Maybe Americans aren't dumb enough to keep buying houses?
blogs.law.harvard.edu
blogs.law.harvard.edu
While it's obvious that this flawed logic existed five years ago before the bubble burst, I'm surprised at how much of it still remains. I'm surprised that consumers are still trying to play numbers games to justify purchasing homes, but perhaps as the OP suggests, the supply of buyers is less than before. If you want to buy a home for lifestyle reasons, great, but make sure that's clear; there are so many people who are stuck in their homes without a job because they thought they were clever at math.
When my wife and I were figuring out what to do with our lives, we decided to put my finding a good job above owning a home. Because of this, I was able to accept a job in NYC and move from the suburbs of Atlanta without worrying about selling a home in a horrible real estate market.
We'll consider buying a home after I feel more rooted in the tech industry, but for now, we appreciate the flexibility that renting affords.
When you start waking up in the morning and thinking "god damn, I wish I had a home, so I could . . ." then it might be time to start giving it consideration. For me, I had dealt with a home invasion. I'd lived in my apartment for five years and someone walked in while I was asleep and stole everything (the layout of the apartment was such that I wasn't disturbed by the intruder - if you were in the back bedroom, you couldn't even hear someone banging on the front door). I lived alone. Nobody else had keys . . . except the leasing and maintenance offices. Took $30k worth of stuff.
So, I started waking up in the mornings feeling a bit unsafe, wishing I had a sweet surveillance/alarm system, and also thinking about how great it would be to have room for my entertainment system (and get to blast it as loud as I wanted). Also, I kind of still want to get a dog and that wouldn't have worked in the apartment. Enough things started to bug me that I just sat up one day and said "let's go look at houses".
Until you are home shopping for those reasons (or similar reasons of your own), then you may be doing it for all the wrong reasons. Maybe because friends are all buying homes. Maybe because you feel like you're still a "kid" as long as you keep renting. Who knows?
In the mean time, definitely don't buy into the idea that you have to go for it because people around you are talking about it and you feel like you're missing out. You might be the sanest of them all. I didn't buy a home until I was starting into my 30s. I could have done it a decade before and went so far as to check out homes and even get approved for loans. It just never felt quite right, until last year. And I have been happy that I finally did so, when I did.
Well-being accounts for a lot, too. Whatever you may be losing "on paper" with renting, you may be compensated for in peace of mind, right now. You can focus on work and savings and family rather than finding a trustworthy and affordable lawn service, worrying if your boiler is going to make it another year, wondering why in the hell that sink is draining slowly, when it isn't clogged up, wondering how much it would cost to turn that spare room into a sex dungeon. . .
Another issue is the fact that not everyone can buy a house that they're going to realistically want to live in for 30 years. Your family grows, you change cities due to job opportunities, etc.
So for the guy who knows he's going to be single and stay put, it may make sense for him to buy a $200k house instead of paying $1200 in rent for an apartment. But for many others, buying makes absolutely no sense.
You [or your group] do an outstanding job. Thank you for it.
The main problem is that the general public sees renting as throwing money away, and that owning a home is unconditionally "better".
I'll make the assumption that this community has higher-than-average financial literacy, and hence there are people who have made the right decision with respect to rent/buy. However, I don't think this is true in general, and often times the rent/buy choice is much, MUCH closer than people assume.
related: Ann Arbor/Detroit HN group http://groups.google.com/group/hn-ann-arbor-detroit
I would certainly rather own a business that generates whatever my rent or mortgage would be, than to own a house that costs me that mortgage.
Two examples: The house I live in has a carriage house behind it. It's zoned as a rental, has a kitchen, bathroom, bedroom and about 800 sq ft of studio type space with about a 15 ft ceiling. Does this information appear on my Zillow page? Nope. Zillow has no way to enter that type of information and its valuation is missing this very crucial bit of info.
Secondly, where I used to live (in the mountains above Boulder), there was a house for sale next door. It was on one acre and was a modified single wide trailer. Zillow said it was worth $350,000. They said the property I was living on next to it (5 acres, a main house twice the size of our neighbor and a detached cabin) was worth $420,000. Seemed way off to me. Well, the house next door went for sale and sold for $149,000.
After that, I don't trust Zillow at all. They have a lot of work to do before someone could take any statistics they provide seriously.
My income mirrors my actual worth. I've seen people shortchanged because companies know that person is chained to a mortgage. I'm not paying maintenance, insurance, or front loaded interest on a home. (Tax deductible not that impressive)
After rent is subtracted from my net pay I still have enough to turn around and invest in a diverse array of investment options. A home is a savings account with a maintenance fee. Viewing it as anything else IMHO is wishful thinking. An apartment is that same service fee condensed. Remember, in my situation both the house and a car have costs I don't have to worry about.
Having freed myself of those problems I have much more spare time, more investment options, and flexibility. I'm perfectly ok with not having a lawn, neighbors degrading property values, or surprise expenses. To other people those negatives are perfectly acceptable, they cite the lack of space, public transit, and neighbors as negatives. I don't mind any of them.
I rented for years, and not being able to fix stuff when it broke (without losing the investment when we moved) drove me crazy. I feel a strong desire to maintain my own home, even though I know I'd do better financially hiring cheap labor to do the work while I go make money faster building an empire.
Prices are still kinda crazy and unjustified compared to 2005.
Also, the average person can probably not get credit anymore and the wealthy desire only so many 2nd homes.
My sister closed 5 days ago on a house in a very desirable part of Mountain View CA. Through their process they had houses with up to 25 bids.
I'm seeing (anecdotally, in the SF Bay Area) a lot of people buying right now. These are generally savvy folks too, they're putting 20%+ down getting awesome fixed rates, and staying well within their means . We may still see a slight dip in prices but my feeling is that we've bottomed out a bit here and on the way up. We think we'll be able to sell our house in 5-10 years and make a profit. That may be wishful thinking, but I'm fairly confident in that position, especially as the tech sector heats up.
