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.
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.
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.
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.
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.
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.
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.
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
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 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%.
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.