Who's smarter?
1) Renters renting for a fraction of the cost of "owning"
2) Interest-paying homedebtors paying a bank for the right to live in a depreciating home when they could have rented the exact same home for a fraction of the cost
3) True homeowners who have no mortgage
April 20, 2008
HousingPANIC Stupid Question of the Day
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63 comments:
It's hard to say anyone really owns their house.. In my case it becomes clearer year after year that we are only renting it from the local school district... and they keep raising the rent.
today: renters
most of the time: homeowners
never: homedebtor
Homeowners who have no mortgage. Because in 10 years their investment will have returned more then most bonds and most stocks.
Probably the guy who bought 8 or 10 years ago and now has a mortgage of $1000 on a nice 3br 2 bath. Assuming of course that he enjoys his house and doesn't mind fixing shit all the time. Today renting is obviously better.
homeowners
True Homeowner
True homeowners that bought many years ago with prop 13 in place. $2100 tax on a $700,000 property. Booyahh...
Anonymous said...
It's hard to say anyone really owns their house.. In my case it becomes clearer year after year that we are only renting it from the local school district... and they keep raising the rent.
April 20, 2008 3:28 PM
===========================
I was going to say three since I have no mortgage, but anon 3:28 pretty much sums it up for me. if i had to do it again, I'd be a #1.
It all depends...
Many on this blog would say a renter is smarter....
But, what happens if the homedebtor you are renting from, walks away from the place you are renting?
I have seen cases where the landlord is paying $4K to 6K a month on the mortgage and renting it for $2500 or less. Why would they
continue to take a $1500 or more loss per month with no equity or negative equity in the house.
Even worse, if you kept paying the landlord and kept your funds and not paying the mortgage until it finally foreclosed. Then you have a Sheriff knocking at your door forcing you to get out in less than 3 hours! Not a very good feeling, huh?
If this market keeps tanking, there will not be as many rentals available. (except for apartments)
That hasn't been a big topic on this blog... it's happening everywhere.
School tax on my paid for house is wrong. I never attended public schools and I have no children. It is the largest annual bill on my house. I can understand county tax because of police and fire, but I have no use for sending other people's children to school. Finally, I believe that no one retirement age should continue to pay school tax.
in order of smartness.
#3
#1
#2
#3 always wins.
The Mexican...
1. Homeowners
2. Alternate
3. Alternate
Homedebtors and renters alternate for position 2 and 3 because it depends how much the homedebtor owes on the property. If the homedebtor is paying less for his mortgage+fees than he would for rent than he is smarter than a renter...and vise versa.
Homeowner, in a state with low property tax rates and no eminent domain abuse. As long as you didn't buy at a bubble price.
Renter, if renting from family or friends, so that you're sure no Robert Kiyosaki clone is profiting.
Better yet, renter, renting from a Kiyosaki clone who is losing money!
I vote for #3 thought it all depends on when they bought.
Put the extra money in the bank after paying the rent. Then buy a house outright, because you will probably have enough after 10 years. But never in California, because you will pay too much tax, since the houses are so overpriced.
What no #4
Squatter in an abandoned new home.
It depends.
In this market, someone who works for a living probably wants to rent. It costs less than a mortgage, and truth be told, you get the same amount of equity.
Someone who has retired probably wants to own their home Free and Clear (or as Free and as Clear as Homeowners associations and local municipalities will allow). It reduces expenses. The difference between homeowning expenses and rent is like money earned without risk.
People with interest only loans and negative amortization are dummies in any market. Interest only is rent, and negative amortization is slavery.
I would say #3- except it all depends when the house was purchased.
Anything bought 12 years ago or later, they're in a good position.
Anon said:"True homeowners that bought many years ago with prop 13 in place. $2100 tax on a $700,000 property. Booyahh..."
Agree. New cash homeowners are screwed.
best to worst:
true home owner (outright or can easily pay off the loan)
renter
home debtor (needs two jobs to pay the loan, or can't afford it at all without flipping)
true home owner except if the property taxes are high, or the person needs to move a lot for career
casey serin is the smartest in town.He partied like a rock star for 4 years and then let the banks take all the losses.He is a genius.He has a new lover to boot.
