Majority of Renters Are Not Saving for Down Payment: Freddie
nationalmortgagenews.com
nationalmortgagenews.com
Most of my savings goes to retirement, which is now in the realm of being a down payment for a nicer house. Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house. When I'm older, and I'm not trying to play catch up on my retirement account, like so many 40 and 50 year olds end up doing, more of my income can go to other things, maybe even a house.
I'm super focused on my career and family right now. Why would I want to buy what amounts to a giant time sink?
Bottom line, by focusing my time and money on personal growth. I'll be in a much better position than if I bought a home.
When you just do the game theory on the American Dream, it makes no sense at all. Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet.
> Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet.
It really depends. Rent is also money down the toilet.
If you're "old" now, and you bought a house when you were "young", and properties have gone up in your area, then if you still have the mortgage, the remaining payments are probably very low compared to what people are paying in rent.
Rents don't have compound interest but they rise up and up over the years and decades. And every single dollar is wasted.
Of course, the specific reasoning depends on the area, especially over shorter terms.
Rent = mortgage payment + premium to be able to walk away.
I live in SF and renting is a great deal! (admittedly, as long as you are not looking right now :-/ )
I would consider buying something relatively big in a small town that you can really own, but I don't see the appeal of these tiny starter "homes" in big cities, with so many strings attached.
While you are correct that compound interest does amount to possibly a couple hundred thousands of dollars lost, I think that needs to be compared to the cost of renting.
Two very conservative assumptions: 1. over 30 years (standard mortgage) your home/condo value only stays the same as your purchase price. 2. The rent on your apartment never goes up.
In the Boston market I rent a rather dumpy and small 2 bedroom apartment for $1600 a month, which is most likely already below market value. If I stayed here for 30 years at this price it would cost $576000, all of which would be completely sunk money. Decent to nice condos in the area range from say $350k to 600k. The money lost to interest in that range is at worst only a couple hundred thousand over 30 years. Meanwhile you have a nicer place to live and equity in the property.
Obviously very simplified scenario, but I don't think buying a house/condo when you are relatively young amounts "to flushing hundreds of thousands of dollars down the toilet" anymore than renting does.
Result: That condo is worth half what I paid. I got married and had children so we bought a house, but I am now a landlord for the foreseeable future. It sucks.
I really wish I'd thrown my money away all those years - I wouldn't have this constant source of interruption and expense hanging around my neck.
My advice for anyone who really wants to buy a house... I would suggest trying to make sure it's the last house you'll ever need.
Real Estate prices are extremely local. There are many places where buying will likely never payoff. In other parts of country, renting is significantly more expensive then buying a similar home.
Here is a reddit discussion from 2 years ago: https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_...
That happened to me, and I felt exactly like you do, six years ago — but the market has recovered, and I've paid off enough of my home that, if I wanted to, I could write a cheque for the balance of the mortgage. And local rents are up, way above house prices, so when I buy a house I'll have a rental property.
Slow and steady wins the race. Hang in there, and you'll be glad you did.
I'm interested in the analysis here. This is a thought I'd considered and when I ran the numbers they were about the equal. You're buying a house on margin with just 20% down. With 3% appreciation your house has appreciated 80% in 20 years. You're earning 400% roi.
For the portfolio, if you're averaging 8% you're returning 466%. So the portfolio still wins, right? But no so fast: you don't owe a dime of taxes on that $80k appreciation.
Anyway, your argument was beyond just ROI, but i'm interested if you have any thoughts about that?
- have a big yard,
- be able to nail things to the wall or paint them without asking permission,
- no fear of landlord selling the house and me getting kicked out
- custom improvements I put into the landscape or the interior will not be wasted
The only reason I bought the house was that my need to live somewhere was a given, and owning removed a host of variables from my model which were hard to predict. Rather than thinking of it as an investment it acted more like a cost shield which meant as my income grew all of the additional growth could go into retirement rather than being allocated to higher housing costs.
I analyzed the cost of moving against the cost of renting it out and buying a new place which has its own interesting quirks. My wife's parents did the keep/rent the previous house each time you move thing while my parents simply rented until my Dad retired. In retirement my wife's parents have a built in cash flow that my parents do not.
Insurance has been the most variable with California adding earthquake and flood insurance requirements. As a component of cost has varied the most (it isn't included in the $600/month which is just maintenance).
On the plus side, with California's no pre-payment penalty I could always use bonus money to pay down the mortgage which both kept its value in the future and mitigated future interest expense. That was always a better net use of cash funds over a savings account. I've always maintained a line of credit on the house which could allow me to "re-access" that value if something unexpected happened.
