Comments on: Buy or Rent

Buy or Rent

rubin — Wed, 11 Apr 2007 21:21:18 -0800

Should you buy a house, or rent? (caution, flash & NYT) The answer is, of course, it depends. One of the biggest factors is how well the housing market will do after you buy. [previously: 1, 2] [via]

By: rubin

rubin — Wed, 11 Apr 2007 21:27:04 -0800

About 4 years ago, faced with the strong possibility of moving 4 years later (now), I made the decision to rent, and came out way behind because of housing prices shooting up. Now I am stuck in the quandary again, but will they keep going? By playing with the expected rate of interest in the advanced section, I was able to come up with a lot of totally plausible scenarios where buying is never better than renting, even out 30 years :( Course, this all doesn't take into account quality of life, being able to modify things to your taste, etc.

By: Kwantsar

Kwantsar — Wed, 11 Apr 2007 21:27:43 -0800

The devil is in the advanced settings, where the opportunity cost of capital is set below the Fed Funds Rate, and the combined cost of buying and selling are 10%.

By: smackfu

smackfu — Wed, 11 Apr 2007 21:31:00 -0800

Why does changing the down payment to 50% have so little effect?

By: blahblahblah

blahblahblah — Wed, 11 Apr 2007 21:35:34 -0800

Neat calculator. Also in the advanced settings, under general, is your income tax rate. And if you want to break the calculator, set the return on investment to something insane.

By: padraigin

padraigin — Wed, 11 Apr 2007 21:45:39 -0800

Oh, now I just want to throw up. When I plug in the numbers for the city we had intended to move to, we come out pretty good. When I plug in the numbers for the houses I'm going to look at tomorrow, because we're not moving out of state but we need to move into a better school district, we're totally fucked. I hate being a grownup, specifically in the Bay Area. That's all.

By: Eekacat

Eekacat — Wed, 11 Apr 2007 21:50:42 -0800

The other factor is what your motivation is in buying a house. Part of which rubin points out.

By: davejay

davejay — Wed, 11 Apr 2007 21:56:27 -0800

Cool. I plugged in the average two-bedroom rents in my area (where a huge bubble is just bursting) and the actual info from the house we mortgaged four years ago -- and even with no housing price growth, I was way off-the-charts ahead of the game over renting. then I noticed I'd accidentally added an extra zero to the end of the rent number...

By: delmoi

delmoi — Wed, 11 Apr 2007 21:58:22 -0800

The housing market is a fucking scam. The cheese at the end of the rat-race. A four bedroom house should cost no more then $50k, and you should not need to live your life in bondage in order to own something you can never sell without becoming homeless.

By: padraigin

padraigin — Wed, 11 Apr 2007 22:00:27 -0800

And beer should come out of the taps, too.

By: Blazecock Pileon

Blazecock Pileon — Wed, 11 Apr 2007 22:12:49 -0800

And cheeze wiz.

By: Optimus Chyme

Optimus Chyme — Wed, 11 Apr 2007 22:14:34 -0800

Oh, fuck.

By: yohko

yohko — Wed, 11 Apr 2007 22:30:03 -0800

You can find a 3 br house for under $50k, as long as you are willing to live somewhere with no jobs or things that attract retirees.

By: Kwantsar

Kwantsar — Wed, 11 Apr 2007 22:33:34 -0800

A four bedroom house should cost no more then $50k, and you should not need to live your life in bondage in order to own something you can never sell without becoming homeless. Well, no, it shouldn't, because land in places where people want to live is scarce, and that land needs to be rationed somehow. What's bullshit isn't that housing is expensive, it's that (some) landlords collect unearned rents on the backs of their tenants.

By: blenderfish

blenderfish — Wed, 11 Apr 2007 22:53:53 -0800

What's also bullshit is the lenders and agents convincing people to speculate and take out retarded upside-down loans, leaving people who just-want-a-house unable to buy. Fortunately, that will average itself out in time.

By: id

id — Wed, 11 Apr 2007 23:02:45 -0800

So that's what the war in Iraq was really about- housing prices always go up during or after a war! Okay, kidding aside- Purchasing a house has become such an emotional transaction that even intelligent financial advice barely dissuades those who seek to find their McMansions. This is a nice tool, just wish it would find a larger audience. I owned a house for two years, and spent most of that time trying to figure out how the hell to get out of it. Upkeep and maintenance was just too much of a time investment for me. Now, I try to let people know that when they buy a house, they still have rent. It's just called 'interest' instead. I'll have to point them to this.

By: sien

sien — Wed, 11 Apr 2007 23:33:00 -0800

It's weird what a global thing housing prices rising is. In the UK, Australia, NZ, Sweden and many other countries a similar thing has happened. This hasn't been the case as much in previous housing price rises, which tended to be more country specific (i.e. Japan in the late 80s). It looks like we can easily get food and clothing easily, but shelter is proving to be a problem. It's also a pretty local problem in the US too. There are reasonable places in the US that are reasonably priced, like Austin and Denver, but also places that are beyond horrible like the Bay Area, NYC and LA. Some other countries, like Australia, are more consistent in their higher prices, but without the extremes of LA, NYC etc.

By: sourwookie

sourwookie — Wed, 11 Apr 2007 23:36:16 -0800

With my rent on a 2,000+ sq ft apt(townhouse in a 100 year old-mansion-district w/garden) being hundreds less per month than my friends pay on their particle-board mini-mcmansions I can invest the monthly difference where I want and see a greater return than them. "But" they cry, "you're just handing your money over to someone every month. Indeed.

By: frogan

frogan — Wed, 11 Apr 2007 23:42:15 -0800

Anyone that says renting is better than buying, when you have an equal means of doing either one or the other, just doesn't understand fundamental economics. Buy, buy, buy. Scarlett O'Hara's dad was right -- land is the only thing that matters. Kinda shocked to hear so many people espousing the joys of renting, what with no chance of equity build-up, no mortgage interest tax deductions and no chance of collecting rent from some other sucker. And rent = interest? Okaayyy ... guess those retarded interest-only, variable-rate mortgages were too good to pass up, huh? The market may crash and then I'll be upside down. Oh well; then I'll be in the same boat as the renters, paying out a monthly nut with no hope of retrieving it. Because that's what rent is -- you take your money and you throw it in a hole each month, never to be seen again. I may end up in that boat. But I'm not, and a-ha, the renters are in the boat right now, while I'm building equity, and the market probably won't crash... Kinda reminds me of that scene from The Shawshank Redemption, where the evil guard thought it was unlucky to have received an inheritance, because it meant he would have to pay a portion of it out to taxes ... and didn't know there was an easy way to avoid it altogether. He still wins either way. Guess he just likes being angry about something.

By: sourwookie

sourwookie — Wed, 11 Apr 2007 23:43:05 -0800

I should add, however, that this is not a city in which any of you would wish to live.

By: frogan

frogan — Wed, 11 Apr 2007 23:43:07 -0800

I can invest the monthly difference where I want and see a greater return than them. Now that's true, though. But it better be a heck of an investment...