4) Debtors who gamed the system for hundreds of thousands, if not millions, only to walk away with nothing but a tarnished credit score. Example: someone who did a cash-out refi on a 2nd (or 3rd, 4th, etc) house. Let the house(s) go into foreclosure and pocket the change from the cash-outs. Yes, it's criminal, but they ended up further ahead than groups 1-3.
Then you have a Sheriff knocking at your door forcing you to get out in less than 3 hours! Not a very good feeling, huh?
You are either a total moron or a shill for the REIC. Maybe both...
ONCE AGAIN: IT DOSEN'T HAPPEN THAT WAY! You get proper notice and time to respond to an eviction. Call a lawyer and use the rent money to pay his fees... Sue and live rent free for a while. Been there and done that. Free rent for three months before the LL settled out of court.
Finally, I believe that no one retirement age should continue to pay school tax.
Perfect, because I believe that nobody under 40 should be paying taxes to support social security, since it's not going to benefit us in any way.
I live in Bethlehem, pa. I have a mortgage. My mortgage is less than 20% of my take home pay. I only use credit cards with zero interest. I'll still have over 30%equity in my home even if prices drop 20% here in Pa. which I doubt as rentals are in line with buying and we never experienced a huge run up. I'd say I'm smarter than a local renter and not as old as those who have no mortgage. You see the way of a significant down payment and affordable mortgage and living within one's means still exists in most of the country. The crashing bubble markets get all the press but the majority of buyers aren't shallow Californians who need a Hummer and plastic surgery to feel a sense of self worth.
I love this blog, but the incessant berating of homeowners is a little tired. Homeownership is generally a great financial decision, and claiming that renting is smarter is ridiculous. Renting is like flushing money down the toilet each month. "Homedebtors" borrow money at rates of 3% to 4% after the tax benefit, which is like getting free money after inflation. The current housing crash is a once-in-a-lifetime event, and your are really unfortunate if you bought recently in a bubbly market. But over the past 100 years, "homedebtors" have been financially rewarded. And so have landlords. But renters have received the shaft, and always will over the long term. Renting may be trouble free, but don't believe it is a financially wise decision.
4) True homeowners who paid off their house in the past, and could pay it off anytime they like, but choose to leverage that money into investments that pay interest and get the tax break for owning a home
For years I owned my own home outright, but what sense does that make? $250K in gold when I bought my home would have been worth $750K now.
Money is dirt cheap. As long as you are borrowing to invest, not borrowing to consume, you're fine.
But, what happens if the homedebtor you are renting from, walks away from the place you are renting?
You live there for free until the banks sends the sheriff to evict you in 6-12 months. From the time the banks posts the first defult notice, you stop paying the homedebtor. The homedebtor gets the bad credit while you get free rent.
True homeowners, but that's really a tough one
Because today you can't become one because of the prices
The question does leave out a long-lost forgotten option.
The responsible use of credit by a homebuyer that sees a home as a stable place to live first an a investment second(if at all).
I know it's shocking, but some people DID pay 20% into a fixed rate loan on a home that had not been over-appraised.
The question leaves out those that are not renting, debt slaves, or independently wealthy.
Across the board generalizations like that make no sense. I hate to sound like a scumbag (realtor) but conditions do vary dramatically depending on where you live. If you live in a place where the bubble didnt inflate prices too much and low property taxes it may make sense to borrow money to buy a house. Granted, most real estate is overvalued right now, but there are circumstances where #2 is better than #1. And the difference between #2 and #3 really just depends on what mortage rates are available. I would be willing to bet that within our lifetime #2 again becomes the winner.
Renters are losers, pessimists and have an unhealthy grudge against people who buy.
Be a homeowner like me.
After 10 years, i finally dived in a couple of months back after cashing all my options and bought my home with a piddling $100K mortgage in Fremont, CA for $500K. If things get really bad, I could always flip burgers or wash cars or do janitorial service to feed my family and make my $650 monthly payment.
If renting is so good, why the heck do you guys care if house prices are too high other than being envious of those who bit the bullet ?
Keith,
Coming soon to a bubble city near you...
