Dumb — Nirvana
I’m not like them
But I can pretend
In my ongoing, yet unintentional, campaign to obtain realtor hate mail, I would like to quiz you today. MalibuRenter conceived of this post, and he did all of the research — basically, he wrote it, and I got to add the snarky comments. Get something to write on and record your answers to the following questions, the complete questions and answers are below the fold:
{book}
Are You Smarter Than a Real Estate Agent?
1. Looking at the long history of US home prices adjusted for inflation (1890 to 2008), how long has it historically taken for US home prices to double (for the same type and size of house in the same location)? ___5-10 years, ___10-20 years, ___20-50 years, ___51-80 years
2. Adjusted for inflation, had real estate prices ever declined nationally before 2007? ___yes, ___no.
3. Can the value of a home drop so much that it has to be given away in order to find a new owner?
4. What portion of US homeowners take the mortgage interest deduction? ___under 30%, ___30-40%, __40-50%, __50-60%, __60-70%, ___over 70%
5. Assume a couple purchases a home at the US median home price of $200,000 (as of 3rd quarter 2008), puts 10% down, and gets a $180,000 30 year fixed rate loan at 6% interest. Assume they are in the 25% tax bracket. If they have no other itemized deductions, about how much is the mortgage interest deduction worth to them? ___$12,000 ___$10,800 ___$3,000 ___$2,592 ___Zero.
6. If overall inflation is 3% per year (with similar rates of inflation for home prices, maintenance, and property taxes), buying a house with a fixed rate mortgage means that the cost of living in that house will ____ stay the same for 30 years, ____rise by 1-3% per year, _____rise by 3%+ per year?
7. Through 12/31/05 (near the peak of the housing bubble), which investment had the highest return over the past 100 years? ____stocks (Dow/S&P 500), ____high grade bonds, ____ single family homes
8. Do children of renters and homeowners living in adjacent homes/condos typically attend different public schools? ___yes, no
9. If a stockbroker or investment advisor knowingly made misleading statements about historic returns on an investment to a potential investor, what would happen?
10. If a realtor (or the National Association of Realtors) made misleading statements about real estate, what would happen?
11. Which of the following groups files for bankruptcy most often, and is most likely to lose a home through foreclosure?
___Single men, ___Single women, ___Couples with no children, ___ Couples with children
12. If you have a 30 year fixed rate loan at 6% interest, how much of the principal will you have paid off after 15 years? __under 25%, __25-35%, __35-45%, __45-55%, __over 55%.
13. Does taking a home equity loan or refinancing for a higher amount make it more likely you will be foreclosed on? __ Yes, __No
14. In 2007, CA had 13.2 million houses, condos, and apartments. How many people in CA had real estate licenses? ___under 100,000; ___200,000-300,000; ___300,000-400,000; ___400,000-500,000; ___500,000-600,000; ___over 600,000.
I’m having fun
I think I’m dumb
Or Maybe just happy
For those of you who do not want to relive your school test nightmares, I have a property for you to look at.
Asking Price: $609,950
Income Requirement: $152,487
Downpayment Needed: $121,990
Monthly Equity Burn: $5,082
Purchase Price: $495,500
Purchase Date: 7/22/2004
Address: 145 Danbrook, Irvine, CA 92603
| Beds: | 2 |
| Baths: | 3 |
| Sq. Ft.: | 1,400 |
| $/Sq. Ft.: | $436 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other, Tuscan |
| Year Built: | 2004 |
| Stories: | 3+ |
| Floor: | 3 |
| View: | Park or Green Belt |
| Area: | Turtle Ridge |
| County: | Orange |
| MLS#: | P518047 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 959 days |
 Unsold in 90+ days
|
|
CABINETS, TUSCAN-STYLE KITCHEN COUNTER TOPS, BLACK APPLIANCES,
STAINLESS STEEL REFRIGERATOR(included), CUSTOM CABINETS, A/C, LARGE TWO
CAR GARAGE. STACK WASHER/DRYER(included). LOTS OF STORAGE. COMPUTER
INTERNET OFFICE AREA. MICROWAVE OVEN. TWO PATIO DECKS. NEWPORT COAST
SHOPPING.BEACH COUPLE MILES AWAY. OWNER MOVING OUT OF AREA(MOTIVATED).
Owner is motivated? After 959 days on the market, I don’t feel a big sense of urgency here.
This property was purchased on 7/22/2004 for $495,000. The owner used a $320,000 first mortgage, and a $175,000 downpayment.
