FOMO in Los Angeles
There are a lot of people in L.A. who basically tie their entire hopes and dreams in life to what mortgage they’ve either qualified or been denied for.
Though it is stupid simple to get a mortgage when you have the appropriate down and income – regardless of your credit – many are fearing they are missing out on a great property investment boom of some sort in Los Angeles.
This is called FOMO (or fear of missing out), is based on manipulated emotions and gets significantly worse when we refuse to do math.
The median home price in West Adams is $638,000
The median home price in Los Angeles is $603,900.
The median home price in Inglewood is $441,600
Lets take the median for L.A. for a second.
First – the 5 year holding costs on a $603,900 house with 4% down:
PMI – $476/month
Insurance – $67/month
Taxes – $554/month
Maintenance, repairs and upgrades – $1,509/month going into a MRU fund
Principal and Interest (mostly interest) – $2,918/month
– mortgage tax deduction ($554)
= $4969 total holding costs each month.
$4969 x 60 months = $298,140 over 5 years.
$298,140 IS THE PRICE OF AN ENTIRE HOUSE IN OTHER AREAS.
AND ALL YOU DID WAS PAY INTO INTEREST OVER 5 YEARS WITH LITTLE PRINCIPAL.
What about initial out-of-pocket costs on a $603,900 house?
1) $21,137 downpayment
2) $18,117 closing costs
= $39,254 total ($18,117 of which you will never get back)
Opportunity cost on a $39,254 out of pocket sum:
$39,254 invested by itself with no other additions would have grown to $62,361 over 5 years. In other words, applying the out-of-pocket costs to a house alone cost you over $20k over 5 years.
Credit card interest:
The average L.A. household with credit card debt owes $11,042.
If over the course of owning a home, half of your expenses from the Maintenance, repairs and upgrades portion of your real estate expenses are placed on a credit card instead, that balance can balloon to $20,096 per household.
Average credit card interest rate is 15.07%.
This means that a household would pay an additional $8,633 over 5 years in credit card interest payments.
By having low liquidity, you’re much more likely to take out car loans, personal loans and even grad school loans.
This is an entire other level of principal and interest added to your load.
“Now that I just bought this $600k house, I’m free to quit my job!” – said noone ever. Its actually quite the opposite.
Psychological effects of being tied to 13 hour days at the office to afford housing costs are incalculable. Add that to being tied to offices you may want to desperately break free from, and there isn’t an amount of money on earth worth years of your life you cant get back.
When the bubble bursts:
You know all the costs we mentioned above? Well outside of property taxes which can be adjusted on falling property values, these costs are yours and yours to bear alone regardless if your house drops in market price.
In other words – real estate costs can’t keep going up forever, its simple economics. The median individual income in L.A. is just $27,749.
You’re already paying significantly more than you’re earning from buying primary residences in L.a.
What happens when even the price appreciate stagnates…or gulp…decreases…
Now again, just like the latest edition of Brass Knuckle Finance says – none of this is about NOT buying a house. This, specifically for L.A. is about knowing WHY you’re buying said house. Buy whatever the hell you want when you can afford it and know why you’re doing so.
But chasing any price – regardless of what it is – is the quickest way to fool town.
Thinking a house $600k house is an investment when it costs over $300k over 5 years, aka HALF of the damn price of the house – is a quick way to fool town.
Now what about buying rental property?
Well thats an entirely different set of circumstances and benefits and for another post.
This is about your primary residence.
www.BrassKnuckleFinance.com | 3rd Edition | “Home Loanership”
Ps: real estate agent fees to sell the house in 5 years or income taxes if house is sold in less time has been included in these numbers.