Renters Tax
RayNLA
"Homeowners who have no mortgage. Because in 10 years their investment will have returned more then most bonds and most stocks."
Did you pull that litte factoid out of your posterior orifice?
How's about #4....people who don't live in California (and parts of Arizona, Nevada or Florida)?
Hate to break it to you but not everyone wants to live there. I don't care what a realtor told you, or how it's "different" there, etc.
I'm a homeowner. I paid cash way back in '83 for my home. Yes, I can sell for more than I paid, but it was my home and I raised my children there.
But now, due to the housing boom/bust, my area is slowly being destroyed. As old folks die, they leave their homes behind to vacancy, renting speculation, etc.
Care is going out the window with respect to neighborhoods and property.
I have already arranged to go to one of those retirement apartments but they have a waiting list that can take you 2 years to get in and you must leave a significant deposit.
I did this because I know the area is dying. My offspring will have to continue to live there because although they are adults, they cannot make enough to buy a place.
Eventually they will have to sell it and move on. I am leaving it to them, it is all I can do.
Americans and their greed have betrayed me. Bernake has made my life miserable with rising prices for energy and food costs.
I'm old. Health is sliding, I don't have health insurance either. I hope to have it again by next month. I have been waiting a year.
This is how life is led. Gaps in everything, time, wait it out.
This is not what America was about in the old days. Workers were taken care of by companies with health plans, etc.
My father had a health plan for life. My last relative has a golden health plan, where if she has a hang nail she can go to a hospital and not be charged one penny. No co-pays, no nothing.
Me, I can't even see a doctor. I served a civic job for 24 years. Worked every day since I was 16.
Now? Thanks a lot you greedy businessmen! Thanks for destroying everything!
The funny thing is there are others who are in worse condition. There must be change in America soon or all of you will be joining me in debt, depression and a slowly eroding ability.
Visiting home, a quiet non-bubble, small city. I see the wisdom of slow home appreciation and not gouging each other. Could it be non-bubble area folks are "smarter", i.e. - the simple, old-fashioned way of doing things and less susceptible to get-rich-quick mentality? Could also just be that economies in those places are flat or depressed. Still, the "unsophisticated" appear smarter.
Hey Cunning Stunts-how much property taxes are you paying a year on your recent Fremont, CA purchase?
Today: homedebtors
Tomorrow: homdebtors
Forever: homedebtors
Why?
Well, assuming you weren't a total twit and tookout an ARM, your payments - short of property taxes, which are maybe 5-15% of your mortgage payment - stay the same. So as rents continue to rise over time (which make no mistake, they do - I rented from '98 - '07), the gap closes and within a reasonable timeframe (much quicker normally). So there's that.
Also, over time, the value of the house rises with inflation (again, normally), thus not only do you continue to pay the same amount, but you get free $$ building in the background.
And then, there's the tax deduction from hell. Depending on your tax bracket, this reduces the true cost of your mortgage by about 20-25%. Of course, over time that slowly decreases since more and more is principal, but then you end up having more and more $$ waiting for you on the back-end.
So whereas my $3700 mortgage is high, the effective rental cost for a house like mine is about 2300-2500. Taking the low-end of that, It's a $1400 diff, of which $800+ is offset with the tax deduction alone, so it's $600 diff. And when Uncle Bushy/Congress give me the handout and reduce my mortgage effectively 20-25%, I'll be ahead and you'll still be where you are. ;)
GENIUS ALERT!
Stay-at-home mom, 40, Apopka, Fla.
We bought a home in Orlando, Fla., in February 2005, the height of the boom here. At the time, we could afford the home, the taxes and the insurance. It would be tight but we kept planning on "the bonus" or "the raise."
We got all caught up in the "square footage" of the home. Well, what we didn't realize was that with our BIG HOUSE comes BIG EVERYTHING! Big taxes, big insurance, big water bills, big electric bills. The anxiety at the end of the month caused health problems for both my husband, Victor, and I.
Last summer, we realized that we could not live like this any longer. We could not afford our home, we were prisoners of our mortgage. We couldn't enjoy life outside the house. We were literally trapped.
