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Buy a house or you will die.
December 1, 2006 9:43 AM   Subscribe

If you continue to wait, you may never be able to afford to get into the housing market. The National Association of Home Builders wants you to buy a home now. Should you wait? No, no, no, no! Via Housing Panic.
posted by brain_drain (91 comments total) 6 users marked this as a favorite

 
Fabrice Grinda says "renting is clearly the best option by far!".
posted by These Premises Are Alarmed at 9:50 AM on December 1, 2006


wants you to buy a home now.

Cool.

When can I expect NAHB's $many-thousands check?
posted by owenkun at 9:51 AM on December 1, 2006 [1 favorite]


With so many homes on the market to choose from, your best strategy may be to scale back expectations for your dream starter-home. Instead of trying to buy a 2,000 square foot home, consider shopping for a 1,500 square foot home.

Huh. How do they get from point A (there are so many homes on the market to choose from) to point B (so just go ahead and lower your expectations and buy a smaller home)?

Because to me, more choice means lower prices, and lower prices mean I want something bigger for the same amount of money.

Not that I expect any sense at all from these guys... It's just "Buy! Buy! Buy!", really.
posted by splice at 9:52 AM on December 1, 2006


"Should I wait until home prices go down? NO!" Hilarious, awful advice directly from the horses mouth.
posted by mathowie at 9:52 AM on December 1, 2006


awful advice directly from the horses mouth.

Wrong end there, I think.
posted by me & my monkey at 9:54 AM on December 1, 2006 [1 favorite]


Am I the only person who doesn't want to own a house, no matter the price? (I guess that's kinda like asking am I the only person who doesn't want to be wealthy? Then again, a mortgage on a "reasonable" home in my city would be 3-4x my rent, so maybe it's not...)

I wish there were more support (i.e. massive federal tax subsidies) for nomads. Thank god for local rent control.

Even as home prices are currently moderating – or even falling in some areas – rents continue to climb.

Not if you can stay in your same apartment. My rent has gone up 18 dollars in 4 years. I'll take that against inflation.

If I wanted to buy a house in my city, I would definitely wait for an earthquake first.
posted by mrgrimm at 9:58 AM on December 1, 2006


"Studies show" has to be one of my favorite phrases to see in articles driven by spurious reasoning. Even more charming is the "time to buy" link at the bottom of every page. What a fun post!

Now I'm off to ask McDonald's if today is a good day to eat a whole lot of beef. I look forward to their reasoned, impartial judgment.
posted by EatTheWeak at 10:00 AM on December 1, 2006


Buying is usually more expensive than renting, but at least your money is going towards an asset that you can keep or resell.

Renting is like paying the cable bill. Nothing residual about it.

At the end of the day you're left with nothing.
posted by dsquid at 10:03 AM on December 1, 2006


McDonald's has beef now?

Home ownership ain't all bad. It *is* emotionally satisfying (until you have to pay the plumber). But it isn't always, clearly, the best choice, economically.

I say this as a guy who owns a rental property but lives in a rented apartment. Which is weird.
posted by These Premises Are Alarmed at 10:04 AM on December 1, 2006


This is one of those cloaca horses.
posted by cortex at 10:07 AM on December 1, 2006


I like the fabrice glinda link in the first comment, b/c he does an amazing thing: math. It's really not a hard calculation to determine if its better to rent or buy but you have to actually DO the calculation for your particular circumstance rather than make vague prognostications about the merits of rent or buy. In my case, buying was way smarter than renting.
posted by selfmedicating at 10:08 AM on December 1, 2006


I'm gonna be making my final mortgage payment this month. :)
posted by Happy Monkey at 10:09 AM on December 1, 2006


It *is* emotionally satisfying (until you have to pay the plumber).

I have the same problem with McDonald's food.
posted by hal9k at 10:10 AM on December 1, 2006 [3 favorites]


Am I the only person who doesn't want to own a house, no matter the price?

Well, I don't really want a mortgage, I'll tell you that much, but I find myself lusting after an actual house. It's hard at times to cram all of our stuff, all of my hobbies, into a one-bedroom, and I have a guitar amp I haven't even plugged in since my last band broke up. A basement and couple extra rooms, and being able to put things into the walls—these are appealing notions.
posted by cortex at 10:11 AM on December 1, 2006


I'm shocked that an association of home builders would try to encourage people to buy new homes on their own website! Next thing you know, dairy farmers will try to get me to drink milk! Or plastics manufacturers will try to tell me how great stuff made of plastic is!

I would have expected their website to say "You know what, it's a really shitty time to buy a house. Stay in your current home." That's what a smart industry association would do.
posted by pardonyou? at 10:13 AM on December 1, 2006 [1 favorite]


massive federal tax subsidies

that would simply raise rents, just as the mortgage interest deduction

at least your money is going towards an asset that you can keep or resell

I'm in Sunnyvale; my rent is $1350. Condos are $300k+ at the very low end up to $400k for an equivalent unit to what I have now.

As long as condo prices are not rising more than (wage) inflation it makes little sense for me to write a $3000+ check to the bank every month.

Granted, I missed the appreciation boats in 1997-2000 & 2002-2004, but that was out of my hands.

Making the market very interesting is the $2T in ARMs that are due to adjust in the next 2 years. This is going to juice the market, but in a very bad way (for sellers).
posted by Heywood Mogroot at 10:14 AM on December 1, 2006


at least your money is going towards an asset that you can keep or resell

Provided you are in it for the long haul. If you're just looking to flip a property, the first couple of years of payments is going almost exclusively to interest. Payment = Equity only on year 29 of a 30 year mortgage. The scale slides as you get further into your payments, but the banks always arrange it so you pay for their profit first.

And if the market goes down and you decide you can't afford the home any more, you could easily end up owing more than the home was "purchased" for (where purchase = buy over a long period of time).

When I do buy, it'll be in one giant lump of cash. No mortgage, thank you very much. The money lenders of this world are already rich beyond the dreams of avarice.
posted by Civil_Disobedient at 10:16 AM on December 1, 2006


I don't know a thing about money, but isn't the mortgage vs. rent equation influenced heavily by things like tax deductions, interest rates, laws that favor ceaseless new urban sprawl?

