Five years ago, I thought about buying a home, and everyone around me was saying "You HAVE to buy a home. Don't THROW AWAY YOUR MONEY by renting. Houses NEVER lose value."
While it's obvious that this flawed logic existed five years ago before the bubble burst, I'm surprised at how much of it still remains. I'm surprised that consumers are still trying to play numbers games to justify purchasing homes, but perhaps as the OP suggests, the supply of buyers is less than before. If you want to buy a home for lifestyle reasons, great, but make sure that's clear; there are so many people who are stuck in their homes without a job because they thought they were clever at math.
When my wife and I were figuring out what to do with our lives, we decided to put my finding a good job above owning a home. Because of this, I was able to accept a job in NYC and move from the suburbs of Atlanta without worrying about selling a home in a horrible real estate market.
We'll consider buying a home after I feel more rooted in the tech industry, but for now, we appreciate the flexibility that renting affords.
A very valid point. As others have stated, buying a home should be more about quality of life and living than making a buck and that has to be on your time schedule; not someone else's. The worst thing you can ever do is buy a home when you're not ready for a home -- and you know better than anyone else if you're ready.
When you start waking up in the morning and thinking "god damn, I wish I had a home, so I could . . ." then it might be time to start giving it consideration. For me, I had dealt with a home invasion. I'd lived in my apartment for five years and someone walked in while I was asleep and stole everything (the layout of the apartment was such that I wasn't disturbed by the intruder - if you were in the back bedroom, you couldn't even hear someone banging on the front door). I lived alone. Nobody else had keys . . . except the leasing and maintenance offices. Took $30k worth of stuff.
So, I started waking up in the mornings feeling a bit unsafe, wishing I had a sweet surveillance/alarm system, and also thinking about how great it would be to have room for my entertainment system (and get to blast it as loud as I wanted). Also, I kind of still want to get a dog and that wouldn't have worked in the apartment. Enough things started to bug me that I just sat up one day and said "let's go look at houses".
Until you are home shopping for those reasons (or similar reasons of your own), then you may be doing it for all the wrong reasons. Maybe because friends are all buying homes. Maybe because you feel like you're still a "kid" as long as you keep renting. Who knows?
In the mean time, definitely don't buy into the idea that you have to go for it because people around you are talking about it and you feel like you're missing out. You might be the sanest of them all. I didn't buy a home until I was starting into my 30s. I could have done it a decade before and went so far as to check out homes and even get approved for loans. It just never felt quite right, until last year. And I have been happy that I finally did so, when I did.
Well-being accounts for a lot, too. Whatever you may be losing "on paper" with renting, you may be compensated for in peace of mind, right now. You can focus on work and savings and family rather than finding a trustworthy and affordable lawn service, worrying if your boiler is going to make it another year, wondering why in the hell that sink is draining slowly, when it isn't clogged up, wondering how much it would cost to turn that spare room into a sex dungeon. . .
It's really difficult to make general statements about the wisdom of buying versus renting across an entire country with extremely diverse local real estate markets. We made an up-to-date heat map of US rent ratios here: http://hotpads.com/search/rent-ratio-heat-maps that demonstrates how some markets, even at the state level, are still tilted toward the buyer while others favor renters.
I think that it's not just an issue of region but also of price range. I am a life long renter and I've seen that rents tend to stay within a certain band - they only go so low or so high generally. So a small apartment might be still $1200 to rent vs. a mortgage of $1100 whereas for a high end home, rents might only get to say $5k or $6k vs. a mortgage of $12k on the same home. I rent a house for $4500 per month that would cost me a $7500 mortgage if I bought it.
Another issue is the fact that not everyone can buy a house that they're going to realistically want to live in for 30 years. Your family grows, you change cities due to job opportunities, etc.
So for the guy who knows he's going to be single and stay put, it may make sense for him to buy a $200k house instead of paying $1200 in rent for an apartment. But for many others, buying makes absolutely no sense.
There are a few defensive home owners in this thread who seem to be missing the point:
The main problem is that the general public sees renting as throwing money away, and that owning a home is unconditionally "better".
I'll make the assumption that this community has higher-than-average financial literacy, and hence there are people who have made the right decision with respect to rent/buy. However, I don't think this is true in general, and often times the rent/buy choice is much, MUCH closer than people assume.
The rent vs buy index is misleading. I used to live in Ann Arbor where rent is mediocre, but home prices are ridiculous. On paper the ratio still looks pretty good because the median rental property is downtown while the median home for sale is in the suburban neighborhoods. I was on the board of a downtown housing cooperative and the ROI on properties in the downtown area was nonexistent. I moved 5 miles to the east to rough around the edges Ypsilanti and the situation was completely reversed. You can have a house downtown paid off with 5 years of rent payments. Further out you go into the surrounding farmland, the lower rent becomes and the higher sale prices get.
Interesting. The perception when I was in school was that the rent was too damn high. I never really looked at house prices, but I knew someone who got into a 2 bedroom off Main near Stadium for around $190k (in 2005 or so), which seemed reasonable considering its location.
Can we just all agree that owning a business is the real American dream and whatever you choose to do (rent or buy) after that has significantly less affect on your situation than owning your own business?
I would certainly rather own a business that generates whatever my rent or mortgage would be, than to own a house that costs me that mortgage.
Referencing Zillow is the first indication you have no clue about the real estate market.
Two examples: The house I live in has a carriage house behind it. It's zoned as a rental, has a kitchen, bathroom, bedroom and about 800 sq ft of studio type space with about a 15 ft ceiling. Does this information appear on my Zillow page? Nope. Zillow has no way to enter that type of information and its valuation is missing this very crucial bit of info.
Secondly, where I used to live (in the mountains above Boulder), there was a house for sale next door. It was on one acre and was a modified single wide trailer. Zillow said it was worth $350,000. They said the property I was living on next to it (5 acres, a main house twice the size of our neighbor and a detached cabin) was worth $420,000. Seemed way off to me. Well, the house next door went for sale and sold for $149,000.
After that, I don't trust Zillow at all. They have a lot of work to do before someone could take any statistics they provide seriously.
Perspectives obviously vary by market and circumstance. In mine I'm fine with renting. I tend to stick around the 1700/mo range in NYC. For that, I don't have to own a car or the maintenance and depreciation associated with it. I still pay transit, but it is significantly less than the cost I paid in Ohio to drive 40-60 miles to work.
My income mirrors my actual worth. I've seen people shortchanged because companies know that person is chained to a mortgage. I'm not paying maintenance, insurance, or front loaded interest on a home. (Tax deductible not that impressive)
After rent is subtracted from my net pay I still have enough to turn around and invest in a diverse array of investment options. A home is a savings account with a maintenance fee. Viewing it as anything else IMHO is wishful thinking. An apartment is that same service fee condensed. Remember, in my situation both the house and a car have costs I don't have to worry about.
Having freed myself of those problems I have much more spare time, more investment options, and flexibility. I'm perfectly ok with not having a lawn, neighbors degrading property values, or surprise expenses. To other people those negatives are perfectly acceptable, they cite the lack of space, public transit, and neighbors as negatives. I don't mind any of them.