Check out this listing price history. At one time this woman was asking $804,995. LOL! She probably deserved that $310,000 profit after owning it for two years.
| Date | Event | Price | Appreciation | Source |
|---|---|---|---|---|
| Jan 19, 2009 | Price Changed | $609,950 | — | SoCalMLS #P518047 |
| Jan 06, 2009 | Price Changed | $675,000 | — | SoCalMLS #P518047 |
| Jan 03, 2008 | Price Changed | $714,000 | — | SoCalMLS #P518047 |
| Apr 14, 2007 | Price Changed | $748,900 | — | SoCalMLS #P518047 |
| Feb 11, 2007 | Price Changed | $794,900 | — | SoCalMLS #P518047 |
| Jun 05, 2006 | Listed | $804,995 | — | SoCalMLS #P518047 |
This property is still grossly overpriced even after all these reductions. Most Irvine neighborhoods are at or below 2004 pricing, but this property is supposed to be 25% higher? Oh yea, it is Turtle Ridge…
{book}
Are You Smarter Than a Real Estate Agent?
1. Looking at the long history of US home prices adjusted for inflation (1890 to 2008), how long has it historically taken for US home prices to double (for the same type and size of house in the same location)? ___5-10 years, ___10-20 years, ___20-50 years, ___51-80 years
A. 51-80 years. From 1890 to 2000 this had never occurred, even if you purchased at the bottom and sold at the top. In 2001 home prices adjusted for inflation were twice as high as 1921, the first time a doubling had occurred. The shortest period of time for prices to double was from 1949 to 2006, 57 years.
2. Adjusted for inflation, had real estate prices ever declined nationally before 2007? ___yes, ___no.
A: Yes, prices drop about as often as they rise. When adjusted for inflation, home prices have dropped slightly more often than they have risen. This is true from 1890 to 2008 (52% of the years prices dropped after adjusting for inflation), from the end of WWII to 2008 (51% of the years prices dropped), from 1980 to 2008 (48% of the years prices dropped). The chart below shows inflation-adjusted single family home prices in the US (From Robert Shiller http://www.econ.yale.edu/~shiller/data/Fig2-1.xls ).
3. Can the value of a home drop so much that it has to be given away in order to find a new owner?
A. Yes. There are currently numerous examples in Detroit and Cleveland, and an assortment of others in places like Indianapolis. When prices drop below several thousand dollars, the current owner is very likely paying out more than the purchase price for a real estate commission, title search and title insurance, and documents fees.
This most commonly happens to smaller homes in poor repair, and in areas where the population is dropping. http://news.google.com/news/url?sa=t&ct=us/0-0&fp=49671eb0070dbe74&ei=K3FnSZnEKoKQNe2KwOkE&url=http%3A//money.cnn.com/2009/01/08/real_estate/thousand_dollar_homes/%3Fpostversion%3D2009010812&cid=1291117800&usg=AFQjCNHqWeJv4ixHrneUNW4mMuh0APfrLw
4. What portion of US homeowners take the mortgage interest deduction? ___under 30%, ___30-40%, __40-50%, __50-60%, __60-70%, ___over 70%
A. 40-50%. Approximately 43% of homeowners take the mortgage interest deduction.
In 2007 there were 75.6 million owner occupied homes. Owner occupied homes were 68% of all households. Only 29% of tax filers itemized and took the mortgage
interest deduction. 26.7 million (35%) of homeowners have no mortgage. 48.9 million (65% of homeowners) have mortgages. 42% of homeowners have mortages and take the mortgage interest deduction. Sources: Number of owner-occupied homes, 2007 American Housing Survey Table 1A. Number of owner-occupied homes with and without mortgages, 2007 American Housing Survey Table 2-19. Portion of tax returns with mortgage interest deduction from IRS Publication 1304 (2006), tables 1.1 and 2.1.
Note that many people who take the mortgage interest deduction don’t get to deduct the full interest cost. If you have no other deductions, the first $11,400 of mortgage interest doesn’t exceed the standard deduction.
5. Assume a couple purchases a home at the US median home price of $200,000 (as of 3rd quarter 2008), puts 10% down, and gets a $180,000 30 year fixed rate loan at 6% interest. Assume they are in the 25% tax bracket. If they have no other itemized deductions, about how much is the mortgage interest deduction worth to them? ___$12,000 ___$10,800 ___$3,000 ___$2,592 ___Zero.
A. Zero, zip, nada, zilch, absolutely nothing, a nullity. For 2009, the standard deduction for a married couple is $11,400. For a $180,000 loan at 6% interest, the interest is about $10,740 per year. Thus, there is no benefit for this couple to itemize and take the mortgage interest deduction.
Even if the couple had bought a more expensive house and taken the mortgage interest deduction, the interest would drop every year, and the standard deduction likely rises in future years. Thus, the value of the mortgage interest deduction drops every year the loan is outstanding.
Median home price as of Q3 2008 from National Association of Realtors , http://www.realtor.org/wps/wcm/connect/c5200d804bf84ae9beb7befda086cc0a/REL08Q3T.pdf?MOD=AJPERES&CACHEID=c5200d804bf84ae9beb7befda086cc0a .
Median national downpayment is from a Zillow survey for Q3 2008, http://www.zillow.com/reports/RealEstateMarketReports.htm. Even at a 5% downpayment, there would still be no benefit to the mortgage interest deduction.
