24 years old, and making $94,000 – a typical Bay Area tech salary
Glassdoor.com reveals why Bay Area Real Estate is affordable. [Burbed.com]
San Mateo Home Sellers in Trouble Says:
June 11th, 2008 at 5:12 pmLOL at polygamy comment. Anyway, I graduated from Berkeley. This year’s students are indeed getting 90k at some places. I know a guy starting at 90k at VMWare, and another guy getting 95k at yahoo. The yahoo guy has a masters though. Both of them are Berkeley guys. On the other hand a guy who got a masters from Arizona state went to Google and got offered only 70k. As for me I made 94k last year including bonuses but I’ve already worked for 2 years. Even though I think my salary doesn’t suck for a 24 year old, a 800k median San Mateo house is too ridiculous.
Although SMHSIT didn’t ask for it, here’s my advice: Buy that $800k house asap.
Here’s my reasoning: sure when you turn 30, you’ll easily be clearing $141k base, $160k after bonus (I’ll ignore stock for now, though that’s probably double.) And sure by then you’ll probably meet your fine Mr./Mrs./Partner in the office. Hey suddenly you now have $320k! Times 5? BOOM. You can afford at $1.6m house in 2014. Just look at a $1.1m house today to see what you’ll be able to get then. (Appreciation happens.)
But… but… what if you don’t meet the right person? Let’s say you end up with… well… an undesirable. Someone who adds no value to tech, isn’t part of Web 5.0, or the Greentech 2.0. Someone who really doesn’t need to live in the Bay Area. What if you end up with a public school teacher? It doesn’t make sense, but love can do that! Well then you’d only be making $210k which would only afford you a $1m house in 2014. And that’s assuming that salaries don’t go down in that doomed and dying industry. That’s a $740k house today! Ouch! That’s worse than a $800k house today!
That’s why it makes complete sense you should go buy a $800k house right now asap. Sure that’s 8.5x your income, but can you afford to take the risk of being priced out forever? Just tell the lender, “Look, I’m investing in Real Bay Area Real Estate really. And, in just 6 years my income will grow 70% – and that ignores stock. What could possibly go wrong? Can you afford not to bet on me?”
You’ll thank me for this SMHSIT.
June 12th, 2008 at 8:35 am
Burbed is the modern day Nostradamus. All hail the seer!
June 12th, 2008 at 9:49 am
At a ratio of four guys to one girl, he ain’t gonna be meeting ANYONE. The only guys I know who’ve married here either A: married their high-school sweethearts, or B: moved in from out of state and brought their girlfriends with them. (Actually, there’s also C: Fucked A Fat Girl.)
June 12th, 2008 at 10:04 am
Also, if a tech guy marries a tech girl, they’re at serious risk for raising a whole generation of autistic children. What with those detail-oriented computer skills on both sides genetically, they’ll have kids who can do calculus in kindergarten but won’t stop staring at the faucet.
Seriously, autism is way way up in California, and especially the Bay Area. Yet another special way that we’re #1.
June 12th, 2008 at 10:18 am
I believe SMHSIT is female, and already married, probably to some other person in the tech industry.
So with that kind of money the could easily afford the 800k house?
June 12th, 2008 at 10:23 am
Hey let’s watch it with some of the language here.
Thanks.
June 12th, 2008 at 10:25 am
Thanks Jorge, yes I am a female and I’m already married. LOL, thanks for making my comment into a post Burbed. You’re hilarious.
June 12th, 2008 at 10:38 am
Just as a side note, I find it amazing that people would consider buying in PA when they can buy a house that is actually nicer in the East Bay -aka- Berkeley, Alameda, etc etc for sometimes half the price. I don’t find anything particularly great about the Peninsula. It all looks like 1950′s subdivisions thrown together on the freeway. The only difference is that all those Brady Bunch ranchers are getting all spruced up by rich people , which frankly makes them look stupid because a rancher house is still a rancher house no mater how much marble, stainless appliances, and big screen TVs you pack into em’.