I think it's interesting to compare Greenspun's attitude to Mike Rowe's recent Senate testimony about the lack of skilled workers in the trades in the US. Greenspun thinks that going to Home Depot and pulling weeds clutters the mind and prevents us from writing novels and building empires. Mike Rowe wishes that we weren't a nation of people who just left a check on the counter for the plumber.
I rented for years, and not being able to fix stuff when it broke (without losing the investment when we moved) drove me crazy. I feel a strong desire to maintain my own home, even though I know I'd do better financially hiring cheap labor to do the work while I go make money faster building an empire.
One data point, we just bought our house (Berkeley CA) in January for the exact same price the previous owners purchased it on 2003.
My sister closed 5 days ago on a house in a very desirable part of Mountain View CA. Through their process they had houses with up to 25 bids.
I'm seeing (anecdotally, in the SF Bay Area) a lot of people buying right now. These are generally savvy folks too, they're putting 20%+ down getting awesome fixed rates, and staying well within their means . We may still see a slight dip in prices but my feeling is that we've bottomed out a bit here and on the way up. We think we'll be able to sell our house in 5-10 years and make a profit. That may be wishful thinking, but I'm fairly confident in that position, especially as the tech sector heats up.
The tricky thing about the SF Bay Area however is its very resistent to outside pressures, it was one of the last places hit and will likely be on of the first to recover. Its very hard to time a bottom in the housing market here.
Why should the SF Bay Area be one of the first to recover?
In most parts of the country, housing prices are roughly comparable to what it costs to build a house, so I imagine they should be at least reasonably stable.
But here, prices are way out of proportion, and this seems to depend on draconian laws preventing almost any sort of development. If people could actually build condo buildings in, say, Palo Alto, prices would be going down in a hurry.
They were looking to buy a house and some of the houses they were looking at were in such high demand that up to 25 different people had put offers on them.
Yeah, I think the credit issue is a big part of it. Whether it's a good idea or not, if it were as easy to get a mortgage today as it was in 2005, I'm pretty sure a lot of Americans would be getting huge mortgages. So it may be overstating the case a bit to claim that Americans have in aggregate made a rational decision not to buy houses--- versus simply not being able to buy houses anymore due to a change in the banking situation.
I posted this in my own comment, but I agree that a lot of people won't buy homes until they drop even more. Unfortunately, I don't know how much more they're going to drop. There is a lot of artificially maintaining the value of homes, because politicians want to keep the voting block happy (people in debt with a family). I bought my home, because rates dropped below 5% and I had a chunk of money on hand, found a home I really liked, and was kind of sick at the thought that I'd just handed over almost $200k in just over ten years by renting apartments.
I make a solid income and owning a home isn't a trivial expense to me, so I can't imagine someone making a go at it if they have a family and an income that is half or a third. Prices should drop to whatever their natural un-aided point would be, so that all those people out there who will either never own a home or only do so by getting into unfathomable debt (all over again) will actually be able to own a piece. Imagine what the long term benefit to the economy would be if prices dropped just long enough for tens of millions of people to lock in rates on their own home? It would transform the economy as well as, perhaps, society. Owning a home would be the rule, instead of exception. Being in debt to own a home would be an exception. High rent would be an exception. There would be much more discretionary income to put back into other industries. Or, better, for people to stick into their savings so that they can retire with a home to live in and finances to support themselves.
Energy costs will be the main concern. We need to cool or warm our air, heat our water, refrigerate our food, and mechanically dry our clothing.
Housing around here is not particularly expensive, but the house's gas bill peaks a little over a tenth of the rent in an Upper Michigan winter, and the electric bill doesn't really get near that peak. There would have to be some pretty significant change before energy costs were that much of a concern.
Do you also get kind of sick when you notice that food and clothing and flowers and education and entertainment cost money also? If no, why is housing different? If yes, what do you think income should be used for?
Housing should cost whatever supply and demand value it at. That means that when everything goes belly up because of stupid lending and stupid borrowing, those people should have to sell their homes at a loss and people should be able to come in and buy those now cheap (because of a new ratio of supply and demand) homes on the cheap.
In other words, I want the natural value (free market) of things -- not some artificially inflated value, because government and committees felt obligated to bow to home-owners in saving their asses and maintaining the value of their assets. If I buy a car and then my financial situation changes, I may need to get rid of that car on the quick and someone can get a good deal out of it. Why should the government come in and rescue me by ensuring that I get a solid high value for my car, at the expense of another person who could have benefited from circumstances that otherwise would have made the car affordable to them?
I know we don't tend to have a truly free market much of anywhere, but it seems particularly shitty to artificially maintain a high value in housing at the expense of a huge chunk of society that can't afford ridiculous (artificially so) housing prices.
One of the things that he's critically missed is that it's unfair to only compare the price of buying vs. the price of renting today. When you purchase a house, your mortgage is set for the term of the mortgage. Rent is usually only set for a year at a time and does go up.
The NY Times buy vs. rent calculator in the article that he links, uses 3% as a baseline rent increase per year. So, after 5 years, a $1500 rent could be expected to cost $1740. That's not too impressive if you assume it's a place worth $375k and at his 2% taxes and maintenance price, you'd have $625 in costs in addition to the mortgage - well over the $240 that the rent had risen. However, after 15 years, that theoretical rent would have risen to $2300 and eclipsed the cost of taxes and maintenance. Now, as home values rise, taxes would rise with it, but then you own something that you can sell for more money and have made a good investment so it isn't a good argument to say, "well, one's home could go up in value a lot every year which would mean more taxes."
It depends on what you're buying a property for. Frankly, the NY Times calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) is going to be a lot better than my crude calculations. However, if you're buying a property to stay in for a good while, it can be a better idea to buy. The costs of selling don't matter that much when you've stayed in a place for a long time. It also depends on your market. I've priced things out in the Boston area against rent (more urban than Greenspun), and it really depends on how long you're going to stay in that place. Most of the cities here offer you a homestead exemption on your property taxes if you live there and it's usually around 200k - meaning that if you buy a place for $400k to live in rather than rent, you're actually only paying half the property tax rate. The towns tend not to have that exemption. So, if you want to be in one place for a decade, the calculator shows that buying can be a nice option.
Buying a house isn't something to go in for like buying an iPhone and getting a two-year cell phone contract. It requires a careful look at the costs and that you're relatively settled in life. It isn't a panacea of money, but it can be cheaper and can be stabilizing. While it isn't everyone, there are people who really like an area, have a job that won't see them have to move, and would stay in that house for 20-30 years.
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Plus, if you look at Trulia's rent-vs-buy index (http://trulia.movity.com/rentvsbuy/), you'll see that Greenspun has cherry-picked the worst cities to buy to do his calculations. Trulia notes that in 36 out of its 50 cities studied, it is "much less expensive to buy than rent". That includes real cities like Chicago, Wahsington DC, San Diego, Minneapolis, Philadelphia, and Atlanta. He's used a buy-to-rent ratio of 30:1, but the average for the 50 cities shown is 14.22. So, we live in the Boston area and buying here is an expensive proposition that might not make sense. However, there are many places that have much more favorable ownership conditions. If you're in a market where the buy-to-rent ratio is below 15:1, the NY Times calculator will show you how favorable buying is. And, frankly, that's most of the country. Where Greenspun and I live seems to be the exception, not the rule and his calculations are based on data that doesn't apply to most people. It applies to him and it applies to me based on where we live, but it probably isn't something that one should generalize to the country.
