StudioGlyphic

Author: glyphic

  • Rent vs. Buy

    Somewhere along the way people lost their common sense when it came to real estate. Houses that used to sell for $250k started looking attractive at $1m because everything else was selling for $1.1m. But while the prices of comparable houses in a submarket gives you some indication of the market value of a house, it doesn’t necessarily mean you should buy that house. The cheapest overpriced house is still an overpriced house.

    One thing I like to look at is a simple comparison of rents and mortgage payments. Calculate the mortgage payment for a property you are looking at, then compare it to the rent of a comparable place. This can sometimes be difficult when trying to evaluate a large single family detached house, since there may not be too many comparable rentals in the area, but for a smaller house or a condo, you shouldn’t have a problem.

    In my neighborhood, I’ve seen plenty of condos that are being offered as rentals for $2000-3000 a month. Assuming an interest rate of 5.25%, this payment would translate to a mortgage of $362,000-$543,000. Assuming a 20% down payment, this results in a house price of $453,000-$679,0000. Comparable condos actually sell for $550,000-750,000.

    Looking a little wider, 2 bedroom single family detached houses are renting for $3000-4000 a month, translating to a house price of $750,000-$900,000. The asking price of these houses are still $1m and up.

    This simple calculation doesn’t even take into account the additional recurring costs of homeownership: property taxes, insurance, and maintenance. Nor does it take into account the time or transaction costs involved when you happen to find a great new job and have to extend your commute or sell your house. Nor does it put a price on the risk of falling housing prices.

    But never mind all that. Just keep it simple and look at the rent vs. mortgage payment as a starting point. Purchasing a house is a big emotional as well as financial investment, and emotions run pretty high when you’re talking about owning a piece of property with your name on it, providing a shelter for your family, and possibly regretting the biggest financial mistake of your life. By starting simple, you might be able to run a sanity check: Is the pride of homeownership worth a $100,000 premium on that small 2-bedroom condo? If you saved the $1000 difference every month in an ING Direct account at 1%, what could you do with the $61,500 you would save over 5 years?

  • There’s no shame in walking away

    Apparently there’s a growing number of people strategically defaulting on their mortgages. Or, at the very least, there’s a growing fear that this is happening. For some commentators, this is a sign of low moral fiber, that the strategic defaulters are somehow breaking their word, losing their honor, etc.

    Bullshit.

    Housing loans are not based on the belief that the borrower will pay the money back because his honor is at stake. They are based on a contract, which spells out exactly what the lender can do if the borrower stops paying back the loan. The lender can choose to take the house and sue the borrower for the difference between the house’s value and the loan amount (unless it is a non-recourse loan).

    There’s also this refrain of unease that not only is the decision to default immoral, but it’s just too easy and trivial to do. That the borrower somehow escapes punishment-free for buying too much house or getting a terrible loan.

    But losing your home and getting sued is not a trivial thing. Not to mention the massive hit your credit score will take. For the borrower who defaults, it means that credit will either be unavailable or offered at exorbitant rates. Moreover, employers and landlords often do credit checks prior to hiring or renting, which will further limit the borrower’s options.

    Nor is it necessarily easy! The lender has the option to take the home, but no obligation to do so. If there’s a glut of inventory in a particular submarket, a backlog of defaults to process, etc., the lender can choose to send nasty letters to try to get the borrower to pay, but may hold off on actually seizing the property. In the meantime, the borrower still owns the property and any liabilities that go along with it.

    Finally, there are those that mention other effects of the foreclosure, such as declining house values and higher borrowing costs within the submarket or economic cohort. But aren’t these effects the natural outcomes of a market? We are coming off a 7 year bubble; houses are going to go into foreclosure, prices will drop, costs will increase, and to expect anything else is insane.

    The bottom line is that the decision to take a loss, just as the decision to purchase, should be evaluated rationally by the individuals involved. There are a lot of things to consider beyond the value of your house, the amount of your loan, your monthly income, and the monthly expenses, but morality is not one of them.

  • Pay as you go

    Pretty soon you’ll be able to pay a toll and drive in the carpool lanes by yourself.

    Metro Board Approves Toll Rates for Freeway Expresslanes as Part of Congestion Reduction Demonstration Project

    The Los Angeles County Metropolitan Transportation Authority’s (Metro) Board of Directors today approved toll rates to be used on portions of the I-10/I-110 ExpressLanes following a series of public hearings that gathered public input on the tolling pricing proposal to be implemented as part of the agency’s Congestion Reduction Demonstration Project (ExpressLanes) that will debut late next year.

    The new adopted toll rates will range from 25 cents to $1.40 a mile for solo drivers using the ExpressLanes. Tolls will go into effect with the opening of the ExpressLanes in December 2010.  Staff estimates that the average trip on the I-10 ExpressLanes will be nine miles with an average toll of $6 depending on demand and the average trip on the I-110 ExpressLanes is five miles for an average toll of $5.

    The big question is… how is this supposed to reduce congestion?

    Freeways are congested because they are free. No individual has any incentive to change their behavior, their location, or their job when you can theoretically zip along a 4-5 lane interstate at 60mph. Of course, the reality is that when enough people try to do this, the system comes to a congested halt.

    If the goal is to reduce congestion, charge tolls for every lane, not just the carpool lanes. Base the charges on time of day (free between 9pm and 5am, $.50/mile between 7am-10am, $.70/mile between 4pm-7pm, etc.) and build in rate increases to adjust to inflation and changes in congestion patterns.

    Charging drivers money instead of time for using the freeway will immediately change their behavior. They’ll combine/postpone/eliminate trips, move the location of their jobs or homes, or change their mode of transportation to foot/bicycle/transit/carpool. As long as the tolls adjust in response to average speeds on the tollway, we can ensure that it works efficiently and at optimal capacity.

    With all the revenue generated from the new tolls, we can invest in both maintaining the highways and building high capacity transit alternatives. Soon enough, we’ll have a multi-modal system that offers equally compelling choices.

  • File for unemployment

    This probably sounds pretty obvious to a lot of people, but if you’ve lost your job, file for unemployment benefits as soon as you are no longer working.

    I’ve known a few people who’ve lost their jobs and seemed reluctant to file for unemployment benefits. They figure their financial situation is not dire and that they can get by with their savings and severance packages until they land a new gig. I’m not sure if this is a matter of pride, an inability to deal with a highly stressful situation, or pure laziness.

    The fact of the matter is that if you’ve had gainful employment, then you’ve been paying for unemployment insurance directly and indirectly, and now’s the time to collect on that insurance. The benefits aren’t much; the maximum in California is $450 a week if you earned an annual salary of $47,000 or higher. But they should take the edge off your unemployed status and give you some breathing room until you find a new job that’s comparable to your old.

    Benefits can start the week you are unemployed; you may not get benefits for up to one week, starting from the time you file for unemployment benefits, so you’re best off filing as soon as you can. With almost 1 in 10 workers facing unemployment, processing times can be lengthy. Again, you’re best off filing as soon as you can.

    California Employment Development Department – Unemployment

  • The war on stupid links

    To the members of the world wide web development community… I never want to see this again:

    Click here to do something.

    If you want to do something, click here.

    Click here if you don’t want something to happen.

    Of course you click links! We don’t need you to tell us how to interact with a link on a goddamn web page. If my parents can figure it out, so can everyone else.