Not for everyone of course but its a different way of looking at home ownership which isn't commonly discussed.
The parent was talking about the volatility of maintenance costs, not the average. Just like people in different situations need to adjust their investments to achieve the right amount of volatility, for some people it probably makes sense to shield themselves from the possibility of unplanned maintenance costs.
I have no clue how volatile maintenance costs are, but I don't think you addressed it in your reply.
This is a very common way to annualize a very volatile cost, but what it means in practice is you find yourself putting money into the maintenance account when no maintenance needs to be done that month, with the understanding that eventually in the future you're going to have a cost which you can then pay out of that account. You don't go into debt that way to cover random maintenance expenses, because if you did it right there is always enough money in the account to cover your costs.
Granted a string of costs all at once will bite you, but statistically that is not likely to happen.
The goal though is to never use credit card debt to finance anything because you pay so much interest on that debt if you can't pay it off at the end of the month. And in practice it means putting what seems like all your money into weird "future" accounts (maintenance, food, insurance, taxes, etc) but it also means than when you pay to those expected bills you already have the money to pay them and don't have to borrow. You are mailing yourself the funds in the future to cover that cost.
I'm curious, do you really mean multiple separate accounts? What's the advantage to that over putting it all in one single account? After all, if one of your accounts were to run out you'd surely have to draw from the others?
Then, each month I toss that amount into that month's category. So, if I suspect I'll be replacing my roof in 3 years for about $10,000, then I will be adding $277.77 per month. Hopefully my estimation was correct and when I need to replace the roof, there's no financial stress since I'll have about $10,000 sitting in my "new roof" account.
That "account" though is virtual, not a real separate account. Though I do have a separate real account I'll use to hold high-dollar/long-term future savings. But that's just a little paranoia on my side, not wanting to keep all of my eggs in one basket, so to speak. It's just in case something weird happens, like an unauthorized ACH run on my checking account or my wife splits with the debit card and drains it completely on week long bender in Las Vegas. At least the larger value "accounts" or "envelopes" would be unaffected. So, the money set aside for items like a new roof, rebuild of deck, next car, etc., is safe and sound in their own separate savings account.
It works well for car repairs, which I recently confirmed. I always put $100 each month into my "car repairs" envelope. I went about 6 months with no significant repairs and then got hit by two repairs within two weeks for a total cost of about $470. I must admit I really enjoyed the lack of stress over the bill. I simply paid the man his money and drove away still having $130 in that category and it'll continue to increase by $100 per month.
The YouNeedABudget.com style of budgeting has immensely improved my financial situation. It's a Mac app with a companion iOS app, but a similar method is used by the good folks at everydollar.com [2]. Their app is web-based but they also have Android-based apps.
Well. This post meandered about a bit more than I had intended :)
[1] https://www.youneedabudget.com/ [2] https://www.everydollar.com/
When I was a kid I found it fascinating that everyone's money in the bank was in the same pile, but your account number had associated with it the amount of the pile that was "yours". It was not that the $10 bill in lawn mowing money I gave them was going to come back when I withdrew $10. Instead it just went into the big pile. By organizing expenses and income as different accounts in my budget and separating cash management from accounting, I'm able to focus on doing things which make economic sense while maintaining cash balances which are appropriate for different savings or investment goals.
Also, my job is not to feed into the mortgage-finance-housing industrial complex.
This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.
If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015.
For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015.
Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time.
In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars).
EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.
Granted this will depend on where you are in the world. Here, the house has to be a rental property to be able to deduct the interest.
It's a stupid game I don't want to play, but not playing makes me the automatic loser of it.
Example: Consider a $500k mortgage with a $50k down payment (10x leverage). A 5% drop in value on the $500k home means you've lost 50% of your principle investment (-$25k), and vice versa with gains.
Most investors have rather modest risk profiles and would never consider a 10x leveraged investment of any other type, but for some reason they give no second thoughts to putting down money for a 10x leveraged mortgage.
I personally would rather pay the fixed monthly expense of a rent rather than exposing myself to the risks of a 10x leveraged investment.
Unless your house appreciates considerably ever year, you will pretty much always sell at a loss when you factor in the interest paid over your time as owner. This is not even including incidental expenses like appliance repair or extra warranties hi might purchase to "protect" you from said incidental costs.
