (current jumbo rate). $5,880/month mortgage payment, but the mortgage interest tax deduction reduces this to $4,500/month, at least initially. Property tax, maintenance, and insurance bring the monthly total for the homeowner back up to $6,700/month, initially.
Turns out the rent grows above the cost of mortgage payments (less the mortgage interest tax deduction) after 10 or 11 years.
However, it is not fair to let the homeowner invest the difference... because the homeowner must still pay property tax, and more importantly, insurance and maintenance.
A funny thing happens... most home cost calculators put the cost of insurance and maintenance at a fixed percentage of the home value.
I think that is really right for insurance, if you are insuring properly. But maintenance... hmmm... my experience on the South Coast is that maintenance is darned expensive, because the tradesman are used to sweet jobs in the richer areas here.
When you include maintenance and insurance at a total of 1.46% of the *home value* (and the home value escalates faster than inflation in Santa Barbara) then, it turns out, rent is *always* cheaper than monthly homeowning expenses over 30 years.
In 2037, after 30 years, rent has grown to $12,350/month, assuming 5% a year increase in rent. The last mortgage payment of the homeowner is only $5,860; their monthly property tax expense is $1,480. But, since their home value has grown to $8 million, the monthly maintenance and insurance has grown to $10,031. So the homeowner is paying a total of $17,760 per month, which still exceeds the renter's $12,350/month. When the mortgage payment turns off, the expenses on the house come to $11,673/month, a little below the renter's expenses.
It is possible to disagree over what the homeowner's expenses really are in 30 years. But pretty much the standard guidance is 1.5% or so of the value of the house. So I assumed 1.46%, which I got from the New York Times calculator on this subject.
That maintenance, insurance, and real estate closing costs scale with the appreciated value of the home is a kind of `negative leverage', rarely mentioned in homebuying discussions.
OK, so then, make the renter and homeowner expend *exactly* the same amount over 30 years. The renter pays rent, some insurance, and invests the rest. The homeowner pays a mortgage, gets the mortgage interest tax deduction, pays real estate transaction costs, pays property tax, pays insurance and maintenance.
Let the renter get 10% return on their investments... the 200-year average of the US stock market. Let the homeowner get 7.2%, the OFHEO appreciation rate over the past 30 years of the Santa Barbara real estate market. Make both pay capital gains taxes when they sell out.
Over 30 years, both pay $3.7 million; for the renter, that is $2.4 million in rent and expenses and $1.3 million invested. The renter gets to invest right at the start of the 30 years the downpayment and the closing costs that the homeowner must pay for the home.
For the homeowner, all $3.7 million goes into mortgage (mortgage interest tax deduction included), property tax, maintenance, and insurance. Only the homeowner must pay real estate commissions and fees.
When both sell in 2037, the renter has netted $4.5 million, the homeowner $2.5 million.
Renting and investing is financially superior to homebuying here.
After the 30 years of mortgage paydown, the homeowner has not reached nirvana, because their house has become so expensive that maintenance and insurance are about the same cost as rent for the renter. But the renter/investor has $2 million more available.
Now, if homes appreciate at 8.5% per year or greater, homebuying becomes superior to renting and investing.
For most of the US, homes appreciate at inflation only, about 3.5%. Renting and investing is clearly superior in that case.
Note, `leverage' is totally included here. It may be that under conditions of extreme home appreciation, selling quickly (after 5-10 years) and not paying off the mortgage beats renting. I haven't studied it.
I did study negative-amortization loans with adjustable rate mortgages. Homeowners really, really take a bath under that scenario.
"my experience on the South Coast is that maintenance is darned expensive, because the tradesman are used to sweet jobs in the richer areas here."
No, It's because so many are trying to get rich by renting them 60yr old 3 bedroom claptraps in the barrio for $3000.
sa1... good point!
9:03 p.m. a.k.a. the stock broker
Sir, you are full of it.
You obviously don't live inn Santa Barbara.
It is a FACT that in 1997 that the price of single family houses in Santa Barbara were higher then they were in 1990.
I am a real estate broker. I continuously listed and sold houses in Santa barbara for clients each and every year. I have old real estate MLS books that I kept from each year since 1980, which include thew years from 1990 to 1997. I can prove to you that the prices here went up. I can show you many cases where the exact same house was sold multiple times over those years, each time fort a higher price.
In the course of this blog there have been over 20 folks responding that buying is better than renting and only one who says that renting is better---YOU. In the three blogs about this issue I have counted 30 times you have sent in your comments.
At least one every single morning and one every single afternoon.
All of your comments have one thing in common. over half of what you ever say is just plain wrong.
You use faulty 'funny " math. You use faulty and incomplete assumptions, not just once but over and over. You quote from your sources as some journalists who are biased and whose stories are biased, slanted, and contain faulty arguments and faulty predictions. Anyone can make a prediction and that mens nothing, because for every issue there are so called experts claiming the opposite thing is going to happen. This proves half of them mare wrong and you are listening to the half who is wrong. you obviously don't know what you are talking about. I say that you don't even live in Santa Barbara area but live out of state. Thats o.k. except that you obviously don't know, or understand, the Santa Barbara housing market.
So that our readers can judge the source I ask you to reply and tell us whether or not you live in the Santa Barbara area. It goes to your credibility. if you claim that you do I want to give you a test to verify what you say: Give us the name of our pier at the end of State Street, and the names of the three restaurants on it. You don't know because you don't live here.
So much for what you say.
You have been proved wrong numerous times but you just don't get it. this proves that you are biased and that your goal is to steer peoples investing away from real estate and into the stock market instead. This proves that you have obvious ties to the stock market. Thats O.k. bit it slants your opinions and makes everything that you say biased.
I'm biased but at least I am honest enough to admit it. I'm sometimes wrong but at least I'm man enough to admit it. Several of us have proved you wrong on numerous occasions and NOT ONCE were you man enough to ever admit it. NOT ONCE!
now my intent is not to attack you personally. I'm sure you are a nice person. All I'm doing is attacking your fairy-tail story.
