How high can House prices go

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prettybogle
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How high can House prices go

Post by prettybogle » Tue Nov 06, 2018 10:40 pm

I am curious to learn how the dynamics of house prices work. From what I understand, banks can only give loan if the monthly mortgage is within the 30 - 40% of the debtor’s salary. So, for houses priced at 500k, the salaries have to be atleast 120k. For 600k, salaries atleast 150k and so on. In Nashville burbs - Franklin, Brentwood, average homes are 450k - 500k. With the interest rates rising, how high can these go ? Barring big tech relocations eg Amazon HQ2, are there any reasons why house prices can jump to 600k, 700k etc ? No body knows future but what could happen if we wait few more years before we buy ?

runner540
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Re: How high can House prices go

Post by runner540 » Tue Nov 06, 2018 10:44 pm

prettybogle, lenders are giving bigger loans on the same amount of income. Now 50%+ DTI is allowed, with very small down payments. That's one reason house prices have gone up faster than incomes and it can't/won't last forever. More info here if you want to learn: http://www.aei.org/publication/mortgage ... 2018-data/
Ultimately, shelter prices have to be aligned with incomes and rents, OR it has turned into a speculative financial asset.

AlohaJoe
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Re: How high can House prices go

Post by AlohaJoe » Tue Nov 06, 2018 10:51 pm

I dunno, I'd look at other countries and see how loans work in them if you want to extrapolate some kind of worst case.

No reason loans need to be 30 years. They could be 50. So how high do house prices go if you assume a 50 year mortgage and 50% of the salary goes to debt?

$120,000 salary pays for a $1,000,000+ home, right?

So I'd guess that prices could go up to at least that.

Or look at places like Sydney and Hong Kong and assume those are your comparables.

prettybogle
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Re: How high can House prices go

Post by prettybogle » Tue Nov 06, 2018 10:58 pm

AlohaJoe wrote:
Tue Nov 06, 2018 10:51 pm
I dunno, I'd look at other countries and see how loans work in them if you want to extrapolate some kind of worst case.

No reason loans need to be 30 years. They could be 50. So how high do house prices go if you assume a 50 year mortgage and 50% of the salary goes to debt?

$120,000 salary pays for a $1,000,000+ home, right?

So I'd guess that prices could go up to at least that.

Or look at places like Sydney and Hong Kong and assume those are your comparables.
Well this is what keeps us up at night. We have pretty good financial discipline (except hubby’s speculative trading losses - glad he is now investor and not trader). We want to maintain this but the only thing that is tempting us to take on 500k debt is this exact possibility. Regulations, lending standards can be easily tweaked to unleash unrealistic price jumps.

Slacker
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Re: How high can House prices go

Post by Slacker » Tue Nov 06, 2018 11:02 pm

I'd imagine the ceiling raises as you have more dual income households where each spouse makes close to six figures. Much easier for a household to make $200k than a single earner... And do on.

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bottlecap
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Re: How high can House prices go

Post by bottlecap » Tue Nov 06, 2018 11:09 pm

There's lots of money out there right now. Asset prices are up. Might get reined back in temporarily. Who knows?

JT
Last edited by bottlecap on Thu Nov 08, 2018 10:50 am, edited 1 time in total.

jminv
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Re: How high can House prices go

Post by jminv » Tue Nov 06, 2018 11:23 pm

prettybogle wrote:
Tue Nov 06, 2018 10:40 pm
I am curious to learn how the dynamics of house prices work. From what I understand, banks can only give loan if the monthly mortgage is within the 30 - 40% of the debtor’s salary. So, for houses priced at 500k, the salaries have to be atleast 120k. For 600k, salaries atleast 150k and so on. In Nashville burbs - Franklin, Brentwood, average homes are 450k - 500k. With the interest rates rising, how high can these go ? Barring big tech relocations eg Amazon HQ2, are there any reasons why house prices can jump to 600k, 700k etc ? No body knows future but what could happen if we wait few more years before we buy ?