Standard deduction for 2009 is from http://www.irs.gov/newsroom/article/0,,id=187825,00.html
6. If overall inflation is 3% per year (with similar rates of inflation for home prices, maintenance, and property taxes), buying a house with a fixed rate mortgage means that the cost of living in that house will ____ stay the same for 30 years, ____rise by 1-3% per year, _____rise by 3%+ per year?
A. Rise by 1-3% per year. Because the costs of maintenance, insurance, and property taxes all rise over time, having a fixed rate loan is only a partial hedge against inflation. The portion of the mortgage payment which is interest drops each year, and the standard deduction rises. For people who take the mortgage interest deduction, the aftertax mortgage payment rises slowly over time, even with a fixed rate mortgage.
7. Through 12/31/05 (near the peak of the housing bubble), which investment had the highest return over the past 100 years? ____stocks (Dow/S&P 500), ____high grade bonds, ____ single family homes
A. Stocks 6.7%, Bonds 2.6%, Single family homes 0.7%. Those are real numbers adjusted for inflation. Since they are all measured over the same time periods, without adjusting for inflation, stocks would still have outperformed bonds, and both would have outperformed houses. Sources: Real rates of returns for stocks and bonds Prof Jeremy Siegel, Wharton School, http://archives2.sifma.org/boca2005/pdf/JeremySiegel.pdf . Real returns on homes prices, from Robert Shiller, Yale University, http://www.econ.yale.edu/~shiller/data/Fig2-1.xls .
8. Do children of renters and homeowners living in adjacent homes/condos typically attend different public schools? ___yes, no
A. They all attend the same public schools. Parents don’t need to buy in a good school district in order to have their children attend school there.
9. If a stockbroker or investment advisor knowingly made misleading statements about historic returns on an investment to a potential investor, what would happen?
A. He would be subject to discipline, fines, revocation of his license, and under certain circumstances criminal prosecution. Rule 10b-5 of the Federal Securities Act of 1934 Employment of Manipulative and Deceptive Devices states:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
There are many similar state law provisions.
10. If a realtor (or the National Association of Realtors) made misleading statements about real estate, what would happen?
A. If recent experience is any guide, they would be ignored or mocked, but would not encounter any sanctions. Real estate itself is not classified as a security, and the Federal government does not regulate misrepresentation regarding investment returns on real estate.
An extremely public example of a questionable or misleading claim is a National Association of Realtors ad which first aired in 2008. It claims “On average, the value of a home nearly doubles every 10 years”, https://www.youtube.com/watch?v=AyZpNIyVKQk .
The Wall Street Journal skewered this claim, and another investment return calculation from the National Assoc of Realtors at http://blogs.wsj.com/developments/2008/01/29/nar-campaign-touts-real-estate-as-a-great-investment/ . Here is an excerpt:
“It’s a “very misleading statement,” said James R. Webb, director of the Center for Real Estate Brokerage and Markets at Cleveland State University and a professor of finance. Mr. Webb noted that housing-price appreciation rates vary across the U.S. and that “the rates for appreciation that we saw in the past few years were artificial due to the fact that we gave a zillion people mortgages who shouldn’t have gotten them. If we hadn’t given those people the mortgages, those rates of appreciation wouldn’t have happened.”
It’s best to view a house as a home – not as an investment he stressed, adding, “You shouldn’t buy a house if you don’t need a house. You should buy a house because you want to live in it, not because it’s a good investment. People have become seduced by the idea that a house is a good investment.”
We also phoned Chris Mayer, the director of the Milstein Center for Real Estate at Columbia Business School. About NAR’s down payment/stock market comparison, Mr. Mayer said, “That’s insane. If one of my students made that calculation, I would fail them.”
NAR’s calculation leaves out several important variables, such as closing costs, how much money goes into maintaining a property, brokers’ fees, property taxes and “the risk of using 95% leverage – in the example NAR puts forth, the buyer only puts down 5% of the home’s cost and borrows the rest, he explained.”
11. Which of the following groups files for bankruptcy most often, and is most likely to lose a home through foreclosure?
___Single men, ___Single women, ___Couples with no children, ___ Couples with children
A. Couples with children are the most likely to file bankruptcy, and the most likely to be foreclosed on. “The families in the worst financial trouble are not the usual suspects. They are not the very young, tempted by the freedom of their first cr
edit cards. They are not the elderly trapped by failing bodies and declining savings accounts. And they are not a random assortment of Americans who lack the self-control to keep their spending in check. Rather, the people who consistently rank the in the worst financial trouble are united by one surprising characteristic. They are parents with children at home.” The Growing Threat to Middle Class Families, Elizabeth Warren, Harvard Law School, http://www.nacba.org/files/new_in_debate/GrowingThreatMiddleClassFamilies.pdf .