The tricky thing about the SF Bay Area however is its very resistent to outside pressures, it was one of the last places hit and will likely be on of the first to recover. Its very hard to time a bottom in the housing market here.
In most parts of the country, housing prices are roughly comparable to what it costs to build a house, so I imagine they should be at least reasonably stable.
But here, prices are way out of proportion, and this seems to depend on draconian laws preventing almost any sort of development. If people could actually build condo buildings in, say, Palo Alto, prices would be going down in a hurry.
Can you please clarify what these means?
I make a solid income and owning a home isn't a trivial expense to me, so I can't imagine someone making a go at it if they have a family and an income that is half or a third. Prices should drop to whatever their natural un-aided point would be, so that all those people out there who will either never own a home or only do so by getting into unfathomable debt (all over again) will actually be able to own a piece. Imagine what the long term benefit to the economy would be if prices dropped just long enough for tens of millions of people to lock in rates on their own home? It would transform the economy as well as, perhaps, society. Owning a home would be the rule, instead of exception. Being in debt to own a home would be an exception. High rent would be an exception. There would be much more discretionary income to put back into other industries. Or, better, for people to stick into their savings so that they can retire with a home to live in and finances to support themselves.
Energy costs will be the main concern. We need to cool or warm our air, heat our water, refrigerate our food, and mechanically dry our clothing.
If prices were to diminish as you speculate, the real cost of home ownership would be property taxes, utilities, and maintenance.
How many of these homes built in the last 30 years will last another 30 years?
What does it cost to cool a poorly insulated wood-frame 2000sqft house? What will it cost to cool in 10/20/30 years?
Housing around here is not particularly expensive, but the house's gas bill peaks a little over a tenth of the rent in an Upper Michigan winter, and the electric bill doesn't really get near that peak. There would have to be some pretty significant change before energy costs were that much of a concern.
Housing should cost whatever supply and demand value it at. That means that when everything goes belly up because of stupid lending and stupid borrowing, those people should have to sell their homes at a loss and people should be able to come in and buy those now cheap (because of a new ratio of supply and demand) homes on the cheap.
In other words, I want the natural value (free market) of things -- not some artificially inflated value, because government and committees felt obligated to bow to home-owners in saving their asses and maintaining the value of their assets. If I buy a car and then my financial situation changes, I may need to get rid of that car on the quick and someone can get a good deal out of it. Why should the government come in and rescue me by ensuring that I get a solid high value for my car, at the expense of another person who could have benefited from circumstances that otherwise would have made the car affordable to them?
I know we don't tend to have a truly free market much of anywhere, but it seems particularly shitty to artificially maintain a high value in housing at the expense of a huge chunk of society that can't afford ridiculous (artificially so) housing prices.
The NY Times buy vs. rent calculator in the article that he links, uses 3% as a baseline rent increase per year. So, after 5 years, a $1500 rent could be expected to cost $1740. That's not too impressive if you assume it's a place worth $375k and at his 2% taxes and maintenance price, you'd have $625 in costs in addition to the mortgage - well over the $240 that the rent had risen. However, after 15 years, that theoretical rent would have risen to $2300 and eclipsed the cost of taxes and maintenance. Now, as home values rise, taxes would rise with it, but then you own something that you can sell for more money and have made a good investment so it isn't a good argument to say, "well, one's home could go up in value a lot every year which would mean more taxes."
It depends on what you're buying a property for. Frankly, the NY Times calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) is going to be a lot better than my crude calculations. However, if you're buying a property to stay in for a good while, it can be a better idea to buy. The costs of selling don't matter that much when you've stayed in a place for a long time. It also depends on your market. I've priced things out in the Boston area against rent (more urban than Greenspun), and it really depends on how long you're going to stay in that place. Most of the cities here offer you a homestead exemption on your property taxes if you live there and it's usually around 200k - meaning that if you buy a place for $400k to live in rather than rent, you're actually only paying half the property tax rate. The towns tend not to have that exemption. So, if you want to be in one place for a decade, the calculator shows that buying can be a nice option.
Buying a house isn't something to go in for like buying an iPhone and getting a two-year cell phone contract. It requires a careful look at the costs and that you're relatively settled in life. It isn't a panacea of money, but it can be cheaper and can be stabilizing. While it isn't everyone, there are people who really like an area, have a job that won't see them have to move, and would stay in that house for 20-30 years.
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Plus, if you look at Trulia's rent-vs-buy index (http://trulia.movity.com/rentvsbuy/), you'll see that Greenspun has cherry-picked the worst cities to buy to do his calculations. Trulia notes that in 36 out of its 50 cities studied, it is "much less expensive to buy than rent". That includes real cities like Chicago, Wahsington DC, San Diego, Minneapolis, Philadelphia, and Atlanta. He's used a buy-to-rent ratio of 30:1, but the average for the 50 cities shown is 14.22. So, we live in the Boston area and buying here is an expensive proposition that might not make sense. However, there are many places that have much more favorable ownership conditions. If you're in a market where the buy-to-rent ratio is below 15:1, the NY Times calculator will show you how favorable buying is. And, frankly, that's most of the country. Where Greenspun and I live seems to be the exception, not the rule and his calculations are based on data that doesn't apply to most people. It applies to him and it applies to me based on where we live, but it probably isn't something that one should generalize to the country.
There were articles in 2007 [2], how Japan's real estate crash may finally end after 16 years, but oh well.. we know happen in 2008.
[1] http://blogs.reuters.com/felix-salmon/2010/01/12/house-price... [2] http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e070...
Which one would you do? The reason why _some_ people make money from housing is leverage. You take out a huge loan and if it goes up in value a few %, you made much more than your starting value. Leverage works exactly the same way when prices are declining. Your small $50,000 downpayment is quickly erased by a 5% decline in value.