Well this is what keeps us up at night. We have pretty good financial discipline (except hubby’s speculative trading losses - glad he is now investor and not trader). We want to maintain this but the only thing that is tempting us to take on 500k debt is this exact possibility. Regulations, lending standards can be easily tweaked to unleash unrealistic price jumps.
Didn't you already sign on a house and put 30k down on it?

Prices can go up or down for many other reasons than a income to debt ratio such as speculation, changes in interest rates, local economic factors, national economic factors, natural disasters, time of year, etc etc. I'd be a lot more worried about those than income to debt ratio changes.

It also sounds like you are bringing this up out of a fear of missing out if you don't close. In the long run, you would hope to have a positive return on an investment. The long run is just that, though, the long run. In between you can have all sorts of things happen. If you're going to be staying there for awhile, close on the house and just forget about it. It's the same idea with buy and hold investing.

Although you don't mention it as a worry here, there's also the possibility that your new home will decline in value. It's interesting that you're more focused on the fear of missing out (speculation basically) versus the fear of your new home declining in value. That's a bit of a red flag. You really shouldn't buy into something with the main reason being the fear of missing out on gains or because everyone else is doing it and getting rich or so and so says it's a good investment. I remember that you bought cryptocurrency late last year.

If you don't close, you will lose 30k. If you do close, you could either lose or gain some undetermined amount. Hopefully, when it comes to sell the house sometime in the long run, you have a gain and in the meantime you'll have an enjoyable home.

prettybogle
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Re: How high can House prices go

Post by prettybogle » Tue Nov 06, 2018 11:38 pm

jminv wrote:
Tue Nov 06, 2018 11:23 pm
prettybogle wrote:
Tue Nov 06, 2018 10:40 pm
I am curious to learn how the dynamics of house prices work. From what I understand, banks can only give loan if the monthly mortgage is within the 30 - 40% of the debtor’s salary. So, for houses priced at 500k, the salaries have to be atleast 120k. For 600k, salaries atleast 150k and so on. In Nashville burbs - Franklin, Brentwood, average homes are 450k - 500k. With the interest rates rising, how high can these go ? Barring big tech relocations eg Amazon HQ2, are there any reasons why house prices can jump to 600k, 700k etc ? No body knows future but what could happen if we wait few more years before we buy ?

Well this is what keeps us up at night. We have pretty good financial discipline (except hubby’s speculative trading losses - glad he is now investor and not trader). We want to maintain this but the only thing that is tempting us to take on 500k debt is this exact possibility. Regulations, lending standards can be easily tweaked to unleash unrealistic price jumps.
Didn't you already sign on a house and put 30k down on it?

Prices can go up or down for many other reasons than a income to debt ratio such as speculation, changes in interest rates, local economic factors, national economic factors, natural disasters, time of year, etc etc. I'd be a lot more worried about those than income to debt ratio changes.

It also sounds like you are bringing this up out of a fear of missing out if you don't close. In the long run, you would hope to have a positive return on an investment. The long run is just that, though, the long run. In between you can have all sorts of things happen. If you're going to be staying there for awhile, close on the house and just forget about it. It's the same idea with buy and hold investing.

Although you don't mention it as a worry here, there's also the possibility that your new home will decline in value. It's interesting that you're more focused on the fear of missing out (speculation basically) versus the fear of your new home declining in value. That's a bit of a red flag. You really shouldn't buy into something with the main reason being the fear of missing out on gains or because everyone else is doing it and getting rich or so and so says it's a good investment. I remember that you bought cryptocurrency late last year.