It is also important to mention prediction regarding prices of real estate (which also influence rent).
For example, prices of real estate in Japan are still falling down - nearly 20 years of constant decline [1].
There were articles in 2007 [2], how Japan's real estate crash may finally end after 16 years, but oh well.. we know happen in 2008.
However, how many people stay in a place for the life of the mortgage? This is the flexibility part of the equation. If you lose your job in one area then while renting you can adapt quickly. If you own you have to sell (at a loss) or try to rent, at 3% of your cost. These are not features in times of economic instability. You say, "it isn't for everyone", but really there are very few who benefit from an illiquid housing market with low rents.
Actually, anybody can benefit from an illiquid housing market with low rents. Anyone that is smart enough not to buy and just wants to rent and invest their hard earned money elsewhere. In my affluent neighborhood I can rent a house for $2,000 a month that would cost $4,000 a month to pay a mortgage on, not counting maintenance, repairs, and upkeep. I could take that extra $2,000 a month and invest it in conservative financial instruments and make at least 6-7% return. Or I could be paying a $4,000 mortgage with only about $500 of that going towards equity and having to pay an additional $10,000 annually of maintenance and upkeep (generally considered to be 1.5% of total house price per year).
Which one would you do? The reason why _some_ people make money from housing is leverage. You take out a huge loan and if it goes up in value a few %, you made much more than your starting value. Leverage works exactly the same way when prices are declining. Your small $50,000 downpayment is quickly erased by a 5% decline in value.
I don't like leverage in my investments. I prefer to know that I can't lose more money than I invested in the first place. I diversify my risk so that I can never lose more than 10-25% of what I own with a single investment. Why would I put so much money in a single asset that is extremely illiquid and has so much leverage that I can lose more than my net worth?
Housing just doesn't make sense until the market returns to reality - and with federal subsidies including tax credits, Fannie Mae and Freddie Mac, it won't return to a fair market until _all_ government subsidies are removed, including mortgage interest tax credits, Fannie/Freddy backing mortgages, etc.
My thoughts, also. It used to be that you could reasonably argue the money you'd spend "investing" in a home would be better spent in the market, but that would not seem to be the case, these days. Not to mention, there is now a distinct value to having a roof over your head that is your own that is, perhaps, more emphasized than five years ago.
The key is, you can invest in real estate without owning a home and better still: be diversified into multiple kinds of real estate. A home is a very homogeneous investment vehicle. Think of it more like a savings account with a maintenance fee but you can live inside it.
In effect you may be owning a very small sliver of the loan the person renting the apartment to you is paying off. By giving them a tax break, their ability to repay the loan improves and as one of the many people who has invested in their success, you get a return on your investment for taking a risk in that market. It's not like that interest saved vanishes. Someone benefits from it. In this case it happens to be the financial system backing the loan as well as the person who took the loan.
Money flows, tax breaks can decrease the viscosity of that flow.
Young people? Probably not many anymore. Elderly, or people who've got a decade+ invested in a large company? Tons will stay put for 10-15 years or longer... (hah, self fulfilling prophecy - if you CANT sell, you'll stay longer too).
What happens when those companies downsize or outsource their jobs? They can't move and they don't want to learn new skills. If anyone thinks that because they've had the same job for 10 years they're going to have it for the next 10, I'd say they're crazy. (Having been through layoffs a couple times in the last decade.)
True. That's a big risk and that's one major reason to hold off on buying a home. However, at some point, you have to either decide that you're going to live somewhere or you have to decide you're going to spend your entire life as a nomad. I've been with the same company my entire adult life and my feeling of uncertainty made me delay buying a home by almost fifteen years. I eventually decided I can't just keep living my life (relationships, purchases, etc) based on a fear that I may or may not be in one spot long term.
Wrong. While one of the products Trulia offers is a subscription service for realtors, Trulia is independent and committed to providing the most accurate information to consumers (I'm YC founder from '06, and a am now a product lead at Trulia)
Additionally the 3% rent increase theory may be true in aggregate, but doesn't take into account the real world practices of landlords. It's exceedingly common to list a property for a low lease then jack it up after the first lease term. They understand the friction of moving puts them in a better bargaining position the second year vs. first move in.
As a whole rates may increase 3% per year, but individually it will look more like a 7-10% increase the first year followed by 3% increases thereafter, unless you move.
I've rented for most of my life, and never seen that happen. In fact most leases I've signed switch to month-to-month after the first year, thus decreasing the friction.
When I rented last, my lease switched to month-to-month if you didn't sign up for a new term, too. It went from (at the last number) $1,200/mo under lease to something like $1,900/mo without a lease.
Normally your renters agreement will have a clause saying that they can only increase the rent by X% a year. If they want to go above X then they need to give you one years notice. At least my rental agreements have looked like that.
In my experience, leases are exactly the opposite. You sign a lease for up to a year and are locked in at a certain price over that year and they do whatever the hell they want to when it comes time to renew your lease for the following year. Your option would be to switch from annual lease to monthly, but you're often looking at paying double the monthly rent, then.
Yeah my option is an annual lease, they can only change the rent @ the end of the lease (that's why the minimum when they go above the max is 1 year - basically you always have @ least a year at a predictable rate).
As someone pointed out further below, though, the mortgage "term" is not the time it will take you to pay off the loan but significantly shorter. So you can most definitely be hit by increased rates.
In the US, you have fixed-rate mortgages and adjustable-rate (ARMs). Fixed rates are usually 15 and 30 years. The longer the term, the lower your monthly commitment, of course. I believe a 30yr fixed rate is probably the most common type of mortgage. I don't know the details of the ARMs, but a lot of people were suckered into those which is why a lot of people are having huge problems, these last few years. If you get as much or more house than you can afford so that you're just getting by every month and a few years down the road, your rates jump, you're screwed.
My fixed mortgage is fixed for the life of the loan (until 2040), so over time, the percentage of my income dedicated to paying my mortgage will continue dropping.
As a European I'd give up a non-essential body part for a mortgage like that. Even 10 year fixes are rare in the UK and we're coming off of a 2 year fix later this year. While we have plenty of leeway with our budget, it's pretty annoying not knowing the exact amount I'll be paying until the very end of the mortgage. I wonder why this concept doesn't exist here.
There appears to be a lot of government involvement in the US mortgage market (e.g. providing guarantees for mortgage backed securities). We don't have anything like that in the UK.
The real property inflation is in New Delhi and Mumbai, India. Real estate in Delhi is more expensive than New York. A house built on a 500 yards lot will set you back $6 million. Moreover, the real estate prices are growing @ 50% every year and high as 100% in some areas.
Compared to that, I would say houses in America are affordable. I hope India's real estate bubble gets burst.