In short, from a financial standpoint the math on buying a house with a mortgage never works out in your favor. It's not even close. I am looking at this from a purely mathematical standpoint. I do undere that there are qualitative reasons that owning beats renting; however, I'm sick of hearing people try to make the case that a home is an investment, which is true only if you ignore the interest paid.
EDIT: if you did sell early in in the loan you could treat the money lost to interest as an implicit rent. This makes me laugh because you could've just rented in the first place and had the benefit of mobility and avoided the headache of putting a house on the market.
Then go to a cost of living calculator to see how much the inflation trend of 30 years minimizes that. The dollars you pay at the start of your loan have much more value than the dollars at the end; it tends to take quite a bit out of the "sticker shock" of just looking at the "total interest paid" column of an amortization schedule.
Headline BLS inflation figures aren't very representative of reality. Bottom line is that if you pick the underlying asset smartly, owning a house is leverage, and leverage increases financial returns. The historical high quality of real property as an asset could change -- a lot of people in my generation think it has. But I suspect it has not.
Even your edit, which mentions rent, pretends as if the interest paid and the rent always end up equal. This is clearly not the case. Sometimes it makes more sense to buy, from a "purely mathematical standpoint." The benefit of mobility has a different worth to different people.
That's not what you were saying before, you didn't say anything like that. You said "you will pretty much always sell at a loss when you factor in the interest paid over your time as owner", as if losing money overall on your house means it was a poor choice.
And if that's what you're saying now, you haven't backed it up. Of course, that's a statement that can't be backed up, because obviously some people are better off getting a mortgage than renting. It depends on all kinds of quantitative reasons that you're ignoring, like average rent in your area vs house prices, cost of living in your area vs other areas, our salary and where your job is located, etc.
From a financial standpoint, that does make it a poor choice. Losing money == bad investment.
I've been listening to some other commentors on the subject and that has evolved my position a bit. Smart people change their mind when new info/viewpoints become available.
>average rent in your area vs house prices, cost of living in your area vs other areas, our salary and where your job is located
Rent is pretty much always a function of home price so, again unless there is a qualitative reason (like you have a big family and you need 3-4 bedrooms) renting is going to make more financial sense. You statement on cost of living is wrong. Places where the cost of living is high will have high rents and home prices.
My OC was not about comparing the monthly costs of rent vs. buying. It was pretty explicitly about a home not being a good investment when the actual cost (including total interest and incidentals) is factored in.
The bottom line is, there are cases where it will make sense to buy. For most people, this is not the case and they buy simply because they are ignoring the actual cost.
Even if we factor in other costs during that period beyond loan servicing, such as insurance, taxes, utility repairs and maintenance it seems unlikely I will have LOST money in the process.
It's not a terribly GOOD investment, but it's not a financially asinine choice either.
I'm deflecting though. Historically what you say holds up.
Owning comes with a lot of advantages: home renovations, settling in and making something your own, building property value over time, a stable monthly mortgage payment, that pride that comes from saying you own something.
But it has a lot of other factors to: being responsible for repairs, landscaping, property taxes, less flexibility if you need to relocate.
The "renting is throwing your money away" line is prevalent, but is also a gross simplification of the rent vs buy decision.
Yes, you can get away with a 3% down payment with an FHA loan. But 3% is still $6K on a $200K property, even more if you're trying for a $250K or $300K property. That doesn't include closing costs, nor an emergency fund you need for homeowner expenses that traditionally come up.
Sure, you can afford the house at closing. Are you financially well off enough to afford it for the next 15/30 years (depending on loan term) so as to not lose your equity?
Probably not, and that's not going to get fixed until incomes start rising.
Are you financially well off enough to afford what the rent is going to be over the next 15-30 years?
If you aren't well off enough for the mortgage or the rent, then you're fucked either way.
Now suppose we equate mortgage with rent, and declare that the payments you're making aren't contributing to equity---they are just pure rent. Then the equity you have in that $200K property is the $6K you put in. That is what is at risk relative to renting.
(Of course we are ignoring the effects of location. Relative mortgages versus rents and the longer term picture in a given area and such.)
The problem with buying a place is you get stuck in one location.
With rentals, you typically have to hand over the old place on the same day you get the new place. All the renters play a a ridiculous round of "musical suites" at the end of the month.
Only if you're lucky, the place you're moving to is already vacant, and the new landlord is kind enough to give you the key in advance, or the old landlord doesn't have anyone moving in right away and lets you have access to the old place for a couple of days.
How much you're going to pay and how long it will take is just a projection based on the current numbers: interest rate, remaining principal and payment size. The projection isn't reality.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...