By: Heywood Mogroot

Heywood Mogroot — Wed, 11 Apr 2007 23:47:11 -0800

A four bedroom house should cost no more then $50k, and you should not need to live your life in bondage in order to own something you can never sell without becoming homeless As a quasi-Georgist, I tend to agree with this sentiment. The Georgists see/saw a housing transaction in two components: acquisition of the Land aka the site, and acquisition of capital improvements on this land, largely the house. The Georgists of 100 years ago proposed a free market for the latter but taxation on site values to eliminate the -- often quite speculative -- market for land itself. They even imagined this tax on site value could replace all other taxes, hence they were also known as Single Taxers. The Georgist movement died in the capitalist excess of the 20s, to be replaced by the mixed ad-hoc socialism we know and love today, but I still enjoy its rather purity of philosophy, that Capital is that created by Man from Nature, and since a community creates its own site value it should have the power of profiting from it, rather than self-proclaimed landlords (cf. Lloyd George's quip: "to prove a legal title to land, one must trace it back to the man who stole it."). Anyhoo, I think the rent vs. own calculator on eloan.com is a lot better. Living in Sunnyvale I am plugging in my soon-to-be $1500/mo rent vs. the $400k condo equivalent and scratching my head. It's mainly this chart that's keeping me on the sidelines now.

By: Heywood Mogroot

Heywood Mogroot — Wed, 11 Apr 2007 23:52:03 -0800

I may end up in that boat oh, you're in this same boat as us lowly, bitter renters frogan. You're just renting money from a bank to have a piece of paper with your name on it registered at some government office. Granted, our entire economic system has been structured to have your investment pay off, and even with millions of over-extended monkeys -- your fellow home-debtors-- scheduled to be falling out of the lending trees over the next 3 years, I have no great expectation that price devaluations will exceed the rather mild declines (in real terms) we saw 1991-1996.

By: eurasian

eurasian — Wed, 11 Apr 2007 23:53:42 -0800

... When I plug in the numbers for the houses I'm going to look at tomorrow, because we're not moving out of state but we need to move into a better school district, we're totally fucked. ... posted by padraigin Wasn't there an article awhile back, NY Times, perhaps, that looked into what affected finances the most? It apparently wasn't big screen tv's or someone's thirst for expensive wines, but the desire to live in the 'good school district'.

By: Heywood Mogroot

Heywood Mogroot — Wed, 11 Apr 2007 23:53:54 -0800

It looks like we can easily get food and clothing easily, but shelter is proving to be a problem oh, free market capitalism is great at providing for wants. Needs, on the other hand, well, better get lubed up.

By: frogan

frogan — Wed, 11 Apr 2007 23:59:28 -0800

oh, you're in this same boat as us lowly, bitter renters frogan. You're just renting money from a bank to have a piece of paper with your name on it registered at some government office. Yeah, but the funny thing is ... I keep selling these houses before anyone gives me a piece of paper with my name on it, and someone keeps giving me more money than I paid into the house in the first place. I think you call that a ... what's the word? A profit? Anyway, it's totally rad. It's like magic or something. But you're renting and doing the same thing? Hurm. Maybe I'm doing something wrong, then ... ;-)

By: Bookhouse

Bookhouse — Thu, 12 Apr 2007 00:06:03 -0800

With my rent on a 2,000+ sq ft apt(townhouse in a 100 year old-mansion-district w/garden) being hundreds less per month than my friends pay on their particle-board mini-mcmansions sourwookie -- all of my house-owning friends in Springfield pay half of what I pay in rent each month, and I have about 300 square feet. The housing market in Springfield is a New Yorker's wet dream. Of course, this calculator says that it is never better to buy than to rent in Brooklyn Heights. And of course, Brooklyn Heights has some things that Springfield don't, but there's not a Caspers nor Mexican Villa in sight.

By: Heywood Mogroot

Heywood Mogroot — Thu, 12 Apr 2007 00:06:16 -0800

I stand to inherit my Mom's California spread -- and her 1981 Prop 13 valuation -- so I fully agree that on balance buying is a great investment. I sold $10k of AAPL in 2002 and loaned it to my sister to buy a condo in OC in and that $10k made more money for her than it would have for me, and AAPL frickin' skyrocketed from 12 to 90 in the interim. However, in the short-term horizon, I want to see how the next two years play out before I get my own place here in California. There's been a lot of financial hijinks that I suspect will get worked out of the system, the hard way.

By: srboisvert

srboisvert — Thu, 12 Apr 2007 00:32:32 -0800

I've just experienced one of the joys of renting. I got an eviction notice yesterday. This comes just a few days after having the pull cord on the light switch repaired. So in exchange for fixing a string that went directly into an electrical appliance (thanks UK electrical code for mandating that piece of crap kit!) I am going to have to fork out another security deposit while waiting for my previous deposit back, pay installation fees for a phone line, internet and TV, pay to move, pay to have my mail forwarded,and spend the time finding an unfurnished apartment (which is absurdly hard to find in the UK - thanks taxman).

By: imperium

imperium — Thu, 12 Apr 2007 01:45:22 -0800

I dislike both renting and the prospect of buying. I've been in srboisvert's position before, although we'd done more than fix a light cord. However, the housing market in Edinburgh is insane, and I definitely get a much nicer house for the money so long as it belongs to someone else's bank instead of mine. Bring back squatting!

By: blenderfish

blenderfish — Thu, 12 Apr 2007 01:56:53 -0800

I keep selling these houses before anyone gives me a piece of paper with my name on it, and someone keeps giving me more money than I paid into the house in the first place. I think you call that a ... what's the word? "Pyramid Scheme"? I guess that's two words.

By: antifuse

antifuse — Thu, 12 Apr 2007 02:53:12 -0800

According to this, it is (approximately) better to buy instead of renting over 26 years for me here in Dublin, with housing prices increasing at 5% and rent increasing at 5%. Of course, housing prices have been SKYROCKETING here over the last 5+ years, but they're averaging out now. I'm still not going to pay 650,000 euro for a 750 sq foot 1 bed apartment, though. Back to Canada I go!

By: Merlin

Merlin — Thu, 12 Apr 2007 03:31:29 -0800

But isn't this all based on selling the house at the end. Then where do you live?

By: PenDevil

PenDevil — Thu, 12 Apr 2007 03:48:59 -0800

The National Association of Realtors said Wednesday it expects its measure of home prices to fall this year for the first time since the group began tracking sales nearly 40 years ago. In its latest monthly forecast, the group said it expects a 0.7 percent decline in the median price of an existing home sold this year. A month ago it had been projecting a 1.2 percent increase.

Home prices set for first drop in 40 years

By: Mutant

Mutant — Thu, 12 Apr 2007 04:31:05 -0800

"It's weird what a global thing housing prices rising is. In the UK, Australia, NZ, Sweden and many other countries a similar thing has happened. This hasn't been the case as much in previous housing price rises, which tended to be more country specific (i.e. Japan in the late 80s)." Globally, there has never been so much money sloshing about, so much liquidity, credit so easy to obtain. The money spigots were opened right at 911, and only now are (slowly) being tightened. But its far too late. Too many uncredit worthy people have been encouraged to take on debt they never will be able to repay. I consider the current situation the end result of totally irresponsible lending. Unfortunately, this will have a pretty messy ending. Disclaimer: I own a two bedroom two floor garden flat in Central London, Zone 2. But I was only interested in purchasing a flat in need of renovation and negotiated heavily (ask was 125K, I got it for 115K). Then I financed it using long term, amortizing fixed rate debt with 20% down. Any bonuses, lottery winnings, found cash, whatever was used to pay down principal. A little over five years later, I only owe 37% of my original debt; things will have to get really bad before I'm in negative equity.