7:38 a.m. a.k.a. numbers guy
I am sorry to report that your numbers are wrong. You uses numerous faulty assumptions so your final conclusion is way off and wrong.
One can get a Jumbo loan currently for 6.25% not the 6.82% that you use.
Maintenance and insurance over 30 years is NOT 1.46 % but is closer to 0.5% average each year.
Renters have to pay for some maintenance and improvement cost too. you failed to take that into account. A landlord will allow a tenant to paint a wall purple if the tenant pays for the cost of the labor and paint.
Some maintenance is in the form of improvements which increase the value of the property but you are not taking this fact into account. you failed to allow the buyer to invest during the last 15 years when his fixed payments are now lower than the renter. your analysis to be accurate must assume the same income for both people. You failed to take into account that after 15 years when the renters rent doubles that he no longer has any money left over to invest.
You failed to use the proper 5% per year rent increase which is what it is in Santa Barbara.
You failed to properly calculate the appreciation. You used 7% per year , but Santa Barbara's historic appreciation is 10% per year. In the run up years it is actually 20% per year but when taking the corrections into account it averages out to 10% per year.
So by the rule of 72 a house in Santa Barbara doubles in price every 7.5 years so following is the math;
1. end of year 7.5 doubled from $1,000,000 to $2,000,000
2. end of year 15 doubled from $2,000,000 to $4,000,000
3. end of year 22.5 doubled from $4,000,000 to $8,000,000
4, end of year 30 doubled from $8,000,000 to $16,000,000
your math for the stock is accurate when you say the renter ended up with $4,500,000
but you say the homeowner now has $2,500,000.
Just how in the hell can he end up with $2,500,000 when his free and clear house is now worth $16,000,000.
This proves just how 'funny" your math is mister numbers guy.
also you fail to mention how his monthly payments now that his house is paid for are $2,000 per month for taxes, insurance and repairs. while the renters rent doubles each 15 years at 55 per year so it doubled at year 15 to $6000 and double again at year 30 to $12,000,000 per month. I say ending up in a position with $2,000 per month is vastly superior than ending up having to pay $12,000 per month rent.
The bottom line, my friends, is that buying is simply superior to renting and investing.
SA-1 You fail to take into account that many of us homeowners do our own repairs. It's part of the way that we can afford to buy instead of rent. if thats what it takes those that truly want to buy can easily do it. it's not that hard to maintain a house. Anyone too lazy to do his own painting deserves to rent, and remain poor.
It takes some work to get ahead my frioends.
"SA-1 You fail to take into account..."
I fail at nothing my friend, some endevors are just more successful than others.
Spelling and punctuation come to mind...
However, to your point, I might add $3000 rents AND frugal DIYer, soon to be fabulously wealthy, hardworking and self-satisfied homeowners. How's that?
As to the $3000 rents, it's unfortunately true that one can get that much by renting to 8-10 adults who wash dishes, wait tables, flip burgers, make beds and tend the crops and landscapes.
They might actually find it "affordable".
Those adorable little slumlords...er, better life enablers really have the community spirit!
Just a different form of densified smart growth perhaps. Who needs city planners...when we have Dario?!
6:29
Don'y knock Dario uunless you know him and all the details.
I know Dario well and I can say that he is one of the nicest guys that you would ever meet.
Dario is one of the few landlords in town who will rent to Mexicans. I have spoken to numerous who told me that nobody in town would rent to them except for Dario. He treats them good even though he charges them the full going rent. Each
Chrisrtmas he throws a huge party for all his thousands of tenants and their kids and gives them all christmas presents. he gets a bad rap because the neighbors don't want Mexicans living next door to them. So just who is the good guy here and who is the bad? Dario is very hoinest as far as paying all his bills and he even gives his tenants jobs from time to time to help them out. Once when I had no place to live for a few days Dario let me stay in one of his motels on the beach for half price.
Dario has one "bad habit" and that is doing work without a permit. But the work he does is up to code. Since he is so very successful and now owns so many units, and since he buys old buildings, and has a lot of tenants doing damage, he does have a lot of maintenance, and sometimes gets behind but the city keeps constantly on his back and he always complies by doing everything they want done.
Dario started out with almost nothing and for the last 20 years starts work at 6;00 a.m. and works until 11:00 p,m. each day. I have never in my life seen ANYONE ever work this hard. In 20 years Dario built nothing into owning something like 500 units, in several towns, and has built up a real estate equity in the neighborhood of $50,000.000. Yes I said 50 million dollars . All in 20 years starting with almost nothing and working like a dog.
So give him a break.
SA-1
I just can't figure you out.
You are obviously extremely intelligent and extremely knowledgeable and you seem to have an opinion about everything. And you seem to have a good sense of humor.
And your spelling is impeccable.
I can't quite tell when you are serious or are being sarcastic. In other words you are hard to pin down.
half the time I agree with what you say and half the time I don't.
On balance, I kind of think I like you but I just can't be sure because you are so elusive and mysterious. it would be nice for all of us to know more about you because you are one of our leading regulars.
I really respect the way you have given yourself a name instead of Anon.
Out of town landlords have been a huge blight problem in this town for decades.
But the biggest problem is the failure to enforce the zoning ordinance with stupid enforcement procedures that don't work, lazy staff, and a city council attitude that does not want to disturb blighted housing, no matter what the health, safety and zoning violations this overlooks in their obsession to house the world at everyone else's expense.
We have laws on the books that prohibit over-crowded sub-standard housing that blights the neighborhood. But just try to get the city to enforce them .That is the problem.
The out of town landlords need to get daily, accumulting fines until they lose their properties and sell them to police or fire personnel who will start making a difference in these houses blighting this city.
"Don'y knock Dario uunless you know him and all the details."
Well here's all the details, Dog:
http://www.popcenter.org/Library/Goldstein/1995/95-76.PDF
Some lowlife highlights:
Mr.Pini has an established history of converting his properties in a manner that allows him to rent to as many people as possible. This results in extremely high population densities in his buildings. Officers serving a search warrant in a studio partment found eight men residing there, one of whom was paying separate rent on a closet. He has no regard for the safety of people living in his rentals, he does not abide by building and fire codes, and he does not care about the impact his substandard properties have on neighborhoods.
