Nice to see others finally figure this out a couple years after HP'ers. Only problem? In a sea of dead inventory and increasingly desperate homebuilders and homedebtors, it might be too late - good luck finding a buyer, at any price.
Man, this is getting ugly now. When the collective consciousness changes, when people around the world paying 50% of their income to housing (instead of 10% if they rented) figure out that home prices are declining, and that the Big Bet on future appreciation is a bad one, then the rush for the exits will be fascinating. And ugly, so so ugly.
Jul 06, 2007 -- Worried about the state of the housing market? You should be. Millions are expected to be financially devastated by the downturn. Don't be one of them. Read up on the situation and find out what's happening. To get you started, here are ten reasons why you need to sell your house NOW.
1. Renting is Cheaper
Renting is almost always cheaper than buying. You know why? Because when you rent, you pay for a roof over your head and that's it. When you buy, you pay for a roof over your head, you pay a bank for the privilege of borrowing money, you pay property taxes to the government, and you pay any and every maintenance fee associated with the upkeep of your house. Imagine how much money you can save every month because you chose to pay rent rather than all of the other costs associated with owning. Now imagine what you could do with that money every month. Sounds nice, doesn't it?
2. The Joneses are Crazy
Houses are status symbols to Americans. (For more evidence see the show Cribs on MTV.) But just because the Joneses own a home, it doesn't mean you should too. The Joneses may look cool, calm, and collected on the outside, but chances are they cry when they open their credit card and mortgage bills and are so overextended that the idea of being debt free is laughable.
3. Real Estate is a Terrible Investment
Unless you are able to pay for a home in cash (no loans), real estate is a terrible investment. Repeat. Your house is not an investment vehicle. Not anymore. Nowadays, it's just a dead asset. If you want to invest your money or create a next egg, invest in an IRA or something that is more likely to give you the return you are looking for.
4. Selling is More Profitable Than Renting
If you are thinking that you may be better off renting the house rather than selling it, think again. Unless you live in a rural area or an area where prices haven't been affected by the bubble, you will probably not make enough money in rental income to pay the mortgage payment and cover the hassles that come with being a landlord. Selling and washing your hands of the whole matter is most likely the more profitable choice.
5. The Market is Cooling
Home sales are slowing, foreclosures are rising, and inventory is growing. Bottom line, the market is getting colder, not hotter. If you are waiting for buyer interest to get to the level it was a few years ago, you will be waiting a long time indeed. Your best bet will be to sell now and take what you can get before the competition gets worse than it already is.
6. Home Values Will Plummet
Home prices couldn't be more disconnected from fundamentals. In many areas, individuals who make the median income can't afford a median priced home. For this reason alone, current home prices cannot be sustained. Experts are predicting price drops of 25 to 60 percent in large areas. Think about where you will be if your home loses 10 percent of its value. How about 20 percent, 40 percent, or 60 percent?
7. Because Japan Says So
If the beliefs of housing experts aren't enough for you to base a decision on, then you should consider what happened to Japan when they experienced a similar boom. After home prices doubled nationally and tripled in Japan's largest cities, they fell sharply to pre-boom levels. Homes in Tokyo lost as much as 80 percent of their value and to this day the country is still is still struggling with the aftermath of a housing induced recession.
8. Location is Irrelevant
Many people think that because they live in a desirable area that they will not be affected by falling home prices. This assumption is generally incorrect. If prices have reached an unsustainable height, they are going to fall regardless of how nice it is to live there.
9. Recession is in the Air
Talk of a recession is at near manic levels. If the market crashes (and it will) the U.S. will be tipped into a recession that rivals the one seen during the Great Depression era. Selling now ensures that you won't have to struggle with a mortgage payment later.
10. Because the Consequences of Not Selling are Too Ghastly to Consider
If you don't sell now, you might not have the chance to walk away later. Once prices fall, you could lose your ability to refinance, to borrow from equity, and to sell for a profit (or to break even). If you are left owing more on your house than it is worth and find yourself unable to meet your mortgage obligations for any reason, you're stuck. The bank will take your house and you'll be left in the col
July 12, 2007
"10 Reasons to Sell Your House Now"
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For the average person real estate has been at best a lackluster investment. Looking at historical data you see typical returns of 3% after taxes, depreciation and the like. The last few years there has been a huge runup having nothing to do with fundamentals. KEY: TRY TO PROVE TO THE SHEEP THAT THE EXCEPTION DOES NOT PROVE THE RULE. It will be 2-3 years and further prices before some (not all) recognize this inevitable adjustment. Yep they still ride motorcycles without helmets, get fat, smoke and do crack. So yep they will still make stupid finanacial moves--its amazing it really is!!!!!!