If you’re all high on the BA and MUST buy a home NOW, well you can buy an overpriced home in the East Bay ( but less overpriced than PA) for say-550-600k. Wow! what a deal! You’ll only have to shell out around $4,500 a month for one of those. That’s ONLY about 55% of the typical BA 200k tech worker power-couple take home pay, not including other stuff like repairs, car payments,food, gas, and vacations, but none of that stuff counts anyway.
June 12th, 2008 at 10:38 am
On a more serious note, my husband and I do know several couples our age that bought 800k houses, but all they seem to do is complain about how much it costs. We make pretty good incomes but after taxes it’s not as much as it looks. I’m pretty confused as to why the rule of thumb is that if you can spend 33% of your gross income on a mortgage you can afford it, because 33% of our gross income is about half of our take home income. So, an entire salary on a house doesn’t seem worth it to me.
June 12th, 2008 at 10:41 am
r u all on a first name basis?
June 12th, 2008 at 10:43 am
>>Just as a side note, I find it amazing that people would consider buying in PA when they can buy a house that is actually nicer in the East Bay -aka- Berkeley, Alameda
—
not everyone wants to drive 10 hours to go to work.
June 12th, 2008 at 10:47 am
The discrepancy people are talking about with home prices and increases are time-dependent. Sure, if you bought before 2005 you’re ahead of the game, but after… pretty unlikely unless you found the exact right neighborhood.
We’re going to see prices rolling back to under 2004 levels in many places. At this point, the RBA is either the nicest neighborhoods or close to major jobs centers. Anywhere else is toast.
June 12th, 2008 at 10:47 am
Yeah, I lived in the East Bay from highschool to the end of college, but now I work in San Mateo so crossing the Bay Bridge would be a big pain in the butt. If I worked in SF I would probably live in Berkeley/Albany/El Cerrito and take public transportation. I agree that San Mateo homes suck, though.
June 12th, 2008 at 10:53 am
>>At a ratio of four guys to one girl, he ain’t gonna be meeting ANYONE.
If you own a BA house, may be the girls will show up?
June 12th, 2008 at 10:58 am
An 800K house results in payments of about $4700/mo when all is said and done. Thats with 10% down – a rate around 6 3/8, and $700/mo into the escrow acct. I can see where somebody who buys an 800K house in palo alto where you get a 1br/1ba shack on a major street for that, if you can even find it, would feel like 4700/mo was too much. But if you were renting a decent house in San Mateo for $2500, and now you buy and have a $4700 outlay, it results in about $1K more out of pocket per month than the rental when you account for the tax benefits. An 800K house is really a win in the bay area and thats why I buy at that price point, if I can find a nice place. What happens when people complain is they buy an 800K fixer, and then they need to do all this stuff like new roof, kitchen, bath etc and finance that and the next thing you know you have $6500 payments every month. But that is comparing apples and oranges because most rentals don’t have those upgrades.
June 12th, 2008 at 11:14 am
>>But that is comparing apples and oranges because most rentals don’t have those upgrades.
–
sort of. most rentals aren’t falling apart like a lot of the 800k houses.
i don’t know much about Willow Glen. Is it that much better than most of San Mateo County?
June 12th, 2008 at 11:15 am
but WillowGlenner,
Almost all the banks out there now require a 20% down payment on a house. So we’re talking about a 200k down payment right up front. Your estimate doesn’t include property tax or insurance. The realistic payments for housing related stuff-not including repairs-on a 800k house is more about $5,500 per month. Seeing as how the avg home around here still rents for around $2,00-$2,500, this wouldn’t even cover half of the payments if you were seeking to monetize. You would be taking a $2,000 hit every month. So that house had better be doing some SERIOUS appreciation, and fast.
In regards to commutes, well there are easy ways to deal with it. I tend to leave for work early, and leave to go home early. The result is that I can be home in about 40 minutes each way. Traffic in PA and the Peninsula is so bad that I’d put money on it that many who live in PA actually spend as much time just getting through the bottlenecks. I went to get lunch one day in PA 4 miles away from the office and it took me 30 minutes just to get back.
In any sense, a few extra minutes spent in the car seems well worth not having to pay 500k more for a crappy house in the burbs.