If you play around with the rent vs. buy calculator at the NY Times for a while, you will come to two conclusions:
1) The rent vs. buy decision is almost entirely based on your expectation of future house price changes versus rental prices changes. Everything else is around the edges.
2) Regardless of your opinion on the first question, you should never buy a house when you think there is a significant chance you will leave in less than five years.
I think housing will go down another 20-40% from here (causing widespread bank failures and eventually the dissolution of the Federal Reserve) and rents will be stable to down due to the deflationary pressures we are facing. Therefore, I will not buy a house.
I'm glad I bought a house, because paying $1,100/mo (including tax and insurance) for a 3,000sqft home with a yard where I can mostly do what I want and have control over my living environment and get a tax break on about half of that monthly payment sure beats the $1,200/mo I was paying for a 1,000sqft apartment in which I had been robbed of $30,000 during a home invasion where the person had a key (maintenance crew, surely, who had access to the keys) and let themselves in while I was sleeping.
The rent/own ratio may be different in San Francisco (where I've lived) and New York, but there's a lot of other country out there that exists besides those two and Seattle. There's Portland, Denver, Chicago. Plenty of places. I live in a fairly expensive city (on par with Portland, where I lived most of my life). Still, my house didn't cost a lot more than the mount I'd already paid in rent during my adult life. I did the math and I have paid about $170,000 in rent. That includes apartments I've lived in in Portland, San Francisco and Denver since 1999 and is not adjusted for inflation. It includes the 400sqft hellhole in San Jose that I paid $1,200/mo for in 2000 and the 400sqft studio and 585 sqft 1bdrm in Portland, and the 1,000sqft 2 bdrm in Denver. The house I bought last year was only $25,000 more than that. Even if my home loses a ton of value (and it probably has and will), at least at the end of paying $200k into it, I'll have something worth something, versus what I have after about thirteen years of renting for $170,000 . . . which is nothing.
The real problem with the home market is that it's being artificially buoyed, to keep current home owners happy at the expense of houses dropping even more in price, so someone can reasonably eventually buy a home even if they're making an average income. After all, isn't that how the market is supposed to work? Stuff drops in price, other people get an opportunity to own that stuff who previously may have been priced out of participation.
Also, the article states that someone who just bought a house and lost 10% due to decrease in value plus commissions when selling is unlikely to enter the market again any time soon. Well, why are you buying a house just to sell it a few years later?
I bought my house so I could live in it. I would like it to increase in value, eventually, too. I'm not counting on it, but it would be nice. If it doesn't, at least I have a home to live in and will eventually own it (because I didn't buy the maximum house that my credit score and loanability would have allowed).
I don't know a lot about the housing market and I'm not an economist, but I do know that I'm glad I bought a house last year (with a rate under 5%) and wish I would have done so many years ago, instead of putting it off for a decade. (On the other hand, if I had done it a decade earlier, I probably would have taken a big hit over the last few years, so whatever).
Also, the other nice thing is that I'll be paying the same amount (except for tax changes) for the next 15-30 years that it takes me to pay off the house. In my apartment, I'd gone from paying $900 to $1,200/mo in only four years for the same unit. Oh, and I don't have people stomping on the floor above me 24x7, so I can't sleep. And I don't have to allow someone from the maintenance/leasing office come into my home nearly any time they want with a 24hr notice. And I can (and did) run ethernet in the walls. And I can (and did) setup my home theater and run it at 50% power instead of having neighbors complain when I ran it at 5%, before. And when I have a guest that stays for more than three days per year, total, I don't have to register them with the leasing office. And I know my neighbors and they have lived here for a couple decades and are friendly and helpful. I never even saw the neighbors at my apartment.
Well, why are you buying a house just to sell it a few years later?
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?
I agree that owning a home limits your mobility and that is one reason why I put it off. In retrospect, I should have bought a home earlier, anyway. In fact, when I first moved to Denver, I started looking at homes and decided against it. After all, I didn't plan to live here forever. Only awhile. Next thing I knew, I had been here for five years and spent that whole time giving money to someone else.
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!
I never get the mentality of renting being 'giving money to someone else'.
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 think the point is long-term thinking. As you mentioned, over the life of a 30 year mortgage, I'm likely to have paid about double what I bought the house for. However, that's $900/mo today and that'll be $900/mo in 30 years. In 10 years, that'll be worth $675/mo, in 20 it'll be worth $495/mo and in 30 it'll be worth $270/mo. Meanwhile, the unit I was renting will probably be $1,500, $2,136, and $2,760.
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 can't compare apples with oranges, the rent on your old place is a different place, so you can't use those figures. You could be renting the home you're in now, that figure is the only figure you should be using in comparison.
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.
"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."
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.
The interest rate risk on a house isn't just the mortgage payment. It's also the value of the house itself.
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.
> A lot of lenders also have heavy penalties for early payment.
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.
Yes, but when you pay off the home, it's yours. Sure, you still have to pay maintenance, taxes, and insurance, but a home warranty can solve many of the problems associated with the first, and you have to pay insurance anyway (renters).
I moved to FL and we're renting out our NC home while paying rent in Florida, and I loathe being a renter again.
Would be curious to hear why you were modded down. The fact is, cash-strapped states and municipalities are going to see property owners as sheep primed for the shearing over the next several years.
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.
You need sources, as does the down-voted comment. Cash-strapped states does not equal "eminent domain" on random suburbs. Some tax-levels on property taxes are going down or neutral (Utah) while others remain the same (California, both () examples are personal experience) and can't be used as a broad paint-brush stroke.
Interest is a tax write off, many states are suing for home-owner protection, the very large fraud lawsuits against mortgage lenders, etc.
Property tax increases will hit renters just as hard, since they pay them as part of their rent. Maybe even harder, since rents are often calculated as a percentage above fixed costs.
By definition, as a renter, you pay those same costs plus a small proft margin plus a premium to cover the times it's not occupied. Unless your landlord is a moron.
If you're staying in the same place for ~10 years, that is right. However, if you are NOT staying long term, you pay that + a profit margin to your landlord, but avoid the (usually 6%-8% all things considered) friction that goes to real estate agents, 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.
False. Your landlord could have purchased the place at an advantageous time many years or decades before you would have been ready to purchase a home. Thus the landlord could charge less than a current or recent homebuyer could charge while still profiting or at least covering costs.
I'd probably just rent my house out. Over the years I've purchased enough of the principle (by overpaying on the mortgage, the difference buys down the principle) that my monthly payment is about the same as the rental rate for a home this size in my area. Even if I lose a little bit every month, I'm just buying more of my own place with somebody else's money.
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'm just buying more of my own place with somebody else's money."
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.
Could be worth it for the gain in equity, but it's something to think about - especially as some of these risks can't be insured against.
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.
All good points. You have to figure in costs of use when renting. As it turns out in my locale, you can reduce your taxes when renting under the assumption that renters are beating your place up and thus reducing the property value.
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.
I pay 10%/month to a rental company to handle most of that for me. As to the first - this is why you take a deposit, and why you have money in the bank just in case something goes wrong.
