Impact Of Low Interest Rates On Real Estate

"The evidence of history suggests that allowing asset bubbles to develop is the greatest mistake that a central bank can make."  pg. 8 Valuing Wall Street.  We had seen how this was proven true back in 2007 when the real estate bubble fueled by low interest rates popped.  Today, interest rates remain low, which has created a huge demand in real estate, thus pushing prices way up again.   This is why I'm in no urgency to buy an overpriced  home right now.  It's just not the right time for me.

An Extremely Affordable California Water Front Condo But Do You Dare To Live There?

Would you like to buy a spacious condo at over 1,700 square foot for just $182,000, in sunny breezy Southern California in a neighborhood where you are close to everything, and I mean everything, within a 15-minutes drive?

I said yes to this question and therefore I went to see the place.  I thought to myself, what a bargain, meanwhile everybody in California are complaining about how expensive home prices are!

On my way there, I finally understood why this beautiful spacious condo was bought at $203,000 in 2009 and now is listed for sale in 2016 for $182,000.  The place is recently beautifully remodeled and I wonder how much this cost?  Now for those of you who are strong believers in real estate being the safest and best investment, how about this one?  If you were the owner of this condo, could you see how much money you already lost from 2009 to 2016, and that doesn't even include the $400+ monthly HOA fees and the approximately $3,000 annual property tax.  In order to sell this property, the owner even had to remodel it. Imagine all the beautiful brand new kitchen, bathroom, recessed lighting, crown molding and new flooring!

I really love the interior of the condo so much, and the ocean view that comes with it. But I just don't feel safe in that neighborhood despite the fancy Marina across the street.  It's because the building was sitting on a neighborhood that is infested with crimes.  The safety and goodness of the location stop right outside the gate of the fancy Marina from across the street.  The road right outside the Marina is the cutoff line between safety and the "no-go" zone.  The back and side of the building are surrounded by very scary apartment buildings that appear to be subsidized housing (or section-8).  I suspect that the condo building itself is also sort of subsidized by HUD.

After I went home to do more research on the crime rate in that specific neighborhood, it's unfortunately very high even in Los Angeles standard.  From the crime report, the neighborhood appears to be one of the most dangerous areas in Southern California.  This is why the streets I drove through to get to the condo look so shady.  I got scared just to go into the underground parking of the condo building to park my car.  It was right there that I realized I would not want to buy into this condo, because I don't know who else are also living in this building, if only there are section-8 housing or any government HUD subsidized elements here.

I want to ask everybody who are complaining about how housing cost and rent are so expensive in California to think hard.  Are you seeing why we are paying ton loads of rent or mortgage at wherever we live?  It's not because there isn't enough land or housing in this state.  It's because there are too many subsidized houses and apartments sitting in too many crime infested neighborhoods, vacant, looking for the next subsidized HUD buyer or the next subsidized renters to occupy.  While our taxes are subsidizing developers to build affordable apartments that make neighborhoods unsafe to live (including prime real estate near the ocean and downtown) , we are being pushed to move farther and farther away into the country to avoid the crimes that subsidized housing attracts.

Housing aren't just built fast enough in safe neighborhoods in the country for us to flee to. This is one of the reasons why we have a shortage of housing for regular middle class people.  There are plenty of cheap housing in California, many are surrounded by the government's housing projects, and more are cornered by section-8 rental apartments.  But do we dare to go buy our homes in these neighborhoods despite the short driving distance to where we work, despite the nice weather and the ocean view?

Are Tech Companies To Blame For Real Estate Bubble In Silicon Valley?

Sure, employees from the tech companies in Silicon Valley drive up demand for housing in that area. But, as  you can see in the video, there are a lot of foreign cash buyers scrambling for houses in the area too.  Buyers from Mainland China seem to be singled out by the video to be the only foreign cash buyers who buy up Silicon Valley.  But there are actually lots of cash buyers from India, the Arab world, Europe etc, etc, who are buying houses, not just in Silicon Valley, but in all major cities all over America.  America doesn't produce much to export or trade with other countries.  But America's land and natural resources are up for sale, and they seem to be the only American-made products that sell well internationally.

Many employees in the Silicon Valley actually have to live outside of the area because despite their higher than average American paychecks, they can't afford to live in the area.  They are priced out too, as a result of the bubble demand for housing in the area.  The bubble demand is shown by empty unoccupied houses owned by investors (foreign and domestic).  If only the people of California can lobby a law to limit the number of unoccupied houses a foreign investor can own, there will be a tremendous ease of housing supply in the market and people will see a drop in rent because owners of those unoccupied houses will have to rent them out fast, or sell them to the local homeowner occupants fast.

But will this kind of law gain support in the State of California?  Not really because lots of home owners in California love to see the price of their homes shot up by investors speculation.  A law that bans or limits foreign non-resident investors from owning unoccupied houses or land, will be a very unpopular ballot among existing California homeowners.  