He does little or no rental application screening, which brings an element of crime and fear to the neighborhoods where he owns property. The condition of Mr. Pini's properties contributed to an environment that was unsafe, unsanitary and fostered criminal behavior. Residents were resigned to living in homes infested by cockroaches and rats.
Tenants were allowed to live with as many as ten people in two bedroom apartments that had been subdivided into four livingspaces. It was common to find three refrigerators in one kitchen to accommodate various renters.
Neighbors of Mr. Pini's properties felt the effects of Mr.Pini's indifference. Trash from his properties seemed to find its way into adjacent properties. Neighbors had to withstand continual noise and parking problems associated with the large number of people living in cramped conditions.
...A turningpoint in the data collection came when Officers Fryslie and Aspland looked at all past arrests, utilizing Pini owned property given as the arrestee's home address as the search criterion. They found 758 arrests on 1185 arrest charges.The charges ran the gamut of crime. Of the 1185 charges, 105 occurred prior to Pini acquiring the property.This ratio was disproportionate when compared to other properties of similar size.
I heard Hitler treated his Dogs nice too.
I find it interesting that the "no growth" faction complains bitterly about the possibility of building attractive and functional apartments or condos for middle income workers because they worry about density issues, yet they turn a blind eye to slumlords like Pini who rent to illegals and criminals. What is worse, a modern paseo style, 3 story apartment complex or 100 year old firetraps cut into tiny studios that are crammed to the gills with people? This is the part of paradise that the "haves" tend to pretend doesn't exist. It is easy to ignore this side of SB living when you have a nice home in a good neighborhood.
Dec. 16 11:39am said:
``Maintenance and insurance over 30 years is NOT 1.46 % but is closer to 0.5% average each year.''
Also says that for the owner of the $16,000,000 house in 2037
``his monthly payments now that his house is paid for are $2,000 per month for taxes, insurance and repairs''
Hmmm... 0.5% of $16,000,000 is $80,000. That is what Dec. 16 11:39am said yearly maintenance and insurance would be.
Split that over 12 months, you get $6,666.67/month.
Saying that $6,666.67=$2,000 is funny math to me!
About taxes... Prop. 13 allows appreciation at 2% a year. After 30 years, the homeowner will have an assessed value of $1.81 million on their $16 million abode. Property taxes will be $18,100 a year.
That is $1,510 month.
$6,666.67+$1,510=$8,176/month
Oops! Actually, the kind of math 11:39am uses really says:
$8,176=$2,000
Now I understand the real estate math. Take any cost for homeownership, and divide by four, because homeownership is great. Ignore the other 3/4. Call it a `good investment' and `the american dream'.
And when you ignore 3/4 of the costs, homeownership does look terrific! Whoops, I forgot, everyone should ignore the 5-10% commissions and fees involved when a house changes hands! When that $16 million home sells, a real estate agent will make $800,000 for shuffling some paper. Hey, ignore that, it's the AMERICAN DREAM!
Now actually, serious studies peg the cost of maintenance and other homeownership expenses at 1.5% of the home value per year.
That $16 million dollar home will cost $21,500 per month to maintain and pay taxes on!
Now, you can save money by re-roofing your own house, doing your own external sandblasting and painting, and, let's not forget, doing your own welding and brazing when your plumbing needs fixing.
Just what everyone here looks forward to doing in their retirement years. I see lots of 80-year old ladies around here up on their roofs and with welding masks on!
11:14am... uh... if I were a man perhaps what you say might bother me.
In the early 1990's housing prices here in Santa Barbara fell in both simple $ terms and much more after accounting for inflation.
Who says so? the Office of Federal Housing Enterprise Oversight, aka the OFHEO, which tracks same-house sales over time. They say our area's homes fell 12% in $ terms between the third quarter of 1990 and the first quarter of 1997, and 26% after correcting for inflation.
Data from the UCSB Economic Forecast Project says south coast single family home prices fell 24% between 1989 and 1996, after correcting for inflation.
The Santa Barbara Association of Realtor's October, 2007 Market Summary Report, page 13, says south coast homes fell in price between 1989 and 1996.
It could be that all three of those organizations fouled up... 11:14am, if you think so, I'd suggest writing to them at:
Office of Federal Housing Enterprise Oversight (OFHEO)
1700 G Street, NW
4th Floor
Washington, DC 20552
UCSB Economic Forecast Project
Mail Code 3195
University of California
Santa Barbara, CA 93106-3195
Santa Barbara Association of Realtors
1415 Chapala St
Santa Barbara, CA 93101
After you've got them to correct their reports, I'm more than glad to apologize.
Additionally, here is a list of 10 south coast APN's that declined in price between one sale around 1990 and another a few years later...
79-690-20, 79-670-32, 79-690-16, 79-690-9, 73-410-43, 73-290-58, 73-290-54, 73-280-17, 73-270-3, 73-280-33
The first one had a 28.3% decline in simple $ terms between June, 1990 and July 1997. Accounting for inflation brings that decline up to 41.9%!
Any realtor who tells you Santa Barbara real estate cannot fall or has never fallen 40% is ignoring the real data from the 1989-1997 downturn.
If you point this out, they shout at you. If you back it up with hard data, they turn so nasty that Sara has to reject their postings.
Oh, BTW, the OFHEO says that our area's real estate has fallen 17% (after accounting for inflation) between the fourth quarter of 2005 and the third quarter of 2007.
Now where has any of the local media reported that? Not even edhat or the Indy publish that... they both depend heavily on the real estate industry for ad revenue.
Viva Sara de la Guerra and Blogabarbara!
Now watch as real estate prices fall another 30% or so over 4 or 5 years.
7:39am from Sunday...
I double checked the appreciation of Santa Barbara real estate using the OFHEO link provided by 9:03pm (thanks!).
I just let my Excel do a trendline to the Santa Barbara housing data since early 1978.
The yearly appreciation is 6.4%, not 7.2% as I assumed.
I'm terribly sorry for that mistake! I get it wrong sometimes, and looks like I had the wrong Santa Barbara appreciation. Sorry!