The ONLY reason to buy the past few years was the promise of appreciation which is now the promise of depreciation
Watch out below
I'm gonna be pissed at Kieth if my promised depreciation doesnt materialize.
In that event, I shall demand a complete refund, sir!
But I just bought a house in NY b/c it was a "deal"? The salesperson said so....
I am one of the biggest bag holder. I bought Nomura High yield Fund ($)in Japan and I am told Nomura is the biggest bag holder in the world. I hope I get back at least 50%.
Got a friend who owns a condo in NOVA pre-bubble, so he owes very little & refied to a super low fixed rate during the trough in rates. Wife was "tired" of living in sucha small space (1200 sq ft split level condo w/ lofted ceilings & garage seems good to me but I recall the Suzanne commercial). He rents the condo & now also "owns" a TH nearby which he had to do the 80/20 financing & both loans are ARMS!! He bought post bubble-burst and got a good deal relative to prevailing market conditions but the price was still uncoupled from fundamentals. He recently told me that he wished he'd sold the condo and used the 200k profit as a downpayment on the TH so he'd have a smaller single loan at a lower rate. He said the cost savings would EXCEED his rent net profit!!
Too bad more didn't figure this out years ago
LauraVella said: My husband and I thought this might go up for around 1.2 million. WRONG! After less than a week, it's already sale pending at 2.28mil-granted it's a beautiful house (I love old architecture) in a upscale area, but sitting on less than 1/4 acre isn't exactly a great deal.
http://homes.realtor.com/search/listingdetail.aspx?zp=94501&ml=3&mnp=44&typ=1&sid=623557f5b96e41e79f4d176c54695b97&lid=1084697932&lsn=3&srcnt=3#Detail
1. Renting is Cheaper
Not always. Depends a lot on your tax situation and the price of the home. I rent now for $1700 in a non-bubble city. It would cost about the same to own the same house after subtracting the tax deduction and the principle I pay back evey month. I'm renting because I know I will be here short term and don't need the hassles of selling a house when I move. Were I to stay here long term, renting would be foolish.
3. Real Estate is a Terrible Investment
Tell that to my parents who bought their Pasadena house for $100K in 1976 and sold it for just under $2M in 2004. I'll bet many folks thought they were nuts to spend $100,000 on that home back then too.
From The Economist:
"IF A Briton had bought a house in 1975, by 2006 that happy homeowner would have an asset worth over 14 times more."
Look at the graph: in every country, real estate has been a great investment over the years. This includes, wars, recessions, oil embargos, terrorist attacks, you name it. The one constant has been home prices have gone up constantly.
http://tinyurl.com/yo82xn
Saying r/e is a terrible investment is plain ridiculous. It may be a terrible investment for the next year or two or three, but long term history has proven it to be pretty damn good.
8. Location is Irrelevant
HUH? So the writer thinks a $10M beachfront home in Malibu will fall in price % wise as much as a $600K tract home in the IE? I don't think so.
9. Recession is in the Air
Paul Krugman has been predictng a recession every quarter since 2002. Talk of recession is always in the air.
We sold our Alameda home in Oct 04' because my husband wanted to take full advantage of selling into the madness. Since the house is located on a very busy street(2509 Otis Drive)it's much harder to sell when the market slows down.
I remember back when I was single in 1996 - driving at night down Otis Drive on the way to a friend's Haloween party. I counted at least 13 houses in only a 7 block stretch for sale, (between High&Park Streets) with my now husband's house as one of them. It really scared me, because I had never seen that many homes ever for sale on Otis Drive. With the closing of the Alameda Naval Air station, combined with the recession, both hit Alameda extremely hard. It was a scary and surreal feeling I had that night. Just remembering it made the decision to sell very easy for me.
My husband knows full well the downside of buying when prices are out of wack from reality. And I wonder why more people don't see that there's something wrong when homes are 10 times people's salaries.
3. Real Estate is a Terrible Investment
Tell that to my parents who bought their Pasadena house for $100K in 1976 and sold it for just under $2M in 2004. I'll bet many folks thought they were nuts to spend $100,000 on that home back then too.
Made a good gain.
Per http://goldinfo.net/londongold.html average gold price in 1976 was $124.84/oz. So $100,000 / $124.84 per oz = 801 oz of gold to purchase their home in 1976.
Average gold price in 2004 was $409.42/oz. So $2,000,000 / $409.42 per oz = 4885 oz of gold earned selling their home in 2004.
