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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Moominoid who wrote (56319)	6/19/2006 10:03:05 AM
From: GraceZ	Read Replies (1) \| Respond to of 306849

Around here I would doubt that the mortgage payments are going to be 85% of your costs. That is the norm here for a first house and it gets progressively lower on subsequent houses as you build up equity. Maybe in high tax places like CA they are 70% if you fully finance the purchase, but they don't shrink in percentage as fast because of the cap on tax increases. And how many people don't move for 30 years in the US? Housing has high transactions costs, this is a definite negative but the equity from one house can easily be moved to another so that you need not raise the amount of borrowing even if prices rise. Most people do move up at some point because their housing needs change, offset by moving down at some later age when their needs shrink. The average age in the US for a first time buyer is early thirties. Most families who become homeowners will own three houses over their lifetimes (with some owning a great deal more and some owning just one). So that means with a 80 year life span you spend an average of around 15 years in each house. In practice people spend the most amount in their middle one, the move up house and the least in their downsized house and the first house somewhere in between. I know a lot of people in their late 50s who stayed in their first house and don't show any signs of moving and I know other people who are on their 7th house at the same age. It's difficult to go from a ridiculously low mortgage payment to one closer to the national average (I had an office manager who had a mortgage payment of $145/month and she still lives in that house), they won't do it but there are lots who never get past the first five years of payments on any loan so they don't experience a large addition in pain in moving and their incomes have grown along with the house prices. If your income is stagnant or your house doesn't appreciate, you tend to stay where you are. Also I think of the cost of buying as including the opportunity cost on capital invested. Capital always has a cost. You can rent the capital by renting the house directly, or rent the capital using a mortgage or rent your own capital by buying out right. What makes buying a house worthwhile for most is that they happen to buy during a period where RE is a better investment than other investments in the same risk class and they are forced to put money into that investment, it is a way to enforce savings that they might spend instead of save. I grew up in Britain where ARMs were the norm, maybe I never adjusted my thinking to fixed rate mortgages. My husband had an ARM on his first house. He held the ARM between 1986-2005 and I can't think of a better time period in which to own an ARM (except if he'd taken it out in 1982). It would be hard to beat that now. On my primary residence we had a fixed at 7% which meant we had to wait until rates bottomed out to exchange it for a lower rate, we paid a premium to have a fixed rate mortgage. Refinancing always has a cost so the interest savings has to hit a threshold but it was significant when we finally swapped out for a lower rate. The US has created some strong advantages to borrowing money for a house and one of these was to pass consumer protection laws that make mortgages far more advantageous for the borrower than for the lender. If I have a low rate and interest rates rise to the sky, I'm protected by the fix and my loan is not callable. If rates fall below I can refinance for the lower rate without a prepayment penalty screwing the mortgage lender out of thousands. People pay a premium for this advantage. Over the life of my husband's ARM he paid far less than a person who had a fixed who then refinanced but that was during a period where rates fell for almost 20 years! I wondered about why the institutional difference between the countries... The US is even more socialist than Britain? We never got over the Great Depression where so many people lost their houses due to the fact that bankers called in their loans when they ran short of cash. We also assume that all house buyers are babes in the woods while all mortgage bankers are evil capitalists so the house buyers need protection from them. This view has never been adjusted in light of the fact that some very naive or elderly retired investors invest in mortgaged backed securities. Michael Burke once described mortgage bonds here as "If you are right about interest rates it's a short term bond and if you are wrong it's a long term bond" In bond terms they are lose/lose. The other side of lose/lose in win/win.