We decided to "downsize" our life, our lifestyle and our home. It was a lot of soul searching but we both realized that it's not all about "square footage" or bedrooms or full baths. It's about being able to afford a mortgage (and all the add-ons) and still have money at the end of the month.
Read about many other geniuses here:
http://tinyurl.com/2m2qgb
Oh, almost forgot! :)
The other angle is that I'm borrowing someone else's $$ @ 5.75%. Even WITH a insane bear-market that's still down 15% from peak, my investments are pulling about that over the last 16 months. :) So in the worst of times, you're about even and in any other reality, you're making money by putting your money elsewhere and borrowing someone else's. Suckahz!
The funny thing is there are others who are in worse condition. There must be change in America soon or all of you will be joining me in debt, depression and a slowly eroding ability.
Nope, not me. I saw this coming many years ago, saw how most of you voted for it, TWICE, so I have prepared accordingly. I can retire well in two different countries, as I didn't buy into the ponzi schemes and didn't let the Bush/Cheney/Neocon/GOP/Zionists played me for a fool. Hey, isn't Bush the guy you prefer to have a beer with?
BTW, you do realize that the ranch in Crawford, TX was a trick to fool the sheep, right? GWB will never go back to that place once he's out of the office. That was a neocon/Karl Rove idea to trick the sheep into thinking that GWB was another Reagan, the cowboy with the ranch, cleaning bushes for fun. And you fools fell for it.
Now you fools are going to vote for the Messiah Obama, who will finish destroying the American middle-class. The fools are following the MTV-Pot Smoking-College Immature idiots who love a fad, the $10k handbag Hollywood celebs who could care less about the price of milk or gas, or ghetto America who can't even pick up the trash in their own neighborhoods.
Follow them, geniuses, they know better. Enjoy now, since you've been voting for it.
I rent for less than 10% of my income. To buy *anything* that I'd even consider living in would cost me three times as much per month, and that's with 20% down. This is in a so-called "non-bubble" area. Median household income: about $45k. Median home price: last I checked, about $250k, and dropping.
Tell me I'm not financially better off to rent right now...and I say you're a damn idiot. I can pocket over $1k a month that would be wasted on interest if I had a mortgage. I'll just wait until the prices correct. And if the interest rates are a lot higher by then? Great! That'll drive prices even lower...maybe I'll just pay cash then and skip the whole 'homedebtor' phase.
Anon 12:43 re: healthcare
I really feel for you. The living misery however should be attributed to the gradual transition towards socialism that this country has been undergoing in the last 70-90 years. The reason why your own father and your last relative had "golden healthcare" was very simple: you were paying for it! It was literally a Ponzi Scam. The worker to retiree ratio was 10:1 when social security was introduced. Today, it's 3:1! The same kind of demographic change has been taking place for medicare and medicaid. That's the fundamental problem with pay-as-you-go systems. So naturally you can get only 1/3 the benefit of your father's generation, at the best; the higher bureacrats doing the redistribution of course hold a position in the line ahead of you for receiving such benefits. "Greedy businessmen" are just any other individuals looking after their own interest, and checked by the greed of other people at the same time. It's the greed of the political class that has been robbing the rest of the country blind.
I pay about $6K in property taxes but only $4K out of pocket after the tax break. I cannot imagine paying only $1K or so rent and living in a similar house in Fremont. With the dollar depreciating rapidly, i have locked in a an investment of a lifetime. In a about 10 years, my monthly payment will be peanuts while all you renters will be paying $3K-$4K for a similar home with no limit in sight !
Now tell me, who wins ? Fiat currencies have no value, not when 90% of the population have a dream to buy a place of their own. Human beings are emotional, not accounting robots!
#4 - as pointed out by others, someone who bought before the bubble and is paying less on a mortgage than rent for a comparable place.
Someone posted, "if you don't mind fixing shit all the time". Some people enjoy that kind of work. I've got a ton of tools that wouldn't all fit in your apartment, which allows me to pursue woodworking and metalworking as hobbies, I can run my power tools anytime I want (I hear your landlord knocking), and I actually know how to do something as opposed to calling in a contractor to caulk around my tub. Experience leads to skill, which leads to independence and self-sufficiency.