Santa Barbara real estate appreciates at 6.4% per year.
Jumbo loans are 6.75% from the survey at all the news that fits we print.
Realtors say set aside 1% of the value of your home each year for maintenance.
Homeowners today pay $866/year for insurance. The U.S. median housing price is $221,000.
So the cost of insurance is 0.4% of the value of your home.
Plan on insurance and maintenance totalling 1.4% of the value of your home.
11;31 SA-1
During this discussion on housing we have determined that the poor cannot afford to buy here so are FORCED to rent.
Now in our wonderful free enterprise system housing is not provided by the government but is provided by private enterprise, i.e the landlords.
Now, by your own admission, criminals are concentrated in the poor. The anti discrimination laws prevent landlords from discriminating according not just according to race but also family size, marital status, and one certainly is prevented discriminating according to the tenants being poor. Even a person who has been arrested, even more than once, has to live someplace and therefore cannot be discriminated against.
Also it is a fact that 99% of all l;landlords do NOT run a criminal background check on their prospective applications. Yes 50% run a credit check but a credit check does not show whether or not a person has been arrested.
Now it is certainly not Dario's fault that people are poor. and it is certainly not his fault that people do things for which they get arrested. The poor generally live in the more modest rentals. These rentals are generally in rundown buildings. Someone has to buy and own and rent out these buildings. What is wrong with Dario buying some of these buildings and renting them. Absolutely nothing.
What is wrong with Dario renting to the poor or to minorities. Absolutely nothing. It is perfectly legal.
Since the poor inherently include a high percentage of criminals a landlord automatically gets a few.
Dario may have 1000 total bedrooms in his 500 units. Each bedroom is REQUIRED BY STATE LAW to allow 2 persons to occupy each bedroom. That makes a total of 2000 people occupying Dario's rentals. Now since these are 100% poor people and since it is a fact that a high percentage of poor have criminal records, ( hell, 50% of black men in their 30"' are in prison), there automatically would be at least 100 who have been arrested in the past.
So just because the police noticed that these 100 rent from Dario means nothing as there is no more concentration than in the poor population and the low end units as a whole.
Now State law says that it's illegal for a city to put in place any law that restricts a rental unit to one family of related persons. The State law defines a family as also including unrelated persons. So the law allows 6 unrelated adults to rent a rental unit and it is illegal for any landlord to discriminate against this group of unrelated adults.
Do what Dario is doing is perfectly legal and is in fact required. So what you are asking Dario to do, for the 'convenience" of the neighbors, is to break the law and discriminate.
the city is watching everything Dario does so carefully that if Dario was breaking any law they would not let him get away with it.
Now as to the units themselves. The city has inspected each and every unit and had made Dario bring every one of them up to health and safety ordinances, the zoning ordinance, and the building codes. . At this time every single unit complies with all laws. So these units are in fact safe and meet the health and safety standards.
yes Dario did divide some big units into smaller legal units. SO WHAT! This is perfectly legal and was done with full city approvals and permits and inspections. So these smaller more numerous units are in fact perfectly legal. Dario has a right to do this. Just because you personally don't like it means nothing, other than the fact that you discriminate against the poor.
The poor among us need affordable housing and Dario is providing this much needed affordable housing. If Dario evicted all 2000 of his poorest of the poor tenants you tell me just where these 2000 are gong to live. Nobody else will rent to them!
So the fact is that Dario is actually providing a much needed community service by providing affordable housing to 2000 workers who pump your gas, work on your construction projects, cook and wash dishes in your restaurants and are your gardeners or maids and work in the hotel industry. many of these folks work two jobs just to be able to stay in town and provide you with services.
so don't give me this crap about Dario being the bad guy, when he actually is a wonderful and extremely nice person who is providing a wonderful public service legal units in a legal way to the poorest of the poor ( which just happen to automatically includes some with previous criminal records.
Many are jealous because he has made $50,000,000 in the process by his 20 years of working 80 hours per week, and pyramiding one unit into 500 units. All legally.
Another recommendation of 1-3% of the home value as the right estimate of home maintenance costs.
Here are the links that got flattened in the post that started this round of this thread; these are articles that discuss all the costs of home ownership, not just the costs that realtors want you to think about.
MSN, get rich slowly, the Wall Street Journal, the Motley Fool, and and the housing crash blog.
7:30 a.m.
There are MANY ( in fact a clear majority ) who don't want to density our town and grow vertical!
Smart growth is just another name for population growth.
Now I ask you, just what is better?
1. Cap our population in the city to 100,000. Be sustainable and live within our resources of water and street traffic capacity. preserve the wonderful; and desirable small town character, which is due to charming buildings being 99% one and 2 story and with human scale and preserve our quality of life.
OR
2. Adopt high density Smart Growth and allow our town to density and grow vertically to house 200,000 people. and now we are no longer sustainable and no longer live within our resources of water and out street capacity. We now have gridlock bumper to bumper traffic where even the bus is stuck in stop and go 5 m.p.h. traffic. We lose our wonderful and charming small town character and human scale due to 1000 new monster 4 story 60 feet high buildings, just like those monstrosities going up on Chapala. These buildings are incompatible with our town due to mass, bulk, and scale. We lose our quality of life due to over-crowding, significantly increased crime, and the traffic congestion. The businesses downtown fail because nobody goes downtown anymore due to the gridlock traffic and no parking spots available. We lost our beloved mountain views. Our paseos and plazas lose their sunlight die to being in canyons of tall sun blocking monster buildings.
All the dense new buildings are not for our current residents but so 100,000 of people in LA can move here and ruin our town in the process.
And when our town of now 200,000 is ruined, the problem of expensive housing will still be with us because this is a luxury coastal small ( relatively speaking) beach town, that even though has no sembalence to its former beauty is still so much better than the LA alternative thats, though ruined, it''s still RELATIVELY SPEAKING a desireable place to live. So the upper class will still move here and gentrify the population but now we will now have 200,000 newly weds and nearly deads rather than 100,000 newly wed and nearly deads.