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
In the year that I've owned my home, I've toyed with the idea of renting out a room or two. I have three bedrooms and I don't use any of them. I live in my basement. I know, I know. That sounds stupid. I have a basement that is the size of all but the largest apartment I've rented and it is where my sweet home theater is as well as my home office (I telecommute). Since it's where I spend so much time, I threw a sofa and a futon and an enormous bean bag down there (and a fridge and microwave). Now, I never even go to the top floor where the bedrooms are.
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.
Just seconding - being a landlord can REALLY suck, and is full of hidden obstacles. You need to be committed to it, get proper legal advice and do everything by the book. In principle (though I don't know specific state laws in the US) - tennants have a lot of rights. It's their HOME - even though you own the structure. You may not be able to evict them because you want to move back in. You may be liable for all kinds of things.
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.
Let me say that we just moved into a rental unit and the landlord is pretty dang carpy. He is too cheap to pay a qualified person to fix anything. Stuff is falling apart all over. He resents us for asking for simple repairs that cost less than a tenth of what we paid to move in. He calls the neighbors to try and get them to do it for free, and if they won't do it, he comes over on the weekend to try and fix it himself (usually failing, always doing a "ghetto fabulous" job).
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.
You should really convert the basement to a seperate residence, so you can independently live there, while also providing the same conveniences to the renter upstairs.
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.
One pretty much has to assume that your property is going to need a repainting/recarpeting/other repairs when the tenants move out and price accordingly. Most renters (not all mind you) will do all sorts of bad things to your property. Taking that into account is important when renting out.
Unless I moved out of my home, I'd actually be more likely to just rent out rooms. I think there's far less risk and legal complication if you're essentially renting out a room to a "roommate" versus giving over your entire home to another person or family.
I feel compelled to reply. You're basically saying that by paying extra money for years you now pay about the same money as a renter next door. What a terrible way to invest your money. You could have been taking that extra money you were paying in principle payments for years and investing it in conservative investments and making 6-7%. Instead you've wasted it on a depreciating asset that only requires repairs, costs taxes every year, and isn't likely to appreciate in value for the next 3-4 years.
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.
Instead you've wasted it on a depreciating asset that only requires repairs, costs taxes every year, and isn't likely to appreciate in value for the next 3-4 years.
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%.
I don't know where you're getting your numbers from, but even Treasury I bonds were returning 5.93% (according to the calculator at http://www.treasurydirect.gov/BC/SBCPrice).
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.
"In the United States, residential rental buildings are depreciable over a 27.5 year or 40 year life, other buildings over a 39 or 40 year life, and land improvements over a 15 or 20 year life, all using the straight line method."
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.
Sorry, we don't have those in the U.S. Our equivalent is called a Certificate of Deposit (CD) and those have just finally climbed above the 1% range after a few years sporting near 0% ROI. Put another way, they weren't even worth the time it took to go down to the bank to buy one.
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%.
Chalk up another dumb one here. Owning a home is the best thing I've ever done. I don't own it as an investment and it's value doesn't mean squat to me on a daily basis. It only matters when I want to refinance it to move to a lower interest rate and shorter term. Or when (if?) I eventually sell it in the LONG TERM.
Housing isn't a short term investment. If you need to be mobile, rent or surf couches. But when you are ready to settle down nothing beats having your own roof over your head and 20 years of fixed payments ahead of you.
The article must be comparing house vs. apartment rental prices to get their 30:1 ratio, even in Seattle. If you rent a house you're paying the mortgage for the owner + a bit more so there is no way you can rent a comparable home for that much less than buying.
If you rent a house you're paying the mortgage for the owner + a bit more so there is no way you can rent a comparable home for that much less than buying.
This is one instance of a classic fallacy. Let's call it the steady-state fallacy:
If X is impossible over the long run, then X cannot really be happening.
In the housing market the second-order factor is speculation: During bubbles, like the one that is deflating now, people overpay for housing, way more than the equivalent rent, on the assumption that the house would appreciate. When housing prices fell instead, these people ended up owing more on their mortgage than the housing was worth. But it's better to collect 60% of your mortgage in rent than collect 0% of your mortgage on an empty house, or to live in your house in a town where you have no job.
So there are lots of houses and condos that rent for significantly less than they cost to buy. Pretty much all the ones in Boston, for example, at least until very recently.
Right, renting is a related but partially separate market from buying. There are various pressures that affect the market value of the home you're interested in renting, and you may not be able to charge rent+expenses and actually get any decent tenants.
If you could buy a business that was guaranteed to make you 1k-1500/month every year for the rest of your life, while also having someone pay most or all of the loan required to buy said business, would you do it? I sure as hell would (and did).
There's that word again -- "guaranteed". Not that making assumptions is a bad thing as the worst case scenario is bankruptcy along with everyone else, but never assume the market is going to remain where it is. $1k-1,500 a month when your neighbor is renting out at a discount is not going to fair well.
There were no less than 10 houses for rent in my neighborhood when I moved, and it's been full ever since. The market for some place to live is endless, and arguably more competitive than the buying/selling market.
I think that the difference between us and the people that they are referring to in that article is that we consider a house to be a place to live and not merely a medium-term investment.
I think that the thing that really lead to the housing market bust was that a ton of people started buying houses just to sit on them for a few years and then sell for a profit. The speculation fed on itself until it became unsustainable, then it fell apart. It is just a shame that this had an impact on regular long-term homeowners as well.
I thought that was what they were referring to, also, but they keep referring to the rent versus ownership ratio as well as the maintenance work issue. I think they're talking about actual homeowners buying homes to live in, because of the way they keep basing it on that. Though I guess they could be using those to draw a basis for why nobody will buy the houses an investor is stockpiling?
They refer to the rent-ownership ratio and the maintenance work, but they also implicitly dismiss the longer-term argument for owning a house. They keep talking about the costs of home ownership with no talk of the benefits that can result from owning vs renting - painting a picture that home ownership is a really dumb thing to do.
To me, by not discussing the long-term benefits of home ownership they are looking at the issue all wrong. Their analysis is focused only on the short to medium term and the valuation of the house itself.
They are discussing homes in a similar way to how one would look at any investment - ignoring that a home should be considered differently because of the non-monetary values that come along with home ownership.
Of course, a home is an investment and it can provide capital gains, but there are other, not easily quantifiable, benefits to home ownership that make it attractive. To ignore these benefits is to miss the picture completely.
A home may or may not be an investment - investing in a property for investment gains and buying a home as a place to live are not necessarily, and nor should they be, the same thing. Most people don't ever see the distinction.
The article focuses on the bad things, sure, but there are already a ton of articles written out there about why "renting is stupid, buying (mortgaging) you can't lose!)
I rented for a long time. Proudly. People told me I was throwing my money away. I ignored them, I liked the simplicity and mobility.
And the savings.
Then one day I bought (not mortgaged) a home. I bought it not primarily as an investment but as a home, for my family. Some day I'll probably sell it and move on to something bigger, but whether that means I take a loss, a gain, or whatever isn't the point - the benefit is that, for now, I don't have to worry about dealing with landlords, and my expenses on a monthly basis are lower, so if I lose my job or otherwise come into financial hardship, my home won't be on the line (and no I'm not ignoring taxes and other stuff - I'm well aware of my local obligations where I live)
All that said - speaking vaguely of the "benefits" of home ownership doesn't communicate much - perhaps you can elaborate on what you see as those benefits? I know what mine are - but it's subjective.