So when measured in a way that can approximate controlling for inflation they multipled their initial investment 6 times. NOT 20 times, which would be a straight fiat currency calculation (i.e., $2,000,000 / $100,000 = 20 times).
But you have to subtract from their gains ALL of the additional costs they had to pay to hold their investment over the 28 year period. Taxes, insurance, maintenance, upkeep, repairs, remodeling(?), additions(?).
Also, did they pay cash for their home upfront? If not using a mortgage to pay principal + interest would have cost significantly more.
As was mentioned, house pricing is not in line with wages.
Until it is, we'll continue to see house prices fall further and futher through-out the nation.
Greetings from RENTERS PARADISE of San Diego - with 22,365 homes on the MLS (not to mentions 5000 NEW homes) rents are going down by the day. . .I now count "for rent" signs rather than "for sale" signs. . .three "for sale" signs in my neighborhood (which didn't sell in 9 months) are now "for rent" signs (and they are still overpriced). . .but. . .now I am seeing RENT REDUCED signs!!!!!. . .and commercial REITS (Archstone anyone) have huge banners pasted all over their projects - baloons flying on weekends, etc. . .yes - its great to be a renter here in SoCal!
To Heyman - Remember, FLAT prices are depreciation - with even 3% inflation over 4 years, you have lost 12% on your house - if you put $500K out in a 5.25% CD you would get $26,250 a year, or $105,000 in 4 years. . .why do you think I am renting?? (actually I took my house sale money and put it in Calif Tax Free bonds at 4.3%). . .no tax, no property tax, not HOA's. . .and low rent!
I know it could never happen, but wouldnt it be great if the people who were right about the bubble all along were elevated to the status of "expert" and those who were wrong were lowered to the status of tinfoil hatters?
Are you high? They paid $100K, sold for $2M and to you that is not evidence of a profit. I don't care how many ounces of gold that was, they sold for 20 times the buying price.
Yes they paid property taxes, with Prop 13 in place (DING DING DING!). Yes they paid for maintenance. Yes there were repairs. All that and they still walked away with a $1.9M profit.
And had they rented, they would have paid rent for 28 years. A little piece of the piece of the puzzle you convenently ommit.
Rent for that house would have been $3000 a month easy in 2000. So just between 2000 and 2004, rent would have cost more than the $100K purchase price, meaning they essentially lived 24 years for free.
Great post. OK, I'm renting.
Now what about my investments (mutual funds, IRAs). I have no debt, but what else can I do to brace myself and my family for the upcoming economic apocalypse?
the Pasadena example of $100K invested for 28yrs and being sold for $2MM shows a compound average return of 11.4%, which is pretty good. But, it assumes that no money went into the house for improvements (unlikely), ignores the costs like interest, property tax, insurance and maintenance. I bet this would cut the 11.4% average return by half (just a guess). Plus how much of that gain came in just the last few years during the euphoria phase of the bubble? I bet about half again. So really, after discounting the recent mania time period, and including costs, this "great" investment yielded probably around 2.5 - 3% compound average return. Congratulations!, your parents kept of with inflation. Hardly a reason to act so smug - Ahole!
Anonypussy 3:47 said . . .
"I don't care how many ounces of gold that was, they sold for 20 times the buying price."
-------------------------------
You really didn't understand that calculation, did you? It's not exactly quantum mechanics.
3. Real Estate is a Terrible Investment
Tell that to my parents who bought their Pasadena house for $100K in 1976 and sold it for just under $2M in 2004. I'll bet many folks thought they were nuts to spend $100,000 on that home back then too.
If they'd put that 100K in the stock market in 76 along with 30 years of mortgage interest and property taxes and insurance and maintainance, that 2 mil would look like chump change right now.
To Gentle Readers - yes, real estate investing WAS a great deal if you bought in 1992 and sold in 2005. . .but, as is the case with stocks, etc. buy low and sell high. . .we are now in a flat/declining market. . .so the old rules are of no use (sorry). . some day - perhaps in 2010, real estate will start appreciating again, and then it will be the time to buy - "ride a horse the way it is going" my auntie in North Carolina always used to say.
1. Renting is Cheaper. Renting is almost always cheaper than buying.
When comparing apples to apples, this may not be true when factoring in tax write-offs and appreciation. There are calculators designed specifically to determine whether home ownership or renting is the best. See for example SmartMoney Rent/Own Calculator.