June 12th, 2008 at 11:34 am
BURBED, regarding the “24 years old, and making $94,000 – a typical Bay Area tech salary”, I WOULDN’T BELIEVE WHAT PEOPLE ARE SAYING ON THE WEB THOUGH, you know what I mean. Some do get lucky and get paid that much, but usually they wont last long in their job. Some companies are desperate and willing to pay that much to fill an immediate need, but you still need experience. What can a 24 year-old know and develop? A system that is prone to failure and full of bugs. I’ve seen that too many times.
June 12th, 2008 at 12:31 pm
No bob, banks do not require 20% down unless you want a low doc loan. I am buying a house right now with 10% down. There are even 5% down loans available again. There are no zero down loans that I am aware of anymore.
As for $4700/mo to buy vs $2400 or so to rent, its all about your timeframe. I know, I was a renter in the bay area for years. You can rent here for cheaper than buying, but there is NO piece of mind in it, at all. Your home can be sold out from under you at any moment, those new owners can raise the rent, whatever. With a 4700 mortgage you are relatively safe in knowing that in 10 years you will be paying LESS monthly for that house than what it rents for. You pay $1000 more per month for that piece of mind.
PS man this server sucks.
June 12th, 2008 at 12:39 pm
bob, banks do not require 20% down on a house. I am buying right now with 10% down. There are some with 5% down. I have not found any no down anymore.
June 12th, 2008 at 12:53 pm
What about the typical loan of 2005-06, the 80/20 loan where you’d get an 80% first mortgage and a 20% second mortgage, essentially you were paying zero down. I hope those are gone.
Also if you only pay 10% down you have to pay PMI.
June 12th, 2008 at 12:54 pm
dang this server! I thought I took that extra tag off my Name (required) field.
No doubt this is a plot by a 24 year old networking engineer who is paid $94,000 to slow us down.
June 12th, 2008 at 1:14 pm
RoxBoy,
Why you don’t believe it? I see it all the time.
Bob,
If it takes you 30 minutes to go 4 miles, imagine if you live on the East Bay. The bottlenecks are much worse, and there are trucks all over the place throwing rocks against the windshield. I keep an older car around just in case I need to go to the East Bay.
June 12th, 2008 at 1:14 pm
LOL at madhaus. I think burbed is hosted on dreamhost, which is the same hosting service I use. Maybe burbed is just super popular so there is slow down. Anyway, about loans another problem is that until recently a lot of these loans on a 800k house were jumbo loans so you couldn’t get the 6 3/8% rate. I think they are called jumbo conforming or whatever now, but still, the rates aren’t that good because lenders are more cautious.
June 12th, 2008 at 1:18 pm
Willowglen,
then Peace of mind must be about the most expensive and overrated item in the Bay Area. When people mention things like “Oh no! I might have to move if I rent!” or- ” Well, I can’t paint the walls the color I want.” or- as you say, the owner could sell it out from under you.
In all my years of renting ( 10 so far) None of the things you mentioned have ever happened to me. Even if it did, well so what. There are countless homes for rent in my area, many for less than what I pay now.Even if you do have to move, what does that mean? It means you spend a weekend or two moving crap from one house to another and probably getting rid of a lot of useless garbage you really don’t even need.
I’ve lived in the same 4 bedroom house with a nice yard for 5 years. I pay less than $1,200 a month. To buy would cost $4,500 a month Minus insurance. So I’m paying around 5 times less than what it would’ve if I had bought. You do the math: One year of “buying” costs the same as renting for 5. So in that case, your math isn’t correct: In 10 years I will still be far ahead of the same person who bought the same house as I rent. In the meantime, All the money I save goes into retirement/mutual funds/savings, etc, which in turn have an annual appreciation of 10% per year, or about double what the overall appreciation of housing is if you add in all the ups and downs.
So for the “price” of possibly having to move to another rental house, I’m still saving more and living cheaper than the homeowner who bought.Even if they put 50%.
Do I want to own someday? yes, but not here. By the time you’re just getting warmed up into your house payments, mine will be paid for in another city like Austin, complete with retirement savings intact.
I bet none of that makes a lick of sense to you does it. Perhaps it sounds so simple that it can’t be true. But that’s the truth folks- If you buy in the BA, you lose.