We bought our house because in our area because it was financial suicide not to, not because I had any interest in being a homeowner. For me, ownership now means too many Saturdays at Home Depot, too many Sundays pulling weeds, too many middle of the night phone calls to plumbers. Honestly, if it the economy made it financially more viable, I'd really prefer to go back to renting a nice apartment in the center of the city.
posted by Slarty Bartfast at 10:16 AM on December 1, 2006


Stats for Silicon Valley
posted by Heywood Mogroot at 10:18 AM on December 1, 2006


Provided you are in it for the long haul. If you're just looking to flip a property, the first couple of years of payments is going almost exclusively to interest. Payment = Equity only on year 29 of a 30 year mortgage.
posted by Civil_Disobedient


Of course, any money you pay over the minimum is taken directly off of the principal, which speeds the process up considerably.

Not as much as paying in cash, but it's a happy medium.
posted by Happy Monkey at 10:20 AM on December 1, 2006


At the end of the day you're left with nothing.
posted by dsquid at 1:03 PM EST on December 1


Wrong. You're left with what the reason for renting in the first place should be: $avings and investments.

That piece is hilarious and infuriating. It's like a drug dealer pushing crack.

This whole speculative circle jerk house of cards called the housing bubble is going to mess up a lot people who find themselves with negative equity (i.e., the value of a home or property drops below the mortgaged value) in a quasi-feudal realtionship to the banks, credit card companies and the finance companies.
posted by Skygazer at 10:26 AM on December 1, 2006


any money you pay over the minimum is taken directly off of the principal

So I can borrow money at 6.5% and then get to pay it off faster. Where do I sign up?

The only real determinant in this game is land value appreciation. That's where the money is made & lost.

Buying into the end of a speculation bubble is in fact 'financial suicide'. Just ask the people who bought 1988-1990 and couldn't hold on until 2000+.

as for:

Or plastics manufacturers will try to tell me how great stuff made of plastic is!

IMV, the apt comparison would be the plastic manufacturers advertising that now is the best time to suck on plastic carcinogens.

I'm a solid R.E. bear; I think 2005 will look like 1991 in the real estate cycle when we have ink on the graph.
posted by Heywood Mogroot at 10:26 AM on December 1, 2006


"For me, ownership now means too many Saturdays at Home Depot, too many Sundays pulling weeds, too many middle of the night phone calls to plumbers."

Huh. All that is the good stuff to me. I like being a homeowner because I enjoy the fixing/renovating/sprucing up part - that's what makes it my home.
posted by mr_crash_davis at 10:27 AM on December 1, 2006


desquid: Renting is like paying the cable bill. Nothing residual about it.

At the end of the day you're left with nothing.


Nothing except the down payment that I didn't use to buy a house, which I can invest. Plus extra money leftover each month, from the difference between the mortgage payment and rent costs.
posted by cotterpin at 10:29 AM on December 1, 2006


The equity you store in a house is not super-liquid, either, since you have to live somewhere.
posted by sonofsamiam at 10:34 AM on December 1, 2006


If you want to buy a house, buy a house you want.

I've been in so many arguments with everybody under the sun about home ownership that I can't keep straight who said what anymore. If you see your rent check as a "cable bill", your forgetting property taxes and house maintenence and all those other fun things. Having a water pipe break in a solid slab foundation is not fun, except when you visit your parents and fall though the wall the pipe was leaking on (though the slab).

My family has made its way in the world via property development and lending institutions. From my observations buying houses to turn a profit is a full time job.

I've paid off all of my college debt, credit cards and car. I rent a condo, and I plan on getting CDs when I've put enough away. If you own a home and enjoy it, I'm honestly happy for you. But I've seen way too many dirty forclosures to take home ownership lightly.

Most of you MeFi people seem like you know this allready, so I'll just shut up now.
posted by The Power Nap at 10:36 AM on December 1, 2006


I pay $450 in rent a flat with a river in my backyard, and to live in the same neighborhood, I would have to take out at least a $200,000 mortgage and that's for the glorified apartments. I'd like to get a home, but thanks NAHB, but I'll wait until the time is really right.
posted by drezdn at 10:37 AM on December 1, 2006


dsquid says, “Buying is usually more expensive than renting, but at least your money is going towards an asset that you can keep or resell.”

But, depending on the difference in that expense, and the current market, you may be better off investing that money in some other form of equity.
posted by ijoshua at 10:38 AM on December 1, 2006


The main reason I bought, and I'm glad I did, was so that when the rent went up my mortgage would probably be less. I bought my house for £86,000 2 years ago. It's now worth £140,000 and we haven't made one improvement. The rent on a house of my size is now well close to what I pay for a mortgage. In another two years, who knows... but I reckon I made the right decision.

I also now have a real fondness for DIY (or, completely destroy it yourself in my case). Fun either way.

Of course, that article is still nonsense, whatever country you live in... buying a house is long term and should never be seen solely as an investment. It's your home.
posted by twistedonion at 10:44 AM on December 1, 2006


There's one option still out there for those seeking a very livable, pedestrian-oriented city with wonderful architecture, good schools, friendly residents, and a vibrant nightlife, yet which is still very affordable by mere mortals.
















Buffalo.

Good luck finding a job there, though.
posted by elmwood at 10:48 AM on December 1, 2006


Fabrice is correct--it's straightforward to calculate whether you're financially better off buying or renting. The only hitch is that if you decide to rent, you take on the responsibility of wisely spending or investing the monthly surplus. Buying a house soaks up up that money and stocks it away for later, even if you're getting a poor return. In a country that seems to have more grasshoppers than ants, this shouldn't be overlooked.
posted by Nahum Tate at 10:52 AM on December 1, 2006


Interesting! Here at chez carter, we're finally getting towards deposit status, but now I'm seriously thinking of just investing that money and seeing what happens for a year or so. The local market is supposed to be off by 5-6% over the next year, but you don't have to look to far to find 20%+ markdowns on estate agents' lists, in areas that were once impossible to get into. And this is before anyone seems to be panicking. It really does feel sometimes as if it is about to go over a cliff.
posted by carter at 10:58 AM on December 1, 2006


buying a house is long term

long-term, home prices aren't going to go up without wage inflation.

