Monday 16 November 2009

The Story Of Mr Dharod

Nov. 3 (Bloomberg) -- Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.

“We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

Buying a house at the top of the market and on top of that being a first time buyer is the last thing to do.

Mr Dharod, by looking at my crytal ball, you could come back from a loss like that if the Federal reserve continue to weaken further the dollar and allow interest rates to flirt with the zero levels.

So Mr Dharod, Mr "hyper" inflation could come to your rescue however he may take time before ringing at your door...

13 comments:

Anonymous said...

Sounds a bit like the first flat we bought in Finland (1989). It was discounted because the previous owner had a bridging loan and had to sell. But even then two years later similar sized flats in the same housing company were being sold for 50% of what we paid. Eventually when we sold that flat the price had climbed up so we almost got back the capital we put in.

Although we made a loss on the captial 'investment' (over a 15 or so year period), when comparing the cost of owning (including interest payments, as well as housing company payments, and inprovements) it was significantly cheaper owning than renting.

However, we did not sink in nearly as much money as the people in your article so we were able to come back from such a loss.

"IslandCrow"

Anonymous said...

Could IslandCrow enlighten us with a formula or so to show why it was significantly cheaper owning than renting?

Anonymous said...

Costs: capital + interest payments + housing company payments + repairs.
Imputed income: the cost to rent a similar sized property in the same area.

Calculated in a simple spreadsheet, on a monthly basis.

Costs - Imputed income = monthly costs/gain.

Because I aimed to pay the mortgage down as fast I could, the initial costs were more expensive than renting. I kept a monthly total of the over all costs and added a % to that for loss of income due to capital being tied up.

Once the loan was paid back to the bank the monthly payments to the housing company were much much less than what one would have to pay in rent. So the key was to hold the property for some time, as well as paying the debt as soon as possible.

The gain comes from taking a long term position (in our case 15 years, with loan paid within 8 years). If I had taken a short term position then I would have lost badly.

If you need a formula, any decent spreadsheet will have a function for calculating interest. Use that to play with the amount of interest paid on a loan while varing the length of the loan. See just how much more you are paying if you take a long loan.

"Island Crow"

Anonymous said...

Dear IsLandCrow,

Thanks a lot for the clarification. It is a importance to share indeed.

Your formula seems to be:

"
Costs: capital + interest payments + housing company payments + repairs.
Imputed income: the cost to rent a similar sized property in the same area.

Calculated in a simple spreadsheet, on a monthly basis.

Costs - Imputed income = monthly costs/gain.
"

For me, in the costs side, one should also include the otherwise would-be gain that would be realized if one (say) would have save what paid in cash in a bank otherwise. This part of the costs is cumulative and you should have it all the time even after you have made all the payment and until the day you actually sell your property.

For this, the costs could look as the following:

Costs until today: capital + interest payments + housing company payments + repairs + otherwise_saving_gain,

where the otherwise_saving_gain should be calculated with a loop:

otherwise_saving_gain = 0 at month_0;

loop from month_1 to
this_month

otherwise_saving_gain = (capital + interest payments)* (1 + monthly_saving_interest_otherwise);

end

We could have more fastors to consider, e.g., inflation, property depreciation rate, etc.

One thing for sure, the real-estate company will give a possible buyer a formula convincing to buy...

If I am totally wrong, please show me why. Thanks.

Anonymous said...

Dear IslandCrow,

Sorry for a mistake in the loop. It should be as the following actually:

where the otherwise_saving_gain should be calculated with a loop:

otherwise_saving_gain = 0 at month_0;

loop from month_1 to
this_month

otherwise_saving_gain = otherwise_saving_gain + (capital + interest_payments)*monthly_saving_interest_otherwise;

end

Anonymous said...

I think you have the idea.

For me the main key in this is paying back the loan in a short time, so that the interest payments are no too high.

I have not done the calculations, but I am beginning to wonder if renting would be cheaper compared to a buying with a long term (say 20-25 year) loan.

"IslandCrow"

Anonymous said...

Thank you IslandCrow. I am also tortured by this puzzle.

