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Advice on helping sellers to price properly
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AgentGrn



Joined: 28 Sep 2006
Posts: 82

PostPosted: Sun Feb 04, 2007 7:30 pm GMT    Post subject: By the ratio ... Reply with quote

... 7x income to get into a house is a trip into insanity ... even with lower interest rates.

It'll be an interesting year for sure with the next wave of foreclosures hitting, interest rates possibly rising, and more boomers retiring and having a tough time downsizing. Should be a good year for those of us sitting on the fence.
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JCK
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PostPosted: Mon Feb 05, 2007 3:30 pm GMT    Post subject: Reply with quote

What is differential in monthly cost between buying the town home and renting one, factoring in the mortgage tax deduction, etc?
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Feb 05, 2007 4:21 pm GMT    Post subject: Reply with quote

That 7.5 times household salary doesn't sound right.

I just ran the numbers for my scenario and if we did 7.5 times our income the mortgage and taxes would be greater than the entire amount we would take home (after taxes and including the mortgage and property tax deduction).

Keep in mind, greater house price usually means greater property taxes.

If "C" is the limit, Dick takes home "A" and Jane takes home "B". A+B can't be greater than "C". Unless they have a bunch of other earners kicking in I don't know how they swing it. Because this is the average, I'm skeptical.

What this might be pointing out is a few different scenarios:
First, the reason why the average salary and price may be way off is because either most people either rent or they have bought their homes several years ago at a much lower price. Take for instance the babyboomers that are within 0 to 15 years of retirement. They bought their homes like 20 years ago (they got married and bought homes at a much younger age) So if the babyboomers are weighting the average salary higher because they are older and earn more and they bought their home a long time ago and typically aren't the profile house buyer (more of a seller's profile). hmm this doesn't prove my point, because the higher they weight the average salary, the median house price should actually lower because the profile of the buyers is that they are younger, earn less. This either doesn't sound right or the situation is worse than I thought.

There is not second thought and I think my first thought got tangled up. Help...
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Mon Feb 05, 2007 5:03 pm GMT    Post subject: Reply with quote

Quote:

That 7.5 times household salary doesn't sound right.

Indeed. Here are some possible explanations:

  • Prevalence of liar loans (aka, stated income loans). I know the popularity of these loans has exploded in some parts of the US - I'm not sure about Massachusetts in specific. There's an anecdotal USA Today article on Casey Serin which shows how these loans are a potential time bomb.
  • Option ARMs and/or interest only loans. Did you run your numbers using a 30 year fixed mortgage? People can supposedly stretch further using option ARMs and interest only loans, although in reality that only delays for a few years the day when A + B has to be greater than or equal to C.
  • Buying property in order to rent it out. The rental income would go toward the monthly expenses, but it wouldn't be included in the income preceding the purchase, so maybe a high multiple would make sense if everybody bought property at the same time with the intent of being a landlord. This situation isn't sustainable for very long either.
  • Interest rates have risen somewhat. Maybe 7.5X income would have been possible for you when interest rates were lower. I have my doubts here too because rates are still pretty low.

None of these scenarios are particularly optimistic.

- admin
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BosKat
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PostPosted: Mon Feb 05, 2007 5:24 pm GMT    Post subject: Advice on helping sellers to price properly Reply with quote

Just came across this forum and it is somewhat of a relief to know that others are facing the same issues. My husband and I have been looking for a house in Natick since last July. We would like to start a family and cannot do so in our Brighton apartment mainly due to the drunk college students screaming on their balconies and in the street. Targeting Natick because of the good school system and since my parents live in nearby Framingham and could help with child care.

We had the crazy idea that $400,000 would get us a nice, 1500 sq ft., 3 bedroom house with basement space for a home office in Natick (I work from home). We were terribly wrong. Just about everything that we've seen between $350 - $400,000 has been junk (old wiring, asbestos, unheated rooms, not structurally sound, etc.) We found a home that has been on the market for almost a year now at $455,000 and made a reasonable offer of $420,000 (a bit above our price range) - it was flat out rejected. Saw another home last week that is going for $450,000 with a very small yard, located next to the commuter rail tracks (fine if you love to see and hear trains every 15-20 min). The realtor was bragging to us that he sold the house across the street last year for over $500,000. Thought to myself "sorry buddy, we're not this year's suckers."