12. If you have a 30 year fixed rate loan at 6% interest, how much of the principal will you have paid off after 15 years? __under 25%, __25-35%, __35-45%, __45-55%, __over 55%.
A. 25-35%. At the end of 15 years, at 6% you would have paid off 29.4% of principal. At 5% interest, you would have paid off 32.5%. At 7% interest you would have paid off 26.6%.
13. Does taking a home equity loan or refinancing for a higher amount make it more likely you will be foreclosed on? __ Yes, __No
A. Yes, because you now have higher monthly payments, and the total outstanding loans are larger. This makes it more likely you will have difficulty making payments due to job loss, divorce, or serious medical problems. It also makes it more likely that you cannot sell the house for at least the loan value.
14. In 2007, CA had 13.2 million houses, condos, and apartments. How many people in CA had real estate licenses? ___under 100,000; ___200,000-300,000; ___300,000-400,000; ___400,000-500,000; ___500,000-600,000; ___over 600,000.
A. 500,000-600,000 http://www.ocregister.com/money/estate-real-number-1970845-people-last. As of Dec 07 there were 548,959 people with CA real estate licenses. One for every 24.2 housing units. The number of housing units (including 8% vacant) is from http://factfinder.census.gov/servlet/NPTable?_bm=y&-geo_id=04000US06&-qr_name=ACS_2007_3YR_G00_NP01&-ds_name=&-redoLog=false. 60.2% were owner occupied as of 2006, *http://www.census.gov/hhes/www/housing/hvs/annual06/ann06t13.html . That means one real estate agent for every 14.6 households. Of course, not all real estate agents do residential sales. Some do commercial, some do leasing, and some have licenses for other purposes.
I’m not like them
But I can pretend
The sun is gone,
But I have a light
The day is done,
I’m having fun
I think I’m dumb
Or maybe just happy
Think I’m just happy (x3)
My heart is broke
But I have some glue
Help me inhale
And mend it with you
We’ll float around
And hang out on clouds
Then we’ll come down
And have a hangover
Have a hangover (x3)
Skin the sun
Fall asleep
Wish away
soul is cheap
Lesson learned
Wish me luck
Soothe the burn
Wake me up
I’m not like them
But I can pretend
The sun is gone,
But I have a light
the day is done,
I’m having fun
I think I’m dumb
Or Maybe just happy
Think I’m just happy (x3)
I think I’m Dumb (x12)
Dumb — Nirvana
Great quiz. It reminds me that I should be studying.
great quiz, I was really surprised by the interest deduction not being of value because of the standard deduction.
I believe there is a typo in the answer to 12, it should be 29% after 15 years.
I was also surprised by that… when doing my taxes after buying my first home for about that amount, 2 years ago. I was expecting a whopper of a refund, but did the math and found myself owing a few K as well as owing the state of CA under-withholding penalties.
FWIW, the realtor never made any statements implying that the purchase was an investment or even financially wise.
Isn’t that what question 12 currently says?
“2. If you have a 30 year fixed rate loan at 6% interest, how much of the principal will you have paid off after 15 years? __under 25%, __25-35%, __35-45%, __45-55%, __over 55%.
A. 25-35%. At the end of 15 years, at 6% you would have paid off 29.4% of principal. At 5% interest, you would have paid off 32.5%. At 7% interest you would have paid off 26.6%.”
I fixed it. It originally said 25 years.
Thanks MR. That was fun.
I wonder how much rent today’s featured condo can fetch? Is there anyone renting in Turtle Ridge? Can anyone post a rental ad there?
I follow the rental market in Huntington Beach where I rent now. All I can say is that the inventory of rentals on CL is going up substantially. My bet is we will see dramatic drops in rent over the next two years……10 to 15 percent.
and as rent falls, so does the realistic asking price of a home based on the Irvine Renters gold standard: price to rent ratio. Encouraging news that waiting is the wise choice to those wanting to buy and having to live within a budget!
Hi George. I think I’m well placed to answer your question.
I currently rent a “luxury” townhome in Foothill Ranch. The similarities to my place and this featured property are very close indeed. I’m at 1400 sq.ft, 2bd/2.5 bths, attached 2-car garage etc.
I am paying just over $2200/mo. for our place. At a GRM of 160 that puts the sale value of this joint closer to $355K or $400K at a generous 180 GRM. Clearly the “owner” is still K-A intoxicated and the realtard is mailing it in. $600K asking price isn’t just grossly overpriced it’s flat insulting. Even the $495K sale price in 2004 was a joke but hey … a fool and her money are soon parted. This chick is just betting the next fool is right around the corner. Dare to dream honey, dare to dream!
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Fun quiz. On Question #5, there will be some benefit for itemizing deductions. Since we are able to also deduct state taxes, income and property, the mortgage interest will throw him over the standard deduction by some amount.
This is true. If you use the median income of $60k for a CA couple, they pay $3276 in CA income taxes.