The reality, that the smart growth advocates don't want to accept, or face, is that we simply cannot build our way out of the problem of having relatively expensive houses.
Now there are some solutions but they sure ain't smart high density growth.
The solutiuions are to preserve our moderate housing stock INCLUDING DARIO PINIS LOW END UNITS instead of demolishing then and replacing them with high end large luxury $1,000,000 condos for the rich. We need to outlaw all rentl apartment to condo conversions.
We need to build rental ,housing by building in incentives including higher density available only to apartments, and to discourage new big high end luxury units by lowering their density and limiting the size of mew units. Our housing authority needs to build more rental apartments and keep away from being involved in for sale condo projects. I could go on and on with ideas, but you all get the picture.
Want to reduce global warming?
Then reduce commuting in to Santa Barbara.
There is no commute method that produces less greenhouse gas than walking to work!
Walking to work also reduces traffic congestion.
Let the mighty free market build, build, build! Build housing right near our jobs!
Live within our resources with Swiss trash incinerators, Israeli desal, biodiesel recycling, Belgian sanitary processing, good old LA solar (like were on every LA home in the 1900's), and Japanese mass transit.
Build, Build, Build it all!
The only way to get the money to transform our area into the greenest coolest place on the planet is to let the new construction pay for all the new infrastructure development.
Let it all be executed by the glorious American Free Market!
End the boot of SB planning (both city and county) on the neck of mighty free market!
The phlegmatic grey unimaginative rich folk of Santa Barbara couldn't have built our current infrastructure if you gave them all the riches in the world and the smartest engineers. They are the can't do crowd.
The *only* way to make Santa Barbara better is to build. The *only* way. People who say `we can't build our way out' are telling a BIG LIE. The *only* way to make this the greenest place on the planet is to build our way out.
Ok anon 3:25,
I should have friends like you. (actually I do but they'd never admit it)
Only problem is you misread the report that was prepared as an honor to the two cops that nailed him after years of abusing the system.
There were 105 arrests before he owned the properties and 1085 arrests and warrents after he owned the properties. By your calculation that's more like half of the people he rented to.
What gives Dario the right to bypass the planning codes in the first place? By your own admissions, he over occupied the dwellings and nearly single handedly ruined what was a prime location in SB.
If he's such a nice guy, why doesn't he spend more of his ill gotten gains on upgrading the properties? Why doesn't he limit the occupency to some humane number of renters?
You kid yourself if you think we "need" his renters.
The F'd Bros (Fess and Firestone) need these people. Let them build housing on their land in the SYV.
His first bust was 15 years ago. Why is he still in court fighting continuing charges in multiple states, just this last fall.
He doesn't care about you or the poor my friend. Neither do the crack dealers, check cashers, loan sharks and gangbangers that prey on the defenseless.
I'm sorry they're poor but they shouldn't be enabled to live in such squalor. There are plenty of communities all up and down California they can live much more comfortably and safely. They might even find time to properly raise their children...
Goodnight Dario (or Mrs. Pini), nice talking to you.
The only thing green about your post is what you're smoking Hiriam.
Belgian and sanitary are mutually exclusive. There's so much dog poop on the sidewalks of Bruxelle you can grows musrooms for profit.
You obviously haven't sat in a Belgian bar and watched dozens pick their nose while their dogs pee on the floor.
They make awesome beer though. Good thing the alcohol kills the germs...
And of course we don't have a free market here, or a democracy for that matter...minor details, I know.
sa1 yes I have! They really know their excrement in Belgium, that is why I mention them.
We are no longer a can-do country, and in Santa Barbara we are the leaders of the can't do-ers.
We have a flaming train track down our transpo corridor and we've been so disorganized we can't even get a local train on the tracks.
Let's change into can-doers and let's BUILD BUILD BUILD.
11:52 a.m.
Stop putting words in my mouth.
I said prices didn't fall.
I did not say prices didn't fall after taking into account inflation.
And it is a fact that the UCSB economic forecast is often wrong. for example last year they said Santa Barbara home prices were not going to drop but were going to go up 2%. They dropped 10%. They are idiots who don't understand Santa Barbaras real estate.
You base your whole argument on faulty things that journalists write as if it were fact, when in reality what they say is often wrong. and you take it as gospel, and pass it on as fact.
it is you who are wrong.
Buying is better than renting and investing. You are the only one on this blog who says different.
If you were right it would be common knowledge. It's not common knowledge. But it IS common knowledge that buying is better than renting. no matter what you ever say you cannot change this reality! So put THAT in your pipe and smoke it!
10:44 p.m.
I am not Dario and he is not married. He is much too busy too have time to read this blog.
the number of his tenants is 2000 at any one time. but there is a huge turnover with the average staying 2 years. So over 20 years it is not 2,000 tenants but 20,000 different tenants.
And those 1085 arrests are NOT during the year that while they were living in his properties but 90% actually occurred before they moved into Pini's rentals. So its more like 100 arrests over the 10,000 tenants who came and went. This is only 1% of his tenants and far more than 1% of poor people have been arrested!.
So the reality is that he does not have any more concentration of criminals than exist in the general poor population.
It only looked bad because he has so very many units and so very many tenants. 20% of the poor rent from Dario. So of course he is going to get stuck with a huge portion of the who have ever been arrested. a vast majority of the arrests are for drug related offenses. It is a fact that somewhere around 10% of the cities employees use drugs on a regular basis. This is the city halls dirty little secret. If Dario shouldn't rent to them the city shouldn't hire them.
Lastly if they were arrested why were they not convicted. if they were not convicted might it not be because they were not guilty. Is not a person assumed innocent until they are found guilty. So is this a proper reason to discriminate and not rent to someone who has been arrested and not found guilty.
And those that were guilty is it not the job of the criminal justice system to put them in prison and get them off the streets. Is it Dario's job to get these people off the street for us? Of course not!
4:51 p.m.
You are obviously the same person who posted the reply at 4;38 right before yours. You try to look like 4 different people but you are the only one who uses some blue type!
We have all heard enough crap from you. You are repeating yourself. Same old lies and faulty reasoning and faulty math. ! Please go away!