I've kinda made a game-theory decision matrix:

wages go up in Silicon Valley
wages don't go up

buy
rent

[wages go-up & I buy now]: results in a wise decision1
[wages stagnate & I buy now]: mistake, possible financial catastrophe
[wages go-up & I rent]: I get boofed financially, but I have a good paying job, at least
[wages stagnate & I rent]: status quo. Money being banked as we speak.

Basically buying is a decision-point where I cease enjoying control of the situation; it is a lock-in, for good or ill. There's some upside in locking a good situation, but a concomitant downside in locking in a very bad situation.

The rent side of the decision matrix is financial stability, if not gain, and the convenience of renting.



[1]: assuming the market as a whole doesn't tank thanks to the toxic mortgages and macroeconomics of monetary policy
posted by Heywood Mogroot at 10:58 AM on December 1, 2006


"At the end of the day you're left with nothing."

Um, except the roof over my head, a nice place for my stuff, and about $1200 a month to do with as I please, after all my bills are paid. A good bit of that goes into savings, investments and retirement funds. I think I've got plenty at the end of the day.

I've been in my 500sf 1br apartment for 8 years, 9 months. It's rent-controlled, I'm paying $840 a month; my rent increase has averaged $23.75/year. And I live in a very nice, walkable neighborhood in Los Angeles, with underground garage parking and close proximity to a lot of great culture and dining.

I think I've got plenty left at the end of the day, thanks!

I'd have to be completely insane to try to buy a house around here; I'd have to move a minimum of 40 miles out in order to afford even a starter condo. The only way I'd even consider buying a place is if my S.O. and I (we currently live in the same building, different apts) decided we really want to have a kid, and even then I'm more likely to stick with apartment living. There are buildings right on my block where $2300 a month gets us a 2,250 sf 3-bedroom apartment in a secure building with two parking spaces in a gated garage, with swimming pool and workout room access. We'd still be able to sock a good bit of cash in the bank, too.

This in contrast to equivalent-sized condos on my street going for minimum 880,000 a month - that's what, a $5,100+ mortgage?? Screw that!!

I admit I got really lucky finding my place!

I'll wait for the earthquake too. It's perfectly possible to raise a family in an urban apartment setting.

"If you see your rent check as a "cable bill", your forgetting property taxes and house maintenence and all those other fun things."

Bingo.
posted by zoogleplex at 10:59 AM on December 1, 2006


It really does feel sometimes as if it is about to go over a cliff

Welcome to my world. Friggin' free money & insanely loose lending 2002-2005 ruined my plans, but my revenge is being prepared.
posted by Heywood Mogroot at 11:00 AM on December 1, 2006


I sold my home over a year ago in San Francisco, and having made some wise investments while renting, I'm pretty happy with how things are turning out. I've got a pretty nest egg for a home when I feel like the time is right, in the meantime my 25% annual return is just fine. OH LOOK! The NAHB says "the time is right", right now! Where did I put that realtors phone # again?

Thanks, but I think I'll wait a little longer. It's true that I could be living something that was MINE right now, but thanks I think I'll wait until I can get something even nicer for the same amount. How anticonsumer of me. I'm sorry, I guess I do hate freedom after all.
posted by trigby at 11:00 AM on December 1, 2006


Clearly, the best option is crashing with a variety of friends for several weeks at a time, and then shooting them whatever cash you can spare to cover the utils you're using plus getting them your work discount when it's some place they like to spend money.
posted by Eideteker at 11:01 AM on December 1, 2006


LOL Eideteker... you're describing my rocker-band days!
posted by zoogleplex at 11:04 AM on December 1, 2006


There's the old saw "buy property; they're not making any more of it"...

Of course one should complete some sort of analysis between renting and buying in an area.

But home ownership has always been a simple and effective way for an average person to build and hold onto equity (... or has this changed now?), and everyone's gotta live somewhere...

My wife and I bought in 1989, yes, the last peak, just before the crash. And.., the house itself was complete shite, but it had trees and backed onto a park. Well, we've hung onto it, and sunk alot into a major reno... and it's now a nice house in a great location, and we're finally seeing some improvement in price, and we now have real equity... in short we survived.

The dangerous trend I see is letting people buy with only 5% or even 0 down. These people will be crushed in a downturn.
posted by Artful Codger at 11:11 AM on December 1, 2006


This is REALLY funny. Great post!
posted by jonson at 11:14 AM on December 1, 2006


I come from a pretty frugal, anti-credit family background (bought 4 out of 5 cars with cash, no credit card debt, etc.), and as such I've always been told that it's wise to pay an extra $100-200/month towards the principle on a mortgage if you can afford it. But I'm struggling to see the point in paying one's mortgage off early if one does not intend to pay it off fully, assuming one has the discipline to save/invest that $100-200 and not spend it on hookers n blow.

If you sink, say, another $10k into equity, you're still paying interest on the outstanding balance for now. Now it may well be that you will pay off the house a full 2-3 years early, but until that time, you're still making payments + you have that $10k tied up in equity doing nothing.

So by paying off some principle early, you sell the house after 10 years and you get back your equity VS. not paying off early, and having your money free all along.

So unless you plan to be there 30 years, where's the win?
posted by LordSludge at 11:14 AM on December 1, 2006


These people will be crushed in a downturn

They're being crushed now. People have -3% going in, with negative-amortization up to 15%. Then the rate resets to LIBOR+5% or whatever.

Price valuations were driven up by the availability of these toxic loans, and it's going to be getting a LOT worse over the next 2 years.

where's the win?

The win is in locking in your monthly housing payment. The place I'm in now was renting for $2000+ 5 years ago, and the mgmt seems to have the idea of upping it 5%/yr right now.