I don't like leverage in my investments. I prefer to know that I can't lose more money than I invested in the first place. I diversify my risk so that I can never lose more than 10-25% of what I own with a single investment. Why would I put so much money in a single asset that is extremely illiquid and has so much leverage that I can lose more than my net worth?
Housing just doesn't make sense until the market returns to reality - and with federal subsidies including tax credits, Fannie Mae and Freddie Mac, it won't return to a fair market until _all_ government subsidies are removed, including mortgage interest tax credits, Fannie/Freddy backing mortgages, etc.
I'd sure like to know more about those.
For instance, buy an index with a low maintenance fee that tracks the REIT. It's also a lot quicker (and easier) to get out of that index fund than it is to get out of your home. https://personal.vanguard.com/us/FundsSnapshot?FundId=0123&#...
The key is, you can invest in real estate without owning a home and better still: be diversified into multiple kinds of real estate. A home is a very homogeneous investment vehicle. Think of it more like a savings account with a maintenance fee but you can live inside it.
That throws the calculation way off, because you don't get the tax benefits associated with buying and living in a house.
Money flows, tax breaks can decrease the viscosity of that flow.
There's more than one way to play the game. :)
This will obviously not be accessible to you - but just to illustrate that they do exist for special protected classes of individuals.
When I heard this from my co-worker, I was flabbergasted.
Her relatives, senior citizens in India, get +9% interest on their personal savings. Call it subsidized, but there is no risk.
She is really annoyed when they harangue her about her middling 1-2% interest rates.
As a whole rates may increase 3% per year, but individually it will look more like a 7-10% increase the first year followed by 3% increases thereafter, unless you move.
My fixed mortgage is fixed for the life of the loan (until 2040), so over time, the percentage of my income dedicated to paying my mortgage will continue dropping.
Compared to that, I would say houses in America are affordable. I hope India's real estate bubble gets burst.
1) The rent vs. buy decision is almost entirely based on your expectation of future house price changes versus rental prices changes. Everything else is around the edges.
2) Regardless of your opinion on the first question, you should never buy a house when you think there is a significant chance you will leave in less than five years.
I think housing will go down another 20-40% from here (causing widespread bank failures and eventually the dissolution of the Federal Reserve) and rents will be stable to down due to the deflationary pressures we are facing. Therefore, I will not buy a house.
YMMV.
The rent/own ratio may be different in San Francisco (where I've lived) and New York, but there's a lot of other country out there that exists besides those two and Seattle. There's Portland, Denver, Chicago. Plenty of places. I live in a fairly expensive city (on par with Portland, where I lived most of my life). Still, my house didn't cost a lot more than the mount I'd already paid in rent during my adult life. I did the math and I have paid about $170,000 in rent. That includes apartments I've lived in in Portland, San Francisco and Denver since 1999 and is not adjusted for inflation. It includes the 400sqft hellhole in San Jose that I paid $1,200/mo for in 2000 and the 400sqft studio and 585 sqft 1bdrm in Portland, and the 1,000sqft 2 bdrm in Denver. The house I bought last year was only $25,000 more than that. Even if my home loses a ton of value (and it probably has and will), at least at the end of paying $200k into it, I'll have something worth something, versus what I have after about thirteen years of renting for $170,000 . . . which is nothing.
The real problem with the home market is that it's being artificially buoyed, to keep current home owners happy at the expense of houses dropping even more in price, so someone can reasonably eventually buy a home even if they're making an average income. After all, isn't that how the market is supposed to work? Stuff drops in price, other people get an opportunity to own that stuff who previously may have been priced out of participation.
Also, the article states that someone who just bought a house and lost 10% due to decrease in value plus commissions when selling is unlikely to enter the market again any time soon. Well, why are you buying a house just to sell it a few years later?
I bought my house so I could live in it. I would like it to increase in value, eventually, too. I'm not counting on it, but it would be nice. If it doesn't, at least I have a home to live in and will eventually own it (because I didn't buy the maximum house that my credit score and loanability would have allowed).
I don't know a lot about the housing market and I'm not an economist, but I do know that I'm glad I bought a house last year (with a rate under 5%) and wish I would have done so many years ago, instead of putting it off for a decade. (On the other hand, if I had done it a decade earlier, I probably would have taken a big hit over the last few years, so whatever).
Also, the other nice thing is that I'll be paying the same amount (except for tax changes) for the next 15-30 years that it takes me to pay off the house. In my apartment, I'd gone from paying $900 to $1,200/mo in only four years for the same unit. Oh, and I don't have people stomping on the floor above me 24x7, so I can't sleep. And I don't have to allow someone from the maintenance/leasing office come into my home nearly any time they want with a 24hr notice. And I can (and did) run ethernet in the walls. And I can (and did) setup my home theater and run it at 50% power instead of having neighbors complain when I ran it at 5%, before. And when I have a guest that stays for more than three days per year, total, I don't have to register them with the leasing office. And I know my neighbors and they have lived here for a couple decades and are friendly and helpful. I never even saw the neighbors at my apartment.
So, yeah. I guess I'm dumb enough.
Your post mentioned at least four different cities where you lived in an apartment. How would owning a house have changed your mobility? What would it have done to your overall cost of housing if you needed to sell one house and buy another?
The cities I listed as having lived in were actually three (I realize that I was unclear about California, where I worked in SF but actually lived in San Jose). I can break it down to under a year in one place and at least six years in each of the other two places. Even there, I actually could have probably found a way to not move, so it wouldn't even have been an issue. (I've had the same employer for almost fifteen years).
So, in my case, it was only a perceived need for mobility and unwillingness to say "I'm here, for a long time" that kept me from owning a home and it was probably not the best financial decision, looking back. I sacrificed a lot of income over the years for something I thought I needed, but never did.