To reduce real estate speculation caused by bubble foreign demand without creating a law to ban foreign investment in America's residential real estate, America can start telling the truth to the ignorant Chinese cash buyers, "You don't really own anything here in this country.  The houses you are buying are paper thin like the props in your high school plays.  The land underneath the prop is owned by the State government and you are only leasing it perpetually by paying annually adjusted property taxes (for example, $5,000 for a property that is purchased at $385,000, triple that annually if you are buying a shed at $1 million. ) Meanwhile, there is no property taxes in China if you are holding (leasing) a property in China. Yes, the land lease in China is 70 years, but you are also leasing here in the USA with a perpetual land lease that costs you a lot more in annual property taxes (lease payment), than the zero property tax you pay in China.  In China, you don't own the land but you can definitely renew the lease with the government when it is due to expire.

As for investors in other countries, I am sure if only they are told the truth about the annual property taxes in America, they will not be so eager to sink their cash into the real estate market here.   So until the truth is told, or until a law is passed to limit foreign investment, ignorant foreign investors will continue to sheepishly pay big bucks for an asbestos coated shed in the U.S. They naively think they own the land, but they really don't.

Risk In American Home Buying: Upscale Neighborhood Turns Ghost Town

For many who preach about how home buying is the best and safest investment.  The truth is, home buying can sometimes present more risks than any typical investment.  Home buying being the safest investment is a myth.  What happened in the upscale neighborhood in Porter Ranch, California can happen anywhere in America. (Click here to read a really good article about this on Newsweek magazine.) The average home price in Porter Ranch used to be over US$1 Million, and for many who spent this much to live in a supposedly great suburb with great schools, they found themselves suddenly homeless due to the massive gas leak.  Many residents are worried about not being able to sell their homes.  But then there are always lots of uninformed Chinese immigrants and immigrants from other parts of Asia who may be very eager to pay all cash above any listing price and waive any environmental or structural inspection to buy the houses in Porter Ranch.  It's because many immigrants, particularly the ones from China are often coming with a very real estate obsessed mentality and they will pay cash for anything, since they don't understand how American homes should really be valued. The Chinese just don't understand much about real estate investment in America and are often very naive.  One of the reasons can be because they never got a chance to own their own land and home back in China, and when they did, they were misled by the speculative buying behavior among their own people.

If I were a homeowner in Porter Ranch,  I would quickly get a broker who specializes in selling to the Chinese!!  The Chinese will bail the Porter Ranch residents out of their polluted neighborhood, with loads of cash.

Home Price In America Is 25% to 60% Overvalued

For those of you who are looking to buy a home right now, try low balling your offer, because according to Fortune Magazine, America's homes are 25% to 60% overvalued, depending on the average income and the average listing price in your area.

Owning A Home Isn't Necessarily Cheaper Than Renting

Many home ownership get rich books tell you that by paying a monthly rent of $1,500, you can easily waste up to $540,000 over the cost of 30 years even the landlord isn't going to raise the rent.  But these books forget to tell you that by owning a home or a condo that is purchased at $385,000 for example (many condos in major cities where the jobs are,  easily cost more than this price) ,  the interest payment + annual property taxes + HOA fees actually add up to be much more than $540K in the course of a 30-year fixed rate mortgage (at  the current 4.25%), assuming your effective income tax rate is about 25% which is pretty much the average rate for the majority of homeowners who can afford a 30-year mortgage for this price range.  If your income tax rate is any lower, you get much less tax deductions and therefore increase your cost of home ownership. Income tax deduction is like a discount for your existing interest payment and property taxes, the higher your effective income tax rate, the bigger the discount, but it doesn't mean you don't have to pay any interest or property taxes after tax deduction.  This doesn't even include the deterioration of the condo in the course of the 30 years that will cost you extra bucks to repair and to remodel; just so it can still be livable for you, or presentable to your potential buyers when you attempt to sell it.

In an ideal world where there is no property taxes and where local governments don't raise property taxes on a yearly basis, and where the homes are so well-built that there will never be termites attack, plumbing pipes bursting, and the roof chipping away, yes, owning is definitely cheaper than renting.  When you find a country like that, please let me know so I will move there too.  But until then, owning a home in America is not necessarily cheaper than renting, particularly when a home requires you to put 20% as down payment for 30 years.  Holding that kind of money down for 30 years comes with a hefty opportunity cost, which further downgrade the financial benefits for owning a home.

Toyota's Move To Plano Texas Doesn't Ease Housing Crisis Here In California

Guess how much is the above 2,200 sq ft,  4 bedroom, 1.75 bath house (built in the 60s) with a total lot size of 5,500 sq ft is listed?  $895,000!!  Yes, after closing cost and miscellaneous escrow fees, you will need over $900,000 to buy this modest looking house in the California town where Toyota's current headquarter is (which will be no more sometime this year when Toyota's move to Plano Texas is complete).  

Is this a smart investment for $900,000?  I personally don't think so unless your job is actually within 30 minutes commute away from this house.  With $179,000 (20%) as down payment, the monthly mortgage payment for a 30-year mortgage on this house is about $3,600 a month at the current fixed mortgage interest rate of 4%. This doesn't include property tax, which is about 1.2%++ on the $895,000 per year, that you will have to pay, which by the way will also increase every year.