My mom's mortgage is $400/mo, and is due to be paid off next year. Big win for her, now.
posted by Heywood Mogroot at 11:19 AM on December 1, 2006


Interest rates are low, the market has cooled a bit. It might cool some more, but probably not too much. Why not buy now?
posted by caddis at 11:25 AM on December 1, 2006


The comments below the Housing Panic post mention K. Hovnanian... I'm amused by how, since I turned 40 last year, I started getting a new kind of junk mail: Buy Our Houses/Condos! The majority of them come from K. Hovnanian, trying to sell me mostly condos in Pasadena or condos/tract housing out near Valencia - starting in the low $400s!! Wow! You mean I can spend $2,500 a month to own 1,100 mediocre-built sf in a bland suburban "city" full of chain theme restaurants or a super-dense-packed condo development, both on the desert mountain edge, where summer temps hit 110 regularly, that's 30+ miles from work and I'd have to commute solely by freeway, 2 hours each way?

GOSHY GEE, THAT SOUNDS GREAT!!

Thanks, but no thanks, K.

I've also gotten a bunch for lofts downtown, which is somewhat more attractive, but they're far more expensive, and thus out of my range. Still, I think it's nice that downtown LA is seeing some revitalization efforts.

I also get a lot of junk mail from BMW and Mercedes dealers. I really feel sorry for the guys in my demographic who fall for this shit.
posted by zoogleplex at 11:25 AM on December 1, 2006


A lot of opinions expressed in this thread, very few seemed to have crunched any numbers based upon the conclusions that many anti-home owners (US) have come to.

The economics of buying primary/secondary residential real estate are not even close to alternative investments when adjusted for risk, and eliminating things like interest only mortgages, rent control, desire to have lifestyle flexibility, poor credit etc. However, it is also a mistake often to think of your home, as 'an investment'.

You can certainly find exceptions or construct scenarios based upon market dynamics over slices of time, but the fact remains that between tax incentives and structural market growth it is generally poor financial management to rent a home, or even lease cars for that matter. This is particularly true in areas where structural growth is virtually assured, like NYC Metro, NorCal, etc, and remains true generally regardless of market downturns, corrections, which will reduce your return but certainly not eliminate it. Market downturns are time to buy real estate, not sell it.

You need the capital, you need the ability to make payments for a period of time to let equity grow, you need a job so that the tax advantages are meaningful, you need to maintain the property, and numerous other caveats which may eliminate or reduce the attractiveness of home ownership for a particular individual.

Those of you who argue for alternative investments, also need to understand the ability to invest the proceeds of home equity loans (in appropriate diversified and hedged instruments) if you think capital market returns will outpace real estate markets (on a risk adjusted basis) during your time horizon.

I am struggling to sell my home now, but my decision is do I want to make only $500k or should I hold out for $750k capital gain over the last 10 years.
posted by sfts2 at 11:38 AM on December 1, 2006


"Interest rates are low, the market has cooled a bit. It might cool some more, but probably not too much. Why not buy now?"

Because having a half-million dollar mortgage on a home that might be worth $300,000 in 6 months or even a couple of years is a bad idea (unless you really, really, really like the house, I suppose...). I think "cooling probably not too much" is a pretty optimistic point of view. You're entitled to that point of view, of course, and you may be right. It will depend on location, location, location as it always does.

Otherwise, you've seen my personal reasons. I can afford a house in Kansas or something like that on my salary, but I can't make my salary anywhere like there.

"Market downturns are time to buy real estate, not sell it."

Well, the optimal time to buy is when prices are bottomed out and beginning to climb again, for maximum ROI.

sfts2, most people aren't as sharp as you are about all this. I just happen to be lucky, the economics work out better for me to rent because of my own peculiar circumstances, but a lot of people are being led around by the nose by hucksters and snake-oil salesmen, getting in way over their heads because they're not putting in due investigative diligence.
posted by zoogleplex at 11:44 AM on December 1, 2006


It might cool some more, but probably not too much. Why not buy now?

Define your terms. I think 'cool' means going back to 2002 pricing, prior to the bogus speculative bubble that drove everything, everywhere, up.

Affordability vis-a-vis median incomes is still at all-time lows, there's now new federal and state loan guidance requiring lenders to qualify people on the back-end permanent rates, not the teaser rates, and the 2005-2006 class of loans are not seasoning well, indicating financial industry troubles will be a looming problem 2007-2008.

Oh, and prices are also declining everywhere, even Silicon Valley, the home of the bubble.

Why should I pay 2004/2005 prices when 2002 prices are around the corner?

This is even discounting the possibility of outright economic recession, which I think is a 50-50% proposition for 2007-2008, given the declining power of the MEW engine that has been pulling our train post 90s.
posted by Heywood Mogroot at 11:44 AM on December 1, 2006


but my decision is do I want to make only $500k or should I hold out for $750k capital gain over the last 10 years.

hmm, 1996-2006. That's good market timing. Try plugging in 1989-1999 into that equation, or 2006-2016.
posted by Heywood Mogroot at 11:46 AM on December 1, 2006


It's simple really. The apartment I rent right now is $800 a month. Were I to buy the same place it would cost me $1400 a month, plus $250 a month for property taxes, and (guessing) $150 a month for condo fees. Sure if I were to buy then when I'm 60 I'll have something I can give to the kids, but right now I have at least $900 extra a month that I can spend and or save on other stuff, never having to risk living from paycheck to paycheck, yet still keep the same house. Where's the flaw in that logic?
posted by furtive at 12:05 PM on December 1, 2006


Heywood Mogroot,

I don't need to plug in any other time frames for multiple reasons, as I wrote in my post.

a) I do not look at my home as an investment
b) Even though it has been a great one, especially in the time frame 1989 to 1999 - (I bought current house in 1992) not sure where you picked those dates from, but I don't think they proved your point.
c) I agree that you can construct time slices where real estate can be a losing investment, but I would also suggest that you are probably not taking into account either risk or the returns on alternative investments.
d) I am not going to verify this, because I lived through it, but I'd guess that capital market returns in the 89-95 were dwarfed by real estate returns (in my area) and 95-99 you might be right - but again 95-02 you would be wrong.

If you really know the direction of any market 06-16 with such confidence, I might advise you to stop playing around on MeFi and get investing, I wish I did.

If my home declines in value by a small percentage over the year, my tax advantages MORE than make up for it. Oh, and by the way, generally prices do not decline for long, downturns (in attractive areas - eg location, location, location) rarely mean drop in price, just stabilization or reduced increases.