By: InnocentBystander

InnocentBystander — Thu, 12 Apr 2007 04:47:10 -0800

We've just purchased an older, well-maintained 4 bedroom house for about $45,000 in an area with excellent schools and a university less than 10 minutes away. Now we don't have to deal with capricious landlords who suddenly decide they don't like our pets, or who won't let us paint our walls or garden. we can do what we damn well please. And the total cost of property taxes, mortgage payment, and homeowner's insurance is $350 a month. We're getting our meat from a local farmer, including free-range chickens, beef, bison, and elk. It may or may not sound idyllic to you, but it is to us. Housing does exist that is both cheap and desirable. But you may have to change your definition of desirable, and decide that maybe being able to afford living in a school district where 99% of kids meet or exceed state testing standards is worth more than living in a huge expensive city. You can't have it all. But don't act like the only places where you can afford to live are places you would find horrible.

By: TheOnlyCoolTim

TheOnlyCoolTim — Thu, 12 Apr 2007 05:03:02 -0800

no chance of collecting rent from some other sucker. Some people have morals.

By: a_day_late

a_day_late — Thu, 12 Apr 2007 05:09:31 -0800

I'm probably quite a bit older than most people here and have been through this whole thing before (back in the '80s). Iffin you plan to settle down some place for a while (say 7+ years) and you have saved some $$$ for a down payment (you have saved some $$$, right?) buying beats the s*it out of renting. You don't need no stinkin' calculator for that. Besides being generally prudent (saving for a reasonable down payment, sticking with a sane mortgage option, etc), the next best thing to do is pay off your mortgage early (make at least one extra payment every year to start with). I know that some of you/us are socialist types but we live in a capitalist society. Play the game to your advantage. That means building capital, and paying off your home has traditionally been one of the best ways to do that. Yeah, I don't know if this trend will continue but then, neither do you. Additionally, NOT buying presents a certain risk in that housing price increases may very well outstrip your income/investments/assets at some point and you end up having less when get older--thus being priced out of the housing market for good. It's no day at the beach looking to rent when you are older and probably just want to be settled somewhere.

By: Kibbutz

Kibbutz — Thu, 12 Apr 2007 05:13:36 -0800

When it comes to the "buy vs. rent" argument, Scott Burns is about as good as they get (more here).

By: game warden to the events rhino

game warden to the events rhino — Thu, 12 Apr 2007 05:13:58 -0800

Because that's what rent is -- you take your money and you throw it in a hole each month, never to be seen again. I'm always amused by this attempt to answer the incredibly complex psychological question of how to choose your living space, and what "home" means, at the level of simple maths. Owning your own house makes a lot more sense than renting if you're a person whose present-moment happiness is heavily dependent on a sense of being wealthier and more secure in the future. (And see, for example, the work of Daniel Gilbert for why you're quite likely wrong about what you think will make you happy in the future.) In general, while I admit I do hope to buy one day, I am glad not to be too much like this. Besides, even on the level of pure economics, renting provides me with numerous great advantages. Why do people never refer to paying for groceries, or a holiday, or a massage, as "throwing it in a hole, never to be seen again"?

By: IndigoJones

IndigoJones — Thu, 12 Apr 2007 05:38:48 -0800

What's bullshit isn't that housing is expensive, it's that (some) landlords collect unearned rents on the backs of their tenants. Why the "some"? And if someone didn't rent out their property, my choice would be to buy even if I do not care to or live under a bridge. Or Motel Six. Moreover, I'm guessing some here have never seen the landlord's position. You can lose thousands upon thousands, the entire building in fact, with a single deadbeat tenant. And, of course, as long as there is real estate tax, the gov't is the landlord of us all, and a pretty capricious one at that.

By: konolia

konolia — Thu, 12 Apr 2007 05:54:16 -0800

If any of you want to invest, buy in my home town. With BRAC, the houses will only go up-and once the war ends, this place is gonna be a BOOMTOWN.

By: antifuse

antifuse — Thu, 12 Apr 2007 06:23:38 -0800

You can't have it all. But don't act like the only places where you can afford to live are places you would find horrible. Umm... I know plenty of people who would see the exact location where you described living and think "Sweet fancy Moses, no way in HELL would I ever choose to live there". Personally, I would probably find it charming - provided I could actually find work there. Why do people never refer to paying for groceries, or a holiday, or a massage, as "throwing it in a hole, never to be seen again"? I don't think I would use the word "never" - I'm sure there's some percentage of folks out there who look at expenditures on holidays and massages as being absolutely wasteful. But it's not really the same comparison, at any rate.

By: joehong

joehong — Thu, 12 Apr 2007 06:39:30 -0800

So what's new with this article? "Buy it only if it looks like it's going to rise." Well who doesn't know that? Now if you can tell me how to measure exactly how much the appreciation is going to be for specific house, then it would be something worthwhile reading.

By: deanc

deanc — Thu, 12 Apr 2007 06:42:20 -0800

"But" they cry, "you're just handing your money over to someone every month. People fail to realize that buying a house also results in this. You hand over money in real estate taxes and maintanence/improvements every month, and it adds up. All things being equal, I'd rather buy than rent. However, the amount of money I pay per month in rent (I share an apartment with a roommate), would be equal to the money I'd "throw away" in things like condo fees and real estate taxes and repairs, especially when the market in which I live in sky-high and poised to go down, anyway. Better to save the excess for a down payment. I'm going to guess that the "optimal strategy" is to figure out "how much you can afford" to pay per month, and then rent much less that that or buy at a maximum of that level, rather than going over that limit to buy, as many people do. Over the long term, however, living in any metropolitan area without rent control, renting is a bad deal. Your income is never going to increase faster than the increases in rent you will face. The advantages of being able to lock in a fixed mortgage payment for 30 years are really subtantial, from my perspective. For those who live outside of already-crowded real estate markets, I would guess that the benefits of home ownership are mainly psychic (eg, control over your own living space, etc.) rather than economic.

By: Mutant

Mutant — Thu, 12 Apr 2007 06:47:07 -0800

"Why do people never refer to paying for groceries, or a holiday, or a massage, as "throwing it in a hole, never to be seen again"?" If someone offered a permanent supply of groceries then we could debate the pro's and con's of this supply's one time purchase price compared to "renting" groceries by the week. Unfortunately, short of farming, no such alternatives exist. In terms of holidays I do price things out that way. I'm frugal, but as I prefer to purchase experiences rather than objects, that's a subjective, non quantitative factor that biases my decision. Other frugal folks that I know would never pay for the type of holidays I take (e.g., Queen May 2, a few weeks in the Four Seasons in Cairo, etc). They're rather aghast, actually. To each his own.