We are now waiting it out. I just can't possibly believe that things can go up any more. Hoping all of the people in our situation will also wait it out too and give the sellers a bit of a reality check this spring.
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Mon Feb 05, 2007 5:40 pm GMT    Post subject: Reply with quote

john p,

To add to my previous post, there is also the issue that not everybody owns a home. Presumably, there would be a disproportionate number of non-owners in the lower income segments because they have less of a choice in whether to buy or not (that is without making other life changes - income is of course a function of career choice). Consequently, the median income for all Massachusetts households is probably a little lower than the median income for home buyers. So, the observed ratio of income to prices should probably be adjusted downward before using it as a rule of thumb in what to buy. I don't know how much of an adjustment would be necessary, but I would guess that it wouldn't be too much because the home ownership rate is at a historical high (at least nationally), because there are plenty of non-owners who aren't poor, and because the bell curve is highest in the middle so including more people probably wouldn't require much of an increase in income. This is a guess, however.

- admin
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Feb 05, 2007 6:40 pm GMT    Post subject: averaging Massachusetts Reply with quote

The other things regarding the 7.5 are that we may be averaging Massachusetts as a whole (less expensive west of Worcester with Brookline conditions etc.)

Could another thing be that the growing number of retired people could lower the median salary/income? You know I thought I had 10 percent of this stuff figured out and now I feel like it's really only 1 percent... Smile
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john p



Joined: 10 Mar 2006
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PostPosted: Mon Feb 05, 2007 7:09 pm GMT    Post subject: BosKat Reply with quote

BosKat

Realtors are trying to "match" right now. It is early in the Spring season and the biggest wave of buyers come in the next few months. A seller may be hopeful and hold out for the gung-ho buyer. The realtor may be trying to determine if you are a moron by saying moronic things and to see if you bobble-head and say "dah-ya-ok". If he/she thinks you're an easy prey they will ride you pretty hard.

That's what "players" do at the bars, they say things that push the limits with girls so they can tell if a girl is easy or not. If a girl doesn't respect themselves, the player is happy. Some girls are drawn to guys that treat them poorly so there is a market for the players.

The more the realtors give you the business, the more you should look for another seller. Sellers and listing agents do get desperate and will tell you "we're desperate and all offers considered". I wouldn't waste my time with a stubborn seller. There are nice houses that go on the market all the time so if you loose a few, don't worry.

Again, the life cycle of a seller is gung-ho now to about March, then they become more reasonable through May, but after say July/August they will play ball for sure.

If you don't own anything and you have some flexibility, your value for flexiblity will not provide you anything unless you time the desperation/ got to get move for the school year cycle.

Lastly, I have never seen this website get this much traffic over the course of the past year, so it tells you how much people have interest in buying this time of year. I bought my winter jacket and skis in August and got an awesome deal. Finding a parking spot the day after Thanksgiving....
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Realty Realist
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PostPosted: Tue Feb 06, 2007 2:33 am GMT    Post subject: Open Houses Reply with quote

I have been lurking on this and other RE blogs for some time. It is nice to see the traffic picking up here. My wife and I moved here in May and were appalled by the housing prices and have decided to rent until the fundamentals say otherwise. Renting and having to move more often is a pain, but it beats losing 10's or 100's of thousands just to have a place to hang your hat.

I am now even more appalled to see that many people are biting the bate on some houses that are now on the market. We went to several open houses over the past two weeks where they already had offers. We went to another where it was like 2004, people fighting to get into the house and snarling at other prospective buyers. Admittedly this was in Newton where people tend to snarl for no good reason.

I am wondering how some of you read this increased activity and what appears to be increased sales and if you have seen the same type activity in your areas. I see this as a dead cat bounce that will probably continue for a month or two with a steady decline over the summer. I also think that a lot of this is generated by the fact that everybody now uses a buying agent, and the buying agents can't really afford to tell people that it is best to wait for a year or two to see where the market goes.

Any thoughts,

RR
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teboston
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PostPosted: Tue Feb 06, 2007 1:46 pm GMT    Post subject: yes, time Reply with quote

I've had very similar experiences to mdp22 recently. Uncanny, actually. I think some owners and agents are in denial, and some are hoping they can find that one last person to buy at the inflated price before the spring selling season exposes the reality of the market. To answer the question: Yes, time is the only cure.
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mdp22



Joined: 28 Jan 2007
Posts: 4

PostPosted: Tue Feb 06, 2007 2:40 pm GMT    Post subject: Reply with quote

JCK wrote:
What is differential in monthly cost between buying the town home and renting one, factoring in the mortgage tax deduction, etc?