If you are living in an area that is unpopular or decreasing in population (eg Detroit) then you certainly can take a bath investing in real estate, but you probably have other problems if that is the case and certainly shouldn't be news to you, and if it is, well just financial Darwinism in action.
posted by sfts2 at 12:07 PM on December 1, 2006


The best way to build household wealth is to own a home.

Isn't that the only way?
posted by furtive at 12:10 PM on December 1, 2006


furtive,

You probably live in a rent controlled apartment. I also think that your figures are wrong or there is something that you are not telling us.

This is a market. Why would the owner of that building pay that, and rent it for what you are saying? Just doesn't make sense. Not that I'm saying it couldn't happen, but its an anomaly.
posted by sfts2 at 12:12 PM on December 1, 2006


Where's the flaw in that logic?

One "flaw," as I understand it, is that when you're 70 years old and don't want to work anymore, how and where do you live?
posted by mrgrimm at 12:17 PM on December 1, 2006


I bought my house for $147k last year. After 18 months, it's valued at $168k. That's a $21k rise in value, regardless of my mortgage and interest payments over the time. I'd say it's a 10% ROI. The best part is that I made it based solely on my credit with no initial investment.

Being a first-time home-buyer with absolutely no assets, I accumulated $21k in physical assets with $0 down. That's one part of the benefit. The other part is I've paid down over $6k of my principal already. I could have saved pretty much the same if I was still renting ($500/month). So there wouldn't have been much difference in renting vs. buying had the property value stayed the same. However, if the property value increases 10% annual, I'd say buy it if you can.

I can sell the house in a few years for over $200k and I'll get to keep $50k + principal paid. That's my money that I can choose to reinvest in another house or pay for my PhD some day. There is no way I can save up $50k within a few years while renting. So for me, the decision was pretty clear.
posted by chime at 12:19 PM on December 1, 2006


LordSudge: So by paying off some principle early, you sell the house after 10 years and you get back your equity VS. not paying off early, and having your money free all along.

So unless you plan to be there 30 years, where's the win?


The way to compare is to consider that every extra payment is the equivalent of a riskless investment at your mortgage interest rate. For example if you pay an extra $1000 and your mortgage is 6% then you have reduced your mortgage costs by $60 for the lifetime of your loan. This is the same as a guaranteed 6% investment. Now compare that to not making the extra payment and investing it in riskless U.S. Treasury bills now yielding about 5%. You have two riskless investment options, one yielding 6% and one yielding 5%. Paying off your mortgage earlier is the better investment.

Now the benefit of liquidity by not making extra payments and having more free cash can't be ignored, but if you spend that cash instead of investing it, it is the same as losing 6% per year.

This doesn't take into consideration the mortgage interest deduction which makes the option of not paying off your mortgage early slightly better. But people tend to over estimate this benefit. First, not all of your mortgage payment is interest and the interest portion declines over the life of the loan. Second, to claim the mortgage deduction you must itemize deductions on your tax return. When you itemize, you give up the standard deduction which is $5000 for singles and $10,000 for marrieds. So it is only your annual mortgage interest above $10,000 that is to your benefit.

So bottom line, it can be a close call depending on interest rates.
posted by JackFlash at 12:21 PM on December 1, 2006


Why would the owner of that building pay that, and rent it for what you are saying?

Because the owner probably bought it for much less some time ago, and a rental is only worth what people will pay for it, just as a property is only worth what people will pay for it?
posted by Armitage Shanks at 12:22 PM on December 1, 2006


If you put $900 a month into just a 4.5% savings account for, let's say 30 years until you're 60, you will have:

Final Savings Balance: $ 684461.99

Initial Investment plus Monthly Contributions: $ 324000.00

Total Interest Earned: $ 360461.99

And you can do a lot better than 4.5% with that money - in fact, you'd better, since inflation will eat your interest otherwise!

In contrast, if you have a 30-year, $1400 fixed-rate mortgage, which is about a $230,000 loan at 6%, you pay $266,427.83 in interest, for a total cost of $496,427.83! (I'm leaving out points and all that crap, keep it simple.)

So if at the end of that 30 years your house isn't worth $500,000, you lost money. Which might not be so bad if you actually stay in the house for 30 years, which is pretty damn rare nowadays. That's been a good bet for some time, yes, but I doubt it is now.

Just from that math you could either give your grandkids almost $700K in cash, as opposed to a house that, given today's conditions, probably won't be worth that much.

The game everyone's been playing isn't about keeping the house as a family home to hand down for generations. It's that housing values have shot to the stratosphere in the last decade, so people who got in at $230,000 saw their houses go up to that $500K within a few years, some even higher; the houses on the block behind mine were going for $350K when I moved in 8 years ago and now are going for $1.2 million (if they sell, of course...). I wish I'd been able to get in on that.

Getting in now at 1.2 million is highly unlikely to get you 3.9 million in 8 years, IMO. Especially if you're buying some crappy McTractHouse.

If you got in 10 years ago, great! Hope you sold your house or can sell it soon for as much as possible! Getting in now? I think that's crazy.

The fallacy of the housing thing is that people are assuming that just because house values have gone up every year for a long time, that they will always do so. That's not guaranteed at all. Ask the Japanese about what happened to their real estate values over the last 20 years!

"One "flaw," as I understand it, is that when you're 70 years old and don't want to work anymore, how and where do you live?"

If you haven't done any retirement saving, you're up shit creek there, bud. That's a pretty good argument towards buying a home though, yeah. There are other things to factor in besides whether the house appreciates.

"I bought my house for $147k last year. After 18 months, it's valued at $168k. That's a $21k rise in value, regardless of my mortgage and interest payments over the time. ... I can sell the house in a few years for over $200k and I'll get to keep $50k + principal paid."

I sure hope you're right. The way things are going, there's a fair possibility that your house will be worth $120K instead, though of course it depends on your location and other circumstances.

"Because the owner probably bought it for much less some time ago, and a rental is only worth what people will pay for it, just as a property is only worth what people will pay for it?"