If you don't close, you will lose 30k. If you do close, you could either lose or gain some undetermined amount. Hopefully, when it comes to sell the house sometime in the long run, you have a gain and in the meantime you'll have an enjoyable home.
Yes we did sign on a house. We will be very happy if we live in the house for long time and eventually sell it for break even. Our worry is how we will deal with any possible stressful situations in between.

runner540
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Re: How high can House prices go

Post by runner540 » Tue Nov 06, 2018 11:40 pm

prettybogle wrote:
Tue Nov 06, 2018 11:38 pm
jminv wrote:
Tue Nov 06, 2018 11:23 pm
prettybogle wrote:
Tue Nov 06, 2018 10:40 pm
I am curious to learn how the dynamics of house prices work. From what I understand, banks can only give loan if the monthly mortgage is within the 30 - 40% of the debtor’s salary. So, for houses priced at 500k, the salaries have to be atleast 120k. For 600k, salaries atleast 150k and so on. In Nashville burbs - Franklin, Brentwood, average homes are 450k - 500k. With the interest rates rising, how high can these go ? Barring big tech relocations eg Amazon HQ2, are there any reasons why house prices can jump to 600k, 700k etc ? No body knows future but what could happen if we wait few more years before we buy ?

Well this is what keeps us up at night. We have pretty good financial discipline (except hubby’s speculative trading losses - glad he is now investor and not trader). We want to maintain this but the only thing that is tempting us to take on 500k debt is this exact possibility. Regulations, lending standards can be easily tweaked to unleash unrealistic price jumps.
Didn't you already sign on a house and put 30k down on it?

Prices can go up or down for many other reasons than a income to debt ratio such as speculation, changes in interest rates, local economic factors, national economic factors, natural disasters, time of year, etc etc. I'd be a lot more worried about those than income to debt ratio changes.

It also sounds like you are bringing this up out of a fear of missing out if you don't close. In the long run, you would hope to have a positive return on an investment. The long run is just that, though, the long run. In between you can have all sorts of things happen. If you're going to be staying there for awhile, close on the house and just forget about it. It's the same idea with buy and hold investing.

Although you don't mention it as a worry here, there's also the possibility that your new home will decline in value. It's interesting that you're more focused on the fear of missing out (speculation basically) versus the fear of your new home declining in value. That's a bit of a red flag. You really shouldn't buy into something with the main reason being the fear of missing out on gains or because everyone else is doing it and getting rich or so and so says it's a good investment. I remember that you bought cryptocurrency late last year.

If you don't close, you will lose 30k. If you do close, you could either lose or gain some undetermined amount. Hopefully, when it comes to sell the house sometime in the long run, you have a gain and in the meantime you'll have an enjoyable home.
Yes we did sign on a house. We will be very happy if we live in the house for long time and eventually sell it for break even. Our worry is how we will deal with any possible stressful situations in between.
Luckily for all of us, mortgages are not callable anymore (in the Great Depression, the banks could call the loan due in full if the collateral - the house- dropped in value). So as long as you can make your payments through any fluctuations in value, you are getting shelter and increasing network by paying off a loan. What's your specific concern?

prettybogle
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Re: How high can House prices go

Post by prettybogle » Tue Nov 06, 2018 11:54 pm

runner540 wrote:
Tue Nov 06, 2018 11:40 pm
Luckily for all of us, mortgages are not callable anymore (in the Great Depression, the banks could call the loan due in full if the collateral - the house- dropped in value). So as long as you can make your payments through any fluctuations in value, you are getting shelter and increasing network by paying off a loan. What's your specific concern?
What happens if we are not able to make payments?

jminv
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Re: How high can House prices go

Post by jminv » Wed Nov 07, 2018 12:00 am

prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
runner540 wrote:
Tue Nov 06, 2018 11:40 pm
Luckily for all of us, mortgages are not callable anymore (in the Great Depression, the banks could call the loan due in full if the collateral - the house- dropped in value). So as long as you can make your payments through any fluctuations in value, you are getting shelter and increasing network by paying off a loan. What's your specific concern?
What happens if we are not able to make payments?
You lose the house. You go back to renting something smaller.

If you're worried about not being able to make payments, you should buy a less expensive house and/or build up an emergency fund so you can weather such a possibility. The same issue exists for renting, though. If you can't make your monthly rent payment you will, after whatever time the state law requires, be evicted.

