February 20, 2007

Notes on the Desperate Homedebtor vs. Bitter Renter debate

Let me try to clear this one up... Lots of bubblesitters and bitter renters battling desperate homedebtors on HP threads it seems.

If you buy a home today vs. renting, you are a fool. Renting is significantly cheaper on a monthly basis than "owning", and if you "buy" you'll lose not only the extra monthly cash flow vs. renting, but more importantly you'll also the negative depreciation to deal with. In addition, you'll have the transaction costs of buying and selling, and you'll likely be locked into the home or a significant loss for years, unable to move for a new job when you lose your current one or are offered a better one during the upcoming recession.

If you "own" a home you "bought" pre-bubble, you're doing fine (unless you did equity-extraction). "Owning" your home today is likely at a similar monthly cost to renting, if you bought pre-bubble. The only issue you have to sleep on is that you'll be losing some of your possible equity every day now that homes are depreciating vs. appreciating. However, if you took out HELOC's, you screwed yourself.

The smartest financial play for "owners" would have been to sell at the peak, over a year ago, cash in, put the money to work, and rent. Then when prices stopped falling, buy again.

The smartest financial play for renters who've never "owned" would have been to buy a home pre-bubble, then sell at the peak and rent again. If you've always rented and didn't buy and sell, you missed an opportunity to make some money off the stupidity of your fellow man during the greatest ponzi scheme the world has ever seen.


Anonymous said...

Given the obvious economic benefits from renting. Why are people buying in formally hot markets where the prices have fallen some but nowhere near the pre-bubble values? Here in S. Florida where taxes and insurance are huge let alone the cost of the house, people are still buying in many areas. I am confounded.

blogger said...

Don't be confounded. The answer is quite simple.

People are stupid.

I hope that helps.

Anonymous said...

The smartest financial play for renters who've never "owned" would have been to buy a home pre-bubble,...

If this was the case, the bubble would have burned a bit longer because of the new wood, no sexual pun intended.

Anonymous said...

Lets have some dead cat bounce to confuse the "i think i'm smart" money out of the market. Every
mofo needs to be broke for us to have a real recession.

Mammoth said...
This comment has been removed by a blog administrator.
Anonymous said...

negative depreciation to deal with

I want negative depreciation.

Frank R said...

Here in Scottsdale I've found that people "buy" primarily out of vanity. In this town, renters are considered 2nd-class citizens and common criminals and people "buy" to make themselves feel important even though they're taking a sucker bet.

Here's why I'm renting in Newport Beach CA when I move next month:

1. I'll be leasing a $1.2M house for $3,500 which would cost more than double to "buy."

2. Due to my higher income I am disqualified from receiving the mortgage tax deduction.

3. I do not plan to stay in the house for 5-7 years which is really the minimum for "buying" to make sense.

4. Prices in that market are in free-fall so buying now would be VERY stupid. You don't buy a stock when you know it's going to fall.

Again ... the ONLY reason people are buying right now is out of vanity, ego, and an inferiority complex.

Anonymous said...

"The smartest financial play for "owners" would have been to sell at the peak, over a year ago, cash in, put the money to work, and rent. Then when prices stopped falling, buy again."

WRONG! Anyone who would have done this where I live, would not be able to even come close to being able to afford the hosue they sold. The taxes would be so outrageous that any profit they maed would eventually be eaten up. It's called Florida Save Our Homes and those that owned pre bubble and held on can continue to pay low taxes. did they cash in on the maina. nope, but they also are immune to the collapse as long as they did not fall for the hype in re-financing.

Anonymous said...

Almost sounds like you are advocating timing the market - or even...flipping!

Anonymous said...

Well it depends. Take one sample in each of the two groups: a) owner, and b) renter.

a) Sample 1 (owner group): people buy house to live in and speculate that equity will grow.

b) Sample 2 (renter group): renters who put monney in stock market, mutual fund, etc rather than in real estate.

The last two years, Sample 2 are clear winners. Three or four years, etc.

Of course there are different samples for each group. You name one and do your analysis.

Anonymous said...

I bought for $300K. Mortgage of $1215 for fatastic home. Had I sold at the peak I could have sold for $500,000. I would also have paid $2200 at least to rent the same home. Today that may have fallen $100, maybe, but it's still $1000 a month more than owning when taking into account tax breaks.

So had I sold 18 months ago I would be down $18K so far. I could have invested the $200K profit at 5% and have made $15K so far of which I would have $10K left after taxes.

Home today is worth $450K.

Add in the costs of moving and I'm still better off not having sold for now. Also add in the pain in the ass factor of moving and I'd say I am well ahead.

Anonymous said...

you missed an opportunity to make some money off the stupidity of your fellow man

Oh well, I'll just have to live with myself.

Anonymous said...

To the Wrong;Florida Save our Homes. Well, its easy and its not wrong. Sell your house at the peak in Florida (like I did) and then you leave Florida and not worry about being shackled by the stupid law of what I found to be after the buzz of the beach wore off--a realy stupid state. So, more places to live out there than florida. Should not subisidize or live in a state with such an insane property tax system. Maybe if they can figure out the whole voting an bollot thing it will be resolved--nah,,,,,

Anonymous said...

secular bulls in real estate may not end till owners are taxed off their properties, we may just be only 12 years into the average average 17 year cycle, not counting the posible resets at the 2000/2002 wall street collapse, that still by most standards of wealth, is way below value,

Mammoth said...

“If you "own" a home you "bought" pre-bubble, you're doing fine”
Yes but…The rental income from my Seattle area house (bought in 1997) comes within $40 of covering the monthly mortgage/taxes/insurance payment.

Last week the new property tax assessment came out, and the annual tax is now equal to two month’s rent. Wow!

But here’s the punch line - I saw a young woman leaving the local community college the other carrying a textbook titled, “Pre-Algebra.” (For all the real estate clerks reading this, “Pre-Algebra” means addition, subtraction, multiplication, division, and fractions.)

That’s right - after all the tax increases to improve education, our high schools are graduating students who can’t even perform these basic math skills.

I want my money back!


Anonymous said...

Well the caveat is whether or not you live in a bubble market. Resale homes in Omaha have not appreciated that much and there are OK deals in decent neighborhoods with good schools. If you want to sell a new house, you are competing with builders whose construction costs have dropped and will have a problem.

Since the drop in the Omaha area will not be huge, then the transactuion costs of selling and moving will overwhelm the benefit of renting for many people.

Further, owning a home is one place where you can invest sweat equity to increase its value. I've seen people do amazing things with their older houses.

For the bubble markets, I agree.