I flipped lots of houses in Phoenix and got out in 2006.
I paid off my mortgage, cars, boats etc. I put money in the bank.
I also paid hefty capitol gains taxes.
I lost my ability to itemize deductions on my taxes.
I still have to pay property taxes, insurance and upkeep on the house.
But... I can paint, remodel, add on and landscape how ever I choose.
I like where I live, so I prefer to have it paid off and fund my retirement instead of throwing it away on rent or giving it to the government.
Visiting home, a quiet non-bubble, small city.
-------------------------------
Where is that? Kansas? Oklahoma? Nebraska?
Well, a true home owner would win out.
But... Renting is SUCH great alternative for people who aren't materialistic and greedy.
I rent a five bedroom house from a true homeowner (he & his father have owned the house for a total of 35 years, before I was born!!). I have four roommates. My rent is $275/month. Total utility bills are (and this even includes a few luxuries like digital cable and broadband) are at most $170. That is a total living expense of $475/month. I have no car payment. I bring home take home pay of $2100/month. If I budget $100/week for gasoline & groceries,that is $434/month. I save $1191/month that I make careful investments with. All my peers keep pressuring me to buy a condo, and I even have a realtor who got my number from a friend. They say that I don't want to be a responsible adult, because I still have roommates like a college student. Well, should I tell them all how stupid they are being? Or should I just let them hang on to their delusions, and have them green with envy when I purchase a home for cash in 15 years?
Suckers.
Like other posters have aluded to, it really depends on circumstances and the location where the individual resides.
If you live in San Antonio, TX where the cost of living (including housing) is very reasonable, than it makes perfect sense to be so long as the difference between cost of rent versus cost of mortgage is within normal margins.
If you live in Miami, FL or various parts of California where housing prices had a massive and to a large degree, unwarranted runup, then in all likihood you are far better off renting. I lived in Silicon Valley for several years before relocating and my rental costs were less than half of what the corresponding mortgage would have been.
Ultimately, if you own your home free and clear, the is obviously the best scenario since your overall cost of living drops significantly.
I really wish this blog would divert away from this silly renters versus buyers stigma and stick to basic interpretations of the situation. To make broad based generalizations that "all" housing is over-priced everyone is inaccurate. Yes, we had a bubble and yes it affected many areas of the country. But it affected them in different ways and in some cases, not at all.
Anyway, I an a happy homedebtor now living in a region of the country with more reasonable home prices. I did not over-extend myself when I purchased and I have a substantial cash reserve should time become difficult. But as I mentioned, that is just my situation. If I was sitting on an interest-only negative amortization loan in northern california where the housing market is dropping, I would likely not be a happy homedebtor. So its all relative.
In Sacramento, due to the collapse of the housing bubble and the resulting number of repossessed properties, owning is now cheaper than renting. Rents for 1 br apts start at about $700/mo. Owing a 2br condo costs between $9-$214/mo. I was expecting things like this. I still find it hard to believe. Many more such deals are probably coming soon to a city near you. :)
http://www.realtor.com/search/listingdetail.aspx?ctid=2207&typ=7&sid=15e22a7b1c9442549b112bbf10f604ad&lid=1097967403&lsn=1&srcnt=5952
http://www.realtor.com/search/listingdetail.aspx?ctid=2207&typ=7&sid=15e22a7b1c9442549b112bbf10f604ad&lid=1097827535&lsn=3&srcnt=5952#Detail
http://www.realtor.com/search/searchresults.aspx?ctid=2207&typ=7
"I rent a five bedroom house...I have four roommates."
Question for you: How many of your four friends will still be willing to split rent with you in 20 years?
Been there, done that. It all looks good on paper until the bickering starts, a couple people get married and move on, someone loses their job and sponges for two months, etc. etc.
The more time you spend in the commune, the longer you spend working paying off the inevitable mortgage. Or you live by yourself in a dumpy studio, patting yourself on the back over all the money you save being non-materialistic. Good thing you can pat yourself on the back, because nobody wants to come into your neighborhood to do it for you.
Bush will be the first president to flee the country. He already has a ranch in south america.