It is definitely a bigger concern, now, than ever before. I absolutely concede that point. My grandfather built his home and lived there for more than fifty years. I will be happy if I keep my home for ten or fifteen. Our lives and careers change too often, now. Buying a home now requires the added consideration of whether you'll still be here in five or ten years and how many times (especially in technology) has taking a new job also required moving? (By the way, I think they say it tends to require about five years of ownership to compensate for the costs of buying and selling a house - and that was back when houses were increasing in prices, instead of decreasing).
Of course, if home prices reached a naturally lower point instead of being artificially kept up, then the affordability may trump all the other concerns. Hell, if I could own a nice home for $100k, I'd buy one in all three of my favorite cities and never have to worry about uncertainties of live and mobility again!
What do you think a mortgage is? The majority of your payments in the first 5 years go to interest, which is just giving money to a different person.
And on top of that you're paying more in hidden costs, stuff like estate agent fees, tax on any future house sale, home insurance, structural problems, boilers, plumbing, etc. which is giving money to more different people just not at a convenient monthly time.
So, I think even the expenses I've incurred (I replaced the power junction box and ugpraded it from 50amp to 200amp, installed several dedicated circuits, and did tons of other work to this place) will seem small in the long run, as will the interest included in my mortgage. Of course, I only have a 30yr mortgage as a failsafe. So that "if things go really bad, I only am obligated to a certain amount per month". Unless things go totally awry, I'm expecting to pay it off in half that time, which will be an enormous savings. (Also, payment on mortgage interest is tax deductible).
And best of all, in the end, I have a house and property to show for it. So even if it came out to be on par with renting for thirty years, I don't end up owning anything at the end of those three decades when I'm renting.
Of course, in the meantime, I'm keeping my fingers crossed that something doesn't arise that requires me to move and spoil the whole plan. That would suck. But the long term game will be beneficial. That's an admitted risk I have to take, since just about none of us can ever be absolutely sure that we'll still be where we are in five, ten, fifteen, or twenty years.
You also don't seem to be taking into account that interest rates are very, very low at the moment, you definitely can't plan around those rates. Sometimes renting is cheaper than your mortgage payments, sometimes its more expensive. It depends on interest rates.
A lot of lenders also have heavy penalties for early payment. If you don't it probably means that the lender has given you an overall worse rate to compensate for the fact that you're probably going to pay early.
They always get their money. That's how banks work.
Buying a house has been a disaster for some people, causing some serious financial difficulty because they bought when they couldn't afford to, ending up with interest-only mortgages and are now in negative equity.
All because they believed that renting is throwing money away. I just wanted to clarify that it's definitely not.
I also want to point out that the tax-break you're currently getting is by no means guaranteed to remain for the lifetime of your mortgage. Governments use that to encourage home ownership. After the recent disaster it's only going to be a matter of time before someone starts questioning why this amazing tax break exists. Abolishing it is also a politically easier way to raise tax revenues without actually raising the tax rate, which allows politicians to say they stuck to their promise of not raising the tax rate. Here in the UK it was got rid of long ago. This also applies to any capital gains tax relief you think you'll be getting in the future.
Buying a house can be just as expensive, if not more and in fact carries far more risk as you can lose all your initial investment if you end up in negative equity or suddenly find yourself at flood risk due to rising sea levels or whatever it may be.
All you can lose renting is your deposit.
That's what 30-year fixed means: you can plan around those rates for the life of the mortgage.
"A lot of lenders also have heavy penalties for early payment. If you don't it probably means that the lender has given you an overall worse rate to compensate..."
I think that's fairly rare now. There are plenty of reasons that buying a house might be bad; but in this environment, bad loan terms are not one of them as long as you shop around.
"All you can lose renting is your deposit."
It's more complicated than that. Rising rents can be a risk, too, because you need to live somewhere. Also, there are costs (financial and otherwise) if you are forced to move by the landlord.
House prices tend to move inversely to interest rates. When interest rates are low, then new home buyers can afford a bigger principal values on a loan of a given monthly payment. The market adjusts to accomodate this, and house prices rise to take up that principal value. When interest rates fall, new home buyers can't afford to take out as big a mortgage, so the supply of cash available in the market declines, and prices fall accordingly.
In 2006, when interest rates were at historic lows and home prices were at historic highs, I worked out who was making the profit from all of this. Obviously, existing homeowners who sold into that market were making a killing; where was the money coming from? It wasn't coming from the people who bought the house: they were paying the same monthly payment, for the same loan terms, as people who bought in the not-so-bubble years before. It might've been coming from the banks, but ultimately their profits were indifferent too, because they were just passing along their low borrowing costs. Trace the money all the way back, and it was being injected directly into the economy by the Fed, through low discount rates. That reduced the banks' borrowing costs, which reduced their mortgage rates, which increased the size of the loan that could be written for a given monthly payment, which increased the amount of cash in the housing market, which made housing prices go up.
And then I wondered what would happen when this system went into reverse, interest rates started to rise, and cash came out of the system. This started to happen in 2007, but then the system froze up, the Fed panicked, and the floodgates opened again. It will probably happen again at some point in the future, unless we get full-on hyperinflation.
Anyway, the obvious losers are people who bought houses with inflated mortgages for inflated prices. With high interest rates, new home buyers can't afford as big a mortgage for the same monthly payment, so house prices must come down for anyone to be able to buy. But who are the winners? Not (really) banks, who're just passing along the borrowing costs from the deposits they have. It's actually people who are holding cash right now and looking to buy in the near future. They're acting as a mini-bank in their own right: if you can buy a house with cash (or put down an absurd down payment like 50+%), then you're effectively acting as your own bank, but without any borrowing costs. Any rise in interest rates goes straight to your pocket.
tl;dr: Falling interest rates are good for homeowners, ambivalent for mortgaged buyers, and bad for people with cash savings. Rising interest rates a bad for homeowners, ambivalent for mortgaged buyers, and good for people with cash savings.
