Lazy Man and Money

Our Buy vs. Rent Situation

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In 2006, I wrote about how my fiancee (my wife now) got a great job promotion in San Francisco. Somewhat reluctantly, I agreed to live more than 10 miles away from my birthplace for the first time in my life. I was 30 years old. I considered it a short-term move. After two years, we’d be eligible to move back and my wife would qualify for some of the top jobs in her field that Boston would have to offer. Sometimes it’s funny how life turns out.

Somewhere along the line, we began to love what is known as “the peninsula” – an area 10-15 miles south of San Francisco. When we first moved here, I remember having an application on my cell phone that would send me a text message of the week’s weather. It was convenient in Boston when you had to know whether it was going to snow or if you’d have a sudden heat wave. I deleted that application after about a month of living in the peninsula – I didn’t need to be reminded that it was going to be 75-85 and sunny every day.

Given the change of heart, we decided to look into whether it makes sense to rent or buy in the bay area. Real estate prices have dropped a lot recently. With mortgage rates low, it sure seems like the time to take advantage and buy. My wife thought it might be the right the time… how much could things continue to drop? I said, “I think I remember seeing some math on this once, let me see what I can dig up.” Fortunately, I remembered that Erica had written an article about whether it is better to buy or rent. In it she gave a couple of metrics:

  • The average house should cost between 100x-150x monthly rent
  • The average house should cost between 3-5x median annual income

Looking at the first metric, our $2100 rent now should buy a home between $210,000 and $315,000. However, in my area, it seems that townhouses equivalent to our apartment still run around $600,000. Granted that’s significantly less than the $783,888 asking price of this 1100 sq. ft. “fixer-upper” I found a year ago – it’s still not what I’d call a bargain by this metric.

Moving to the second metric… City-Data says my zip code has a median house $83,809 – projecting to a home price between $251,427 and $419,045. That’s a little closer to the $600,000, but it is still far from the national average. Again buying a house doesn’t make sense with this metric.

Why are these two ratios important?

If the cost of buying a house is much more than the cost to rent one, people will likely realize the value of renting. Some people have bought into the myth that “renting is throwing away money”, but I always say that I’d rent a mansion in my preferred location for one dollar a year without batting an eye. Throwing away that dollar allows me to save and invest my other dollars. I think it’s only a matter of time before everyone realizes that and discards the conventional wisdom.

The second metric could be an indication of how people potentially paid too much for a house that their income couldn’t support. In other words, if a $83,000 income in other parts of the country supports a $350,000 home, what makes my location in California different?

What about affordability?

There’s another ratio called the affordability index. From what I’ve found it measures the actual monthly cost of the mortgage to take-home income. A number over 100 typically means that people have more than enough money for a median price home. A number less than a 100 typically means that they don’t have enough. According to the California Building Industry Association San Francisco and the peninsula have an affordability index of 16.6 as of Q3 2008 (PDF). But it’s on an uptrend… and in about 20 more quarters of similar gains, it might approach “affordability.”

It’s very possible that the rent vs. buy in this area of California never get back to the national levels. It seems that people are simply willing to pay more to live in this area of the country. Nonetheless, I can’t see the value of buying in this local market – yet. I’ll continue to evaluate the numbers, perhaps using this handy calculator of Buy or Rent from the New York Times.

What about you? Did you do this kind of analysis before you decided whether it was worth buying or not? I realize in much of the country the exercise won’t lead to the big difference I found. It’s still good practice to run the numbers to make sure.

Lower the Interest Rate on Your Mortgage Without Refinancing?

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On my trip to Boston a couple of weeks ago, I met up with a couple of my best friends from college. One is probably more into personal finance than me – but he’s just not the blogging type. He can dazzle with Excel and Quicken and probably could tell you exactly how much money he has to the penny with a single click. The other friend is a lawyer specializing in real estate. When I closed on my condo purchase, he was the guy I went to and it was smooth sailing.

Somehow, we got onto topics of the economy. We gabbed about the sub-prime crisis. They thought that the mortgage holders were to blame because it’s their responsibility to know what they can afford and not get sucked in a mortgage lender/salesman. I took a different view and thought it was the mortgage lender, because they are expert trying to explain a topic that most people are unfamiliar with (mortgages) and pushing them into more complex vehicles with escalating interest rates. The answer is that it’s probably a combination of the the two. It’s almost like a homerun in baseball, sometimes the hitter does a tremendous job of hitting a good pitch and sometimes the pitcher does a lousy job of pitching the ball making the hitter’s job easy… and there’s a lot of homeruns that fall in between those extremes.