June 12th, 2008 at 1:27 pm
I agree with you completely bob. Thank you for being so sensible.
June 12th, 2008 at 1:39 pm
When people mention things like “Oh no! I might have to move if I rent!” or- ” Well, I can’t paint the walls the color I want.” or- as you say, the owner could sell it out from under you.
—————
I know this wall print thing, I heard so many times, especially every time I stumble on some real estate agent. The fact is that, from my own experience, if you rent single family home for longer term, the most of landlords don’t care about wall painting. For example, my current landlord said “Before renting it to someone else after 3-4 years, I have to repaint it anyway”. Landlords are more worried about their properties being damaged or maintained badly by renters.
June 12th, 2008 at 1:44 pm
bob, we did have a house pulled out from under us right before Christmas 1992. The owner had to sell his fancier place and move back into his rental — our house.
That’s why we bought in 1993, so this would never happen again. You say “big deal,” but I assure you it was. And that was Before Kids. There’s no way we could move in a weekend unless we threw out 95% of what we own.
June 12th, 2008 at 1:51 pm
Interesting median price vs rent article.
June 12th, 2008 at 1:56 pm
I’ve been working with the Dreamhost folks on the server performance.
While doing so, I learned that I’m not alone:
http://www.google.com/search?hl=en&safe=off&q=wordpress+cpu&btnG=Search
Ouch. A lot of people are having CPU problems.
Does anyone actually use the Recent Comments thing on the side? If not, I might have to remove it – I think that’s the offender.
June 12th, 2008 at 2:05 pm
bob how did you u score a deal like that? i’m paying nearly 1900$ for a 2br.
June 12th, 2008 at 2:20 pm
Bob sounds like a real smart guy. I agree it doesn’t make sense to buy anything around here NOW. It’s all about timing; if you could have bought in 1998 you would be golden right now and the more you borrowed to buy the house the happier you would be right now. But going forward 10 years into the future I’m afraid there will not but so many happy stories. So if you buy now you had better buy some place were you can easily afford the payments and you like living there.
June 12th, 2008 at 2:23 pm
They have to give you 30 days before you have to move which is a bit more than a weekend. You could also arrange to sign a lease so you only have to worry about being kicked out once a year (or once every 6 months).
June 12th, 2008 at 2:23 pm
Hey burbed you could ask dreamhost to move you to a better server. My server used to be hecka slow and went down a lot and I checked the load on it and it was really high all the time. So I requested them to move my whole account, and now I’m on a less used server with much better uptimes.
June 12th, 2008 at 2:41 pm
“Let’s say you end up with… well… an undesirable. Someone who adds no value to tech [...] What if you end up with a public school teacher?”
Well burbed, without school teachers, you’d probably not see many tech people settle in the bay area and work long hours while their kids sit idle in the hallway.
And being married to a school teacher… I beg to differ, some are quite desirable
June 12th, 2008 at 2:49 pm
Does anyone actually use the Recent Comments thing on the side? If not, I might have to remove it – I think that’s the offender.
I do, but if it’s causing site problems, kill it.
June 12th, 2008 at 2:52 pm
madhaus, the 80/20 which is a 100% financing loan with an 80% conventional and a 20% HELOC (second) is gone. A side version of those was the 80% first and 10% second HELOC, I actually had one of those once and that was a good loan because the HELOC can be paid down and then you are all set with a HELOC for emergencies. But anyway the reason these were set up this way in the first place was to take advantage of conforming rates for the 417K and under part, and then higher rates for the rest. Now that conforming loan limits are 729K, this is no longer necessary. The seconds/helocs were disallowed around March of this year, and for a brief moment in time people had a tough time financing because at that point you really had to pay through the nose for a huge jumbo at 7.5%, or only finance 417K- both of those are a hardship. But, a few mos went by and conforming loans were raised to 729K- now there is no need for a “second”. Fannie/Freddie do require 10% down though so if you don’t have 10% you are at a significant disadvantage.
June 12th, 2008 at 2:53 pm
I also use the comments on the side, it is useful to see which threads are active. But not a big deal.
