"jim_flanegin" <[EMAIL PROTECTED]> wrote:

> I was just looking at housing prices in my neighborhood in Santa 
> Clara, Cal. which is a middle-class neighborhood, but nothing ritzy- 
> Many retired folks, some families and couples. Houses are typically 
> single story, about 50 years old, 1200 to 1500 square feet. Selling 
> prices are 750 to 900K. You won't find a house for less, although I 
> did see a 2/1, 900 square feet, for 720K...
> The proposed mortgage deduction would hurt a lot of people here, 
> even if prices softened somewhat. 

Well the rent to mortgage cost (after tax) in many parts of the bay
area, and other high price areas are quite low, like 50% and less.
They are hurt only if they feel the need to buy. Pay 2000 in rent or
4000 in a mortgage. Rentals in sme areas a great deals -- and a great
way to ride out the bubble.

Some will say, "but I don't want to throw my money away in rent. At
least with a house I amd building equity." False on so many levels.
First, everyone is a renter. They either rent property, or the rent
money to to buy housing. A million dollar home costs a lot of rent on
money. Just as wasted as property rent. 

Second, the only thing that makes owning more attractive, financially,
than renting when the rent to mortgage ratios are so low, is the
expectation of appreciation. But that train has left. Prices
everywhere are leveling off or beginning to fall. And when the
expectations for apprecation are no longer there, it becomes a double
whammy: no appreciation, and demand for housing falls thus bringing
pressure for lower prices -- starting a depreciation expectation
cycle. Thats when everyone tries to unload and prices plummet. 

Third, if you are paying 2000 in rent instead of 4000 in mortgage for
the same property, you are saving 2000 a month which can be saved,
invested etc. Thats your rent equity building up and if there is no or
little price appreciation, it will far outstrip any equity build up in

Fourth, if one is paying interest only, they are not building up any 
equity -- nothing is going to repay principal. And they may actually
be building up negative equity, which gets tacked onto the loan in
later years. The only equity build up is if prices keep appreciating
-- it becomes a game of the greater fool. Hold risky properties now
with the hope someone will be foolish enough to buy at an appreciated
price in a flat or declining market in years hence.

Fifth, international investors may be holding up the market now, and
maybe suffering from information lags -- being sold on price trends of
past years and not understanding the dynamics of the local market. But
after a year or two of flat and declining prices, the bloom will be
off the rose, and hot international money could flood out of the area.
By definition, international investors are renting their properties.
50% rent to mortgage ratios may be bearable when prices are
appreciating 20-40% a year. But when that stops, for a couple of
years, bam, many investors will try to unload. Thus putting more
pressure on downward prices. 

> The trend here, just to buy a 
> house, is to take out an interest-only loan. So many homeowners are 
> counting on that large mortgage interest deduction to be able to 
> afford the house.

And in 2-5 years they may count their blessings the loss of mortgage
deductions prevented them from buying at the peak of the market.
> For the last twenty years at least, through good times and bad, 
> people have been predicting housing prices to go down here. There is 
> about a 15% affordability rate in this area, with lots and lots of 
> overseas investor money mostly from Asia keeping prices high, even 
> through recessions. 

But there has never been sustained 15% affordability and 50% rent to
mortgage ratios. So the past is not a good predictor.

And many parts of california had definite flattening and declines
1985-95 or so. Certainly in San Diego and parts of LA/OC. 
I thought the bay area had such too -- maybe not.

> So the SF Bay Area is not purely a domestic real estate market.
> If the mortgage deduction is adjusted to the 350K range, all that 
> will happen here is that local people will be forced to sell, 

Well, many owners have morgages in the 500 or less range, having
obtained them 5-20 years ago. Who will be initially "hurt" are new
buyers. But they can rent for half the price. I can't feel too sorry
for them.

> the 
> properties will be snatched up by investors and we'll have more 
> renters.

Not for too much longer, IMO.

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