Too often what isn't factored into the rent/own decision is the fact that at some point the home will be paid off, whereas rent will continue for life. My parents haven't had to pay mortgage or rent for the last 15 years on their $300,000.00 home. This is significant given that they are retired and living on a fixed income. At their level of fixed income there is no way they could have afforded to rent their home for the last 15 years, but would have been forced to live in a small apartment. Instead, they have been able to maintain the lifestyle they were accustomed to prior to retiring, and they also have an inheritance they can pass on to their children. That is worth considering, isn't it?
a-hole? whatever.
Tell me oh great one, how much would it have cost to rent a house for 28 years in Pasadena? I told you already that in just 3 years in the 2000s it would have cost more than $100K purchase price.
You are truly an intellectual midget.
Are you high? They paid $100K, sold for $2M and to you that is not evidence of a profit. I don't care how many ounces of gold that was, they sold for 20 times the buying price.
You can't say that because a 2004 dollar is worth less than a 1976 dollar. Measuring price of something in oz of gold is a quick-and-dirty of tracking real prices and real values. Rough way of controlling for inflation.
Yes they paid property taxes, with Prop 13 in place (DING DING DING!). Yes they paid for maintenance. Yes there were repairs. All that and they still walked away with a $1.9M profit.
If they bought they house for 100k CASH in 1976 and sold it a month later in 1976 for 2mil CASH in 1976, yes they would have been looking at an astronomical gain. Since they held their property for 28 years, inflation must be subtracted from capital gains. WHY? Because the purchasing power of the dollar has eroded between 1976 and 2004. You need to compare apples to apples. Measuring prices in a constant unit (gold) is one way to approximate that.
Again you're treating the home sale like an equity stock. Not valid. During those entire 28 years they had to pay all this other stuff for their home IN ADDITION TO the principal purchase price. A more honest profit calculation would subtract not only the initial purchase price of the home from the sale price, but also all the other carry costs that went into the home over the years. The ultimate honest calculation would control for inflation, as well.
And had they rented, they would have paid rent for 28 years. A little piece of the piece of the puzzle you convenently ommit.
If they had a mortgage they paid rent. To the bank. Property taxes are rent paid to the State. There is almost always ongoing carrying costs with real estate.
Here's another omission. 28 years living in Pasadena and breathing SMOG.
Rent for that house would have been $3000 a month easy in 2000. So just between 2000 and 2004, rent would have cost more than the $100K purchase price, meaning they essentially lived 24 years for free.
Am I high? Please reread your statement above and redirect that question to someone else. They bought the house (either cash or mortgage - you won't divulge) in 1976. They were paying the whole 28 year period various carrying costs. Yes, if they would have started renting in 2000 they would have exceeed the initial purchase price for a home in 1976, but you're comparing 2000-2004 rent versus 1976 purchase price. Why don't you compare renting in 2000-2004 versus buying a home in 1876 or 1776? You're statement is nonsensical because it ignores inflation + they would still have had to live somewhere 1976 - 1999.
BTW, I'm not picking on you. You're parents made money on their home sale even when measured in real terms. My own parent's home (Maryland) is in a much worse situation.
Purchased in 1969 for $20,000 (via a 30 yr fixed mortgage) when gold = $41.09/oz => $20,000 / $41.09 per oz = 486.7 oz of gold to purchase home in 1969
Value in 2007 of $344,889 (per zillow) when gold (today) = $667.20/oz => $344,889 / $667.20 per oz = 516.9 oz of gold if sold home in 2007
6% gain in equity value in REAL TERMS (before subtracting everything out INCLUDING mortgage interests).
Gains have been largely illusionary because purchasing power of the U.S. dollar is going into the crapper.
One thing to remember when calculating housing returns is that if you live in the house you are getting value out of the house every year you live in it (as a place to live). It's hard to factor into your calculations, but the value is real. So, you in effect make X%(financial gain) + Y%(value to you of living in the home). Note, the more you "overbuy" the worse this equation gets as the proportion of Y to X goes down.
8. Location is Irrelevant: Many people think that because they live in a desirable area that they will not be affected by falling home prices. This assumption is generally incorrect. If prices have reached an unsustainable height, they are going to fall regardless of how nice it is to live there.
Doesn't it depend on what makes the area "desireable"?
To me, I see metro areas like Seattle, Dallas, Houston, Salt Lake City, and Boise as "desirable" because they have recently, and are projected to have, impressive population, economic, and job growth (the key factors that drive the housing markets); they are still relatively affordable in relation to income; their inventories and cancellation rates are relatively low; and their home price and sales-rate have been modest in growth and thus less inclined to "bubble" or "burst" like the California, Nevada, Arizona, and Florida markets that predominate the news--in other words, home prices in those areas will contiue to rise, contrary to what this article sweepingy states.