I've had at least 5 mortages (in the US) and have never seen a prepayment penalty. That's not to say that they don't exist, but I'd like to see some evidence for "a lot of lenders". More specifics please.
I moved to FL and we're renting out our NC home while paying rent in Florida, and I loathe being a renter again.
As a homeowner you may be able to avoid paying rent, and you may even be able to avoid paying interest, but good luck avoiding the property-tax increases that are probably coming your way.
Interest is a tax write off, many states are suing for home-owner protection, the very large fraud lawsuits against mortgage lenders, etc.
If you live in NYC, and your studio apartment is worth $500K, that's $40K in friction costs -- rent for 16-18 months for the same unit. Ammortized over 10 years, it is not a big deal. However, if you move after 3 years, that brings your "owner equivalent rent" up by 50%.
Circumstance is everything.
In a city like NYC or SF where most people can't afford a house larger than they need at the moment, the introduction of kids forces you to move -- thus, if you're planning kids in the next few years, you're better off renting even if you know you'll stay in SF for the next 20 years.
That landlord would be better off selling.
Folks don't charge based on their costs. They charge what the market will bear above their costs.
Something the parent mismentioned is not that he'll be paying $1000/mo 5 years from now while rental rates will simply go up, but you can actually reduce that rate now and free up more of your income for later. It's actually the sole reason I've been able to fund my co-founder to work on our startup full-time while I work a regular boring old day job, I've paid down so much of the principle the past few years that, along with pay raises from my day job, I have enough cash on hand to float another person for the foreseeable future.
At the cost of incurring risks including but not limited to:
- Property damage by renters and others.
- Property damage by acts of god (flooding/fire/subsidence).
- Default on payments & long eviction periods.
- Low occupancy/months without rent.
- Downward price movements in the market as a whole.
- Downward price movements in your location due to ghettoization, tax increases, service/school decline, structural unemployment or other factors.
You are also forgoing returns on your existing equity if you invested it elsewhere. Risk free interest rates for retail deposits here in the UK are currently above 3% for example.
In addition to that you also have the costs (in time and money) of:
- Management time/effort.
- Time to deal with renters and searches.
- Organizing maintenance.
- Costs of credit scoring etc.I'm fortunate enough to live in an area where finding renters will never be a problem should I end up that route, but you make an excellent point about that.
Also, eviction periods are not too bad in most parts of the U.S., you can write terms into the lease that also help short fuse eviction on non-payment if many places.
The biggest concern I have above all others is just managing the renters. There are services you can hire to handle all that and maintenance, but they consume some not insignificant part of the rent as payment.
The first list is full of what if's...
As a renter:
What if the landlord gets foreclosed on and you are forced out What if they don't pay to fix anything What if the building burns down and you lose everything etc
I could rent out all the bedrooms, including the master bedroom (with its own bathroom). I don't even know what the right price would be and I've heard plenty of horror stories about renting to people, but if I renteded even two of the rooms at only $350/mo, I'd have two thirds of my housing costs covered!
And, if I ever need to move, I could buy a house somewhere else and keep this one to rent it out. Again, I hear being a landlord sucks - but I have a handyman nearby who could do on-site work for me and once the house is paid off, the renters would basically be paying the mortgage on my second home.
Also, I plan to pay down the principal, too. I'm not making any extra payments just yet, but I am putting money in a savings account. If I have an emergency, I have access to that money today. If I don't have an emergency, then once I have enough saved up, I can pay off a hell of a lot of my house at once.
Owning a home can be a hassle. God damn, I sure as hell learned that right out of the gate. (I did a lot of remodeling to fit my lifestyle and my electrical needs, among other things). One thing it gives you, however, is more options. More choices, even if not mobility.
And that handyman close by? That's great - until he has a family emergency and isn't available - then it's 100% on you to fix.
I'm not saying the renting-to-pay-other-mortgage is bad idea - it's not, it's a valid strategy - but it's something to be taken really seriously, not something you should try to just pull out of a hat.
We are on the verge of asserting my state's statutory process to compel the landlord to fix things because he is too cheap to use a qualified repair person, even on complex or potentially dangerous tasks like the gas stove, and even when there will be a long lag time on repairs if he doesn't.
My advice is that if you're going to be a landlord, get familiar with some of the maintenance companies in your area and don't be too cheap to call them out. I have been following this discussion with some interest, but I really believe any position, renter, owner, or landlord, can make sense in the correct set of circumstances. You just have to think things through and do it the right way, and it will save everyone involved a lot of headache.
Rent to a family.
Being a landlord does suck. I have worked closely with a real estate investor managing 30 residential rental properties.
I would say the two biggest issues are the quality of tenants and the quality of homes.
Central A/Cs die. Whole homes need to be repiped. Roof leaks.
Tenants do not pay or will have 5 people in a 2 bedroom home. Eviction is costly and time-consuming.
The only real estate I would consider as an investment right now is something commercial/industrial, like a group of warehouses or office suites, something with multiple renters.
Take all of the extra principle payments you have made - calculate what they would have made at a 5, 6, or 7% interest rate. Then, look at your home equity, subtract the amounts you have paid in repairs and taxes, and ask yourself which number is larger. Chances are you have been foolish with your money.
I'm not sure you understand the difference between a depreciating asset and an appreciating asset. With very few exceptions, a car is a depreciating asset. It's worth less tomorrow than it is today. A house (with few exceptions) is not a depreciating asset. With the singular exception of 2007-2010, home prices tend to rise.
Also, I'm sorry to say, unless your definition of "conservative instement" includes a money printing machine, no conservative investment vehicle since the end of 2008 has broken even 3%, and 5% since 2007 let alone 6%.
In any case, "home prices tend to rise" doesn't make sense if you're trying to justify buying one as an investment. Borrow ten times your net worth and buy a house hoping it'll appreciate. Not exactly a brilliant investment scheme.
Also, you could argue that a house is a depreciating asset. Shit breaks and you have to maintain it. If you were a business you'd actually have to account for depreciation on buildings.