"I never attended public schools and I have no children."
This is my beef too - such BS.
Where I live they are spending 16K/year on the little bastards - glad I am renting.
"There must be change in America soon or all of you will be joining me in debt, depression and a slowly eroding ability."
You couldn't have said it better. I know a lot of talented people who are rotting away in 4x6 cubicles because they can't affort to take the risk of starting something new and leaving their family without money and health insurance. This is the worst climate I have seen for a true entrepreneur.
I am a homeowner so I would be inclined to say #3 is the real winner in the long run and #2 is the real looser in both short and long run.
Visiting home, a quiet, non-bubble, small city.
-------------------------------
Where is that? Kansas? Oklahoma? Nebraska?
About an hour from Philadelphia, actually. Over about 40 years, the house sure appreciated alot. It was paid in full long ago. But between upkeep and the general rise of housing, it just was never an "investment". It sure was home, though.
Cunning stunts,
1) Deduction is available for property tax only if you give up standard deduction and file Sched A. Now, how much total deduction do you have on Sched A? 14,000? Otherwise, you'd be better off going by standard deduction.
2) What you are touching on in the long term is asset allocation. While I agree that in the long run home ownership is a winning strategy, just like stock ownership, however, try tell that to anyone who bought stocks in 1929 (who wouldn't see inflation adjusted breaking-even until the 1960's) or those who bought house in 1908 (who wouldn't see inflation adjusted breaking-even until 1940's). So, assuming you are in your 30's, do you really look forward to be able to say that you finally break even, inflation adjusted, when you are in your 60's? Catching the falling knife is a dangerous game. A recently broken toy usually doesn't get a second chance right away in the serial Ponzi Scams that we call our financial system.
reality:
"try tell that to anyone who bought stocks in 1929 (who wouldn't see inflation adjusted breaking-even until the 1960's)"
Which stocks? Long ago I found the Dow chart you were looking at. However investing takes more thought than looking at a picture. Do people buy the Dow, or a variety of stocks? Do you know what effect dollar-cost averaging has on a portfolio? How soon would a person have recovered after the 1929 crash had they continued to buy, in other words in a dollar-cost averaging scenario? What effect would reinvesting dividends have had?
I know people who lived through the Depression that hid cash in their walls. I also know people that stayed in the market and are worth millions more than the people who hid their cash. To each his own I guess...
I will give you kudos for staying away from things you don't understand, though. Warren Buffet said, "Buy what you know".
"(Vanguard) Wellington started just before the Great Crash of 1929 and the epic bear market of 1929-1932. Wellington investors broke even three years after the bear market ended."
"...the average stockholder who reinvested dividends actually showed a positive return of more than 6% per year during that 25-year period, easily beating the performance of bonds and short-term treasuries. Think about that the next time you hear someone say it took 25 years for stock investors to break even during that period. That's true only for those who didn't reinvest their dividends!"
I guess it depends on the economy at the time you answer the question. Right now it would appear that the renters and the debt free homeowners are on top, in that order. The renter because he has not absorbed the loss in home value (neither did he capitalize when it went up)andthe debt free homeowner, as long as he holds on to watch the value increase again - because it will!
With the economy like it is today I would say only the homeowner...and renting. But don't forget to factor in interest rates, inflation and the falling dollar.
Don't make a mistake...house prices are still falling....And I would never go back to using leverage at least for the next few years.
Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If this is the only home and If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.
It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less. - Tue Jun 10 2008, 14:43
Avg Median Percent drop for homes for 2008: 17%
One of the most important factors in mitigating price declines and an overbuilt, overheated market like Las Vegas, is job growth. While homebuilders pumped the area with jobs in the mid-2000s, as they pull out, jobs in construction-related industries are disappearing. They are down 9.6% from this time last year and still dropping, according to the Bureau of Labor Statistics.
Salaries cannot cover current house prices. This means house prices must keep falling or salaries must rise much faster. You probably noticed that your salary is not rising much, and that inflation in food, energy, and medical care has been very high. This leaves less money available to pay for housing. A safe mortgage is a maximum of 3 times the buyer's yearly income, but most mortgages are well beyond that. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling.
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