And, as long as interest rate remaining low in those metro areas, it could bode well for home ownership being more advantageous than rentals for a large chunk of their respective populations.
Uh, nice list. But isn't this just more realtwhores fishing for clients? I'm sure they've got their "10 Reasons to Buy a House NOW!" list, too.
And, boy, I'm glad they taught me about inflation and mortgages and compounding and all that in high school. I guess everybody didn't get that.
If, as was suggested, it is always better to rent than to own, or to sell rather than rent-out, then there would be a disincentive for people to own places for renters to rent, and thus few if any places to rent?
How does this make sense? How does it comport with reality?
Stupid stupid sheeple... Nobody is saying it is ALWAYS better to rent than own,,, DO THE MATH...and while you're at it, add property taxes, maintenance and insurance into your calculations, not to mention the interest your accumulating on your loan, above and beyond principle.
The Carleton Sheets groupies and Donald Trump wanabees are gpoing to get creamed because they refuse to do the math.
Folks - learn how to read HP - italics are my words. Regular type is the article body, and you can read the full article by clicking on the link in the header
jeesh
meanwhile, the take away from the article is that I'm seeing more and more "rent, don't buy" articles now. Finally. After it's too late.
Anonymous said...
Got a friend who owns a condo in NOVA pre-bubble, so he owes very little & refied to a super low fixed rate during the trough in rates. Wife was "tired" of living in sucha small space (1200 sq ft split level condo w/ lofted ceilings & garage seems good to me but I recall the Suzanne commercial). He rents the condo & now also "owns" a TH nearby which he had to do the 80/20 financing & both loans are ARMS!! He bought post bubble-burst and got a good deal relative to prevailing market conditions but the price was still uncoupled from fundamentals. He recently told me that he wished he'd sold the condo and used the 200k profit as a downpayment on the TH so he'd have a smaller single loan at a lower rate. He said the cost savings would EXCEED his rent net profit!!
July 12, 2007 11:14 AM
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Sounds like the moral of the story is that the MAN of the house needs to "regulate" that Suzanne sh*t.
Has anyone seen this?
---
http://news.yahoo.com/s/ap/20070711/ap_on_re_us/brf_california_population_1
Calif. projects 60M people by 2050 Tue Jul 10, 11:55 PM ET
California is about to get a lot more crowded.
The nation's most populous state will have 59.5 million residents when it reaches the mid-century mark — nearly 22 million more than today, the state Department of Finance predicted Monday.
Hispanics will make up 52 percent of the population in 2050, up from 36 percent now. Whites, now 43 percent of the population, will drop to 26 percent, while Asians' share will grow by 1 percentage point to 13 percent, and blacks will decline from 6 percent to 5 percent, according to the department's forecast.
Hispanics are projected to become a majority of the population by 2042.
The report is updated every three to five years by the department's demographics unit.
---
Sure makes you think twice (or thrice) before shelling out $600K+ for that "starter home" in Mexifornia, doesn't it? What do homes go for in TJ anyway?
Let's look at the rent vs own question from a cost rather than investment point of view using the following scenerio: a 30-year-old man with a life expectancy of 76 years, and wife and two kids, who plans to live at the same place until he dies. As I see it, here are the options:
1) Pay rent for the next 40 years. Assuming a current rental rate of $1,100 a month for a 3 bdr home w/ 2 bths and an anticipated average annual increase in rent of 3% per year, the net cost over 40 years would be $1,125,178.00.
2) Purchase the home. Assuming a current 3bd and 2bth home price of $255,000.00 and an average annual increase of 3%, and a mortgage with a 20% down payment on a 30 yr. fixed rate at 6.125%, the net cost over 40 years (only 30 of which have mortgage payments), including estimated taxes (assuming a 30% tax rate for joint filing), would be approx. $440,000.00.
Not only would the net cost be less to own, but in the end, the owner asset would be worth $815,509.00, whereas the renter's housing assest would be worth nothing.
So, is it really always best to rent rather than own?
I wonder what will happen to the divorce rate in the next few years? I am thinking it will go down simply because people will not be able to afford it. It's poetic justice when you think about- stuck in a home you cannot sell and with a person you cannot stand- living the American dream...
Not sure where this "it's always better to rent" stupidity is coming from
It is MUCH cheaper to rent than buy today. But after the crash, it'll be cheaper to buy than rent
And most towns, pre-bubble, renting was not the way to go if you were going to stay in a place for 5 years or more
When will it be time to buy again? When it's cheaper to buy than rent, or when you can buy a place, finance it, and rent it out and have positive cash flow after expenses and tax savings.
Period.