By: deanc

deanc — Thu, 12 Apr 2007 06:49:17 -0800

I'm sure there's some percentage of folks out there who look at expenditures on holidays and massages as being absolutely wasteful. The issue here is opportunity cost. You HAVE to put a roof over your head. You can either take that money you NEED to spend "throw it away" every month OR you can get a mortgage, and both provide the same benefit. What this ignores, of course, is that housing has expenses which will inevitably get "thrown away" in an effort to maintain your home. On the other hand, there aren't any vacation* or massage options that allow you to build equity, so if you've already decided to spend your money on that, you're going to spend money on it, rather than lament "I could have gotten a massage and built equity at the same time." *My grandmother's cousin used to vacation in the Hamptons but write it off as a business expense because while she was in the Hamptons, she would spend part of her time there scoping out prospects for her real estate investment business, so I suppose there are "equity building" alternatives in vacations.

By: mygothlaundry

mygothlaundry — Thu, 12 Apr 2007 06:55:19 -0800

Me too, srboisvert. Got my eviction notice on Friday night. I've been living in that house for 7 years and paying slowly increasing rent that never caught up with the the rapidly gentrifying boomtown where I live. My landlords finally caught on and realized that kicking me out and doing a few simple repairs would net them approximately $400 or so more per month. Now I find myself pretty much priced out of the rental market - I got priced out of the housing market long ago. So I'm suddenly looking at having to leave a town I love, where my family and friends are, where my son has grown up and is still in school - and am I a bitter renter? Baby, I'm the most bitter renter you could find and it's not quite as easy as saying that it's just a matter of choosing to live in North Dakota. I hope there's some kind of a crash, that we can get back to a place where the working class could actually afford a home, but I'm starting to doubt it will ever happen, that it's just one more wedge in the giant and increasing gap between the haves and have nots in this country.

By: game warden to the events rhino

game warden to the events rhino — Thu, 12 Apr 2007 07:01:43 -0800

Hmm. But I see the rent I pay as a cost for purchasing services that are extremely valuable to me: much greater flexibility, the ability to enjoy the experience of living in an apartment and an area that I couldn't afford to buy, not having to spend time or energy on numerous things associated with ownership. These have value. Like I say, how much value any one person ascribes to them, versus the value of equity, is not only determined by the relative prices of these things on the free market, but by things like how much you as an individual value the promise of future security over the quality of your life now.

By: game warden to the events rhino

game warden to the events rhino — Thu, 12 Apr 2007 07:01:44 -0800

By: game warden to the events rhino

game warden to the events rhino — Thu, 12 Apr 2007 07:02:13 -0800

Pardon me.

By: notreally

notreally — Thu, 12 Apr 2007 07:23:02 -0800

If any of you want to invest, buy in my home town. With BRAC, the houses will only go up-and once the war ends, this place is gonna be a BOOMTOWN. posted by konolia Um, which war? The one on drugs? terror? Iraq? Just curious.

By: The corpse in the library

The corpse in the library — Thu, 12 Apr 2007 07:30:20 -0800

My sympathy, mygothlaundry and srboisvert. We were evicted last year -- through no fault of ours -- when I was nine weeks pregnant. Although I know buying a house is an economic decision for most people, for us it was entirely an emotional one.

By: The corpse in the library

The corpse in the library — Thu, 12 Apr 2007 07:30:46 -0800

Not weeks! Months. Nine months pregnant. As in, due the next week.

By: deanc

deanc — Thu, 12 Apr 2007 07:46:51 -0800

Not weeks! Months. Nine months pregnant. As in, due the next week. This is where being an "honest person" (to your credit) worked against you. By paying the next month's rent, you could have simply stayed put, and no court would enforce an eviction order against an extremely pregnant tenant. As long as you kept paying rent, you probably could have bought yourself at least a few more months, if not more.

By: ODiV

ODiV — Thu, 12 Apr 2007 08:05:06 -0800

I am going to be going through this very soon. We're currently renting (Two apartments this month! We always seem to have a month of overlap when we move), but we will certainly be thinking about buying in a year or so. My problem is that I'm not that confident about the future of our city. The town was a gold mining town. When gold took a dive things were looking pretty grim. Mines were closing, people were leaving, house prices were dropping. Now we're a diamond mining town and prices keep going up. Who knows where they will be in a year. It seems like everyone is buying everything they can get their hands on. To me, buying here would be tanamount to investing in diamonds. I don't know how comfortable I'd be doing that especially since the diamonds that are mined are cosmetic only. If the diamond business goes down, then our house/investment does too. And the economy dives too so our jobs might just follow. The other issue is that the city is a long way away from anything else. Getting everything up here is a chore and takes a long time and a lot of gas. As oil goes up, the cost of supplying the town does too. What happens if oil goes up exponentially? It's probably a safe, long-term investment. But I'm certainly going to worry a lot.

By: phearlez

phearlez — Thu, 12 Apr 2007 08:05:22 -0800

"Why do people never refer to paying for groceries, or a holiday, or a massage, as "throwing it in a hole, never to be seen again"?" If someone offered a permanent supply of groceries then we could debate the pro's and con's of this supply's one time purchase price compared to "renting" groceries by the week. Unfortunately, short of farming, no such alternatives exist. So why are we ruling out farming? Because it involves a serious lifestyle change to make it an alternative? Well, so does home ownership. Game warden touches on it - trying to examine this in simple maths, and maths that only examine rent payment vs mortgage payment, is foolish and incomplete. I'm glad frogan is happy with his lot in life (and for that matter, his lot) but when his toilet breaks he doesn't pick up the phone and call someone else whose problem it is to fix it. Or when the roof needs replacing, or termites fumigated. Or any number of other things that likely will come up in the lifetime of a home owner and which cost a non-trivial amount of money. I'd hazard a guess that a few people here who are stridently pro-home ownership might have commented in a few of the askme threads over the years about hiring cleaning help, where some people have decried the practice as wasteful and something you should be doing yourself. Many people - myself included - think the cost is worth the benefits, even if I could clean my own toilet for a smaller overall monetary outlay. Refusing to look at those same kinds of tradeoffs in home ownership is unreasonable.

By: Relay

Relay — Thu, 12 Apr 2007 08:41:01 -0800

Buy or rent? Hell, I live in San Francisco, unless I win the lottery (and it better be a BIG pay out), there's no chance of me buying.

By: chundo

chundo — Thu, 12 Apr 2007 08:55:58 -0800

According to this, for it to make sense for me to buy with the current rental market and the investment returns I am getting, home appreciation would have to hit 8% per year on average - which is a dicey proposition the way the market is slowing here, I don't think it will hit that rate again for a few years at least. Places are selling for at least 200 times their rental price in my neighborhood. With property taxes, association dues, interest, repairs, etc, the cost of owning a similar place to what we are renting is roughly double what we pay now. I'd still like to buy a place, but only because I would like to be able to modify it to our tastes, not as an investment. Compared to other vehicles we have available, it's a shit investment for us right now.

By: drstein

drstein — Thu, 12 Apr 2007 09:45:58 -0800

I entered some figures and told it I lived in Santa Clara County. I could swear that a flash animation with the "HA HA HA Guy" appeared for a second before teling me "You're fucked." Detroit really is looking more attractive.