4:38 p.m. ( aka "the stock broker")
I have owned a home for 44 years. (4 homes one after another).
Over the 44 years my maintenance expenses were less than 0.25% of the value of the property.
Right now I own a $2,500,000 property and I spend an average of $100 per month on routine repairs and maintenance like installing a new faucet. And another $100 per month average on major repairs such installing a new $20,000 50 year roof. So the cost of the new roof can be spread over the 50 year life of the roof. which comes to $400 per year or $33 per month.
So my total is $2,400 average per year. This is 1/10 of 1% of the value.
Now where you get screwed up is you use national average. The national average property is $250,000 per year which includes a $50,000 lot and a $200,000 house.
Now in Santa Barbara the lots are 75% of our total price instead of the national average of 25% of the total value!
In my case I have a $500,000 house on a $2,000,000 2 acre lot.
You are trying to say my $2,000,000 lot has 2% maintenance. This is patently ridiculous and just plain wrong. ( like most of what you ever say). My maintenance is on my $500,000 house not my $2,500,000 property.
And the cost of material , like my $10,000 roof shingles is the same all over the country. So what is an identical $10,000 roofing material repair for a $250,000 house in the rest of the U.S. which comes to 4% of the property is not the same percentage as the identical $10,000 roofing material repair is on my $2,500,000 property which comes to 0.4 % of my property, or exactly 10% as high of a percentage of the value of my property.
The above proves that your 1.55 per year nationwide is in reality something like 0.5% her in Santa Barbara due to our unusually high percentage of land value to total value.
Don't you ever get tired of being wrong?
You don't even live in Santa Barbara so you don't begin to understand Santa Barbara real estate.
8:44 p.m. hiram johnson
It is a fact that less than 10% of Santa Barbara residents agree with you.
A full 90% of us don't want to build--build---build.
So anything you ever say is totally irrelevant and doesn't mean a thing. Because you will NEVER get your way! You will never change our minds on this subject.
Santa Barbara is a no growth town and that is a fact.
So suck it up and deal with it. Or leave and move to Diamond Bar if you don't like it here. Don't let the door hit you on the way out!
1:49am My home valued $700,000, and I pay $8,000/year maintenance, whole shmeer, landscaping, solar panel maintenance, roof maintenance, etc. Another $2,600/year all types of the insurance, earthquake, so forth. Here in Goleta. Pretty close to 1.5%.
You got 2 acres and no cost of maintaining landscaping/gardening? Wow.
Buildings - they like really expensive here, like maintenance. Paseo Chapala, $1100/sq ft. All the contractors go nuts here. Your little old ladies in retirement, what they gonna do, fix their broken doors in retirement? Contractor man gonna take them to the cleaners or walk them to the bank.
I re-ran the renter v. homeowner scenario.
Home appreciation - 6.4% as analysis of the Federal Government's OFHEO data indicates.
OK, lower the expenses per year to 0.5% of the value of the house and land. Insurance is at least 0.45% of that.
Now in 20 years (2027) the homwoner's monthly expenses finally fall below that of the renters (BTW, there are renter's expenses too for maintenance, insurance, etc, from the New York Times data). The homeowner can start investing then, and I assume they do.
In this scenario, the renter ends up only $98,000 ahead of the homeowner in 2037.
The renter has $6.3 million in their investment account in 2037, paid $2.4 million in rent and expenses, and in the end nets $2.4 million.
The homeowner has $6.4 million in home value and $0.19 million in their investment account. But they get hit with the real estate commission if they sell, which th renter does not, and after subtracting $1.8 million for mortgage payments, $0.4 million for Property Tax, $0.4 million for expenses, they end up with $2.3 million.
True enough, if your really believe the 0.5% expenses, the homwowner in 2037 pays only $4,560/month because they no longer have mortgage payments. The renter pays $12,400/month.
Of course the renter makes $50,000 a month from their $6.3 million dollar investment account, so the $8,000/month difference in rent is not that big a deal. But, the homeowner could sell out and be in the same situation as the renter; the homeowner would have $5.7 million in their investment account in that case.
So, if you reall can keep total expenses to 0.5% of the value of the home per year, you can almost do as well as renting by owning a home in Santa Barbara.
1:59 am
But 70% of California residents want green policies and want Santa Barbara to live up to its legacy of 1969!
Instead we have sub-geniuses who are not optimistic and use every chance to kick the little guy down and feather their own nests.
Let the people of California decide! Put it to a vote of the people of California.
I love Diamond Bar. Go there all the time. Let's make Santa Barbara as great as San Francisco.
Pessimistic pantywaists never changed the world. The optimistic can-do spirit got it all here, and now the wet blankets want to say it was some kind of act of god that got this place here. It wasn't. Build build build got us here from 1850 to 1970, let's honor our legacy and keep the optimistic build build build spirit!
This comment has been removed by a blog administrator.
reply to 7:25 a.m. hirum johnson
hirum,
The State of California does not dictate to us. The citizens of Santa Barbara will plan our own city thank you very much.
And it's going to remain a slow growth city that cherishes and preserves it's small town character and quality of life.
If that makes us selfish, so be it! But that's going to be the way it is. period.
8:44 numbers guy.
O.k. this was your best argument yet. You are softening me up just a little.
How about a compromise. I'm willing to call this a draw and say that buying a house and renting and investing in the stock market are both equally the very best investment that anyone can make in their lives.
I'll even take back all the bad things I ever said about you. You are o.k. after all.
Are you with me in this compromise? It would make this entire exercise all informative, worthwhile, helpful, and useful, for everybody who reads this housing blog. And after all isn't that the whole purpose?
8:30 PM -- Dude! No need for the F-Word! I can't allow that consistently -- but I'll make this an example of a comment I shouldn't allow. Please don't do that!
7:25 a.m.
I do all my own gardening and maintenance so that I can invest my money in real estate.
Everyone has a choice. You can be lazy and hire everything done for you, or you can work hard 50 hours a week, be self sufficient and frugal, and save money then invest it and get ahead. I have built up a very sizable net worth but I worked extremely hard for it because it was important for me. some don't care about getting ahead and never do and that's their choice and thats o.k.