Basically the only thing that will appreciate when owning a house is the land it sits on. A really nice house in a crappy area is going to lose value until the demand for the location starts going up again.
In the words of Shaun Micallef: "All cats are brown, as this exception to the rule proves".
http://www.infochoice.com.au/banking/savings-account/term-de...
If you compare 5-year term deposits most are in the 6.8% - 7.1% range.
Now...if you have something over $100,000 USD burning a hole in your pocket that you won't need to touch for a while, you can purchase something called a jumbo CD, and the 5-year instruments will just break 2.3%.
Housing isn't a short term investment. If you need to be mobile, rent or surf couches. But when you are ready to settle down nothing beats having your own roof over your head and 20 years of fixed payments ahead of you.
The article must be comparing house vs. apartment rental prices to get their 30:1 ratio, even in Seattle. If you rent a house you're paying the mortgage for the owner + a bit more so there is no way you can rent a comparable home for that much less than buying.
This is one instance of a classic fallacy. Let's call it the steady-state fallacy:
If X is impossible over the long run, then X cannot really be happening.
In the housing market the second-order factor is speculation: During bubbles, like the one that is deflating now, people overpay for housing, way more than the equivalent rent, on the assumption that the house would appreciate. When housing prices fell instead, these people ended up owing more on their mortgage than the housing was worth. But it's better to collect 60% of your mortgage in rent than collect 0% of your mortgage on an empty house, or to live in your house in a town where you have no job.
So there are lots of houses and condos that rent for significantly less than they cost to buy. Pretty much all the ones in Boston, for example, at least until very recently.
If you could buy a business that was guaranteed to make you 1k-1500/month every year for the rest of your life, while also having someone pay most or all of the loan required to buy said business, would you do it? I sure as hell would (and did).
I think that the difference between us and the people that they are referring to in that article is that we consider a house to be a place to live and not merely a medium-term investment.
I think that the thing that really lead to the housing market bust was that a ton of people started buying houses just to sit on them for a few years and then sell for a profit. The speculation fed on itself until it became unsustainable, then it fell apart. It is just a shame that this had an impact on regular long-term homeowners as well.
So, yeah, if you're dumb enough then so am I.
To me, by not discussing the long-term benefits of home ownership they are looking at the issue all wrong. Their analysis is focused only on the short to medium term and the valuation of the house itself.
They are discussing homes in a similar way to how one would look at any investment - ignoring that a home should be considered differently because of the non-monetary values that come along with home ownership.
Of course, a home is an investment and it can provide capital gains, but there are other, not easily quantifiable, benefits to home ownership that make it attractive. To ignore these benefits is to miss the picture completely.
The article focuses on the bad things, sure, but there are already a ton of articles written out there about why "renting is stupid, buying (mortgaging) you can't lose!)
I rented for a long time. Proudly. People told me I was throwing my money away. I ignored them, I liked the simplicity and mobility. And the savings.
Then one day I bought (not mortgaged) a home. I bought it not primarily as an investment but as a home, for my family. Some day I'll probably sell it and move on to something bigger, but whether that means I take a loss, a gain, or whatever isn't the point - the benefit is that, for now, I don't have to worry about dealing with landlords, and my expenses on a monthly basis are lower, so if I lose my job or otherwise come into financial hardship, my home won't be on the line (and no I'm not ignoring taxes and other stuff - I'm well aware of my local obligations where I live)
All that said - speaking vaguely of the "benefits" of home ownership doesn't communicate much - perhaps you can elaborate on what you see as those benefits? I know what mine are - but it's subjective.
And to re-iterate - many people get mixed up when deciding whether to mortgage a home - they can't or don't find a way to properly evaluate the financial benefits and risks -vs- the "soft" lifestyle benefits and risks - two very different things.
"I know what mine are - but it's subjective."
Well, see... That's the thing... I spoke vaguely because the benefits themselves are ambiguous, subjective. They are hard to quantify because their intrinsic value varies based on who you ask.
However, just because they are not easily quantifiable does not mean that they have no value. You are right. It is easy for me to sit over here and criticize them for not discussing something that was probably outside the scope of their article.
With that said though, it may be possible - one day - for someone to figure out some way of approximating these things (no landlords, lower fixed monthly costs, more control over your own property) and giving them some type of monetary value.
One thing that could be done is to look at the difference between rent and ownership prices and build an econometric model in an attempt to tease some numbers out of it. Maybe someone has already tried it, but I am not certain. There would be some selection bias though - the kind of people that own homes are probably not exactly the same as those that rent apartments. I'm not sure how to deal with that...
Just something to think about, I have taken some classes in Urban economics and all of these professors talk about how incredibly stupid it is to own a house. Then, over the course of the semester, I would realize that they owned houses myself. When I ask them why, none of them has a decent answer.
Maybe the answer is something really sort-of fuzzy. It seems to me that people tend to buy a house when they want to lay down "roots" in a place, but then that wouldn't explain why so many people just rent for a long time despite not needing the mobility.
There are probably hundreds of factors that creep into the decision to own vs to rent. I guess being aware of this is why I feel repulsed at articles claiming to compare the two but not even trying to factor in the preference-related factors and how they cloud this type of analysis.
Disclaimer: I am an economist-in-training at this point in time. My thesis involves an application of a hedonic pricing model. Too much work with hedonics and you may become delirious - believing that everything can be quantified if you just tinker with the model long enough...
I think a very core issue when discussing this is the fact that the majority of people aren't buying a home - they are mortgaging it. Borrowing money, and the additional costs that entails, have become the accepted norm for people to purchase a house. I do realize this is realistically the only way many people may be able to ever "own" a house - but if you spend the rest of your life paying it off, do you ever really own it for practical purposes?