June 12th, 2008 at 2:58 pm
Hellboy, the thing is, in 1998 people were saying the same thing about buying vs renting. I finally concluded that housing here is like a hedge fund. If you believe that the bay area will continue to be the new company incubator for the USA (and the world), then housing here is going to rise perpetually. RE is a highly leveraged asset- in fact I can’t think of anything more highly leveraged than RE other than some specialized oil/gas commodities contracts- so the key is the direction of the asset. If you think there is any chance of real estate depreciating over a decent period of time (5 years or so- not year over year which is just a little blip)- then stay away from RE because any decline will kill you. But if you think it is going up, go ahead and buy in.
June 12th, 2008 at 2:58 pm
Rather than a shortlist of last comments I’d much rather see a small indication in the front page of when&by whom the last posting was done for each thread.
But I hear this is not possible on this site’s “technology”
June 12th, 2008 at 3:02 pm
hey burbed,
I still think its a pretty good feature since it gives users the opportunity to dig up old topics. maybe you can put a link off the page to the feature, then it won’t be such a hog but still be available to users who are interested.
June 12th, 2008 at 3:03 pm
btw duck, why discriminate? fat girls need love too! …and it sure beats an inflatable love doll!
June 12th, 2008 at 3:04 pm
I moved the link to only the home page – not the subpages. Let’s see if this improves performance a bit.
June 12th, 2008 at 3:35 pm
WillowGlenner: You may have heard that people were saying the same thing about buying and renting in 1998 but what was the price/rent ratio at that time?
I know that rents today are similar to the rents in the year 2000 but prices have doubled. This means that the price/rent ratio today is double the value eight years ago.
June 12th, 2008 at 3:40 pm
All the “bad” stuff that could happen to you if you rent pale in comparison to what could happen to the same family who bought a house. If you rent,and have kids, then you might have the possibility of being inconvenienced into moving, which as mentioned- you have 30 days to do so which is time enough.
If you BUY, well what happens if you lose your job, are asked to relocate for your company, or worse- the Bay Area loses it’s cash-cow industry to other states/countries ( happened in Detroit, and it can happen here), Then you have a situation where if your were in a financial bind, you’d have to sell first before you moved. I know for fact that MANY people who bought over the last few years have zero wiggle room. If either loses a job- say buy-bye to the house. Renting also gives you the option to rapidly relocate to another city.
So there are just as many bad things that could happen to the person who buys, if not more. My take on it is that people who want a house seek reasons and justification for buying, especially in highly expensive areas. I find that most of these reasons are almost hysterical ( paint, fear of having to move, etc etc) or from the known FACTS that somehow, RE is the single best investment known to man, or some other thinly veiled thing. People that rent for long periods eventually think that since they’ve had to “suffer” for so long, well then they DESERVE a house now.The basic fundamentals still remain, regardless of how long you rent. Again- I too want to own. Just not here.
Admittedly, right NOW is not a good time to buy. We still have a number of years to go before things stabilize, and that doesn’t include what could happen if the recession goes full-blown. Eventually, perhaps it will be.
June 12th, 2008 at 4:45 pm
I know this has been debated before, but $100k is an average base salary at bay area tech companies. Take a look at http://www.glassdoor.com which has salary info for companies in the bay area. $100k doesn’t include bonuses or stock options.
June 12th, 2008 at 6:03 pm
Actually, if you’ve been in a place over a year, you now get 60 days to move out, which makes it much less of an inconvenience.
June 12th, 2008 at 7:23 pm
Roser, not really avg salary is $100K in the Bay. If you look at the number of persons who did the salary poll: two. Two is hardly a good indicator. Some only make $60-70K/year. I say the average salary in the Bay is still in the mid $80K/year.
June 12th, 2008 at 7:57 pm
It is puzzling to me how so few people are able to save for a down payment. Mr Stepford and I rented an apartment for 4 years after we were married and waited to have children. During that time, we saved my entire salary and only lived off his which then enabled us to save enough money for a down payment. We only had about 30k worth of options (after tax.) We both drove old cars and bought few luxury items during that time. We did take one vacation to Europe, but spent most of our weekends hanging at the beach boogie boarding which is free. We made quite a few sacrifices, but feel the end result was well worth it. If both spouses are making 100k why aren’t they able to save 50k/yr for 4 yrs? puzzling.