>> I have no debt, but what else can I do to brace myself and my family for the upcoming economic apocalypse?
Absolutely nothing. You're going to be living in an Mad Max world because "they" have it all figured out for you, including making you wish you were dead after you see what's coming.
2) Purchase the home. Assuming a current 3bd and 2bth home price of $255,000.00 and an average annual increase of 3%, and a mortgage with a 20% down payment on a 30 yr. fixed rate at 6.125%, the net cost over 40 years (only 30 of which have mortgage payments), including estimated taxes (assuming a 30% tax rate for joint filing), would be approx. $440,000.00.
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How about property taxes, insurance, maintenance, and possible HOA fees?
As a renter, my only housing related expense other than rent is an electric bill of $8-$10 a month.
Anonymous said...
I wonder what will happen to the divorce rate in the next few years? I am thinking it will go down simply because people will not be able to afford it. It's poetic justice when you think about- stuck in a home you cannot sell and with a person you cannot stand- living the American dream...
July 12, 2007 8:47 PM
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I think up, WAY UP. Nothing kills a relationship like financial stress and the good old "blame game" (a classic). People may be living with their parents if they can't afford to live on their own but I see the divorce rate going up, not down.
8. Location is Irrelevant
Many people think that because they live in a desirable area that they will not be affected by falling home prices. This assumption is generally incorrect. If prices have reached an unsustainable height, they are going to fall regardless of how nice it is to live there.
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Seems that a lot of "desirable" areas will become a lot LESS desirable in coming years and decades. Exhibit A would be Mexifornia, or any other area that becomes part of the Third World. Exhibit B would be anywhere severely affected by Global Warming.
If home prices are in a prolonged decline (a secular bear market), it is always better to rent vs. buy. The price declines may not be readily apparent to sheeple counting in dollars and believing the B(L)S inflation reports. They will be obvious to those counting in hard currencies -- gold, silver, etc...
LOL I haven't read the comments but I'm sure at least a few trolls said "Wrong, you should buy for the tax break, you come out way ahead!!"
Umm ... yeah right! For every dollar of interest I pay, I get 30 cents back? No thanks, if I'm going to throw money away I'll do it in Vegas and at least have some fun in the process.
#3 on that list makes a great point. Real estate is *not* a good investment if you have to borry money to do it. In fact it's not even yours, it's the bank's if you borry money to buy.
Webster's dictionary should change the definition of "homeowner" to "one who owns a home free and clear with no mortgage" and add the word "homedebtor."
Purchase the home. Assuming a current 3bd and 2bth home price of $255,000.00 and an average annual increase of 3%, and a mortgage with a 20% down payment on a 30 yr. fixed rate at 6.125%
This is a fantasy scenario. For starters, where are you going to find a nice 3/2 home (not condo) for $255k at these hyper-inflated prices? Alabama?
Average annual increase of 3% is fantasy too. Housing is in a depreciation cycle right now. Which is the point of this conversation. Duh.
20% down payment? Maybe back in my parents' day, but nowadays it's all about no-money-down, borrowing from a 2nd loan for the down payment, etc. As much as Kiyosaki is ridiculed around here, he correctly has a rule that if you're buying a house to live in yourself, 70% down is the minimum, or you pay so much interest that you're better off renting.
Your interest rate is also in the past. Figure 7+ now and that makes a big difference.
You have also conveniently ommitted:
- Inflation
- Insurance
- Taxes
- Repairs & Maintenance
- Appliances (free for renters)
- Landscaping (free for many renters including me)
If you add in all that and adjust the gains for inflation, you'll be in for a shock. The bottom line here is that you're assuming the runup bubble years are the norm and not the exception. Those days are over. Real estate over the past decades has performed poorly vs. stocks, gold, etc.
"Not sure where this 'it's always better to rent' stupidity is coming from"?
To me, it came from your posting an article about "10 Reasons to Sell Your House Now", which contained the unqualified declaration: "Rent is Cheaper", and the sweeping statement that: "Renting is almost always cheaper than buying."
Setting aside the various disparaging comments and semantics, all I have attempted to do is rationally test the validity of the article's unqualified and sweeping statements, even in terms of today's housing market. I have done so by "doing the math" as suggested, and in terms of certain select markets today (Seattle, Dallas, Houston, Salt Lake, Boise), and over the long run for most any market, I don't see those quoted statements as being correct. In fact, to me, the opposite appears to be the case.