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JoMoney
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Re: How high can House prices go

Post by JoMoney » Wed Nov 07, 2018 12:14 am

It's all about supply and demand.
Some people lie about their ability to qualify for a mortgage.
There are investment firms and REITs getting into residential real estate rentals, so it's no all individual buyers.

I would expect sustainable rents, on the extremely high side, to be up to 40% of household incomes, and homes to be selling at up to 15x annual rent.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

TropikThunder
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Re: How high can House prices go

Post by TropikThunder » Wed Nov 07, 2018 12:20 am

prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
What happens if we are not able to make payments?
You know your mortgage payment doesn't go up if the house value goes up, right? It sounds like you feel the house will become more expensive if it's value increases.

OK, property tax will go up, but not the P&I on the mortgage.

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JoMoney
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Re: How high can House prices go

Post by JoMoney » Wed Nov 07, 2018 12:26 am

TropikThunder wrote:
Wed Nov 07, 2018 12:20 am
prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
What happens if we are not able to make payments?
You know your mortgage payment doesn't go up if the house value goes up, right? It sounds like you feel the house will become more expensive if it's value increases.

OK, property tax will go up, but not the P&I on the mortgage.
^ hopefully locked in a fixed rate mortgage ... lots of people got in trouble with ARMs
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

AlohaJoe
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Re: How high can House prices go

Post by AlohaJoe » Wed Nov 07, 2018 12:38 am

JoMoney wrote:
Wed Nov 07, 2018 12:14 am
I would expect sustainable rents, on the extremely high side, to be up to 40% of household incomes, and homes to be selling at up to 15x annual rent.
In one state in Australia,

"Borrowers in NSW were most at risk, with repayments for the average household taking up 40 per cent of their income"

So 40% seems like a pretty good guess. But that's an average, so many will be over 40%.

"Its figures showed Sydney property owners typically spend 48 per cent of their annual household income paying off their mortgages."

TropikThunder
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Re: How high can House prices go

Post by TropikThunder » Wed Nov 07, 2018 12:48 am

AlohaJoe wrote:
Wed Nov 07, 2018 12:38 am
JoMoney wrote:
Wed Nov 07, 2018 12:14 am
I would expect sustainable rents, on the extremely high side, to be up to 40% of household incomes, and homes to be selling at up to 15x annual rent.
In one state in Australia,

"Borrowers in NSW were most at risk, with repayments for the average household taking up 40 per cent of their income"

So 40% seems like a pretty good guess. But that's an average, so many will be over 40%.

"Its figures showed Sydney property owners typically spend 48 per cent of their annual household income paying off their mortgages."
According to Fannie Mae, they increased the max DTI ratio to 50% since their studies showed that borrowers at higher DTI were statistically no more likely to default than borrowers at lower DTI.
The decision came on the heels of a study that concluded higher DTI ratios don't increase the rate of mortgage default. Fannie Mae researchers examined over 15 years of data from borrowers with DTI ratios between 45 and 50 percent. They found that many of these borrowers had good credit and were not likely to default. This change is a big deal, because according to the Washington Post, a too-high DTI is the most common cause of mortgage denial.
https://www.linkedin.com/pulse/fannie-m ... erdichian/
(I couldn't find a link to the Fannie Mae announcement itself).

Note this says nothing about whether such a high DTI is advisable, just whether or not Fannie Mae allows it.

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Watty
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Re: How high can House prices go

Post by Watty » Wed Nov 07, 2018 12:48 am

One thing about bubbles is that they often go on for longer and get higher than a rational person would think possible.
prettybogle wrote:
Tue Nov 06, 2018 10:40 pm
I am curious to learn how the dynamics of house prices work.
Another thing to consider is that over time that not only do home prices change but the size and features of the house also change too. In most areas home sizes have gotten a lot larger over the last 50 years or so if look at a graph of the average home price over time it can be misleading.