Just notice that the otherwise_saving_gain must be made to the costs side and, this cost continues until you sell the property to get the cash. So, even you completely own the property now, you still "pay" for the otherwise_saving_gain as cost. It is not that visible. So, we may neglect it usually, while it is not small.

HousingFinland said...

I'm back - I was away for work reasons.

Thanks for the well behaved discussion and that goes in line with the spirit of the blog that is sharing important information in a transparent way.

With regard to the rent versus buying, it is an interesting euation that has been put and should try to put forward an article with that concern as it is an important question from an investment point of view as well as deciding if it is the right or wrong moment to buy.

In general there is a point in time when byuing is better than renting. This point in time may never occur if the purchase was done at the wrong level or location etc... there are many parameters to take into account in particular the inflationnary or deflationnary threat that is more less link to the degree of economical growth Finland will have in the future (which is currently pretty "dire" (;->)).

In the past I had put one article (can be found in the right menu: http://housingfinland.blogspot.com/2008/02/rents-breaking-myth.html)

where I explained beginning of 2008 that rent level were to accelerate their increase (and they did in the susequent two years) base on the asumption that a crisis was to develop. However, historically rent will then decrease quite sharply as unemployment rise and supply increase (nobody can or want to buy so more dwelling are put for renting and constructors have no choice than supplying them otherwise they bankrupt...so of course during those time housing price should decline...)

Anonymous said...

But home prices are rising in Finland. It is now a fact. Consider this example:

December 1, 2009:

Kerrostalo, 57,0m², Kytökuja 2, Vantaa, Havukoski
Asking price 120000 Euros

Reference:Add on Oikotie.fi, kohdenumero 71298

In 2007 and 2008

In 2007 (October), asking price for the same apartment building/same size was around 97000 Euros. In 2008 the asking price gradually increased to 119000 euros.
Reference:http://www.igglo.fi/building/98109.html

It shows that the price is increasing and it is even more out of the hands of first time buyers.
So housingfinland's analysis is misleading/sometimes incorrect for the english speaking readers in Finland.

HousingFinland said...

"So housingfinland's analysis is misleading/sometimes incorrect for the english speaking readers in Finland."

A "correction" can be slow and take decades. We have had a crash that has already hapenned in the real estate and it is a fact:
-The volume of real estate transactions has collapsed.
-The volume in construction i.e building permit has collapsed
-Credit to household has reversed course since end of 2006 amid record low interest rates.

Now the economy will most probably fall back into recession when artificial measures stop having a stabilizing effect. At that point the housing price downturn will resume.It can take a decade of slow correction, a sharp deterioration or a stabilization while inflation "eat" its real value.

Could you lay down your analysis? is that only based on few choosen samples (I'm pretty sure you can find its contrary)?

Anonymous said...

Just an update: the apartment in Kytökuja 2, Vantaa, (57,0m²) Havukoski for Asking price 120000 Euros is sold in just one day!

Anonymous said...

Housingfinland's Biased Poll:


House Prices will drop into 2010 by: -5, -10, -30, -50%

So, this poll assumes for sure price will decrease (Housing finland's opinion)- no room for differing opinion.

Can't you add option for increase in 2010 as well?

+5, +10, +30, +50%

then we can see real opinion.

Anonymous said...

Not every individual house is the same. It depends on factors such as location, location and location. Sometimes also on the state the house is in (renovations might have been made)

If you have a house in a good location, I think it will be more stable or have more chance of going up despite what the market is doing.

It is pretty much like selling artwork for that matter: It all depends on what any person is willing to pay for it.

We bouht our house late 2007. The asking price was 255,000 euros. After negotiations we agreed to pay 225,000 euros for it, which even to me seemed like a ridiculous amount of money for an appartment at the time, but we needed a home and I was fed up and done with renting.

Today appartments smaller than ours in the same building are up for sale for over 300,000. Go figure.

The point of renting is that you know one thing for sure: You will never see a penny back of what you pay for it after the end of the month.

If you rent a home for 1000 euros for 10 years you have paid 120,000 euros, regardless of what the real estate market is doing. I guess for some that might be a comforting thought.