There are houses here in LA which are renting for $2,000 a month while the owners are trying to sell them at $800,000 a month, which is about a $4,800 mortgage. Do the math, if you want to buy one of those houses right now! :)
posted by zoogleplex at 12:42 PM on December 1, 2006 [1 favorite]


They why is it so expensive to buy? I should not have written "owner of the building pay that' when I meant 'ask that', unless he just is not trying to actually sell that or a competing unit. It just doesn't make sense. The market place will not allow disparity in rental versus buy rates like this to exist for very long.

Everything is only worth what people will pay for it. Having such a rent versus buy price at a particular moment in time is an anomaly. Perhaps not an uncommon one, but I think either he has lived there for years and his rent is less than the market or something.

But, hey, If I'm so smart, why ain't I rich?
posted by sfts2 at 12:44 PM on December 1, 2006


zoogleplex, your math is all wrong, you need to account for tax benefits and time value of money in your future interest payments, discount to net present value.

30 years is a LONG time. My father-in-law paid 32k for his house 30 years ago. Its worth $1.8 m.

Of course, YMMV
posted by sfts2 at 12:48 PM on December 1, 2006


The market place will not allow disparity in rental versus buy rates like this to exist for very long.

Exactly. Where I live we have the same situation, rents are well below what it would cost to buy an equivalent space. My rent is what property taxes are on a single family dwelling of the same square footage in my neighborhood.
Which leads me to believe that since rental property vacancy rates are at an all time high, house prices are due for a downward adjustment.
posted by Floydd at 12:54 PM on December 1, 2006


zoogleplex, wouldn't inflation eat a good chunk of the bank's interest, too?
posted by nickmark at 1:00 PM on December 1, 2006


Probably in the midst of one for sure, but probably also down from highs but still significantly higher than say 5 years ago. A lot depends on locale.

You should really try to avoid making judgements on the basis of what happened to folks who paid up 2 years ago. The guys who bought Internet stocks in Summer of 2000 lost their shirts, but I made a hell of alot of dough from 96-2000 and the correction doesn't mean the equity markets suck.

Couple of other things argue against significant extended overall market price decline.

Baby boomers still moving up market and structural population growth from immigration etc. Demand outpaces supply, and prices go up. In general. YMMV.

Interest rates are still at fairly low levels historically.

My prediction? Sideways market through 1Q07 and stabilzation and moderate growth through 07 and 08. Inventory needs to work its way out of the pipeline. Attractive areas remain attractive with downside protection, areas under recession probably hit much harder than average.
posted by sfts2 at 1:05 PM on December 1, 2006


This is why our plan is simple. Rent apartment, save as much cash as possible, and move away from fucking overpriced California and buy a house in cash.

Thank god for 'portable' job skills.

Buying around here would be insane.
posted by drstein at 1:08 PM on December 1, 2006


"zoogleplex, your math is all wrong, you need to account for tax benefits and time value of money in your future interest payments, discount to net present value."

Yes, you're right, that's all in nominal dollars, of course. But all those other calculations are assuming a long-term growth market, which up to now is a good assumption, but I'm not convinced about the near future. There are mighty forces at work outside the housing world, which are going to have major inputs, since the market is not isolated, and its internal supply and demand is not the only thing that matters. I think that supply and demand has been pretty much illusory lately. What's been holding up the economy for the last decade, since we really don't make and sell so much valuable goods these days?

"30 years is a LONG time. My father-in-law paid 32k for his house 30 years ago. Its worth $1.8 m. Of course, YMMV"

It varies, indeed. My dad bought his house for $100K 30 years ago, and now it's worth $320K. Mom bought hers for $30K at about the same time, and it's now worth $80K, maybe. Seems like significant appreciation, but it means that in real dollars (accounting for inflation) those houses are worth a LOT less than they paid for them - and thus they were a poor investment. It's likely that both of them could have put that money in the stock market or even bonds and gotten a much better ROI.

Still, they are nice houses and they like living in them, so there's value.

Location, location, location.
posted by zoogleplex at 1:34 PM on December 1, 2006


Location, location, location.

On this, of course, we agree.
posted by sfts2 at 1:39 PM on December 1, 2006


I'm hoping people will buy now, but only because I need to sell my house pretty soon. It is in a decent neighborhood (small, quiet, established), it is in good shape and we put a lot of work into it. The only thing wrong with my house, so far as I'm concerned, is that I am looking for a new job in a different part of the country. Hooray.
posted by caution live frogs at 1:52 PM on December 1, 2006


I note that some of you here who advocate renting are living in rent-controlled apartments. That's not an option for most of us. The advantage of a mortgage is that it locks in your monthly payments rather than leaving you at the mercy of spiralling rents.
posted by deanc at 1:57 PM on December 1, 2006


Interest rates are still at fairly low levels historically.

Which means it is a BAD time to buy, since this is factored into the prices; if & when rates rise the market-clearing prices WILL fall.

It's always best to lock in the adjusted valuation (during high-rates) and then refinance to lower rates, if & when they come.

I'd guess that capital market returns in the 89-95 were dwarfed by real estate returns

Peak to trough? LOL.

(in my area)

FantasyLand?
posted by Heywood Mogroot at 2:03 PM on December 1, 2006


Buying around here would be insane.

As would be living anywhere else (in the U.S.) IMO, of course. ;)

Priorities, priorities, priorities ... I agree that I will never be able to afford a house in California. Even with a big earthquake (depending on how big), I can't imagine prices dropping to a middle-income level. Better make best friends with that old lady across the streeet ...

California's Housing Affordability Remains Lowest In Nation

I note that some of you here who advocate renting are living in rent-controlled apartments. That's not an option for most of us.

Sure it is. Petition your city leaders. (It's really hard to write that with a straight face.)
posted by mrgrimm at 2:04 PM on December 1, 2006


And I agree with deanc above. My perspective is driven by the 2-3yr timeframe, not the 10-year. Rents moving up 20% (more) and/or prices coming down 20% (more) will move me into the market. I've got a pretty solid "PUT" feeling about the present 2006-2007 market, but we'll see what happens.
posted by Heywood Mogroot at 2:06 PM on December 1, 2006


The advantage of a mortgage is that it locks in your monthly payments rather than leaving you at the mercy of spiralling rents.