Granted, over the short run, if a person is looking to enter the housing market, or is currently renting, for many of the metro areas nation-wide it may be advised to rent now rather than own a home (I don't know if selling a home into a down marketin order to rent would be wise unless one can accurately predict where prices will bottom out in a given area, and get then getting back in at that level will off-set transactional costs and whatever equity and interest-rate points may be lost by selling at this time) and wait to get back in when the housing market looks more favorable. If that is your point, then we may not be in disagreement.
"How about property taxes, insurance, maintenance, and possible HOA fees? As a renter, my only housing related expense other than rent is an electric bill of $8-$10 a month.
My calculations factored in taxes (net in terms of tax payments and tax credits) and insurance. I don't see maintenance and HOA fees making much of a difference in terms of the apparent gross disparity in long-term costs of renting vs owning. Do you?
Anonymous said...
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My calculations factored in taxes (net in terms of tax payments and tax credits) and insurance. I don't see maintenance and HOA fees making much of a difference in terms of the apparent gross disparity in long-term costs of renting vs owning. Do you?
July 12, 2007 10:01 PM
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Well, around here (SoCal), $255K will (maybe) get you a 1-bedroom condo if you want to live in a "good" neighborhood near the ocean. A typical association fee might then be $300-$350 a month. I wouldn't call that insignificant. Just like rent, association fees go up over time, and then there are the "special" assessments.
Maintenance could add up too: paint and carpets, appliances, etc... These are all non-issues for renters. What's a reasonable rule of thumb for maintenance, 1% a year for SFH, maybe 0.5% for a condo?
The other problems with the calculation is the assumption of living in one place for decades and the assumption of price appreciation. Staying put for that long will tend to favor buying, but it's not very realistic. People tend to move every few years on average. As for price appreciation, it would be more realistic to assume falling (if not collapsing) home prices in inflation adjusted terms.
$255k homes? Maybe in 1995 when I was 12 years old (that's about what my parents paid for their trade-up). In any city where a rental is $1100/mo, single family homes are $400k+ minimum. Now I have some friends in Buffalo who rent for $220.00 a month and you can get a pretty sweet place there for $255k.
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Anonymous said...
Let's look at the rent vs own question from a cost rather than investment point of view using the following scenerio: a 30-year-old man with a life expectancy of 76 years, and wife and two kids, who plans to live at the same place until he dies. As I see it, here are the options:
1) Pay rent for the next 40 years. Assuming a current rental rate of $1,100 a month for a 3 bdr home w/ 2 bths and an anticipated average annual increase in rent of 3% per year, the net cost over 40 years would be $1,125,178.00.
2) Purchase the home. Assuming a current 3bd and 2bth home price of $255,000.00 and an average annual increase of 3%, and a mortgage with a 20% down payment on a 30 yr. fixed rate at 6.125%, the net cost over 40 years (only 30 of which have mortgage payments), including estimated taxes (assuming a 30% tax rate for joint filing), would be approx. $440,000.00.
Not only would the net cost be less to own, but in the end, the owner asset would be worth $815,509.00, whereas the renter's housing assest would be worth nothing.
So, is it really always best to rent rather than own?
July 12, 2007 8:42 PM
>>Frank said: "This is a fantasy scenario. For starters, where are you going to find a nice 3/2 home (not condo) for $255k at these hyper-inflated prices? Alabama?"
Actually, there are various locations nation-wide where prices on a 3/2 home are much lower than the figure I quoted (you can get such a home in Pueblo Colorado for around $119,000). As it is, I was using the fair market value of the 3/2 home I currently live in here in one of the upscale suburbs of Salt Lake City (Sandy Utah). So, I am talking reality, not fantasy.
Frank said: "Average annual increase of 3% is fantasy too. Housing is in a depreciation cycle right now. Which is the point of this conversation. Duh."
While some metro areas have seen recent deprecistion in prices, the nation as a whole has seen continued price increases through the first quarter of this year (see: OFHEO House Price Index) Granted, the rate of appreciation has declined over the last year or so, but even still the latest Home Price Index figures show an nation-wide appreciation of 4.3 percent over last year. So, even today my 3% figure is rather liberal and not at all a fantasy.
Frank said: "20% down payment? Maybe back in my parents' day, but nowadays it's all about no-money-down, borrowing from a 2nd loan for the down payment, etc."
Actually, with the exception of sub-prime loans (which represent about a 10th of the mortgage market), the 20% down figure is traditional even today (see: Yahoo Finance)--particularly now that the fed has tighten requirements on mortgage loans, though there are ways to get around that threshold for a time.
Even still, if you only put down 3% in my scenerio, the net cost of home ownership for the 40 years(including taxes and so forth) would be approxiamately $541,000.00 as compared to $1,125,178.00 to rent. So...what was that you said about "duh"?