And to re-iterate - many people get mixed up when deciding whether to mortgage a home - they can't or don't find a way to properly evaluate the financial benefits and risks -vs- the "soft" lifestyle benefits and risks - two very different things.
Well, see... That's the thing... I spoke vaguely because the benefits themselves are ambiguous, subjective. They are hard to quantify because their intrinsic value varies based on who you ask.
However, just because they are not easily quantifiable does not mean that they have no value. You are right. It is easy for me to sit over here and criticize them for not discussing something that was probably outside the scope of their article.
With that said though, it may be possible - one day - for someone to figure out some way of approximating these things (no landlords, lower fixed monthly costs, more control over your own property) and giving them some type of monetary value.
One thing that could be done is to look at the difference between rent and ownership prices and build an econometric model in an attempt to tease some numbers out of it. Maybe someone has already tried it, but I am not certain. There would be some selection bias though - the kind of people that own homes are probably not exactly the same as those that rent apartments. I'm not sure how to deal with that...
Just something to think about, I have taken some classes in Urban economics and all of these professors talk about how incredibly stupid it is to own a house. Then, over the course of the semester, I would realize that they owned houses myself. When I ask them why, none of them has a decent answer.
Maybe the answer is something really sort-of fuzzy. It seems to me that people tend to buy a house when they want to lay down "roots" in a place, but then that wouldn't explain why so many people just rent for a long time despite not needing the mobility.
There are probably hundreds of factors that creep into the decision to own vs to rent. I guess being aware of this is why I feel repulsed at articles claiming to compare the two but not even trying to factor in the preference-related factors and how they cloud this type of analysis.
Disclaimer: I am an economist-in-training at this point in time. My thesis involves an application of a hedonic pricing model. Too much work with hedonics and you may become delirious - believing that everything can be quantified if you just tinker with the model long enough...
I think a very core issue when discussing this is the fact that the majority of people aren't buying a home - they are mortgaging it. Borrowing money, and the additional costs that entails, have become the accepted norm for people to purchase a house. I do realize this is realistically the only way many people may be able to ever "own" a house - but if you spend the rest of your life paying it off, do you ever really own it for practical purposes?
The primary issue for me is that, in current society (talking us/ca here) - paying a financial institution an arm and a leg for the privilege of having them lend you enough money to "buy" a home as the standard way of doing this is the root of the problem - change our financial habits as a society to reduce this need in a few generations and things will change.
"Maybe the answer is something really sort-of fuzzy. It seems to me that people tend to buy a house when they want to lay down "roots" in a place, but then that wouldn't explain why so many people just rent for a long time despite not needing the mobility."
Wouldn't this come down to the risk appetite of renters vs. homeowners? Perhaps long-term renters overestimate the risks/trouble of homeowning and overvalue their mobility. In a sense, renters may be willing to pay a perceived premium (i.e. "you're throwing your money away") because they feel that they are safer. This feeling would only be reinforced if they've had favourable historical renting experiences.
I can't help drawing an analogy to buying insurance; you hope nothing bad happens, but buy insurance anyway.
The argument for renting presupposes low inflation for the time you live there, which is, at this point, an absolutely crazy assumption. If you have a 30 year fixed mortgage in times of high inflation, after a decade or so your payment is virtually negligible.
I remember a neighbor making his last mortgage payment in the mid 80s. $25.
Another thing you might consider about the difference between a 1000ft apartment and a 3000ft home is heating bills. While there's no guarantee a smaller place will be cheaper to heat, it's very likely. If you are on the lower end of the income scale that can be a significant portion of monthly expenses.
> paying $1,100/mo ... sure beats the $1,200/mo I was paying
Yeah, but you have a huge pile of debt hanging over your head. Before you could punch out anyone who needed punching at work, or at least gone all Jerry Mcguire. Now you're kind of a slave to the wage.
You have to pay something to have a place to live. If you rent a little townhome for $1700/month for just 5 years, that's over $100k gone with nothing tangible in return. Even if your house will depreciate $50k between buying and selling it, are you worse off than renting?
The comparison is never that simple. Even if you don't consider the simplicity of being able to pack up and move, or conveniences like garbage collection and maintenance staff (I haven't picked up a snow shovel in two years), you have to account for closing costs for buying and selling as well as the limited equity you will have after only 5 years. As little as 30% of early mortgage payments go towards principal, the rest is paid to interest.
My bank has a financial calculator "should I rent or buy" and if I plug in $1700/mo rent (+3%/yr), $350,000 home with 0% appreciation and %1.25 property tax, and leaving all defaults for closing costs on buying and selling, the calculator suggests I will actually save about $12,000 by renting.
A quick summary of the details suggests that mortgage payments will be lower than $1,700, but additional expenses make the average monthly expenditure closer to $2,100, but in the long run tax breaks will recover most of that. After 5 years without selling, considering only payments and tax breaks, you'll be ahead about $4,000 if you buy. BUT when you try to sell, and look at the big picture, it's actually going to cost you money, because you have to pay the remaining loan balance in addition to closing costs and related fees. You only get back $60,000 or so, which isn't even enough to recover the initial downpayment of $75,000 the renter never had to pay (and was able to invest in something else).
Obviously it's easy to tweak the numbers either way, but the point should be clear that the simple "renters have nothing to show for it" argument doesn't hold water.
I wonder how solid the 3% rent appreciation is on average. Every place I've rented the rent has either stayed the same or, in one instance, decreased. Never stayed anywhere longer than 4 years, so I'm sure I get a dose as a new tenant, I just wonder how bad it is.
Where I lived through 2004-2007, my rent never increased, but that was a much less active rental market than Boston.
Since moving to Boston in 2007 I've only been in the same place long enough to have 2 opportunities for rent-raise requests, and it was raised both times. I don't recall the first (I decided to leave, the company was horrible), and the second the landlord asked for 3% and we haggled it to 2%.
I think some landlords try to balance turnover because there are benefits as well as costs and hassles. Turnover gives you a chance to thoroughly clean and do lots of minor maintenance that a long-term tenant is likely to neglect.
If you rent a little townhome for $1700/month for just 5 years, that's over $100k gone with nothing tangible in return.
The basic idea is that you spend the same amount (X) every month, in scenario 1 (buying) you spend the whole X on a mortgage and hope to make things up in equity but lose some money in the form of interest.
In scenario 2 you rent (The same house/apt as scenario 1) but only spend Y and have X-Y = Z left over to re-invest in some other investment vehicle. The point of the article is that in some places (Manhattan) you can have the same standard of living but make a better investment because Z is so large.
I think the point of the post is that, yes, often you are worse off than renting. There are extra costs and responsibilities that come with owning, plus the substantial financial risk in case your home does drop in value.
Check the NYT rent calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) and see what the situation is if it costs you 30 years rent to buy a place. If the value does not appreciate, you have to rent go up at a rate comparable to mortgage interest and property taxes to even have a chance of breaking even after 30 years.