They also very by region. For example in many areas in California like the Bay Area the average house it not only very expensive but it they are also very small. In many areas here in Atlanta the opposite true since the average home price is moderate, but they tend to be huge. It would be easy to to look at the average house price in Atlanta and compare it to the Bay Area and think that they are X times as expensive there but that would be comparing apples to oranges since the same house would cost many times more.

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unclescrooge
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Re: How high can House prices go

Post by unclescrooge » Wed Nov 07, 2018 3:02 pm

JoMoney wrote:
Wed Nov 07, 2018 12:26 am
TropikThunder wrote:
Wed Nov 07, 2018 12:20 am
prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
What happens if we are not able to make payments?
You know your mortgage payment doesn't go up if the house value goes up, right? It sounds like you feel the house will become more expensive if it's value increases.

OK, property tax will go up, but not the P&I on the mortgage.
^ hopefully locked in a fixed rate mortgage ... lots of people got in trouble with ARMs
No, people got in trouble with negativly amortizing loans.

People with ARMs actually saw their payments decline as interest rates declined over the past 35 years.

But now interest rates are increasing, that's another story.

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unclescrooge
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Re: How high can House prices go

Post by unclescrooge » Wed Nov 07, 2018 3:04 pm

AlohaJoe wrote:
Wed Nov 07, 2018 12:38 am
JoMoney wrote:
Wed Nov 07, 2018 12:14 am
I would expect sustainable rents, on the extremely high side, to be up to 40% of household incomes, and homes to be selling at up to 15x annual rent.
In one state in Australia,

"Borrowers in NSW were most at risk, with repayments for the average household taking up 40 per cent of their income"

So 40% seems like a pretty good guess. But that's an average, so many will be over 40%.

"Its figures showed Sydney property owners typically spend 48 per cent of their annual household income paying off their mortgages."
Wonder what it is in Hong Kong?

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Boomer01
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Re: How high can House prices go

Post by Boomer01 » Wed Nov 07, 2018 3:20 pm

The prices of homes will continue to rise (not assuming an inflated market correction) due to the cost of materials and labor of new construction rising. Used home values increase as the cost of new construction and land increases.

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willthrill81
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Re: How high can House prices go

Post by willthrill81 » Wed Nov 07, 2018 3:28 pm

I'm reminded of a saying I heard growing up.

"Real estate is expensive when you're young and outrageous when you're old."

That being said, real estate values (in inflation-adjusted dollars) cannot grow faster than wages over the long-term (though this can happen for a quite a while). If it did, eventually no one would be able to buy anything.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Smorgasbord
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Re: How high can House prices go

Post by Smorgasbord » Wed Nov 07, 2018 3:37 pm

Supposedly, the 280 acre Royal Palace in Tokyo was once valued at more than the entire state of California...so real estate prices can get stupid high in a bubble.

Jack FFR1846
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Re: How high can House prices go

Post by Jack FFR1846 » Wed Nov 07, 2018 3:43 pm

Don't forget that many people buying a house are not first time buyers, struggling for a down payment. A family who is relocating might be bringing a 30% down payment with them from the sale of their previous house.
Bogle: Smart Beta is stupid

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ray.james
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Re: How high can House prices go

Post by ray.james » Wed Nov 07, 2018 5:00 pm

Also there are many countries where 40 year mortgages are also a good share of total mortgages. There are several ways the financial industry will cope with it to continue lending in their own interest.

We are not in a bubble though.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

runner540
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Re: How high can House prices go

Post by runner540 » Wed Nov 07, 2018 5:09 pm

Jack FFR1846 wrote:
Wed Nov 07, 2018 3:43 pm
Don't forget that many people buying a house are not first time buyers, struggling for a down payment. A family who is relocating might be bringing a 30% down payment with them from the sale of their previous house.
Median down payment for repeat buyers is only 10%, ALL buyers is 5% and first time buyers is 3%
The research linked in my post above.

prettybogle
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Re: How high can House prices go