At 1% property tax, their property tax deduction is $2000.
So, $10,740 + $3276 + 2000 = $16,016. The portion over the standard deduction is $4616. At at 25% tax rate, that’s a net federal tax reduction of $1154.
With over $16k spent on mortgage payments and property taxes, that’s a small mortgage interest deduction.
No. No. No.
$2000 more in taxes (property) less $1154 “savings” (income tax) is $846 more tax!
But the questions was about the value of the interest deduction, not of the home purchase. The interest deduction would be saving this hypothetical family money – they’d be worse off without it. They’d still have to pay their property tax if they took the standard deduction.
The tax deduction is mostly for the well to do. If you get a large bonus each year… that has a 50% tax rate.
Did I read that Redfin posting correctly? That condo has been on the market since June 2006!! Time to fire that agent.
Somehow, I get the feeling that the house has had multiple agents, because each and every one gave up in disgust at the owner’s delusions. I’ve been watching this game of musical chairs with one property near my house: the owner bought a horribly overpriced older house, started renovations, and then “accidentally” knocked out the supports during the gutting so he could build a McMansion in its place. Unfortunately for him, he couldn’t get the loan nor the permits for the new house, so now he wants to take his toys and go home. Problem is, he’s still paying off a mortgage for what’s essentially an empty lot with an obscenely expensive stone wall around the front and sides, so he’s been advertising for the last year to find someone dumb enough to pay that much for that small a space. Three agents and counting, and I suspect that he’ll go through more realtors than there are stars in the known universe before he finds someone dumb enough to buy at the rate he’s asking.
Stories: 3+
How exactly does one fit 3+ stories in 1400 sq ft?
There is so much wasted space with staircases that it must feel very tiny. However, it is Turtle Ridge in Irvine, so it must be worth at least $600K… Not.
“How exactly does one fit 3+ stories in 1400 sq ft?”
Picture living on a ladder.
Hey IR, when are you gonna use “I wanna marry a lighthouse keeper”, from A Clockwork Orange? Seems appropriate for the 3 story models.
Well. If you count the attached garage as a floor … voila, three stories! Referring to my earlier post response to George8, my current rental is a townhome, 1400 sq. ft. with the garage beneath my main floor. I dunno if they describe it as a 3 floor or merely 2 floor with attached garage. I suppose I should check.
Point is, I have a garage, main floor and then the bedrooms on the top floor. Stacked as it is, it could technically be described as a three story townhome.
I’m terrible at math and need some perspective. Anybody want to play as Suze Orman for me???
I’ve got 190k left on my condo that I bought in ’01 for $300k @ 5.75%. I make over 90k a yr and have no other debt. Since I don’t plan on living in my condo indefinitely, is it worth even trying to pay it off? Or is it? I hate the idea of losing 10k a year in interest.
In order to obtain the tax benefit you must be spending money on interest. It is NEVER a good idea to spend a dollar to save a quarter. Everyone who tries to concoct a reason why the HMID is good forgets this basic fact.
The personal exemption is free. It costs you nothing. Spending a great deal of money on interest in order to give up something you are given for free doesn’t make sense (or cents).
The home mortgage interest deduction makes interest less painful, but it is still a pain.
Pay off your mortgage. You will be better off.
If I pay it off won’t it take me over 10 years to even make my money back ?(assuming I can keep it rented and not assuming rent will go up)
Should I just try to sell it and take the little equity I have left and rent? Prices are only going to go down further.
I don’t even believe housing is a good long term investment anymore.
btw, can you explain the “personal exemption”? What do oyu mean by free? I’m bad with taxes.
He means that you can always take the standard deduction, whether or not you did anything that would qualify you for itemized deductions. Even if you make less than the deduction you can still claim its full value. It is a free offset to your tax that requires no participation in any of the social encouragements that itemized deductions attempt to encourage.
2009 is going to be the last year I will probably recommend to people to sell and rent for a while. As prices get closer to the bottom, there isn’t enough to be made on the “short trade” to make it worth while.
Since you bought your house as a place to live, and since you have been conservative with your mortgage, I would forget about the resale price and live your life. There is no compelling reason for you to sell.
Also, since you said you have a $300,000 condo, properties in these price ranges have already seen significant depreciation, and they are probably closer to the bottom than to the top. The people who are at most risk of continuing depreciation are those with much more expensive properties. Their pain is yet to come. This is the group I would advise to sell.
my only worry is that the condo is in a high-end area (appraising at 380000) still too high IMOP.
I fear when the high end defaults start rolling in with the Alt-A’s resetting in the coming years,our condo community will turn into a ghost town. The HOA’s will go through the roof or worse…go into bankruptcy like in Vegas. I HATE HOA’s. What do you do if 50% of your community is owned by the banks? Clearly the banks won’t pay the HOA’s. So the load is left on the remaining owners.