I couldn't find exact modern numbers on rent increase rates, so I have to wonder how accurate the default of 3% on that calculator is. My rent increased between five and ten percent every year the five years prior to buying my home. Therefore, my home purchase (per the calculator) comes out as the better solution in only four years.
Also, buying last year had the added bonus of an $8,000 tax credit. Not a discount on your income, but an actual dollar for dollar credit (ie, come tax time, I add $8,000 to the refund amount). That's seven months of rent at my prior place. Not a bad deal. Thanks to the deductions from paying my mortgage (versus no tax deduction that I'd have gotten with renting), I saved just enough money on qualified income to fall under the first time home buyer credit limit. Worked out well.
Anyway, it definitely depends on where you live. Circumstances change drastically, even within a state. Even just outside of a main metro area. San Jose is cheaper than San Francisco. Beaverton is cheaper than downtown Portland. Westminster is cheaper than Denver. In some places, owning will simply never be an option. I couldn't afford a million bucks for a 900sqft home in San Francisco. Hell, I could probably barely afford rent.
Based on my personal experience, I would advise people to buy sooner than later. That is, I personally wish I'd have bought five or ten years earlier. On the other hand, I think I was also wise to wait until just the right time in my life and the market to buy and I think that's a wise path to take, too. You may be putting off the benefits of a home if you delay, but at least you're not making any commitments by paying rent, either. In the long run, I think that is the mistake too many people make. They feel the ticking clock and buy because everyone else says that's what adults do. That leads to buying too much and extending yourself and your credit too far. I know home-ownership is "the American dream", but I think it's a dream that you have to let come to you, when the time is right for you.
My rent increased between five and ten percent every year the five years prior to buying my home.
Please check my math: using your numbers and averaging to 7.5 percent per year, that would be a cumulative increase of (1.075)^5 = 1.44 = 44 percent increase.
Did your rent really go up 44 percent over 5 years? Where do you live?
As an additional data point, I rented a house with some friends in Beaverton for 5 years and the landlord never raised the rent.
Close. I think you counted an extra year in there. It increased 5% at the end of the first year, 7% the second, then 10% the third and fourth. I moved out at the end of my lease after the fifth year, so I don't know what the fifth increase going into the sixth year would have been. It started at $900 and five years later, it was $1,215. That's a 35% increase.
I lived in a more expensive apartment than is typical, but there is no housing anywhere near where I am (only apartments). I don't know if proportional increases are typical all over Denver, though. By the end of the fifth year, I was tired of seeing my rent increase at triple the rate of my raises.
Thanks for sharing the interesting historical data! It does sound like buying may be the optimal choice in your real estate market, especially if you are planning on staying put for a long time.
I do think for the near future, rent will continue to rise as more people decide to sit out of the real estate market (waiting for more price drops to occur). Ultimately even this should correct itself as people start buying houses again since they will grow tired of increasing prices and decreasing availability of apartments.
If you buy a home, market fluctuations don't matter. It's your home, you are going to live in it. If you were in the business of flipping properties for a living, it would matter, but not if you buy.
If you toss a mortgage into the mix, which is what I gather most people mean when they say "buy" a house - then yes, market fluctuations can matter a lot - but these are two very distinct things.
Market fluctuations should only impact you when it comes time to sell. Unless your mortgage is an adjustable rate, which is part of the reason we're in this whole mess in the first place. Put enough payment down up front so that you can lock in a good rate that you can tolerate and don't play the ARM game. That seems like lose-lose, to me. Maybe things go really wonky and I find in five years that I could have locked in an even better rate if I just waited? Well, that sucks, I suppose -- but I locked my rate in at an amount that I was willing to commit to (and I bought far less house than I could afford, so that I had some long term wiggle room).
Unless I'm missing another aspect of potential impact, which is totally possible. I can barely tie my own shoes, sometimes. :)
Just curious (because I've never honestly looked) - can you really lock in a rate for the entire, say, 25 year length of the mortgage?
When I asked a mortgage broker friend (Canadian) about this not too long ago, it was explained to me that yes you could lock in a rate for the "term" - but the "term" was 5 years, and after 5 years it would be adjusted depending on the prime rate, etc..... so from what I gathered you coudln't actually just get a plain old "25 years, x%" mortgage.
In the US, it's standard to have a fixed rate for the entire life of the mortgage. It's my understanding that this state of affairs is due to US laws and that most other countries tend to have floating rate mortgages.
That may explain why renting is the norm in a lot of other countries and owning a home isn't considered a big deal (while, in America, it's almost an obligation before you can feel like you've made it). Shifting terms is unsettling. I don't know the history of loans in the states, but I wonder how much of the 30yr fixed was established in response to everyone returning from service after WWII and starting families and buying property?
Dunno about Canada, but in the US a fixed-rate mortgage is, well, fixed. My rate will never change, and thus my monthly payment will remain exactly the same for the 30-year life of the loan.
Canada is distinctly different than the US. I was also surprised when I realized this difference. The scary part of this all is that even though folks with good credit were able to taken advantage of full-term fixed rate mortgages (i.e. prime borrowers), the US still endured the housing bust long after the majority of the sub-prime borrowers defaulted.
I'm not sure about other Commonwealth countries, but Canada definitely does not have this option. Our mortgages have a specific mortgage rate term (usually 3-5 years), separate from the life-time of the mortgage (usually 20-30 years; the 35 was/will be no longer be available). This means that interest rate fluctuations are more devastating when they rise for those who put little to no money down on their expensive housing purchases in Canada recently.
There are longer then 3-5 year mortgage terms in Canada. I believe up to 15 years is commonly offered.
Amortization length of a mortgage can be up to 35 years for residential mortgages. 35 year amortizations were only eliminated for CMHC/insured mortgages.
I would contend that the system is more stable when borrowers are forced to consider the consequences of future interest rate increases.
If you buy a home for a lifetime, sure. But most people do move not too infrequently, and then it does make a difference. That's why the question is: how long do you have to stay in the same place for buying to be financially advantageous.
On the other hand, servicing the interest on the mortgage can be more expensive than rent, and the amortization schedule is such that for the early part of the mortgage you are only paying interest, not paying down principal in any substantial amount. The money you save by renting can be invested elsewhere. But if you say in the house long enough, then yes it makes sense. It depends on what market you live in and how long you plan to be there.
If the potential home buyer wanted to keep their monthly outlay at $1700 whether they rent or own, then I think in 5 years if they lose $50k on their house they are likely out more money with a bigger headache than renting would've cost them.
Without property tax, $1700/mo means taking a 25 year loan of $320k at 4% interest. Obviously whether this is too high or too low depends entirely on where they live, but again I'm assuming that they were getting a similar place for roughly $1700/mo in rent, and are comfortable in that lifestyle. That's also assuming they have the cash for a down payment ($65k if they want to put 20% down).
So, if you run the mortgage numbers, in 5 years, assuming interest rates stay at 4%, they will have paid $61k in interest. Property taxes over 5 years (where I live, anyway) on a $385k home would be $15k-$20k on top of that. If we factor property tax into the $1700/mo, then they can only afford a $265k loan, and only pay $50k in interest over 5 years.