Post by prettybogle » Wed Nov 07, 2018 7:11 pm

Thanks y’all for helpful thoughts. DH and I are brainstorming heavily on what we should do. We feel like we have these options:
1. Go ahead and close the $545k house that we paid $30k so far
2. Back out of $545k house and sign up for $320k brand new townhome. The townhome is in the almost the same area that the house is in.
3. Back out of $545k house, take a deep breath, search for few months for homes that are less than 400k. The problem we see with this is there are not many decent houses in that range and even if there are, they will be old and we are concerned about maintenance costs, resale etc.
This is turning out to be much harder decision than we thought. We also realized that numbers look pretty on paper but it is much harder to take the commitment to pay those bills every month. We welcome any thoughts.

adamthesmythe
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Re: How high can House prices go

Post by adamthesmythe » Wed Nov 07, 2018 7:34 pm

The "affordability" measure doesn't tell the whole story. There can be societal changes (multiple generations in a single house); purchases by foreign investors; necessity of a substantial inheritance to buy; maybe even taking in boarders.

Having said that- poor affordability tends to be local- over the long term sometimes people and/ or jobs move.

Redfactor
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Re: How high can House prices go

Post by Redfactor » Wed Nov 07, 2018 7:49 pm

My wife and I bought our first home a couple years ago and we stretched to get into a home in an area we liked and a home we can grow with. It was scary to have that size payment due every month, and it has proven to be a strain. That said, each promotion and salary adjustment has made it more and more manageable.

I don’t know if I would change anything looking back, despite not having money for travel vacations and not being able to afford fully furnishing to high standards. We always had food on table and maxed retirement accounts. Where we felt the pinch was buying work attire and eating out.

I think it’s a personal decision on what, if anything, you are willing to sacrifice for the home. If you’d rather have vacations and the townhome, then that’s likely your answer.-

That said, 30k is a lot of money to walk away from given the cost of the home....

dknightd
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Re: How high can House prices go

Post by dknightd » Wed Nov 07, 2018 7:57 pm

prettybogle wrote:
Wed Nov 07, 2018 7:11 pm
Thanks y’all for helpful thoughts. DH and I are brainstorming heavily on what we should do. We feel like we have these options:
1. Go ahead and close the $545k house that we paid $30k so far
2. Back out of $545k house and sign up for $320k brand new townhome. The townhome is in the almost the same area that the house is in.
3. Back out of $545k house, take a deep breath, search for few months for homes that are less than 400k. The problem we see with this is there are not many decent houses in that range and even if there are, they will be old and we are concerned about maintenance costs, resale etc.
This is turning out to be much harder decision than we thought. We also realized that numbers look pretty on paper but it is much harder to take the commitment to pay those bills every month. We welcome any thoughts.
I think second guessing is common. I'd go forward with your plan. Unless something has changed that we do not know about.

Dottie57
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Re: How high can House prices go

Post by Dottie57 » Wed Nov 07, 2018 8:55 pm

Prettybogle,

This thread is from the forum during April 2018

viewtopic.php?f=2&t=248214&p=3902780#p3902780

I am curious as to-why you decided to purchase. Did something in your circumstances change?

TropikThunder
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Re: How high can House prices go

Post by TropikThunder » Wed Nov 07, 2018 11:00 pm

Dottie57 wrote:
Wed Nov 07, 2018 8:55 pm
Prettybogle,

This thread is from the forum during April 2018

viewtopic.php?f=2&t=248214&p=3902780#p3902780

I am curious as to-why you decided to purchase. Did something in your circumstances change?
And that thread references a prior one asking essentially the same question in summer 2017.
viewtopic.php?f=11&t=222233

The consistently stated fear is that home prices will run away from them before they can buy (that and peer pressure + FOMO). We don't seem to be making any progress .....