My understanding is that the banks are legally required to pay the HOAs on REOs, though I have heard of cases where associations have had to take them to court to get the money out of them.
I assume you have a 30 yr fixed interest (5.75%) loan, put nothing down and therefore have a monthly payment of about $1750/mo.
You also bought just as prices were starting to go up. There’s no way of knowing how much more they will drop but I doubt seriously that prices on nice units (condo or home) in a desireable area will drop much below the 2000 price since that was the last year of normal appreciation. (Just for interest sake, I’d check to see what units comparable to yours are renting for. Use the price to rent ratio of 180 to multiply the monthly rent. That will give you a ballpark figure for what units might sell for in normal times).
Bottom line: If I were you, I’d stay put for now.
You might consider paying down the principal on you loan (if there is no prepayment penalty) since you’ll be saving 5.75% on each prepaid dollar. That saving is a lot better than the 1% you currently get on a savings account. (if you do decide to pay down the principal, I suggest writing a second check just for the principal – and designate it as such – to send with your monthly mortgage check.That way there is a separate record of each additional principal payment. Good luck!
wrong!
the bubble began in 1998, by 2001 it was already as high as the bubble in 1991, overpriced by 30% (just not the 300% of 2006)
and wrong!
rents are currently in a small bubble, which is just starting to deflate. rent bubble started in 2001, so look at rents from then to run your GRM numbers
Thanks for the advice. Yes it is a 30yr fixed. And since you put it that way, I will continue to contribute more to the principle. My only worry was this deflation period ending too soon. I assume it would be prudent to pay off the condo before inflation settles in. As for prices crashing..my most depressing guess would be that housing prices drop another 15-25% when the Alt-A’s go through.
Seriously, how long do you think this society can last without loans from the banks? This country is broke.
how do I look up that info?
You should also consider refinancing. Considering your equity position you could potentially bring that rate down well below 5%. Makes the paying off go alot faster…
Refinancing makes no sense if he is paying extra principle every month. He doesn’t need a lower monthly payment, and the additional transaction fees (assuming he pays them upfront instead of financing them with the new loan)would be better spent on applying it to the principle. In most cases, refinancing does not save any money in the long run. The lower monthly payments are offset by the transaction costs and the additional time that you must make a mortgage payment.
FreedomCM: I think the bubble we’ve been discussing doesnot include 1991. My suggestion to compare current rents was to give idmkurm… the tool to see if rents in his/her area are in line with traditional price/rent ratios. They definitely are not in the San Clemente area.
Question for you: Care to make a guess in percentage terms where the current prices will land relative to 2000; i.e., % above or % below the 2000 price?
“Additional time that you *must* make a mortgage payment”? There’s nothing stopping you from paying extra principle after refinancing (again, assuming no prepayment penalty on the new loan). Your point about the transaction costs is a good one, but depending on how high those are, a cut in your interest rate could certainly outweigh them, assuming you’re going to pay down extra principle either way.
In the 90’s as rates were dropping, I refinanced with no points or fees. The rate was higher than if I had paid points, but lower than I had. That meant that I had no risk or cost. As rates continued to drop I continued to refinance. During this time I was also prepaying my loan.
Argh, I was parroting an error there — that’s “principal”, not “principle”.
I am in a house with no mortgage. It’s so great not to make a monthly payment. I highly recommend it. Don’t worry about returns on other investment. The peace of mind is priceless.
Congratulations. You are my hero. And I am not being sarcastic. My goal is to pay cash for our next home.
Yeah, that’s my goal too, unfortunately that would necessitate a move to Yuma!
Yah, me too. Received a good-sized inheritance back in the early 90’s & after failing to find a reasonable safe investment I used $100K, about half, to buy my current house. Given a 30yr fixed note back then would have cost me around $1K/month, after the property taxes ($2K – $4K/year) my $100K investment in effect has returned between 8% & 10% annually since that time & will continue to so do even in these bleak times. (As property taxes have risen in my area over the decades, it’s probable that I would have been required to send larger amounts of money to my escrow account over this time as well making my annual return closer to that 10% number) The money I do not have to send to some mortgage company is money we get to keep (hence return on investment) and for that matter, given that my standard deduction is more than my mortgage interest + property tax, this “interest” money is in effect tax free to boot. Not to mention the “peace of mind” thing as I seem to have joined the ranks of the long-term unemployed. If you like where you live and aren’t subject to massive HOA fee hikes (caused by REO units), by all means pay off your home if you can, especially if you purchased it at a pre-bubble price. (Bubble prices in my neighborhood were as much as $350K for a house like mine w/one more bedroom & a pergraniteel kitchen)). I am grateful to be fortunate. (& thanks again, grandmother, but I do wish you were still here…)
idrnkurmlkshk,
I might make a different decision if I had a 3brm condo that I could raise a family in and could live in indefinitely than if I was living in a 2brm condo.