Now for those of you who are fans of book authors who write about how home ownership will make your a millionaire, ask yourself, how much money will you make with $179,000?  If only you don't have to use that on a house's down payment?  Ask yourself if you can rent somewhere with reasonable commute to your work for less than $3,600 a month, which includes water and trash, and which will excuse you from maintenance and upkeep duties, and also the duty to pay for your annual property taxes that is subject to annual increase?

When Toyota announced in 2014 that it would leave California, I was so happy and excited because I thought home prices near Toyota's headquarter here in California will fall and I can get the chance to buy into the area.  Now that Toyota is close to completing its move, home prices near its California headquarter have increased a lot more than the home prices in Plano Texas. That's very disappointing to me.  So, to all the politicians in Texas who constantly brag about how Texas is stealing business from California, can you guys please, please lure more businesses from California to move out of state.  Please  attract Honda to go to Texas too!!  It's because home prices aren't dropping and more people and companies need to move out of California in order to keep housing affordable here in California. 

I really really hope that more companies will just move out of California...for the sake of housing affordability.  It's just too crowded here in California.

This Is The Risk Of Investing In Rental Properties

The owner of this rental property is himself a lawyer.  Many real estate get-rich books will tell you how easy it is to buy a house, and rent it out so you can be the rich landlord.  But like any investment, real estate is not risk free.  Before contemplating on buying a house so that you can rent it out for income, watch this video and ask yourself how well can you manage the risks that are embedded in real estate investing.

You Don't Have To Buy A Home Just Because You Want To Be Rich

There is just this perception that only the losers are renters, and buying a home is the only way to get rich.  I don't know how many times I was told by my friends, and relatives to stop renting, because I will never be able to build wealth if I don't own my own home.  Yeah? Owning my own home sounds easy to say, but  it's not so easy to do. Besides, I refuse to believe in such propaganda.

Yes, I am a renter, but it doesn't mean I am not building wealth.  I have been trying to spend less than what I earn from my paycheck, and I have been investing my savings in stocks.  Sure, I pay rent to my landlord and it's money out in the cold.  But so are my homeowner friends and relatives who are paying HOA fees, repairs & maintenance, mortgage interests to the banks (however low the interest rate is, it's never 0%)  and the property taxes to the government (yeah yeah, everybody says mortgage interest and property taxes are tax deductible but my rent isn't, which is also not totally correct and I will talk about this in my next post).

What I have as a renter that my homeowner friends and relatives don't have are:

1. I have more time to work for more money, like getting a second job or doing paid overtime because I don't have to take time off to stay home to wait for a plumber, or an electrician, or whoever contractor who needs to show up to fix this and fix that.  When I have anything not working in my rental, I will just call the landlord and let him deal with it. I also can choose to live a lot closer to work to reduce my commute time which I won't be so flexible in doing if only I own a home somewhere.


2. I have complete flexibility to move to any town, city or state that offers me a higher pay.  I don't have to spend time selling my home and I certainly don't have to be stuck in a specific job because of the locale of my home.


3. I have more flexibility to reduce my housing cost because I can always move to a place or a situation that charges less rent.  For a couple years, I was renting a tiny little guest cottage inside a very nice house in the same nice neighborhood as my friends, for US$550 a month, which actually was less than what my homeowner friends and relatives were paying for property taxes. Just because market rent in my town is $1,800 for a one-bedroom apartment doesn't mean I must spend this much. There are always options and landlords who are willing to rent a room, a cottage, or even an apartment to you at a good price, for whatever reasons they may have in mind.  In my case, the old lady who rented the guest cottage to me just wanted a housemate for companionship, not really for the sake of making money. She wanted a clean, friendly, responsible and professional housemate, and there I was.  But if I was owning a home, I would be pretty much tied to my monthly mortgage payment and my property tax obligation, unless I go through the hassle to refinance to a lower payment.  Sure if I own my home, I can always sell it, but the point is,  it's a lot more work and it takes a longer time to cut cost should my situation need me to cut housing cost.


4. I have more liquid savings than my homeowner friends and relatives because their savings are all used as down payments for their homes. They can refinance to get the money out but again, it will take time. Meanwhile, I can liquidate my holdings in my stocks anytime I want whenever I see there are better investment opportunities elsewhere. This is the opportunity costs that my homeowner friends and relatives never thought of.

So, in my opinion, there is nothing wrong in renting. I certainly will buy a home if I can afford it without sacrificing other more favorable investment opportunities.  Wealth can't be built by just being a renter or a homeowner. Wealth building is about how we can take advantage of the best investment opportunities available for what we can afford to invest, given our own very unique circumstances.

The American Dream Remains Just A Dream For Most Of Us

While Americans are reported to have much of their wealth tied up in their homes,( about $12.4 trillion), many Americans are still dreaming of owning our own homes. I'm one of those who are still dreaming and home prices in my state has become so high that home ownership is starting to become too expensive for me to even dream about:)

What about you, do you own your own home, or are you renting like me?