Then you're at the mercy of spiralling property taxes and spiralling maintenance costs.
posted by Floydd at 2:07 PM on December 1, 2006


zoogleplex, here's the main problem I see with your argument:
Rents fluctate, mortgage payments do not (assuming a fixed %, but even if not it should average out long term). So although renting may be $900 cheaper now, you can't guarantee it will be in 10 years. If your rent in 10 years is equivalent to the mortgage payment you'd have if you bought, your time line is only 10 years, not 30. If rents will catch up faster, it's less. This is regardless of increase in income, since once the rent = mortgage equation balances out, you'd still have the $900 either way. In fact, after they balance out, the mortgage starts allowing a large monthly savings.

The exception to this is if you have rent control, but that's not really a fair argument, since rent control is not available to everyone who wants it, nor is it affected by free markets. It's kinda like someone arguing how their grandmother sold them her house for $1 and now their profit is a billion percent.

I agree houses are not the best use of spare cash, but think your logic is faulty.

Another thing to consider that I didn't see mentioned is that house appreciation (and depreciation) is much greater the first few years. Assuming a 5% gain, if you only put 5% down, the first year you're looking at a profit of 100% (minus costs greater than an equivalent rental, plus closing costs). Whereas in the 30th year, when you actually own the whole house, your gain is only 5%.
posted by Crash at 2:21 PM on December 1, 2006


Sorry for the typos...
By the way, most economists agree that the concept of rent control should be eradicated and it actually is responsible for higher rents & housing prices, since it reduces the supply. So everyone gloating about what a better deal their rent controlled apartment is, please realize you're part of the problem, the same way crazy mortgage lenders are (but probably not to the same extent).
posted by Crash at 2:26 PM on December 1, 2006


Zoogleplex is right on the money: There are mighty forces at work outside the housing world, which are going to have major inputs, since the market is not isolated, and its internal supply and demand is not the only thing that matter

Indeed -- it's foolish to speculate about housing prices without considering the bigger picture of the economy and globalization. From everything I'm seeing, the U.S.'s economy is waning and it has lost its position as a manufacturing power... look at all the crap that's manufactured in China. I think what's holding up the house of cards for now is excessive defense spending (and that at the cost of racking up enormous public debt) and health industry, which itself is appearing to be a house of cards.

Where will real wealth be coming from during the next 20 years as globalization continues to take hold? Who will actually buy those houses with $400K and $600K price tags? And don't even get me started on peak oil if those guys are right. I think the only owners who will make out nicely in the long term are owners of cheapass houses (as the masses become forced to accept less for their money) and acreage (where money can be made from the land, by whatever means).
posted by chef_boyardee at 2:33 PM on December 1, 2006


I was satisfied renting, for many of the reasons mentioned above. Then our landlady evicted us -- for no fault of ours -- when I was nine months pregnant. We managed to buy a house, but it was the most stressful time I've ever been through. I'm never renting again.
posted by The corpse in the library at 2:39 PM on December 1, 2006


I wish there were more support (i.e. massive federal tax subsidies) for nomads. Thank god for local rent control.

Yeah, rent control is your support. I'll trade homeowner tax subsidies for a law forcing someone to sell me their house at half the market rate...
posted by jaysus chris at 2:58 PM on December 1, 2006


"The exception to this is if you have rent control, but that's not really a fair argument, since rent control is not available to everyone who wants it, nor is it affected by free markets. It's kinda like someone arguing how their grandmother sold them her house for $1 and now their profit is a billion percent.

I agree houses are not the best use of spare cash, but think your logic is faulty."


Well, I live in a rent controlled apartment, so that's what makes in faulty. I know my situation doesn't apply to everyone, so let me not imply that it does.

In my case, if I used my "spare cash" on top of my rent money to buy a house, I'd be screwing myself, I'm doing pretty well with my savings and investments. Plus my commute would be ridiculous. The quality of my life would be destroyed.

There are people who are spending well above the recommended 28% of gross income on their mortgage, some as high as 50% or more, which is nuts. At my income, 28% of my gross won't buy me a house anywhere in California south of Eureka!

"By the way, most economists agree that the concept of rent control should be eradicated and it actually is responsible for higher rents & housing prices, since it reduces the supply."


Most economists, to my knowledge, assume that the default state of a capitalist free market is continuous growth. It's not, though it has certainly appeared to be so for quite a while.

How exactly does rent control reduce housing supply? Pricing people out of their homes, whether owned or rented, doesn't increase housing supply, it just increases the number of people who can't afford their own place.

Okay, I guess at a "local" level it can decrease supply, because once people get ensconced in a rent-controlled place, people who want to live in that area have to wait for turnover. But again, it's assuming that there's local population growth. Rent control doesn't decrease housing supply in Detroit, because people are leaving there in droves. In fact it probably keeps more people from leaving there than would otherwise.

Growth, growth, growth. All this depends on growth, constant growth.

In the case of my building, we have constant turnover even with the rent control. There are a couple apartments open every month, with 4 apartments open right now, with rent starting at $1,100, which is more in line with the average baseline in LA for a comparable one-bedroom on the city side (as opposed to the Valley side) of the hills. It's only one case, of course, but our building isn't reducing supply.

"Another thing to consider that I didn't see mentioned is that house appreciation (and depreciation) is much greater the first few years. Assuming a 5% gain, if you only put 5% down, the first year you're looking at a profit of 100% (minus costs greater than an equivalent rental, plus closing costs). Whereas in the 30th year, when you actually own the whole house, your gain is only 5%."

Sure, but that's assuming the house is definitely going to gain 5% in value every year, and that you can sell the house in a year, too.

I keep saying that while this has historically been a good bet, I don't think it is now. All this assumption that the market is always going to grow, grow, grow has a historical basis, but that's been made possible by continuous explosive population growth and cheap energy, which have fueled the constant economic growth to the point where everyone thinks that's the default state of an economy. It isn't.

You have to factor all that in because houses are where people live, and they take energy to build and maintain. This isn't like we're selling seashells off the beach, where they magically appear every day when the tide goes out, we're talking about a major essential component of human life, habitation.