Since a 2brm could truly be too small for a family with girl and boy children, I may want to save on the side for my next downpayment instead of having all my money tied up. My fear would be that I may need to rent the small condo rather than sell and borrowing against it may not be possible.
Basicly, if I knew I would be moving, rather than wishing for a move up opportunity, I would plan to have the most flexablity and options.
idrnkurmlkshk – I don’t mean to muddy the waters for you but one other thing to consider is what to do with your “extra cash” as it were. I agree with those who say sit tight, maybe add an extra payment to principle each month to accelerate your pay-off. It is always better to own something outright, regardless of it’s future value than to be making payments on something … regardless of it’s future value.
HOWEVER, if you can find some stable and lucrative municipal bonds to invest your extra wampum into, that might prove a better hedge against inflation than simply paying down your mortgage. A financial advisor friend of mine mentioned that he had seen some muni bonds, I don’t know which ones, offering 6% return. That’s pretty solid AND muni bonds are tax deductible!
One last thing, you are only about 8 years or so into your 30 year amortization schedule. I’d dig that schedule out and see how much of your current and near future payments are going to interest and how much to principle. If more is going to principle than interest, you may consider just paying the normal monthly payment as you are incrementally improving your situation. It is also good to know where you stand in the amort schedule when considering refinancing. The further along you are, the less sense it makes.
..let me add that all my costs (mortgadge, HOA, taxes etc) come to $18000 /mo. This about where rent for a place like mine goes for.
Something is off. I’m guessing either it’s really $1800/mo or $18000/yr.
sorry typo…it’s $1800/mo
YAY! I am smarter than a realtard! Of course I knew this:-)
There were three questions that I answered incorrectly- but know the correct answers now.
Thanks for sharing guys!
CZ
after taking that test, I feel stupid. # 5 killed me. Anybody willing to share some advice for my situation…see post above
Nice quiz and good citations, MR. Thanks.
SCHB
Thanks. Feel free to have your friends try this and see how they do. I personally would have missed a couple of these questions before doing all of the research, and I’m a housing nerd.
I would LOVE to see some of these questions on the CA Real Estate Exam. I also think it is a good list of things for prospective homeowners to know.
Open questions regarding the quiz.
1. For anyone who has dealt with real estate agents lately, did they tell you answers to any of these questions?
2. If they did, were they right?
3. Did anyone else involved tell you answers to any of these questions (e.g., mortgage broker, banker, escrow agent, title insurer)? Were they right?
Question 5 brings up a point I like to tell my friends: “I rather buy a home with a low price and a really high interest rate, than a highly priced home with a very low interest rate”.
As we approach 0% interest rates, we get to deduct nothing from our taxes, but guess what? because low interest rates inflate home prices, you get to pay higher property taxes.
Not only that, but if interest rates go down you get to refinance. But if rates are so low, you get almost no benefit, not to mention that it is unlikely that rates go below 0% :).
Finally, if you get a sudden influx of have cash like a bonus or an inheritance and you use it to pay down your loan, it would have a much bigger impact than if your interest rate is low and your mortgage big.
So I hate the fact that the Fed wants to force interest rates down to 4.5% or lower. I believe interest rates should be more like 8% to compensate the banks for the risk they are taking. Can’t you see they are going bankrupt left and right? Can’t you see that if the risk of default is high and the interest rate is low, the banks are in more trouble?
Don’t worry. Unemployment will lead to more home price drop, foreclosures, and bank closures.
If only we have an ETF to track unemployment/jobless claims….it’ll skyrocket by now.
“I believe interest rates should be more like 8% to compensate the banks for the risk.”
Someone suggested to me that the government should cap credit card rates because they are too high. I told him that since the risk of non-payment was so great, they seem right to me. Also, I would rather see the users of credit pay more to recapitalize the banks. Consider it a user fee.
It burns me everytime I hear someone say that our economy runs on credit. Who thought that was a good idea?
Excellent point that I was making to anyone who would listen that last few years. I kept saying price is STILL a major factor when buying anything, especially your house! Instead, all these fools fell in love with “low monthly payments” and never once considered the actual COST of the damn thing.
I said exactly the same thing … I’d rather buy a house for $300K and pay 10% interest than the same house for $600K and pay 5% interest. Why? Same reasons you list, not the least of which is property taxes and all other assessments based on the sale price. (And of course the actual monthly payment on $300K vs. $600K) The real benefit is as you stated, if interest rates go down then BINGO … ole Jed’s a millionaire!!! Refi and you win both ways! Low home price AND lowered rates.
How did this country get so stoopid? 😀
Thanks for this great test. I failed badly but learned a lot.
Open questions regarding the quiz.
1. For anyone who has dealt with real estate agents lately, did they tell you answers to any of these questions?
>> Yes and No. My realtard that I hired before gave me all wrong data on tax deductions and other stuff. My realtor OTOH told me that I shouldn’t expect to flip this since the market isn’t going up anytime soon.
2. If they did, were they right?
>>Realtor is right.