At the price I'm willing to pay (supported by recent sales), the gross monthly difference between rent on a 1-year-old apartment with the same beds/baths but 60% of the square footage as the 20-year-old townhouse and the principal+interest+taxes+condofee assuming a 10% down payment is $400 at the price I am willing to pay and $700 at the sellers' insane "final offer" price. (80% financed as 30-year fixed @6.125%; 10% financed as 20-year-fixed equity loan @7.75%)

The net monthly difference considering the federal tax break (for the first year) is a wash (<$50 difference) at the price I am willing to pay and $200 at the sellers' price. (I am not considering the loss of the MA-renter's deduction; that effect is fairly small.)

The tax break of course shrinks a bit every year (less interest) and quite a bit when I get married (she has fewer non-house deductions than I do). But the payment also shrinks quite a bit if we pay off that second mortgage in a few years using $ from her income. (I'm planning to be able to afford the payments on my income alone.)

The catch, of course, is that rents are falling out here too. Rent on the apartment I'm currently in in Metrowest has gone down $100/month in the last year. And there's a substantial opportunity cost on the 10% down payment (and the payoff of the 2nd mortgage if we do that in a few years) which looks pretty grim if the market declines substantially going forward.
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john p



Joined: 10 Mar 2006
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PostPosted: Tue Feb 06, 2007 3:27 pm GMT    Post subject: Realty Realist Reply with quote

Realty Realist:

Traffic always picks up this time of year. The more zealous and eager buyers are usually the ones that overpay significantly. If you are looking for a deal, now is not the best time to buy. Last year my wife and I would drive around on the weekends for the open houses and during the spring season we would see the same faces at each of the different houses. We'd eventually smile and say hi (we're not snarlers). What we realized was that it was harder to find a deal this time of year. We also heard about "staged" open houses where people would ask their friends to come to the open house to create an impression that a lot of people were interested. Let me put it to you this way, by waiting until the off season my wife and I were able to get about 1200 more square feet on a much nicer lot in a nicer neighborhood. So the question is the eager people that got the houses early in the season "beat" me at the time, but in the end I got a significantly nicer home for the same money. My rationale was that there was a factor of safety needed to hedge the bet against the price decline. This factor was the basis for how I lowballed.

A real example is: My wife and I put an offer in on a house that in the fall of 2005 was priced around $700k. By February 2006 the price was down to $649k. Our offer (on Valentines day 2006) direct to the selling agent for $540k which was "respectfully declined". I believe that the sellers got another realtor, remodeled their kitchen and sold for $560k at the end of July of 2006. This home currently "zillows" for $687k. The seller should have taken our offer. The selling agent lost the full commission. The house I ended up with, I like much better, has a better lot, more square footage, more modern and nicer spaces and was cheaper. Awesome deals are out there if you're willing to put the time in and stick to your guns. My last point is that I was way, way ahead of the curve. Now the word is out, it is like shooting fish in a barrel. Sellers and buyer's agents don't want to lose commissions so they are going to work the sellers instead of the buyers. This wasn't the case with me so new buyers out there have it much better than I had it, so you have no excuse but to go out and get a good deal.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Feb 06, 2007 3:41 pm GMT    Post subject: in case you don't believe me.... Reply with quote

http://www.zillow.com/HomeDetails.htm?zprop=57074565
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Realty Realist
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PostPosted: Tue Feb 06, 2007 7:55 pm GMT    Post subject: Thanks Reply with quote

John P

Thanks for the input. We have no intention of buying anytime soon. We're just watching and waiting and watching and waiting. Unfortunately it's like watching a supertanker turn. Nonetheless, there are clear signs that the current prices are unsustainable and heading down. We plan to approach our eventual purchase in the same way that you did, and hope to buy in late 2008 or thereabouts.

All the best,


RR
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Feb 06, 2007 10:37 pm GMT    Post subject: turning tanker Reply with quote

I liked the turning tanker analogy. I used to tell my wife that it felt like we were on the first car of a rollercoaster. When you're in the first car you're the first one to look down and start to head down. The surreal feeling is that even though you are aiming downward it seemingly defies gravity because of the weight of the cars behind you that still see it going upward behind you keep you suspended. Once the critical mass makes it's way over the hump the decline starts to pick up speed. I would say that about 75 percent of the cars are over the hump and where the bottom is I'm not sure. Realtors are hoping that they find that moron in the remaining 25 percent. Just as the bubble overshot fundamentals and you had herd mentality, I wonder if the decline will do so as well. Best of luck.
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