But this discussion is all about how someone who can't afford to buy a house can actually buy a house if he wants to bad enough by paying 50% of his income as house payments AND DOING THEIR OWN Yabba Dabba MAINTENANCE.
8:36 Maybe the City of Santa Barbara (once a visionary place) has now become filled with pantywaists, anxiety-paralyzed hand-jivers, wet blankets, and sub-geniuses.
But the State is free to cut off funding to the City in a hundred different ways.
And the County... well, technically, the County is the State; the County is just how the State chooses to administer itself.
Do you think all the areas of California that subsidize this place like to see their money underwrite pantywaists and nay-sayers? And socialists state-supported planners? Ha!
Let the people of California decide the issue, they pay for this place. We've only been no-growth for 40 years of our 160 year existence. Back to normal!
But make the growth great, green, and fantastic! Be optimistic and visionary. Wanking never changed the world.
Hard to believe that the discussion about whether renting and investing or buying comes down to whether you do your own gardening or not!
Enterprising people spend time working their own business (which pays a lot more than gardening) and then hire others to do the low-skill low-enterprise stuff.
Interesting, though, that it is thought that land values here escalate faster than building values, leading to reduced costs to own.
Here is an idea: rent for the roof over your head, but then invest in south coast land alone.
BTW, there seems to be a serious group in Santa Barbara that keeps track of maintenance expenses. Never knew about them... Whitestone Research.
Would be very interesting to see if they have carefully researched data on Santa Barbara maintenance costs.
5;37 hiram johnson
Hiram, you are a real piece of work!
You are living in a fantasy dream world.
Everything you ever say goes against what the vast majority of us Santa barbara residents believe in!
This means that you are in an extreme minority. And that means that none of your opinion matters in the slightest, and what you would like to see happen, will NEVER HAPPEN!
We are the ones in control and things will be done the way WE want them to be done and not the way you want them to be done.
I'm sorry to be the one to inform you that you might as well give up, and keep your opinions to yourself for all the good it will do you, because you have no power behind your ideas, and thus you, and your ideas are impotent, and irrelevant.
7:18 a.m.
You just don't get the point.
The whole point is that what the well off and lazy pay for maintenance costs is irrelevant because anyone whose goal is to get ahead to the maximum extent possible can do their own maintenance. Also, not everybody owns a business where they can spend their time instead.
Also, one of the main topics of our discussion is whether or not the middle class can afford to buy a house here where the price of houses appears to be beyond their reach.
It has been pointed out that those who don't want to make the sacrifice can't, but those who are will;ing to make the sacrifice to liver frugally and budget 50% of their income to cover their house payments , insurance, and taxes CAN. What goes along with that is that these folks must also do their own maintenance. So for them maintenance is not a factor in determining how much money they make over 30 years. in other words you can't use maintenance to hold them back from buying a house because they can overcome this obstacle by simply doing it themselves.
It is truly not that difficult, or even that time consuming. It's no different than some folks changing their own oil on their car.
Think back to the pioneers who came out west in covered wagons. They actually cut down trees and built their own log cabin , let alone maintain it. These folks were not carpenters but farmers and ranchers. Why couldn't someone today build their own house? or buy a "tear down' run down house and rehabilitate it?
People today are just plain lazy. There are just no two ways to put it.
Bottom line is maintenance does not have to be a factor for all. It is more of a plan "B" alternative calculation for the lazy or with money to spare.
You're right, 10:55am, everyone should learn to weld and braze their own plumbing, pour concrete, do their own wiring (particular when on a ladders), tar their own roof, and sandblast their own house.
Anything else is laziness.
And as for their money, the more you do it yourself, the more you can pay the real estate agent ($50,000 on a $1,000,000 sale for shuffling papers) and the previous owner!
9:23 a.m.
Plumbing takes absolutely no welding and it is called soldering not brazing. anyone can easily learn how to do plumbing and electrical work. it is quite easy to learn and quite easy to do. I learned it and I do it.
Anyone can easily pour concrete. There is nothing to it.
I bought a sandblaster and did some sandblasting and that was the easiest thing i ever did in my life. and 90% of the roofs don't have tar but composition shingles which are quite easy to install. I just finished putting on a new roof.
I also work on my own car and i can tell you that it's a lot harder working on a car then it is to do repairs on a house.
And a ladder is no big deal. What are you a panty waist? or a man?
Most all the construction work is now being done by illegals, and these are the same ones who work in McDonald's and who didn't finish high school. If these folks are smart enough to learn how to do construction it just proves that ANYONE can learn how top do construction.
What are you anyway? In the building trades? Where you don't anyone to do their own repair work and put you out of business?
Lastly, what's this crap about having to pay a real estate agent. In the last 30 years I have bought and sold 4 houses and each time I handled the transaction all by myself without an agent. It took under 40 hours work each time. ( See i saved $1000 per hour). Any idiot can easily do it. There is absolutely nothing at all to it. Even easier than learning how to do your own repair work on your house. Hiring an agent is an unecesssary luxury and not at all required.
Any idiot can become a real estate broker, and many do. Any fool can hire a real estate broker and that's why they have the old saying; "a fool and his money are soon parted."
From your message I categorize you as a fool.
"Why couldn't someone today build their own house? or buy a "tear down' run down house and rehabilitate it?"
They can. They just have to comply with building codes and have it inspected at all the right times. As a homeowner, you don't have to have a contractors license,
as long as you have the skillz.
and the tools
and the time
You think it's easy?
Did you know construction workers, especially roofers have one of the highest death and injury rates??
Way,Way higher (as Hiram would say) than Police and Fire.
Should'nt we be honoring them and paying them 6 fig salaries too?
Did you know that the 91st richest man in America (@3.5 Billion $) was killed yesterday when he fell thru his under-repair roof?
Yes, 3.5 Billion dollars only leaves you in 91st place.
Ironically he made his money in Roofing Supplies.
I'm not kidding...
8:01 pm
Bully for you. You must be quite a dynamo and probably under 50 to boot.