It's not an isolated market in any way.
posted by zoogleplex at 3:15 PM on December 1, 2006


bottomline for me, is that if you feel 2006-07 is a good time to buy, go on right ahead. I'll be joining you later this decade most likely, but I'm sitting the downward leg out, TYVM.

I'm sure as hell not entering the market. Read thehousingbubbleblog.com or patrick.net if you want the story the "MSM" isn't quite yet ready to tackle (they're getting better, but still run too many PRs from DataQuick without analysis).
posted by Heywood Mogroot at 4:25 PM on December 1, 2006


Wilton D. Alston asks, in "Does Anybody Really Know Where the Money Comes From?":
"They might let you keep your car, but they will most assuredly take your house away. Interestingly, they will subordinate any loans on the property as well! So the people who loaned you the money to buy the place take a back seat to the people who did nothing but get paid monthly after you bought it.
"I don’t know when it became true that you really don’t 'own' your real property, but whenever it happened, we effectively became indentured servants to the State, except that we can’t ever pay enough to be free. (Yes, I know 'indentured servant' has a special meaning. Believe me – I really know.) But the simple fact is we all rent everything we have from the real owner – the State. Doesn’t that just make you want to stand up and salute?"
posted by Twang at 4:32 PM on December 1, 2006


Doesn’t that just make you want to stand up and salute?

yes, it makes me appreciate how great our government it is, especially its (revolutionary!) founding principles.

As a quasi-Georgist I'm well-aware of the allodial title clown-crowd. As LLoyd-George quipped, to prove title to land you must trace it back to the man who stole it, so let me find my tiny violin before you go on again about how The State is the bad guy here.
posted by Heywood Mogroot at 4:48 PM on December 1, 2006


Jesus, the stories on that housingbubbleblog are scary. Some places that did a building frenzy have better than two years's worth of inventory that isn't moving.

Reminds me of the comic book collector boom.
posted by zoogleplex at 4:58 PM on December 1, 2006


As someone who took the plunge a few years ago and has been very lucky to have made a substantial profit in three years i am still convinced that renting is a better deal if you are going to buy a commodity type house. see article at NYT about a year ago:
http://www.nytimes.com/2005/09/25/realestate/25cov.html?ex=1285300800&en=64f665177066bc85&ei=5090

however if you want something that will contribute to your quality of life and reflect your your non home depot/pottery barn lifestyle then by all means do it.
posted by phoffmann at 6:19 PM on December 1, 2006


The scale slides as you get further into your payments, but the banks always arrange it so you pay for their profit first.


This is absolute rubbish. Interest is charged at a fixed percentage of the principal.

The benefit to a mortgage is that it is essentially an enforced savings plan. You will be better off buying it at the time of selling the house the Capital Gain (appreciation) on the house less the compounded interest and fees paid are less than the cummulative balance on savings after you pay rent. - assuming you save as much as your mortgage was.
posted by mary8nne at 9:28 PM on December 1, 2006


Interest is charged at a fixed percentage of the principal.

cough

The benefit to a mortgage is that it is essentially an enforced savings plan

I like its inflation-hedging powers meself, but it's going to take WAGE inflation to raise prices again, and I not too bullish about this happening any time soon. Quite the opposite, in fact.
posted by Heywood Mogroot at 10:17 PM on December 1, 2006


This is absolute rubbish. Interest is charged at a fixed percentage of the principal.

Ummm, no. Loans are heavily front-loaded so that you're paying almost entirely interest at the beginning and almost all principle at the end. On a 30 year fixed interest loan for $300,000, your $1874 monthly payment pays just < $300 towards the principle right during each of the first 6 months. it isn't until the 19th year that you're applying 50% of the payment to the principle. in the final months, so that you're paying all but $60 to the principle during last 6 months. a href="http://www.bloomberg.com/invest/calculators/mortgage.html">Try it for yourself -- it's pretty depressing and really feels like a scam. You're so heavily penalized for selling the property within the first few years and this amorization schedule just isn't discussed often. Plus the numbers are hard to fit in your head when comparing to a fixed cost such as rent -- you really need to run a (simple) spreadsheet.

Bottom line: for the first few years, you're throwing away most of your monthly payment as interest -- just as you would if renting.
posted by LordSludge at 11:35 PM on December 1, 2006


Of course, that also means the interest-based taxable income exclusions are greatest in the earlier years.
posted by NortonDC at 3:26 AM on December 2, 2006


This rent vs. buy calculator (Java) should resolve some of the disputes. It takes inflation into account as well as your tax bracket.

For instance, to rent a house in Sunnyvale that Zillow prices at $925,000 costs $2700/mo (according to Craigslist), which is far and away cheaper to rent under most realistic conditions.

Sigh.
posted by jewzilla at 2:32 PM on December 2, 2006


It takes inflation into account

Thing is, the CPI is rather meaningless in this discussion. Both wages (how I make the monthly nut) and land valuations, are largely decoupled from the CPI, especially the gummint's CPI.
posted by Heywood Mogroot at 3:08 PM on December 2, 2006


I believe the only use for inflation in that particular calculator is to estimate the rate that your rent will increase. Where else would it fit into the equation?

My personal wage is much more variable than inflation. Land valuations are where forecasting this falls apart for me. Historically, over a long term, land values go up pretty consistently at a not very high rate (I seem to recall about 3%), but there's enough variance that when you buy or sell makes a real difference. Good luck forecasting the error term in that curve!
posted by jewzilla at 6:51 PM on December 2, 2006


This is absolute rubbish.

I agree. It's complete crap.

But it's the truth.
posted by Civil_Disobedient at 8:23 PM on December 2, 2006


selfmedicating writes "It's really not a hard calculation to determine if its better to rent or buy but you have to actually DO the calculation for your particular circumstance rather than make vague prognostications about the merits of rent or buy. In my case, buying was way smarter than renting."

It's a little more complicated than that if you value the flexability of owning your home. If I want to paint, replace lights, plant a garden, replace the grass with rock, remove a tree, add an outlet or put up a garage I can if I own the place. If I'm renting it gets more complicated even if you can garner permission.
posted by Mitheral at 10:16 AM on December 5, 2006


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