Valuethinker
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Re: How high can House prices go

Post by Valuethinker » Thu Nov 08, 2018 4:00 am

prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
runner540 wrote:
Tue Nov 06, 2018 11:40 pm
Luckily for all of us, mortgages are not callable anymore (in the Great Depression, the banks could call the loan due in full if the collateral - the house- dropped in value). So as long as you can make your payments through any fluctuations in value, you are getting shelter and increasing network by paying off a loan. What's your specific concern?
What happens if we are not able to make payments?
That is a function of loss of employment income. Assuming you could make the mortgage when you bought the house, you will be able to make the payments as you go along.

So if one of you becomes ill and is unable to work/ loses job, then you have a problem.

Therefore one should have disability insurance related to one's occupation. As well as adequate term life insurance. And medical insurance which protects against catastrophe (sorry I am not American so I don't know much about that). You can't really insure unemployment *but* you can sell your house.

Negative equity becomes a problem when you need to sell/ move. Depending on which US state, as I understand the law there, in some states you can sell for less than the mortgage and walk away from the remaining debt (?short sale?). In Canada or the UK (with the possible exception of Alberta?) that's not the case - the debt is personal.

Walkure
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Re: How high can House prices go

Post by Walkure » Thu Nov 08, 2018 10:08 am

AlohaJoe wrote:
Tue Nov 06, 2018 10:51 pm
I dunno, I'd look at other countries and see how loans work in them if you want to extrapolate some kind of worst case.

No reason loans need to be 30 years. They could be 50. So how high do house prices go if you assume a 50 year mortgage and 50% of the salary goes to debt?

$120,000 salary pays for a $1,000,000+ home, right?

So I'd guess that prices could go up to at least that.

Or look at places like Sydney and Hong Kong and assume those are your comparables.
I feel like there is a limit to this effect, though. Most of these pricey European and Asian areas have had near zero or even negative sovereign interest rates recently. At the positive and rising commercial rates that American homebuyers face, extending a mortgage from 30 to 40 or 50 years might lower the payment slightly, but it also increases the proportion of interest to principal over the life of the loan. In theory this would make home values even more sensitive to downward pressure from rising rates. The total cost of home financing might go up, but the idea of an upper bound related to income still holds.

AlohaJoe
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Re: How high can House prices go

Post by AlohaJoe » Thu Nov 08, 2018 10:16 am

Walkure wrote:
Thu Nov 08, 2018 10:08 am
I feel like there is a limit to this effect, though. Most of these pricey European and Asian areas have had near zero or even negative sovereign interest rates recently.
I don't think this is true. I quoted Australia, which hasn't had zero interest rates. Same for Hong Kong and Singapore. The existence of numerous counter examples makes me think low interest rates is not an important factor.

engin33r
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Re: How high can House prices go

Post by engin33r » Thu Nov 08, 2018 10:36 am

Bigger issue with new construction is that the value almost certainly declines in the first 5 years...you are paying a premium for brand-new and getting to specify finishes and all of the upgrades are overpriced for that reason. In my nearly-finished neighborhood in an in-demand suburb north of Atlanta, homes that have been resold are selling for ~7-8% less than their purchase price 1-3 years prior.

prettybogle
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Re: How high can House prices go

Post by prettybogle » Mon Nov 12, 2018 9:09 pm

We are seeing in the neighborhoods around here that some of the sellers are named XYZ revocable trust etc. They bought houses in last few years and selling now - may be this is house flipping ?

AlphaLess
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Re: How high can House prices go

Post by AlphaLess » Mon Nov 12, 2018 9:50 pm

TropikThunder wrote:
Wed Nov 07, 2018 12:20 am
prettybogle wrote:
Tue Nov 06, 2018 11:54 pm
What happens if we are not able to make payments?
You know your mortgage payment doesn't go up if the house value goes up, right? It sounds like you feel the house will become more expensive if it's value increases.