We also got on the topic of mortgage rates. They are historically extremely low right now. I lamented that I couldn’t take advantage of the low rates. I had lost a lot of the equity on my home and if I tried to refinance I wouldn’t have the 20% down that mortgage lenders like to see – especially in this market. I am also self-employed (with a less than impressive income) which probably doesn’t make them light up with joy. Lastly, since I moved to California and now rent the Boston condo, it’s not owner-occupied – yet another thing that banks would like to see. That’s three pretty decent strikes against me if I’m looking to lower my rate from 5.875% to some of the 4.875% rates available today.

My lawyer/real estate guru friend told me the solution was simple. He asked me if I came up as self-employed or unemployed on credit reports (I admit that I don’t know this). He said that if I showed up as unemployed, it would be very easy to get a lower rate. I could simply call up the lender and tell them that the ecomony is bad and ask if they could lower the rate – no refinance or paperwork necessary. The theory is that lenders would rather give you a lower rate than risk not getting paid and having to deal yet another foreclosure.

What do you think? I think it sounds plausible and my source is rock solid. Still something sounds almost a little too good be true. Is this possible? Has anyone out there been in a similar situation and tried it?

Home Prices Continue to Fall

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CNN has an article about The National Association of Realtors saying that home sales dropped 8.6% in November. That’s a pretty steep drop for just one month. What I take from that is that this may be one of the best times to buy a home. Buyers have not only this information to negotiate with, but also the benefit of the winter off-season. Mortgage rates are low too – though you might have to have pristine credit to qualify for them.

This news of the home sales drop falls on the heels of Fortune announcing the 10 Worst Real-Estate Markets for 2009. Every year is going to have a 10 Worst Real-Estate Market (even if things are doing well), but some of the predicted drops are huge. Nine of them are projected to lose 20% or more and the 10th, Washington D.C. escapes by the slimmest of margins with a 19.9% projected drop.

It may surprise many that the Fortune list had 8 of the 10 worst markets in California. I always knew that California was expensive, but I didn’t expect it to dominate the list as much as it did. I figured that New York City may be in there as financial, premium fashion, and advertising businesses look to have a tough time next year (in my opinion – I have no objective proof of this).

This made me think, how is my rented-out condo in the Boston suburbs doing? I paid $278,000 for it in the summer of 2004. Zillow, which is very accurate for the property, lists it as currently worth $226,000. Ouch. Pain. Since October it’s dropped more than 13%. I’m actually close to being upside down on the mortgage that peaked at around $300,000 in the fall of 2005. For this reason, I can’t take advantage of cheap refinance rates unless I want to put another huge chunk of money into it to avoid private mortgage insurance (PMI). Sad.

If prices turn around instantly (fat chance) and resume a 5% gain that real estate has made in the past (over the long term), it will take me more than 4 more years for the value to catch up to what I paid for it. At that point, it will have been 9 years of home ownership for no gain. Let that be a reminder to all those who say “renting is throwing money away.”

Finovate Start-up: What Would You Ask Vestopia, SmartHippo and other companies?

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finovatestartup.gifThis Tuesday, I’m heading to Finovate Start-up hosted by Jim Bruene of NetBanker fame. There are a ton of companies presenting there. Some of the highlights that I’m looking forward to are Buxfer, Loanio (are they ever going to launch), Mint, Prosper, SmartyPig, Wesabe, Zecco, Zopa. I’m disappointed that Geezeo isn’t going to be there. Lending Club bowed out, which is reasonable considering their quiet period.

I’d like to single out Vestopia and SmartHippo (not to be confused with SmartyPig or my upcoming start-up SmarterBoar). These companies have contacted me for one-on-one interviews. I’ve been able to secure a time with Vestopia, but I’m still waiting to hear back from SmartHippo. Other companies have tried to set up meetings with me, but since I don’t know what to expect, I’m trying not to over-extend myself.

I could really use your help coming up with questions for Vestopia and SmartHippo. I’m not very familiar with them, other than what I read on their websites, so you can figure out what I can. As best I can tell, Vestopia let’s you follow what Investment Directors are buying and selling – alerting you about the trade right away within 15 seconds of them doing it. There is a whole community aspect to the site as well. SmartHippo seems to be a community reporting mortgage rates from community members. I look forward to finding the value that this community provides, I found that I did extremely well doing a search for mortgages on Bank Rate. Maybe I got a lucky though.

So if you have questions that you want me to ask these companies – or any others, leave a comment or contact me. If there’s a company that you’d like to know more about, let me know and I’ll try to attend their product demo.