3. Did anyone else involved tell you answers to any of these questions (e.g., mortgage broker, banker, escrow agent, title insurer)? Were they right?
>> They didn’t initiate any of these questions. When asked, they either told me that they would get back to me with an answer since they are with a client right now, or gave me wrong answers.
My realtor was good. He did read what is written on IHB, what is written in newspapers and was very aware of the market sliding down. He gave us no such notions that Irvine is heaven, and the fury of hell can’t touch it.
CZ
Thanks IR & MR,
60% correct. Along with “Are You Smarter Than A 5th Grader?”, I now have one more reason to come to grips with my mediocrity.
adjusted for inflation
lol
People believe homes appreciate and provide a return better than the rate of inflation. They don’t.
However, there are many investments that have historically proven to provide returns in excess of inflation. Malibu Renter detailed them in his analysis.
I am not sure what exactly you are trying to mock, but, as usual, it reflects on you.
adjusted for inflation, how much have oil prices gone up?
adjusted for inflation, how much has the price of a hamburger at mcdonalds increased?
adjusted for inflation, how much has the consumer price index increased?
Thanks MR and IR for another insightful post. My husband and I have been following your blog for sometime now. We also followed your advice and sold our Turtle Ridge townhome (for a relatively small loss) last year. We now live in a nicer house for less per month, and our saving up to get into Harbor View when prices fall more. I am proud to say that we sold our TH as for sale by owner and got one of the highest prices in the area at that time (prices have since fallen over 10%). We had realtors calling us all the time and they still check in from time to time and they still tell us the same thing… “this is a great time to buy.” My husband is too nice to reply that’s what you told us last year. Anyway, thanks for the education that we received over the past few years. I just wish you had been around in 2005 before we bought.
Greatest. Quiz. EVAR!
Needs to be a stand alone web based quiz. Sent it to CR/Mish, etc.
As Bender noted: “Soylent Green, my kind of people…” 😉
Anyhow, I’m not too surprised the families with kids are the most likely to get gigged. Kids are very expensive, and unless you hit the jackpot and they all get a ROTC scholarship they cost even more of a bundle to get rid of ( priced UC lately? ).
Not surprised the TRidge is finally hitting the skids. I wonder what Mr. TRidge, aka Hannu Reddy, is doing with his mansion on the ridge…
“Kids are very expensive, and unless you hit the jackpot and they all get a ROTC scholarship they cost even more of a bundle to get rid of ( priced UC lately? ).”
Back in the 70’s, I went to Saddleback. Cost was $5 health fee and books of less than $100 per semester. Then I transferred to Fullerton for $100 fee and books still at less than $100 per semester. Sometime later someone got the bright idea that students should shoulder some of the cost of their education through loans. Now it looks like what happened with housing, if you add more credit, it allows them to charge more.
For the amount we pay in taxes, IMO, there should be a opportunity for a free or almost free higher education.
The assumption in #5 of “no other deductions” is pretty unrealistic, though. Now, it’s not TOO far off for a person with good health insurance, paid for by their employer. But, those health care costs are generally a pretty penny.
That said, the main thrust behind the question, that the MID really doesn’t matter for a lot of people, is a valid one.
Even a RE Moron like me got 60%.
My favorite was the questions about the
results of making “false claims”.
I’m a moron…..60%.
Oh well…..back to work.
I like how 2% of the quiz-takers got question #1 wrong, when both potential answers are marked as correct. 🙂 I guess that’s what happens if you fail to answer the question, eh?
The explanation on #4 is misleading, as “If you have no other deductions, the first $11,400 of mortgage interest doesn’t exceed the standard deduction” doesn’t hold for all values of “you”. That should be fixed to explicitly state that you’re talking about the scenario of a married couple, as in #5.
As oc_analyst so astutely noted in a comment to “Tax Policy and Housing” the other day, in California if you’re single and make $90K, your state tax is going to be about $6K, so you’ve already exceeded the standard federal deduction of $5,450. Any mortgage interest deduction will have an immediate value.
I disagree with the one about kids going to school although agree with the generally bit.
Down in San Diego there are a lot of mello roos afflicted areas. In one of these areas in north county. They cut a deal where the mello roos gives the owners first dibs on the local school. I only know about this because a poster on a different board, probably Jim the realtor or piggingtons had rented in the area – the units were possibly unsold condos or planned apartments – and was carping about not being allowed to have their kids go to the school across the road, because of something to do with the mello roos funding the land the school was on. As a renter they were invited to take a hike and were mad as hell about it.
Also in or near Carmel Valley, there is some kind of scam going on where fees were collected for a school and then decided that now they don’t need the school and will sell the land off. Unclear on the details but its all connected with the new development = excuse to collect truly staggering mello roos fees. As in more that the cost of the mortgage in your example.
Can someone tell me how can you put two bedrooms in three floors? I really a very hard problem 🙂