By: dbiedny

dbiedny — Thu, 12 Apr 2007 09:59:19 -0800

This thread is very, very entertaining. Reality check: you "buy" a house, take a 30 year mortgage, and essentially, you're placing one VERY big bet that things are gonna be OK. You pay 25 years of that mortgage, and then, all hell breaks loose. You try to sell the house, but the whole hell thing means that you don't get any good bites, the market has fallen out and your house sits on the market for a year. In that time, you run out of money - this happens to somebody every day on this planet - and you miss exactly how many mortgage payments before you lost your house, you know, the one you "owned"? It's a hell of a scam. If you cash out at just the right time, you'll do OK, but if not, well, you're another statistic. Personally, I have regrets that I was not really about to ever "buy" a house, and make some decent $$$, but the way that people make their home the central axis of their personal and financial identity seems a little weird to me. Must be some sort of deep, darker psychological flaw in my soul. I don't think I'm a Good American™, maybe those years of living in Venezuela colored my worldview - most folks down there have no illusions of "owning" a home, they're happy if their shanty house ("rancho") doesn't come crumbling down in the rain. Different priorities, I suppose. Then again, I consider life to be something on loan. Seems like the notion of ownership is something of a delusion. YMMV.

By: konolia

konolia — Thu, 12 Apr 2007 11:06:28 -0800

Um, which war? The one on drugs? terror? Iraq? Just curious. I live near Fort Bragg. Whichever of the above that means most folks are back from deployment. My frame of reference is the first Gulf War, and my husband is in the real estate industry.

By: chunking express

chunking express — Thu, 12 Apr 2007 11:34:12 -0800

dbiedny, if only that person had rented. They'd be A-OK.

By: frogan

frogan — Thu, 12 Apr 2007 11:47:34 -0800

but when his toilet breaks he doesn't pick up the phone and call someone else whose problem it is to fix it. My toilet actually did break -- actually shattered it when I dropped something heavy on it. But here's something else for the rent-or-buy crowd to consider ... when I replaced it, I replaced it with a better model. So now the bathroom looks nicer, I'm a little bit more comfortable, and the value of the house went up a teeny-tiny bit. If you're renting and you shatter the toilet, guess who pays for it? You do. The landlord takes it out of the security deposit. There's no get-out-of-jail-free card when you're the one doing the damage. Guess who picks out the new toilet? You don't. The landlord decides how precious your ass is, in all cases from damage to non-functional items. If the landlord wants to paint the outside of your apartment in hot pink polka dots ... deal with it, sucker. At the risk of sounding Republican (I'm not, ick), I'll point you guys to Jack Kemp, who championed the notion that people on public assistance should own, not rent, because it's ultimately better for all involved. As secretary of HUD, Kemp spearheaded the Homeownership and Opportunity for People Everywhere (HOPE) program, an effort to reform socialized housing, by allowing residents of government housing projects to buy their own unit. Likewise, with his Urban Enterprise Zone program, he promoted market-based urban business district reforms by offering tax breaks and reducing the regulatory burdens for businesses in poor neighborhoods. These ideas were fought by welfare proponents, but their immense success compared to public housing and other attempts to control communities through heavy government, they have become the dominant stances of housing and urban development today, giving rise to modern Urban Renewal systems.

By: buzzman

buzzman — Thu, 12 Apr 2007 12:06:31 -0800

You know what they call a person who pays 70k outright for a condo, and then has no savings two years later? A homeowner. Without regard as to whether the value drops for a year or two or three. Period. WoW!

By: Twang

Twang — Thu, 12 Apr 2007 12:46:36 -0800

"Because that's what rent is -- you take your money and you throw it in a hole each month, never to be seen again" But they don't make cottages (5 or 600 sq. ft.) much anymore in the places I want to live. I *can* rent a small apt. for WAY less than the cost of available homes. *Right* where I want to live, so I don't have to drive much. The rest goes for quality of life. The other day I walked by some magnificent homes built in the century before last. The people who built them ... and paid for them with the days of their lives ... and sleeplessness ... are long gone. We all have time to "spend" as we choose.. I enjoy the same parks, trees, shops. And my time is much more my own. Thanks anyway.

By: Twang

Twang — Thu, 12 Apr 2007 12:55:47 -0800

"Throwing money down a hole...." I've known people who had a 30-year mortagage that made a $100,000 house cost $350,000. Where'd the $250,000 go? My guess is that it paid for part of that $1 million house up there on the hilltop.

By: zoogleplex

zoogleplex — Thu, 12 Apr 2007 13:00:54 -0800

Boy, am I lucky I got into a rent-controlled apartment. Also, I made good friends with the guys who manage the building. I've been socking away cash (difference between my rent and "average rent" or a mortgage payment) for years now. I'll buy in about 3 years, with a very large down payment, after the mortgage-lender carnage reduces prices down to about 120x rent. Plus, for now I have no debt and excellent credit, which is very pleasant for my peace of mind. Or if that doesn't happen, I'll just have a crapload of cash invested, earning me money. Either way I should be okay. Anyone who bought in LA in 2006 with a neg-am I/O ARM... you're probably already underwater and truly screwed, unless you can double your income by 2008. frogan, we're glad you rode the market up the hill and did well, but it's not going to continue, so be careful.

By: davejay

davejay — Thu, 12 Apr 2007 13:37:04 -0800

I can break this all down into a few simple rules, as far as finances are concerned (YMMV based on your non-financial preferences): 1. If you want to live in an area that is currently undervalued and shows signs of correcting, BUY. 2. If you want to live in an area that is currently overvalued and shows signs of correcting, RENT. 3. If you currently rent, and you live in an area that is currently undervalued and shows signs of correcting, BUY. 4. If you currently own (or have a mortgage), and you live in an area that is currently undervalued and shows signs of correcting, stay put. 5. If you currently rent, and you live in an area that is currently overvalued and shows signs of correcting, stay put -- and move to a new rental (or two) as the correction happens. 6. If you currently have a relatively young mortgage, and you live in an area that is currently overvalued and shows signs of correcting, sell and move to a new rental (or two) as the correction happens. 7. If you currently have an old mortgage or own your house outright, and you live in an area that is currently overvalued and shows signs of correcting, sell (if you want to move somewhere else) or stay put and don't sweat it. Of course, if you live somewhere that has rents and new mortgage costs equivalent, and that has been stable like this for many years and shows no signs of changing, then it doesn't matter (financially) what you do. By the way, these rules also take into account people getting kicked out of rentals as they become more valuable, and more rentals becoming available as other people realize they're paying too much rent and jumping sideways to cheaper equivalent rentals. As for me, I'm in a young mortgage in an area that's overvalued and shows signs of correcting -- but I'm staying put for now, because (a) I got in before the overvaluation happened, and (b) with dogs and young kids, I prefer stability (not getting kicked out), time (not having to find an apartment), low stress (not having to sell my house) and convenience (not having to move) over making a hundred thousand or two.

By: davejay

davejay — Thu, 12 Apr 2007 13:39:26 -0800

also note that, in a rental, the instability, lack of time, higher stress and inconvenience aren't just one-time costs -- they're recurring depending on how unstable each apartment is, and that's impossible to predict.