OK, property tax will go up, but not the P&I on the mortgage.
These expenses will likely go up:
- property taxes,
- utilities (water, sewer, electric, gas, trash, etc),
- maintenance / up-keep,

Also, you may need to make period improvements so as to maintain the value of the shelter.
"You can get more with a kind word and a gun than with just a kind word." George Washington

jminv
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Re: How high can House prices go

Post by jminv » Mon Nov 12, 2018 9:57 pm

prettybogle wrote:
Mon Nov 12, 2018 9:09 pm
We are seeing in the neighborhoods around here that some of the sellers are named XYZ revocable trust etc. They bought houses in last few years and selling now - may be this is house flipping ?
More like the homeowners are passing away and the heirs to the trust are selling...or half of the couple passed away and the other is moving into something smaller or the homeowners are going into assisted living or moving closer to family. Revocable (living) trusts are popular for estate planning. Even if some flippers were selling what would it matter? People sell all the time for all sorts of different reasons with most of those reasons being unconnected to timing the housing market. None of them have a magic ball.

Sounds like you want to time the housing market.

Valuethinker
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Re: How high can House prices go

Post by Valuethinker » Tue Nov 13, 2018 9:50 am

Walkure wrote:
Thu Nov 08, 2018 10:08 am
AlohaJoe wrote:
Tue Nov 06, 2018 10:51 pm
I dunno, I'd look at other countries and see how loans work in them if you want to extrapolate some kind of worst case.

No reason loans need to be 30 years. They could be 50. So how high do house prices go if you assume a 50 year mortgage and 50% of the salary goes to debt?

$120,000 salary pays for a $1,000,000+ home, right?

So I'd guess that prices could go up to at least that.

Or look at places like Sydney and Hong Kong and assume those are your comparables.
I feel like there is a limit to this effect, though. Most of these pricey European and Asian areas have had near zero or even negative sovereign interest rates recently.
Complicated. In the Eurozone I don't know of any obvious "bubble" markets - even though risk free interest rates are negative. Your valuation outliers are London & SE UK -- where sterling mortgage rates are 3-4%, risk free rate is 1.6% ish. And Stockholm which really does have negative interest rates (haven't checked the Swedish 10 year bond in a while).

Asia I think the nominal interest rates are positive

At the positive and rising commercial rates that American homebuyers face, extending a mortgage from 30 to 40 or 50 years might lower the payment slightly, but it also increases the proportion of interest to principal over the life of the loan. In theory this would make home values even more sensitive to downward pressure from rising rates. The total cost of home financing might go up, but the idea of an upper bound related to income still holds.
[/quote]

Scrapr
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Re: How high can House prices go

Post by Scrapr » Tue Nov 13, 2018 11:13 am

engin33r wrote:
Thu Nov 08, 2018 10:36 am
Bigger issue with new construction is that the value almost certainly declines in the first 5 years...you are paying a premium for brand-new and getting to specify finishes and all of the upgrades are overpriced for that reason. In my nearly-finished neighborhood in an in-demand suburb north of Atlanta, homes that have been resold are selling for ~7-8% less than their purchase price 1-3 years prior.
sounds like a lot of the decline could be attributed to Realtor costs

engin33r
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Re: How high can House prices go

Post by engin33r » Tue Nov 13, 2018 11:41 am

Scrapr wrote:
Tue Nov 13, 2018 11:13 am
engin33r wrote:
Thu Nov 08, 2018 10:36 am
Bigger issue with new construction is that the value almost certainly declines in the first 5 years...you are paying a premium for brand-new and getting to specify finishes and all of the upgrades are overpriced for that reason. In my nearly-finished neighborhood in an in-demand suburb north of Atlanta, homes that have been resold are selling for ~7-8% less than their purchase price 1-3 years prior.
sounds like a lot of the decline could be attributed to Realtor costs
I don't think so. Even if the resale price stays the same or increases, you'll still take the 8%-10% transaction haircut there. What I see is a decline in the ultimate resale price because the original sales price from the builder was inflated.

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nedsaid
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Re: How high can House prices go

Post by nedsaid » Tue Nov 13, 2018 11:49 am

In my metropolitan area, there are signs that residential real estate is cooling off. Rents actually decreased here a bit this year. Still a good Real Estate market here, just not red hot.
A fool and his money are good for business.

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