Frank said: "Your interest rate is also in the past. Figure 7+ now and that makes a big difference."
Click on the link I gave above and you will see the current rate for 30yr fixed is 6.3%. So, agian, I am talking reality, and not fantasy.
But, using the current figures, it amounts to $29 more a month than the rate I quoted, or an addition $10k over the 30-year life of the mortgage, making the total cost for home ownership around $552,000 as compared with $1,125,178.00 to rent.
Frank said: "You have also conveniently ommitted:
- Inflation
- Insurance
- Taxes
- Repairs & Maintenance
- Appliances (free for renters)
- Landscaping (free for many renters including me)
If you add in all that and adjust the gains for inflation, you'll be in for a shock."
Actually, I factored in all but inflation and maintenance (existing homes sales typically include appliances and landscaping). I didn't factor in inflation because it would be the same regardless whether a person used their dollars to rent money to buy a house or simply rented the house. I didn't factor in maintenance because it is indeterminate, and likely doesn't amount to anywhere near the $570,000.00 plus more it would cost to rent than own. So, I don't see where I would be shocked.
Frank said: "The bottom line here is that you're assuming the runup bubble years are the norm and not the exception. Those days are over. Real estate over the past decades has performed poorly vs. stocks, gold, etc."
Wrong. My calculation are not based on the "bubble years", nor am I considering home ownership vs. renting soley from an investment point of view--as with stocks and gold, etc. (when was the last time you tried taking up residence in a brick of gold or a stock certificate?). Rather, I have looked at it from the standpoint of comparitive housing costs. On that basis, and according to my realistic scenario (your mistaken assertions to the contrary notwithstanding), over the long run it would be far better to own than to rent.
The statement he made, "real estate is a terrible investment", may never have been more true than it is right now - at any time in history.
I've decided to sell my house, buy gold with the proceeds, and live under a freeway bridge.
At least I'll be beating inflation.
1. Renting is Cheaper
It really depends. But the reasons given for this situation definatly are not the reasons. 1. Part of your rent will be going to pay the property taxes. 2. part will be going to pay the interest on the loan your landlord took out to buy your property. 3. Part of your rent is alloted to your maintanace.
Its Kind of like saying its cheeper to eat at taco bell because you don't have to pay for the gas to heat the grill or the cheese on the taco or the salsa so it is cheeper. The restrant still has to pay these things and their costs should be included in the price they sell to you for. (if not they are taking a loss, much like our speculator friends who are renting at a loss because they still expect homes to increase by 20% a year for eternity)
Renting is "currently" much cheeper than buying mostly because the Home price/Rent ratio is historically so far out of wack due to the recent historic housing boom. The supply/demand for renting has not yet exploded like housing market, good thing or not too many of us could afford anthing larger than a closet! This gap will sharply narrow as the housing prices fall back to where they should be as we all agree.
::Renting is "currently" much cheeper than buying mostly because the Home price/Rent ratio is historically so far out of wack due to the recent historic housing boom
A rule of thumb to gauge the market is that a mortgage (plus taxes) should be 1.2 to 1.3 times the rent for that place assuming 10-15% down for the property.
That's why places like DC, Boston, NY, LA, and SF are out of wack because the ratios are more like 2.0 to 3.0 whereas Austin, Atlanta, and all of the midwest (sans metro Chicago) are within specs.
"3. Real Estate is a Terrible Investment"
Should be re-phrased to RE is a terrible investment RIGHT NOW.
"8. Location is Irrelevant
HUH? So the writer thinks a $10M beachfront home in Malibu will fall in price % wise as much as a $600K tract home in the IE? I don't think so."
The point made that regardless of your location your value WILL GO DOWN you dimwit.
Also..If you are familiar with the term 'the IE' then you are in SoCal so NO you dont live a non bubble city. The entire SoCal is a bubble.
"A rule of thumb to gauge the market is that a mortgage (plus taxes) should be 1.2 to 1.3 times the rent for that place assuming 10-15% down for the property."
Yes, this model follows in non-bubble regions.
See Buffalo NY...
http://www.homesbyowner.com/49280
It's a $185K stick price for a nice home.
Including taxes, this is $1.3-1.4K per month using a conservative 30 year fixed mortgage with 15% down payment.
Now, here's an equivalent rental home for slightly under $1K/month...
http://www.rentals.com/Display.aspx?adnumber=47844
This fits within a range, approximately less than a 1.5 ratio, and I suspect when mortgage rates were 5.9%, you could have kept everything under $1.3K per month including mortgage, insurance, and taxes and that's clearly in a "buy" territory.
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