By: emjaybee

emjaybee — Thu, 12 Apr 2007 14:16:18 -0800

If you're renting and you shatter the toilet, guess who pays for it? You do. Well, ok. But if I drop something heavy enough to break a freakin' toilet, what was I doing in there...maintenence? Because as a renter, I wouldn't be doing that. If the toilet broke from a light touch because it was so fragile...the landlord would pay. Or hear from me 24/7. And honestly, I don't give a flip about getting a "nicer" one, so long as it works. Nor do I care about pink polka dots on the siding; if anything, it would make my house easier to find for friends that came over. I know there are bad landlords...and that's when you move. I have had appliances break on me several times and the landlord promptly replaced them; sometimes with newer, better ones. My father in law owns a nice place, that he does the constant maintenence on (3 acres). He also has a crazy neighbor who likes to set fire to his dry grass to clear it out, and so has to be watched, but can't be legally stopped until he actually burns something down. Neighbor also has stripped down cars on blocks in the yard. The last crazy neighbor I had in my NY apartment I complained about to my landlord (dude was beating his girlfriend). And he got thrown out, because he never paid his rent and we did. We can trade stories all day, but I don't know that you can really for sure quantify which one is better for everyone. You can get screwed either way.

By: frogan

frogan — Thu, 12 Apr 2007 14:42:01 -0800

But if I drop something heavy enough to break a freakin' toilet, what was I doing in there...maintenence? I was hanging a picture frame, and it caught the edge of the seat just so... ;-)

By: lucidprose

lucidprose — Thu, 12 Apr 2007 14:52:55 -0800

The calculator link is great; I'm looking to buy to buy in SF, but it's hard to justify on numbers alone with the inputs I'm using. I also fear being caught on the wrong side of this graph (previously). Heywood, can you elaborate on the chart in your post on ARM Reset Schedules ?

By: chundo

chundo — Thu, 12 Apr 2007 15:40:55 -0800

lucidprose - That's a graph of the amount of adjustable mortgages that are due for refinancing or bubble payments in the next X months. Due to lender guideline changes (fallout from the current sub-prime mess), up to 21% of current mortgage holders will not be able to refinance, which will probably result in a record wave of foreclosures. I think that's what Heywood is waiting to take advantage of - as am I.

By: ysabet

ysabet — Thu, 12 Apr 2007 16:20:14 -0800

Wow, landlords in america must suck. In australia, anything beyond a leaky tap is the landlord's responsibility. If a bulb blows, or a tap leaks, (eg, sub-$10 costs) the tenants deal with it. If a toilet breaks, or an appliance supplied with the property breaks (dryer, hot water system, etc) it is the landlord's expense and responsibility. I pay for that service as part of my rent. My husband and I are currently paying in rent about the same as some good friends of ours are paying on their mortgage. The difference? The property we rent is worth (conservatively) around 500k; theirs is around 250k. To buy this place, we would be paying (easily) twice in mortgage what we're currently paying in rent. The difference goes to a savings account, as we're trying to get enough money up to buy somewhere in the next decade. It is likely that prices will crash,or our incomes will skyrocket, or both, during that time period. Renting allows us to be free from the hassle of rates, home maintenence, body corporate fees and the like, while being able to live in an area we enjoy, have a cushion of savings, and a decent commute. It is significantly cheaper day-to-day to live where we do rather than buy a mortgage for a similar amount in rent - on the order of around $60 a day, which is kind of a lot of money. Running the figures - given the local conditions, we can either have $400k (possibly more) in the bank at the end of 7 years, or a $300k debt. It takes around 20 years to break even on owning a house - assuming inflation of 3% and no interest rate rises (current rates are 7-8%). Personally? I'd rather have my equity in cash (or wisely invested across a diverse portfolio) than in a single, vunerable property.

By: Jeanne

Jeanne — Thu, 12 Apr 2007 16:29:26 -0800

I can pay $600 a month for a roof over my head, or I can pay $700 a month, plus property taxes, plus maintenance, for a roof over my head... plus a teeny tiny little bit of equity. That teeny tiny little bit of equity is not worth that much money to me, when I could take the savings and invest it instead. I would like to own a house, eventually, and am saving up for a down payment eventually, but to me the only compelling argument for it is that I would be protected from rent inflation.

By: zoogleplex

zoogleplex — Thu, 12 Apr 2007 17:00:00 -0800

"Due to lender guideline changes (fallout from the current sub-prime mess), up to 21% of current mortgage holders will not be able to refinance, which will probably result in a record wave of foreclosures. I think that's what Heywood is waiting to take advantage of - as am I." Me too, but you can see from that chart (the wonderful "Exhibit 42," remember that name) that there will be two rounds of resets, with the next 27 months from Jan 07, or the period from now until April 2009, being the sub-prime resets that most people feel will result in the record wave of foreclosures. There will be a lot more houses coming on the market, especially at the peak of those resets about a year from now, so housing prices are going to come down, and down some more. The "mainstream" feeling is that the "second wave" on that chart isn't going to represent so many foreclosures and sales because the borrowers have intrinsically better credit, but the underground buzz is that those folks have all overextended themselves too, and so the carnage there may be a lot worse than most expect - which will drive prices down further. That's why I'm probably gonna stay on the sidelines until mid-2010 or so, and let my investments swell up my account. "I can pay $600 a month for a roof over my head, or I can pay $700 a month, plus property taxes, plus maintenance, for a roof over my head... plus a teeny tiny little bit of equity. That teeny tiny little bit of equity is not worth that much money to me, when I could take the savings and invest it instead." That's how I feel, and have felt. But you live in a place where housing prices haven't gone completely insane. You can't buy a dilapidated shack in the City of Los Angeles (say, in Compton) right now for less than around $400,000. It's ridiculous. It even sucks for rental properties. I saw a realtor ad for a 3-unit house in West Hollywood for $900,000 last week; the building is "fully occupied" with renters and generating a "nice income" of $5,700 a month from the rents. Sounds great, right? The problem is that a 30-year fixed 6% mortgage on that price would be a $5,400 mortgage - before insurance and property tax, let alone maintenance! With a really toxic ARM, I could maybe make a profit until the loan reset, and then I'd be screwed. There's just no upside to buying even a rental property in that environment. Note that had I been able to buy a house in my neighborhood in 1998, the difference between my actual rent then and a hypothetical mortgage would have been about $1,700 a month! At the time, out of my reach. (Had I been making the salary I make now, I would have bought, immediately, even with that gap, it would have been worth it - but I made less than half what I make now.) Now, in 2007, that difference would be $4,500. The houses in my area went up 250%-plus, all around $950,000 asking price right now. The numbers for ownership just never worked out for me, unless I wanted to live way the F out in Simi Valley or something. No thanks. And now, I can't even really afford to buy out there! Well, maybe near the nuclear waste spill site.... Yeah, I'm glad I live under rent control. :)