The primary issue for me is that, in current society (talking us/ca here) - paying a financial institution an arm and a leg for the privilege of having them lend you enough money to "buy" a home as the standard way of doing this is the root of the problem - change our financial habits as a society to reduce this need in a few generations and things will change.
Wouldn't this come down to the risk appetite of renters vs. homeowners? Perhaps long-term renters overestimate the risks/trouble of homeowning and overvalue their mobility. In a sense, renters may be willing to pay a perceived premium (i.e. "you're throwing your money away") because they feel that they are safer. This feeling would only be reinforced if they've had favourable historical renting experiences.
I can't help drawing an analogy to buying insurance; you hope nothing bad happens, but buy insurance anyway.
I remember a neighbor making his last mortgage payment in the mid 80s. $25.
Yeah, but you have a huge pile of debt hanging over your head. Before you could punch out anyone who needed punching at work, or at least gone all Jerry Mcguire. Now you're kind of a slave to the wage.
My bank has a financial calculator "should I rent or buy" and if I plug in $1700/mo rent (+3%/yr), $350,000 home with 0% appreciation and %1.25 property tax, and leaving all defaults for closing costs on buying and selling, the calculator suggests I will actually save about $12,000 by renting.
A quick summary of the details suggests that mortgage payments will be lower than $1,700, but additional expenses make the average monthly expenditure closer to $2,100, but in the long run tax breaks will recover most of that. After 5 years without selling, considering only payments and tax breaks, you'll be ahead about $4,000 if you buy. BUT when you try to sell, and look at the big picture, it's actually going to cost you money, because you have to pay the remaining loan balance in addition to closing costs and related fees. You only get back $60,000 or so, which isn't even enough to recover the initial downpayment of $75,000 the renter never had to pay (and was able to invest in something else).
Obviously it's easy to tweak the numbers either way, but the point should be clear that the simple "renters have nothing to show for it" argument doesn't hold water.
Since moving to Boston in 2007 I've only been in the same place long enough to have 2 opportunities for rent-raise requests, and it was raised both times. I don't recall the first (I decided to leave, the company was horrible), and the second the landlord asked for 3% and we haggled it to 2%.
I think some landlords try to balance turnover because there are benefits as well as costs and hassles. Turnover gives you a chance to thoroughly clean and do lots of minor maintenance that a long-term tenant is likely to neglect.
The basic idea is that you spend the same amount (X) every month, in scenario 1 (buying) you spend the whole X on a mortgage and hope to make things up in equity but lose some money in the form of interest.
In scenario 2 you rent (The same house/apt as scenario 1) but only spend Y and have X-Y = Z left over to re-invest in some other investment vehicle. The point of the article is that in some places (Manhattan) you can have the same standard of living but make a better investment because Z is so large.
Check the NYT rent calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) and see what the situation is if it costs you 30 years rent to buy a place. If the value does not appreciate, you have to rent go up at a rate comparable to mortgage interest and property taxes to even have a chance of breaking even after 30 years.
Also, buying last year had the added bonus of an $8,000 tax credit. Not a discount on your income, but an actual dollar for dollar credit (ie, come tax time, I add $8,000 to the refund amount). That's seven months of rent at my prior place. Not a bad deal. Thanks to the deductions from paying my mortgage (versus no tax deduction that I'd have gotten with renting), I saved just enough money on qualified income to fall under the first time home buyer credit limit. Worked out well.
Anyway, it definitely depends on where you live. Circumstances change drastically, even within a state. Even just outside of a main metro area. San Jose is cheaper than San Francisco. Beaverton is cheaper than downtown Portland. Westminster is cheaper than Denver. In some places, owning will simply never be an option. I couldn't afford a million bucks for a 900sqft home in San Francisco. Hell, I could probably barely afford rent.
Based on my personal experience, I would advise people to buy sooner than later. That is, I personally wish I'd have bought five or ten years earlier. On the other hand, I think I was also wise to wait until just the right time in my life and the market to buy and I think that's a wise path to take, too. You may be putting off the benefits of a home if you delay, but at least you're not making any commitments by paying rent, either. In the long run, I think that is the mistake too many people make. They feel the ticking clock and buy because everyone else says that's what adults do. That leads to buying too much and extending yourself and your credit too far. I know home-ownership is "the American dream", but I think it's a dream that you have to let come to you, when the time is right for you.
Please check my math: using your numbers and averaging to 7.5 percent per year, that would be a cumulative increase of (1.075)^5 = 1.44 = 44 percent increase.
Did your rent really go up 44 percent over 5 years? Where do you live?
As an additional data point, I rented a house with some friends in Beaverton for 5 years and the landlord never raised the rent.
I lived in a more expensive apartment than is typical, but there is no housing anywhere near where I am (only apartments). I don't know if proportional increases are typical all over Denver, though. By the end of the fifth year, I was tired of seeing my rent increase at triple the rate of my raises.
I do think for the near future, rent will continue to rise as more people decide to sit out of the real estate market (waiting for more price drops to occur). Ultimately even this should correct itself as people start buying houses again since they will grow tired of increasing prices and decreasing availability of apartments.
If you toss a mortgage into the mix, which is what I gather most people mean when they say "buy" a house - then yes, market fluctuations can matter a lot - but these are two very distinct things.
Unless I'm missing another aspect of potential impact, which is totally possible. I can barely tie my own shoes, sometimes. :)
When I asked a mortgage broker friend (Canadian) about this not too long ago, it was explained to me that yes you could lock in a rate for the "term" - but the "term" was 5 years, and after 5 years it would be adjusted depending on the prime rate, etc..... so from what I gathered you coudln't actually just get a plain old "25 years, x%" mortgage.
I'm not sure about other Commonwealth countries, but Canada definitely does not have this option. Our mortgages have a specific mortgage rate term (usually 3-5 years), separate from the life-time of the mortgage (usually 20-30 years; the 35 was/will be no longer be available). This means that interest rate fluctuations are more devastating when they rise for those who put little to no money down on their expensive housing purchases in Canada recently.