June 12th, 2008 at 8:24 pm
We made quite a few sacrifices, but feel the end result was well worth it. If both spouses are making 100k why aren’t they able to save 50k/yr for 4 yrs? puzzling.
To answer that question, pop on over to the $5 gas thread. Dudes who are big-time compensating for something lacking. I bet their wives are cheating on them with Toyota drivers.
June 12th, 2008 at 8:55 pm
Stepford – you know why: restaurants every day, peer pressure, and not knowing any better. When will they start teaching personal finance in middle school?
June 12th, 2008 at 9:39 pm
Bob, you are the poster boy for the angry renter. The reason people justify buying here is because….. (drum roll) … it has been a winning investment strategy forever. Thats the key reason. Beyond that there are many other advantages to buying which we have mentioned. What is so hysterical about people wanting to make money? You don’t want to buy, and you are making up all kinds of stuff like people that bought years ago are underwater. thats just silly.
June 13th, 2008 at 12:17 pm
Willowglenner,
Far from it. Renting has allowed us to save up enough to actually buy a fairly nice place in another state, or a 40% down payment on a place in the BA. If we reaaaaalllly wanted to buy here, we would’ve done it already. If I were an “angry renter”, then I’d not have that financial option and not be able to afford a house here, which isn’t the case.
My simple argument here is that there are easier and better ways to make more money than you will buying a house, and particularly in an overpriced area. But you sound somewhat sold on the whole “housing as an investment” idea.
Let me ask you one simple question: what do you think is a better investment: stocks, mutual funds, and so forth, or a house. Your answer will tell me what your comprehension of economics lie.
June 13th, 2008 at 12:57 pm
I’m with Bob on this one. I’m a renter, and not in the least bit angry about it. Some people value the comfort of never being asked to move out, and I value the freedom of being able to move anywhere at a whim (and I mean countries, not to another apartment down the street). I can afford a house in the Real Bay Area, but the quality of the shelter isn’t worth the cost to me, even assuming that it will appreciate, because the temporary loss of freedom while I’m heavily leveraged into the house is something that I dread. I don’t want to be a serf to any bank.
I’m also a happy renter from the financial side of things. I rent a house in the Cuesta Park area of Mountain View for $1400/month. I’d have to buy a $1.3-$1.5M house to live comparably in the same neighborhood.
June 13th, 2008 at 1:01 pm
The best investment for me, now is housing. I can assure you I have a significant comprehension of economics. The reason I am supportive of real estate as an investment is because of the plight of the USD, something you don’t seem to get, because you keep bringing up the fact that RE has appreciated so much in 8 years without mentioning that the dollar has been cut in half. Stocks have underperformed and will continue to underperform in inflationary environments, just like stocks were a horrible place to be in the 70s, they are a horrible place to be now. This climate is diametrically opposed to what we had in the 90s with an appreciating USD, which made investments in stocks (and earnings) MORE valuable with time, as opposed to LESS valuable with time which is what we have now with the dollar crash. Sure you can find individual stocks like Apple that go up, there is always that needle in a haystack you can find in a flat or declining stock market, but generally speaking stocks are not paying off like RE in this decade. Now if we get a better president which is a given, and the government starts paying down the debt like they did in the 90s, that will turn things around completely.
Angry renters in the bay area come from all kinds of backgrounds and many can afford to buy here but choose to not do so. It doesn’t matter how much money you have – the problem is you present buying in the bay area as some kind of stupid option that is completely unwise without a lot of actualy facts to back up that position.
June 13th, 2008 at 1:57 pm
On a percentage basis, stocks invariably outperform real estate because of productivity gains in the underlying asset. However, at reasonably price levels (which IMO we are nowhere close to), real estate is the better investment because of 1) leverage, and 2) tax benefits. Real estate wealth isn’t generated by paying 500k cash for a 500k house and watching it appreceiate 3-4% a year like a stock is, it is generated by leverage – ie. paying 10k cash for a 500k asset and watching your 10k investment grow exponentially. Simple math really.
June 13th, 2008 at 2:12 pm
WillowGlenner,
Then your answer alone gives me your idea of how you imagine economics work. Enough said.
