Housing prices in San Marcos are about back to pre-bubble prices. A house like we rent for $1750 a month is now going for 560K. That would be about $3,000 a month to own it plus another $5,600 in property taxes. So renting costs us about $21,000 a year while owning would cost us about $41,600 a year. Notice the cost difference. If you wanted to turn the property into a rental, it wouldn’t be worth the effort at these prices.
In the past, many people said, that paying rent was just throwing your money away. Owners rationalize when the home is paid off, "they get to live in it rent free." Actually, they forgo the interest of the dollar value of the home. A paid off 560K home would generate 17K at 3% interest. So if you take the 17K and add the property taxes, of $5,600, you get $20,500. Divide that by 12 and they are still paying $1700 rent a month. We are not even talking repairs here, I've got a $7,000 repair bill to rebuild one bathroom on my rental.
The real reason for home ownership in the past; it was cheaper to own than to rent. The renter paid extra for the freedom to pick up and move when they felt like it. With housing prices up 160K in two years, that thinking has changed a bit. The funny thing for this area is that the people that bought at the height of the last bubble are still underwater after 8 years. They need 34K in equity just to pay the realtors fees if they were to sell without a loss.
In a roundabout way, the Federal Reserve and your retirement funds are what keep the real estate prices artificially high. Beginning in October, the Feds will no longer be buying the real estate paper. The estimates of the dollar value of the paper owned by them is around 2.3 trillion dollars. No big deal on this, the home loans will be paid off over thirty years and the 2.3 trillion will go to zero ---if the real estate doesn’t go back into foreclosure.
The trouble begins in October. Here is a simplification of how the present banking system handles real estate. The bank loans a home buyer 500K for a home loan. The bank then sells the loan to whomever, in this case the Federal Reserve and keeps a half percent of the loan for management fees. The bank then loans the money out again and does the same thing and gets another management fee. If the bank does this 10 times, it is getting 5% in management fees on their depositor’s 500k with little or no risk. Before the Federal Reserve and the Fannie and Freddie bail out, the loans were sold to private parties. So now, it looks as if interest rates will have to rise up about 300 basis points to create interested third parties willing to invest in the real estate note market. You ask why?--- the banks don't want to hold on to 30 year 5% paper. Will rates rise, or will the Fed throw in the towel and start buying more paper?
I think all of us can agree that the stock market has reached new highs for no good reason. A lot of hard working people have retired because they can’t find a job. Many college grads are finding out that their degree isn’t worth the money they borrowed to get it.
Our government has enabled every dreamer the right to become a failure. Buy a home, get a college education and become a part of the American dream. Buy a Lotto ticket and win. And if you can't speak Spanish, you'd better learn.
So we have a housing bubble in San Marcos, I wonder how it will end? If the government rewards failure, I guess we will get more of it; it’s tragic to think that we earned it by hard work rather than ineptness.