By: Civil_Disobedient

Civil_Disobedient — Thu, 12 Apr 2007 19:42:56 -0800

Due to lender guideline changes (fallout from the current sub-prime mess), up to 21% of current mortgage holders will not be able to refinance, which will probably result in a record wave of foreclosures. I think that's what Heywood is waiting to take advantage of - as am I. Me, too! Anyone deluding themselves into thinking there's no bubble need only look at this video respresentation of the housing market over the past 120 years, rendered as a roller-coaster ride. A four bedroom house should cost no more then $50k, and you should not need to live your life in bondage in order to own something you can never sell without becoming homeless. I find it hilarious that most people are ridiculing this statement. Housing prices used to be this sane in the late 70s. In face, it wasn't until the feds changed the rules for how Freddie Mac operated that the housing boom really started taking hold. It wasn't until 1989 that Freddie Mac (started under the presumption that they'd be lending to lower-income earners), was allowed to customize their securities at different levels of risk. This in turn allowed pension and mutual funds to classify FM debt as "low risk." In addition, the price caps for the home prices were increased. These factors triggered a terrifying chain reaction of money-throwing at the corporation. They took this money and decided to buy every title they could get their hands on. What's so bad about that? Simple. When you buy a house, the bank holds the paper on it until it's paid off. But what happens when you default? Does the bank worry about having to sell the home? Nope. They just pass the paper along to mortgage investors, and the buck stops at Freddie Mac. That means there's very, very little incentive for the bank to exercise any kind of prudence when it lends its money. It also means that, with a surge of money entering the picture, prices for homes goes up, up, up! A few years ago, there was a quickly-hushed accounting scandal at Freddie Mac. Unlike Enron, however, the problem wasn't that Freddie Mac was hiding losses... it was that it was hiding huge gains. Greenspan eventually commented that maybe the GSEs (Government Sponsored Entities) should be reigned in. Apparently even Greenspan realized that, when a GSE has as much debt as the entire nation (many $trillions), you're setting up a very precarious house-of-cards. Freddie Mac is now insuring nearly three-quarters of the nation's mortgage debt. That number has doubled since Congress changed the rules in '89. Not surprisingly, the rate of increase in housing prices has escalated to obscene levels. Here's the figures from 1990 to 2005 from an older AskMe post. To make a long story short, don't worry, delmoi! The house of cards will fall, and fall hard. And even the ostriches with their heads in the ground will hear the noise.

By: frogan

frogan — Thu, 12 Apr 2007 19:47:34 -0800

I love this. Wow. The sky is going to fall. Everyone is doomed. Only the renters will survive. Heh. Know what this makes me wanna do? Makes me wanna go buy a house and rent rooms to all you people.

By: Civil_Disobedient

Civil_Disobedient — Thu, 12 Apr 2007 19:52:17 -0800

Here are the latest numbers from the Office of Federal Housing Enterprise Oversight (pdf) -- this is up to 4th quarter of last year. Can't wait to see 1Q of '07.

By: antifuse

antifuse — Fri, 13 Apr 2007 02:39:44 -0800

I've known people who had a 30-year mortagage that made a $100,000 house cost $350,000. Where'd the $250,000 go? That still averages out to $972/month for 30 years. In 30 years, what do you think rents will be in the same area? I'm willing to bet they'll be a fair bit higher than $972. And after the mortgage is paid off, they have an extra $972/month in disposable income!

By: phearlez

phearlez — Fri, 13 Apr 2007 07:05:09 -0800

That toilet story is unfortunate for you, frogan, but it's an outlier. The big expenditures a renter is insulated from are largely inevitable - HVAC issues, termites, dry rot, new roofs, repainting, replacing carpet, replacing appliances, etc. Or they're random acts of god a la floods, cracked foundations, wildfire, whatever. While some can be covered by insurance that's still a premium that renters don't have to pay. The security deposit is also a macguffin. Deposits are typically insulated from "normal wear and tear" by state law, which a failed stove or old carpet qualify as. Of course there are predatory landlords who attempt to take advantage of renters, just as there are predatory mortgage lenders, insurance agents, neighbors, etc ad infinitum. Comparing the best of home ownership to the worst of renting is just lazy thinking, as is making blanket statements that one is universally superior to the other.

By: The corpse in the library

The corpse in the library — Fri, 13 Apr 2007 08:16:09 -0800

Phearlez -- how is the renter insulated from those expenditures? When landlords set the rent, they figure those costs in. The renter isn't going to write the check to Home Depot, but indirectly the renter pays all the expenses: the mortgage, the property tax, the maintenance. (Unless the landlord is renting the property out at a loss, which is possible but odd.)

By: chundo

chundo — Fri, 13 Apr 2007 09:01:54 -0800

I love this. Wow. The sky is going to fall. Everyone is doomed. Only the renters will survive. Heh. Know what this makes me wanna do? Makes me wanna go buy a house and rent rooms to all you people. I'm glad you did well in the current boom - few people are saying that was a poor decision. The last 10-15 years have been a great time to buy real estate. It looks like the next 5-10 may not be. Is that so hard to understand?

By: phearlez

phearlez — Fri, 13 Apr 2007 09:07:12 -0800

Inevitably we all pay for the costs of those we purchase from. I was speaking more about the fact that a renter has the luxury the home owner does not, that of simply picking up the phone when something breaks and making a call, at which point their involvement is done. The home owner, on the other hand, has to handle resolution and write the check for that sudden expense. I suspect there's a few home owners in here who lease vehicles and do so precisely for the above kind of assurance. If it can be considered desirable there we have to acknowledge it as having an appeal in a place to live. Please don't bother me with comparisons about depreciating assets, I'm not trying to draw a perfect parallel here. The only point I have ever tried to make in this thread is that there's advantages of differing appeals to renting and buying. As far as your comparison on costs, you're making the presumption that a renter is occupying a structure being paid for in an identical fashion to a home and that's not always the case - I'd guess it's the case less than 1/2 the time, in fact, if we count by unit. Rental properties are often owned by corporations, not individuals, and their financing method is not the same. They also are often in apartment buildings or even high rises and zoned differently, so the property tax comparison isn't a one to one. They may also be long-since paid for properties, or be in a region that has a cap on the amount an assessment can rise yearly, which would keep taxes down on a long-owner property. Often those clauses are tied to homestead exemptions, but I imagine that's not a 100% thing. Even properties that have not been held for a long time may have mortgages that are not terribly large because they made a down payment with the sale of a previous property and the starker exchange strategy. Assuming any mortgage payment on a rental revolves around a loan that was for 100-80% of the purchase amount of the property is not wise. As far as renting the property at a loss, that's not at all odd. Rental prices are no more immune to the law of supply and demand than any other good, so any landlord might find themselves with a property they can't rent for more at any given time, depending on their costs. Additionally, there's plenty of properties out there that are rentals because the owners made the decision to view it as a long-term appreciating asset and are making mortgage payments that may not be completely offset by the rental income. It's a perfectly reasonable strategy. Very oversimplified: Purchase a $200,000 home on a $150,000 mortgage with a 8%, 30 year loan and you're making about an $1100 payment every month. Bring in $1000 a month in rent and you're running at a $100 deficit every month. You won't pay any taxes on rental income since your costs are higher than your revenue. At the end of the mortgage, assuming somehow magically none of the amounts have change and you never paid any property tax, you have paid $50,000 plus $1200 yearly for 30 years since you've always rented at a loss and never been without a renter. You took $86,000 out of your pocket for that $200,000 home - which we'll pretend never appreciated since we're pretending other equally dumb things too. A $114,000 return on $86,000 over 30 years ain't a great return - 2.8% annually. But it is a return, even making these gross simplifications.