Either way, $50k or more interest + $18k in property tax + $50k in depreciation + $15k in closing and real estate fees costs them a lot more than renting for the same time period, and that's assuming that nothing goes wrong. If their roof starts leaking, the deck collapses, they need to move for work or their growing family in less than five years, they are in an even worse situation. (One might suggest we should amortize the $15k in closing and real estate costs over the 5 years and buy a smaller place accordingly, but at that point your $1700/mo rent becomes more like $1150/mo in mortgage payments, so at that point the question becomes how out of whack the renting and buying markets are, assuming again that you want to maintain a similar living standard, and not be downsizing as you're turning 30.)
The obvious question then is how likely "even if your house will depreciate $50k" ends up being.
At the risk of inflaming some - if you were buying the home, a paper loss in market value is irrelevant unless you are planning on selling the home during that time.
The real problem here is that we're not really talking about home ownership or buying a house - we're talking about taking out huge loans from banks and paying them off over decades, along with a ton of interest, and hoping that property values increase so we can trade up to something bigger and end up in exactly the same situation- rinse, repeat. The real problem is that we discuss "ownership" of homes when we don't really own them - the bank does.
In my area at least, buying makes a lot of sense. Prices are at an all-time low, but rent hasn't gone down at all. The same type of house renting for $900/month can be had with a mortgage of $350/month. As long as you are comfortable with renting the place out when you want to move, it's had to imagine why buying would be 'stupid' right now.
Its interesting to me and a testament to how the topic of housing impacts the psyche of Americans that even on Hacker News the emotional arguments take on a stronger conviction than the logical ones.
This thread reminds of those articles about how people without children are happier. Then a bunch of parents post how giving birth was the best decision they made.
A bit off topic, but what justifies paying a realtor 5-6 percent in real estate commission anymore? Actually last time I talked to an agent about listing a property they quoted 7.5% but obviously that's negotiable.
Before the internet, realtors were the gatekeepers of "for sale" property information. But that's all online now. What do they really do to justify such a large cut on the transaction?
The times I have bought and sold a house with a realtor they actually did very little. They helped prepare the offer (using boilerplate that can be easily found online now, or you can pay a real-estate attorney a couple of hundred to prepare one) and introduced me to a couple of lenders, then showed up at the closing to get their check.
From a grammar perspective, I think this sentence is interesting. It is literally the first time I've ever seen a URL as the subject and first word of a sentence.
Of course, this violates everything I know about a) link sharing [0] and b) good writing, but it's interesting nonetheless.
Decades of personal experience shows that unless you can switch jobs without moving owning a house is a good way to lose money. It can also act as an anchor, preventing or delaying job changes that should be made.
Getting rid of the mortgage interest deduction would probably be the best thing to happen to the US since the Constitution. Especially for people in less than desirable neighborhoods. Slumlords wouldn't be able to function. Housing prices would go down, rents would go down, people who wanted to own could own affordably, and renting would be insanely affordable.
The U.S. Tax Code is one giant game that steals short-term investment power from the majority people (low to medium income people) and gives it to the wealthiest people for them to write new rules of the game.
Well, if true, this is good news for cash flowing investment real estate purchases, on both sides...
Property Owners may have a better chance at returns, if they are able to raise rents to match inflation. And Property Managers (people to buffer the owner from the tenants) are typically charging 10% of rent. There is income to be made...
If you think US rent-vs-own ratios is expensive than you have to check other countries. Every country from the developed western europe/canada/australia to the developing india/china to the thirdworld african countries have worst rent-vs-own ratio than US, yet the prices are still appreciating there.
tl;dr: author feeling unhappy, unexcited and trapped, fears becoming boring, blames house ownership.
More and more Americans will be conditioned to the idea that home ownership is a waste of time and money, not to mention the inflexibility that it imposes on a person [..] That would barely pay for property tax, maintenance (winters are harsh), and landscaping (weeds are aggressive). [..] Another advantage for renters is that they can free their minds from the clutter that prevents homeowners from doing or thinking anything interesting. [..] The rest of us go to Home Depot every few days and pull weeds. [..] They withdraw themselves from the market of potential buyers, at least for 10 years or so until they forget what wounds they suffered and how boring they were when they owned.
Why not? Americans, like most humans, are dumb enough to keep doing a long list of stupid things that would exceed a reasonable comment length if listed here. Usually the only time they stop a stupid activity is when it's impossible to continue.
Those of you renting and hating on home ownership should ask yourself where you'd live if someone hadn't bought a home and allowed you to rent it from them.
Firstly, rented homes are not only from homeowners. Second and more importantly, for people that already have a home through say inheritance, or ability to pay outright cash, it makes sense for them to use it as a source of income. Not saying those are the only people for whom home-ownership makes sense, but the cases above are the easiest non-subjective examples to cite in favor of home-ownership.
And neither homeowners nor renters need be indebted to each other.
Personally, I don't understand the anti-mortgage sentiment at all. I can buy a home at 5%, and then use the money I'm saving to build something else in order to make a higher return. Point being is that it's not always black and white (banks bad, cash good).
Also, though homeowners aren't the only source of rental properties, outside of city life, they are the most prominent. Either way though, the same argument applies. Without someone buying a property and renting it, there would be no place to rent.
The house I'm renting to someone in NC is being paid off because of my renters. It's not income now, but when it's paid off, that's $1k/month free to me.
This might be going off the main topic here, but I'll address it: For someone who has the ability to pay outright, I agree that paying a monthly amount might give some flexibility. If someone is making a monthly payment because thats all they can do, its basically debt and holds you down. I agree though, that its not always black and white.
Back to the main topic: Should renters be indebted to home owners? Its all a case of supply/demand. I dont see renters having a shortage. Which means that more people are willing to rent out their home, than renters wanting to find a place to rent. In this market, homeowners need renters more than renters need homeowners. If say in a hypothetical situation all homeowners stopped putting out their houses for rent, more people will gravitate towards other sources of rentals like rental properties owned by companies. These rental property companies do not have an emotionally-vested interest in their home. They see it just as a service.
I agree when you pay off the money for your house, the renters give you free money. But this is close to the end-game and by this time you would have to factor in also opportunity costs. I am not saying the opportunity cost is huge, but usually a mortgage holds you down for 30 years (in most cases), and its too long a time to just consider what happens at the end of it.
While it's obvious that this flawed logic existed five years ago before the bubble burst, I'm surprised at how much of it still remains. I'm surprised that consumers are still trying to play numbers games to justify purchasing homes, but perhaps as the OP suggests, the supply of buyers is less than before. If you want to buy a home for lifestyle reasons, great, but make sure that's clear; there are so many people who are stuck in their homes without a job because they thought they were clever at math.
When my wife and I were figuring out what to do with our lives, we decided to put my finding a good job above owning a home. Because of this, I was able to accept a job in NYC and move from the suburbs of Atlanta without worrying about selling a home in a horrible real estate market.
We'll consider buying a home after I feel more rooted in the tech industry, but for now, we appreciate the flexibility that renting affords.