I agree that it is smart to do as much of the maintenance as you can. Not everyone has the knowledge and the brawn to do many of the maintenance and improvement projects you mention. For many people it is less expensive to pay someone than to take the risk of screwing something up which may cost them more in the long run. Doing plumbing isn't rocket science but doing something wrong can cause an expensive leak which my husband and I found out many years ago. It would have been less expensive to pay the plumber.
As far as selling your own home, been there done that twice. With all the regulations and disclosures now, it can be intimidating and besides you can unknowingly leave yourself open to lawsuits. Many people are intimidated by all the paperwork but a good escrow officer can help you with that. It is harder to sell a home by owner even if you give consideration to agents. Also,most people purchase through real estate agents because the agents are supposed to have the training and the knowledge to make it a smooth process. You will argue that it isn't true, but that is what most people think whether right or wrong. I agree that the commission structure is outdated and too high due to the cost of homes nowdays, but many agents have cut back their percentages to reflect the changes.
Also, for those who say that you don't pay commission when you buy a home, you are very wrong. The seller just jacks up the price to reflect the commission and you just pay it in the higher purchase price. If you sell by owner, you generally have to undercut the local listings significantly to get buyers interested in seeing your property, unless the market is in a major boom cycle. So in the end, it generally doesn't matter much whether you sell by owner or list the home with an agent.
And in retirement, 80-year olds can stay in shape by working on their roofs! Either they stay in shape or thin out the excess population, but at least they don't have to pay rent!
No doubt clever energetic folks can reduce their maintenance by doing it themselves. More than that... some of the most affluent rental unit owners are plumbers and contractors, which underscores the importance of economical maintenance to turning a buck in the real estate biz.
But also, remember, much of the entry-level home ownership is condos in this town, and the condos pretty much disallow serious do-it-yourselfism. They collect a monthly condo fee... one place I know collects $500 month for condos that sell in the $400,000 range. For condos, you gotta do-it-yourself for the whole complex, and you end up in endless arguments with your neighbors. I know someone in that situation.
If you lend a hand, your neighbors treat you like a slave. If you don't, you pay exorbinant maintenance.
Ah pittee da foos!
9:36 p.m.
As you say a homeowner does not need a contractors license to repair or maintain his own house.
now lets get off roofing. lets assume that even a do-it-yourselfer will hire the roofer every 40 years when his house needs re-roofing.
Now lets look at the rest of the maintenance.
it is a fact that 90% of all maintenance is very minot work and very simple and easy to perform.
things like fixing a leaky faucet or even changing a faucet. things like changing a worn out electrical switch or outlet. A simple and easy no-brainer 15 minute job that anyone with half a brain can do.
The most common is painting. Now just how hard is it to paint a room. other work is no harder than painting. One can easily fix a broken window glass or fix a torn screen. One can easily remove a sticking door and sand a little off the bottom. One can oil a squeaky gate hinge
if a sink trap gets clogged up it is a simple 15 minute job to unscrew the p-trap and remove the hair inside and re-screw it on. If it is worn out one simply takes it to home Depot and buy an identical trap, and go spend the 15 minutes to install it. No plumber necessary! I was surprise at how easy it is to learn to solder copper pipe and the sewer and vent pipe is plastic that is very easy to glue. Just cut the pipe. swab on some glue in the joint and push the two pieces together and hold for 30 seconds and the joint is done. How about mowing ones own grass. hard? of course not. It's very easy to build a fence or lay stepping stones and these are not repairs but improvements.
Now lets look at the time. All it takes to maintain a house is an average of one hour a week. Over the last 40 years I have lived in 4 homes that I owned and did all the maintenance myself other than the roof, which I hired a contractor on one house and did the second one myself. ( The other two didn't need a new roof as they last 40 years and most people don't keep the same house 40 years.) During that 40 years of doing nearly 100% of all maintenance my average time was less than one hour a week.
Now lets look at tools. Each time I did maintenance I went to Sears and bought only the tool I needed. it didn't take long before I found that I had built up all the tools I needed. of course each time I painted I bought a new roller and bush. big deal. The cost of the tool cost only 1/1000 the cost of hiring a contractor to do the work and at the end of the project one still owns the tools. The tools pay for themselves a 1000 times over and a good tool will last a lifetime. The total I spent in tools over 40 years, including repairs, or replacement, of worn out tools, was less than $4000, and that includes my power table saw. and these used tools still have a value of $2,000 as there is still a lot of life in them. That's an average cost of less than $100 per year to buy all the necessary tools. That and 50 hours of my own free labor saved me $5000. So I made $100 per hour by dong the work myself. But more importantly allowed me to be able to afford to buy a house in the first place without the cost of maintenance holding me back. and buying a house instead of renting has resulted in well over a million dollars of profit above what i'd have if I had rented and invested the money in the stock market instead.
So the cost of tools is not a factor.
Now the vast majority of this work is yard work and improvements to the house instead of maintenance, Improvements add to the value of the home when it comes time to sell it.
lastly there is another worthwhile aspect to doing ones own work. I happen to have a stressful job. No physical labor, just sitting at a desk, but a lot of mental stress. During my life i have worked at physical jobs and I can tell you that the mental stress from a desk job is much harder on oneself that physical stress. At the end of a day I feel just exhausted. i find that working on my house is a wonderful way to unwind. Just like doing exercise.
the physical labor of working on ones house actually provides one with exercise but in a way that actually provides a benefit other than the exercise. I actually find it quite enjoyable and relaxing to work in my yard or to work on my house and it gives a wonderful feeling if accomplishment and satisfaction to look at ones completed project with pride.
Someone said on his blog comment that one is better off financially by spending that time working at ones regular job or building up ones business, which would make more money per hour of time spent.
But I just couldn't take another hour, as I'm already so exhausted and mentally stressed out at the end of an 8 hour day. while going home and working on my yard or house is actually relaxing and enjoyable. It's much better on my heart and health not to add more hours of stress of my desk job.
Another prognostication that housing prices have another 30% to fall before the bottom is reached.
Santa Barbara County homes have already fallen 17% from the peak.
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