By the way- buying a home doesn’t shelter wealth because the value of housing is inextricably tied to the fate of the economy. The proof is already here, with the US economy slumping as a direct result of the housing bubble with housing depreciation as the result.
If you have a fear of the USD…. then invest in foreign companies. Diversify. In other words, buy small cap, mid cap, large cap, blue chips, red chips, BRIC funds, Dragon funds, and so on. Regardless of what housing does, stocks appreciate 7 out of 10 years, with an annual median appreciation of 10% per year. It’s been this way for 100 years. Housing has not, and never will be.
We all make financial choices. Do what you feel comfortable with. But the truth is that investments in stocks have historically beaten housing hands down for a century.
June 13th, 2008 at 2:57 pm
@55
R, leverage works both ways. If you can make 10x as much because of it, you can lose 10x as much as well. When the value of a property declines, your loan doesn’t get any smaller, does it?
If you really believe in using leverage to multiply your gains, you can certainly do so with stock investments as well.
In your example, you paid 10k of you own money and borrowed $490k from the bank to buy your $500k asset. If your asset drops by a mere 2%, you’ve lost 100% of your money. Now, let’s be generous and assume that housing appreciates at the same rate as stock. In your case, your net gain with housing is a lower percentage, because you have to deduct the cost of the loan interest from your profit.
There are certainly times where it makes sense to “invest” in housing. Now’s not the time in the Bay Area.
June 13th, 2008 at 3:22 pm
Bob, the returns you cite are generally true, however, they ignore the concept of leverage, which, along with tax benefits, ordinarily makes real estate a good investment. The more cash you pay up front to purchase property, the less compelling real estate becomes, because as you state, it historically only appreciates at about 1-2% above inflation per year. That is why leverage is so important, and why buying now, when 10 + percent is required, isn’t that attractive from a financial perspective.
June 13th, 2008 at 3:26 pm
57 – I generally agree on all fronts. However, bear in mind that on your primary residence, your exposure is limited to your investment (ie. bank can’t obtain personal judgment against you). Thus, if you put in 10k, your losses are capped at 10k but your upside is unlimited.
June 13th, 2008 at 3:30 pm
mtv-renter Says:
>>If you really believe in using leverage to multiply your gains, you can certainly do so with stock investments as well.
You can, but you’ll get margin calls to put up more money if the stock goes the wrong way. That doesn’t happen with real estate.
If you make the wrong calls with stock, you can be wiped out with nothing to show. With real estate, you can always live in it or rent it out.
June 13th, 2008 at 3:37 pm
>>buying a home doesn’t shelter wealth because the value of housing is inextricably tied to the fate of the economy.
When the dot com bubble bursted, how come real estate started taking off?
Why is real bay area not going down despite the current economic situation?
When you say it’s tied to the economy, it doesn’t tell me anything, because there are so many forces within the economy that even economists don’t get it right most of the time.
June 13th, 2008 at 3:47 pm
Bob says,
>>If you have a fear of the USD…. then invest in foreign companies. Diversify.
>>investments in stocks have historically beaten housing hands down for a century.
Unfortunately, it’s not that simple. Stocks go through bear market cycles during which there may not be any gain over a period of 10 years.
I’ve never been a big believer in diversifying either. It tends to give you very modest returns because the different sectors act against each other.
June 14th, 2008 at 10:29 pm
Real Estater said:
Why is real bay area not going down despite the current economic situation?
Fair question.
I believe it’s because technology company income derives partially from overseas markets. The weakening dollar has resulted in increased revenue (in dollar terms) for many companies that maintained their international prices (in Euros, dinars, etc) at earlier levels. Those that reduced prices (since their cost in foreign currency dropped with the weak dollar) had an increase in sales.
This activity is cyclical. As Bernanke and the Federal Reserve Board worry more about inflation, they will start raising interest rates and the dollar will strengthen, drying up the overseas revenue excesses. This will likely take another year to play out. At that time, you will see technology companies begin to cut back. When this occurs, you will see foreclosures in the mainstream and home prices will then fall.
It won’t help that in a year or two the Alt-A resets will be cresting.