Randy_H's Q&A

I'm still waiting to hear more about this wonderful, miraculous "tax shield" our friend Diego claims all his colleagues are enjoying.Please, elucidate us.I know my current land"lord" is enjoying quite a tax shield.  Though by "tax shield", I mean, "blatant tax fraud".But hey, if everyone else is doing it...

Most people pay the cost of acquiring and selling a house multiple times in a decade, not just once every 10-20 years. That should also figure into the total cost of ownership, but it is usually completely overlooked by the RE industry.Say it ain't so.  lol.  You mean they don't highlight the fact you're forking out tens of thousands every time you buy, and every time you sell?  Oh wait.  They tell you that the commissions are "paid by the seller".  Uh huh.  Right.  Last time I checked, the only one writing a check at close is the BUYER.  Thus the word, "buyer". 

if you want to paint a room in purple polka dots, you can.  Or, perhaps you want to set up a workshop or run a small business.  Very often, landlords won't allow things like that.  Know why you want to buy so that you can choose a place that'll likely meet your needs for a decade.lol Spleng.By the way David, you *can* paint your rented room in purple polka dots, if your mental instability is so inclined.  They can also run a home business, so long as it doesn't violate the same zoning which applies to home owners in that zone.  Brush up on tenants rights.  Landlords aren't actually "lords".  The term is a bit old, though I know it might be confusing.  I am astounded to find out how many people renting out domiciles are misinformed about what they can limit, charge, or expect from their tenants.  As for planning for a decade?  I'm happy you think you have enough clairvoyance to do so with certainty.  The rest of us move an average of once every 5-7 years (yes, the real US average), almost always due to work-related causes.

As far as income-to-price in the Bay Area:  I can't speak for San Francisco or Marin from direct experience, given our homes have been on the Peninsula.  But when we first bought in 96 on the Peninsula, we paid 2.2x our income.  We were on the conservative side, but back then you had to have 20% down, or 10% down with 10% piggy back.  Interest rates were about 8.5% for jumbos.  Buyers had to **prove** that all their downpayment came from them, and not from borrowed sources, gifts from parents, etc.  You could use daddy's money to buy, but not to qualify.  You actually had to prove you could pay for the place on your own (or you had to get daddy to cosign).  Imagine that.Most people I knew were about 3.0x income, and the "crazy" folks went closer to 3.5x.By 2000 people were saying the Bay Area had always cost 5.0x or more.  I thought that was funny, given 4 years prior that wasn't the case.  Shows how quickly deluded people can become.  Of course, by 2005 people were paying 12x-15x income, and singing like the party would never end.Excuse me and others who are laughing about that now.  Yes, David, I do have a bone to pick with someone out there.  That someone is all those who contributed to this orgy of irresponsibility, and more recently, to those who continue to defend the idiocy.

My best guess is to refer to the analysis I did in 2005 which i thought was way too pessimistic then, but seems to be holding up now.  I took the Case Shiller data (the famous graph everyone has seen by now) and did and fit the curves of the two most recent real estate cycles onto the current peak (which wasn't quite done yet when I first did the analysis).  That showed two different paths down to the trend line, in 2011 and 2012 respectively.Some caveats:  historical data is what it is, just a guide of what's been possible in the past.  I did not plot overcorrection factors, which would show a true "bottom" would occur later than those dates.  How long and deep the overcorrection is a lot harder to tell than my simple analysis.  You have to go back to 1906-1930 data to find real, serious overcorrection data.  And I'm not as sure that's as relevant to today.

Regardless, all I have to ask is a very simple question -- the one which my model produces as an output (it doesn't pretend to tell you whether to buy or not):  Will the next guy I sell to in N years be able to pay $X, given that implies he has to be making $Y/year in salary, just for me to break even?When many people ran those numbers for my area (Marin Cty, CA), the answer was buying a home for $1.5mm meant you'd have to sell it for over $3mm to a guy making over $700K/year in 10 years, just to break even compared to having rented an equivalent place for 10 years, including all tax effects, private schooling costs, loss of "intangibles", etc.Even today, that value isn't much better.  And I don't know about you, but where I'm at people aren't likely to see their salaries quadruple anytime soon.Affordability.  Affordability.  Affordability.  Those are the first three most important factors in real estate today. 

DavidI am not a securities analyst.I do not evaluate home buying as a purely financial decision.  In fact, I created a peer-reviewed, open model for evaluating buying a home which factors in all those beloved intangibles you cite.  In fact, there are no "intangibles".  Everything is measurable.  Further, most people psychologically do measure "intangibles" through a process known as "mental accounting".  I suggest you read up on the subject before making assumptions about what the basis for my arguments are.The amount of time you spend in the home does not alleviate the opportunity cost pain.  Even if you place a large value on intangibles, the sensitivity of those variables in the equation is small compared to the purchase price.  It is a non-linear equation, and at high entry-prices, the only sensitive variable is that entry price.  Period.You are welcome to follow links to my blog, download the model, and contribute your criticisms along with the many others who've done so over the past many years.

Look up the title data on the owner, and see if they've taken out any new loans against the place.When your lease comes due, demand a 10% rent *decrease*.  You've been paying them for 10 years, their inertia is high.  Show them Craigslist posts of better places for less/month than you're asking for in reduction.  (Copy the CL posts into another place so you don't lose them when they expire.  Start doing it now.)Be prepared to move.  Moving is good, it makes you throw away old crap you don't need anymore anyway.Lastly, never buy a home you've rented.  It won't work out.  There's a reason:  you have more information about the home than any other potential buyer.  You know everything wrong with it.  The owner can almost always sell it for more to someone with less specific information than you.  Just realize that, and go buy a nice REO from a bank.  You'll be happier for it.

Interest rates are at all time lows as well as prices in some areas. Red Flag #4:  "Interest Rates."  Look at data from the 1970s.  Then come back with this argument.  Not as though real estate salespeople care about data, however.  The question they want to ask is "howmuchamonth?"Despite the gloomy media predictions, Red Flag #5:  "The Media."  As a rule, you can say that whenever someone blames "the media" they have no argument.  The media just reflects what oozes from the orifices of groups like the NAR, the rest is just a mirror of ourselves.  A wise person once said, "when they say it's not about the money, well, it's about the money..."it is the perfect market for buyers especially buyers like yourself that do not have a home to sell before they buy.Red Flag #6:  "The Closer."  Just reread the above about 10 times.  Then go rent Glengarry Glen Ross.  Watch it 3 times.  Then you'll be prepared to deal with used house salespeople on even or greater terms.  You'll be surprised.  Most aren't even that good of salespeople and wouldn't last 10 days at a Honda dealership.

Use House Salesperson Warning Indicators:  A Field GuideThe answer to this question depends on what the market conditions are in the area that you live in as well as what your motivations are to buy. Red Flag #1:  "It's all local."  As if that somehow negates regional, national and even global factors that affect everyone's access to credit, real interest rates, opportunity costs, and real incomes.BUT if you are looking to buy your dream home for the long term then this is one of the best times to buy. Red Flags #2&#3:  "Dream Home."  Cheap appeals to emotion; as if a hazy, idyllic daydream excuses making an epic financial blunder."The Long Term."  People with realtor "licenses" are not required to understand basic finance.  As such, most fail to grasp the concept of opportunity costs, or how those accrue over time.  You're actually *worse* off if you overpay and hold for the long-term.