Amortization length of a mortgage can be up to 35 years for residential mortgages. 35 year amortizations were only eliminated for CMHC/insured mortgages.
I would contend that the system is more stable when borrowers are forced to consider the consequences of future interest rate increases.
Without property tax, $1700/mo means taking a 25 year loan of $320k at 4% interest. Obviously whether this is too high or too low depends entirely on where they live, but again I'm assuming that they were getting a similar place for roughly $1700/mo in rent, and are comfortable in that lifestyle. That's also assuming they have the cash for a down payment ($65k if they want to put 20% down).
So, if you run the mortgage numbers, in 5 years, assuming interest rates stay at 4%, they will have paid $61k in interest. Property taxes over 5 years (where I live, anyway) on a $385k home would be $15k-$20k on top of that. If we factor property tax into the $1700/mo, then they can only afford a $265k loan, and only pay $50k in interest over 5 years.
Either way, $50k or more interest + $18k in property tax + $50k in depreciation + $15k in closing and real estate fees costs them a lot more than renting for the same time period, and that's assuming that nothing goes wrong. If their roof starts leaking, the deck collapses, they need to move for work or their growing family in less than five years, they are in an even worse situation. (One might suggest we should amortize the $15k in closing and real estate costs over the 5 years and buy a smaller place accordingly, but at that point your $1700/mo rent becomes more like $1150/mo in mortgage payments, so at that point the question becomes how out of whack the renting and buying markets are, assuming again that you want to maintain a similar living standard, and not be downsizing as you're turning 30.)
The obvious question then is how likely "even if your house will depreciate $50k" ends up being.
The real problem here is that we're not really talking about home ownership or buying a house - we're talking about taking out huge loans from banks and paying them off over decades, along with a ton of interest, and hoping that property values increase so we can trade up to something bigger and end up in exactly the same situation- rinse, repeat. The real problem is that we discuss "ownership" of homes when we don't really own them - the bank does.
This (and college costs) is why it takes so long to get out of this recession - people can't take a new job because they can't sell their home.
Only if you need mobility.
Before the internet, realtors were the gatekeepers of "for sale" property information. But that's all online now. What do they really do to justify such a large cut on the transaction?
The times I have bought and sold a house with a realtor they actually did very little. They helped prepare the offer (using boilerplate that can be easily found online now, or you can pay a real-estate attorney a couple of hundred to prepare one) and introduced me to a couple of lenders, then showed up at the closing to get their check.
From a grammar perspective, I think this sentence is interesting. It is literally the first time I've ever seen a URL as the subject and first word of a sentence.
Of course, this violates everything I know about a) link sharing [0] and b) good writing, but it's interesting nonetheless.
[0] http://www.goodusability.co.uk/2009/01/dont-say-click-here-o...
Part 1 http://www.khanacademy.org/#/v/renting-vs--buying-a-home?p=F...
Part 2 http://www.khanacademy.org/#/v/renting-vs--buying-a-home--pa...
Detailed analysis http://www.khanacademy.org/#/v/renting-vs--buying--detailed-...
It's pretty telling what you should do regarding buy or rent (beyond the NYT calculator).
Getting rid of the mortgage interest deduction would probably be the best thing to happen to the US since the Constitution. Especially for people in less than desirable neighborhoods. Slumlords wouldn't be able to function. Housing prices would go down, rents would go down, people who wanted to own could own affordably, and renting would be insanely affordable.
The U.S. Tax Code is one giant game that steals short-term investment power from the majority people (low to medium income people) and gives it to the wealthiest people for them to write new rules of the game.
Property Owners may have a better chance at returns, if they are able to raise rents to match inflation. And Property Managers (people to buffer the owner from the tenants) are typically charging 10% of rent. There is income to be made...
More and more Americans will be conditioned to the idea that home ownership is a waste of time and money, not to mention the inflexibility that it imposes on a person [..] That would barely pay for property tax, maintenance (winters are harsh), and landscaping (weeds are aggressive). [..] Another advantage for renters is that they can free their minds from the clutter that prevents homeowners from doing or thinking anything interesting. [..] The rest of us go to Home Depot every few days and pull weeds. [..] They withdraw themselves from the market of potential buyers, at least for 10 years or so until they forget what wounds they suffered and how boring they were when they owned.
Firstly, rented homes are not only from homeowners. Second and more importantly, for people that already have a home through say inheritance, or ability to pay outright cash, it makes sense for them to use it as a source of income. Not saying those are the only people for whom home-ownership makes sense, but the cases above are the easiest non-subjective examples to cite in favor of home-ownership.
And neither homeowners nor renters need be indebted to each other.
Also, though homeowners aren't the only source of rental properties, outside of city life, they are the most prominent. Either way though, the same argument applies. Without someone buying a property and renting it, there would be no place to rent. The house I'm renting to someone in NC is being paid off because of my renters. It's not income now, but when it's paid off, that's $1k/month free to me.
Back to the main topic: Should renters be indebted to home owners? Its all a case of supply/demand. I dont see renters having a shortage. Which means that more people are willing to rent out their home, than renters wanting to find a place to rent. In this market, homeowners need renters more than renters need homeowners. If say in a hypothetical situation all homeowners stopped putting out their houses for rent, more people will gravitate towards other sources of rentals like rental properties owned by companies. These rental property companies do not have an emotionally-vested interest in their home. They see it just as a service.
I agree when you pay off the money for your house, the renters give you free money. But this is close to the end-game and by this time you would have to factor in also opportunity costs. I am not saying the opportunity cost is huge, but usually a mortgage holds you down for 30 years (in most cases), and its too long a time to just consider what happens at the end of it.
But what you suggest didn't happen, so I'm not sure that it makes any difference.
Besides, there are two sides to this, and each side can feel that the other is losing out when in fact both sides are getting exactly what they want.
(In fact, that's often the ideal outcome...)