By: chundo

chundo — Fri, 13 Apr 2007 09:14:19 -0800

corpse - But rent is determined by the overall rental market, not by what covers an individual landlord's costs. In many (most?) urban markets today, the supply/demand situation is such that you cannot generate cashflow as a new landlord unless you have get a multi-unit (at least 4-6 units) building, or make a huge down payment on it. In the long term, perhaps, rent will catch up to these costs, and that's when it's time to buy. Right now, it's a renter's market. When the incidental costs of owning (mortgage interest, association dues, repairs, taxes) are as much as the current rental rate, and the interest you get from investing the remainder is growing faster than the housing market, it just makes no sense to buy unless you find a really great deal.

By: LordSludge

LordSludge — Fri, 13 Apr 2007 09:22:39 -0800

Never mind the maintenance and tax costs of owning a home. The loan schedule is what kills you. People tend to forget that mortgage schedules are heavily weighted so that you're paying mostly interest (85%+) up front, with very little of your payment going towards the principle (less than 15%, sucker!). Here's an example of the payment schedule for a 30 year fixed-rate loan of $200,000 at 7% APR. At the end of the first year, your monthly payment of $1330.61. Of that, just $174.77 goes to the principal, with $1155.84 going to interest. It's not until about 20 years into the loan that your payment becomes 50% principle, 50% interest. You do get to write off the interest, so that's helpful -- figure cutting 20-30% off the interest costs (hurray!) -- but the rest of that interest goes into a black hole. You're paying the bank, rather than paying the landlord. So, yeah, you may be saving a little money, offset by your considerable down-payment, but you might as well be paying rent. Indeed, when most people consider buying vs. renting, they do that "I'd rather put my money into equity than throw my money down a black hole" rationalization. That feels nice, and I'm sure lenders perpetuate that myth, but I got yer "black hole" right here -- it's called "interest". I believe the lending industry relies heavily on this consumer misconception. Of course, if you move and/or refinance, you get a NEW loan, and the payment schedule is reset to day one -- you're paying mostly interest again.* Yes, it's really depressing, and yes it feels like a scam. There ought to be a way to transfer the balance of your loan so that you don't get screwed on the payment schedule. I believe most people don't consider this when, say, selling a home to move into a bigger home, but it's a real cost that just kills your investment return. Now I don't know what equations are used to calculate the amortization schedule (haven't Googled them), but I'm damn sure nobody here can do them in their head. That's why that NY Times calculator is a handy thing. Use it. Better yet, put together a spreadsheet and really get a feel for the numbers. Look at what happens when you move, say, every 3 years vs. 4 years vs. 5 years. I think you'll be shocked and a little pissed-off. Your ace-in-the-hole when buying, of course, is that you will be able to sell for a profit in a rising housing market. It is implicitly *assumed* that the housing market will continue to rise. More and more, though, people have been faced with the prospect of selling at loss. That's gotta suck. * Please, somebody smart come along and tell me I'm wrong and why. FWIW, I just bought a loft -- moved from a kick-ass apartment -- and I'm second-guessing that I should have kept renting. The ironic thing is that I didn't renew my apt lease because I didn't want to commit to being there for Another Whole Year. I'll need to stay in my new place for 5-7 years just to break-the-fuck-even! Until then, I'm basically shoveling money into my lender's pockets. Shit. Sumtymes i fel lyke a idoit.

By: frogan

frogan — Fri, 13 Apr 2007 09:44:21 -0800

The last 10-15 years have been a great time to buy real estate. It looks like the next 5-10 may not be. Is that so hard to understand? If you're saying you can accurately predict what the market will do in the next 5-10 years, get thee to Wall Street. It's not set in stone that there will be more downturn, or upswing. But renting removes any question -- you have no chance to recoup dollars paid to rent, period. Some additional points are being missed here: * For the folks complaining about money paid to interest on a loan schedule -- there are many types of mortgages, and interest-only mortgages are indeed nuts. But it's unlikely that you will live in the same place for 30 years, so the "OMG look at how much I will pay in interest over 30 years" doesn't hold a lot of water. * Up to a certain point (I believe it's $500,000), any profit you realize from a home sale is tax-free. If you're renting low and investing the difference elsewhere a) I hope it's a good investment and b) it will be taxed when you realize the profit. * When you own, you have choices. You can choose to rent the property, for example, and defray costs. Of course, if you move and/or refinance, you get a NEW loan, and the payment schedule is reset to day one -- you're paying mostly interest again.* Please, somebody smart come along and tell me I'm wrong and why. I don't see where you're missing on this one? Typically, when one moves and/or refinances, you roll the built-up equity into the new place or you're refinancing a lower principal (since you have that built-up equity). And since you get to make the call when this happens, typically you'll do so when the interest rate is low enough to defray closing costs and the like. You're still "resetting to zero," but the principal and interest is usually now low enough to result in lower monthly payments. Moreover, you can refinance a lower principal into a different type of mortgage altogether, such as a 10- or 15-year one.

By: LordSludge

LordSludge — Fri, 13 Apr 2007 10:04:01 -0800

a_day_late: Iffin you plan to settle down some place for a while (say 7+ years) and you have saved some $$$ for a down payment... buying beats the s*it out of renting. You don't need no stinkin' calculator for that. For "7+ years", you're probably right, assuming you can sell your home at a profit. Make it 10+ years, just to be safe. But for 3, 4, 5 years...?? That's some great home-spun wisdom there, but yeah, you really *do* need a "stinkin calculator" if you care about actually saving money (vs. feeling like you're saving money). Besides being generally prudent (saving for a reasonable down payment, sticking with a sane mortgage option, etc), the next best thing to do is pay off your mortgage early (make at least one extra payment every year to start with). You know, my parents always paid an extra $100 towards the principle every month (we were in the Air Force and moved every 3 years), and although it seemed like a savvy, prudent action at the time, I'm thinking it is one of their dumber financial moves. All they were doing is tying up money in a low interest "investment". If you're only staying somewhere for, say, 3 years, you're better off investing that extra $100 or X payment into a low risk CD. I ran a simple spreadsheet using the 30yr example from my previous post, and plugging in an extra $100/month (the web page has a spot for it). Here's how it breaks down for a few examples: - Stay somewhere 11 years yields $6,598.96 interest savings for a 50% ROI -- *definitely* worth doing! - Stay somewhere 5 years yields $1,159.29 interest savings for a 9% ROI -- *probably* worth doing! - Stay somewhere 11 years yields $393.01 interest savings for a 3% ROI -- *definitely NOT* worth doing! I can't believe I never did this until just now.

By: LordSludge

LordSludge — Fri, 13 Apr 2007 10:20:23 -0800

Ack, that should be: - Stay somewhere 11 years yields $6,598.96 interest savings for a 50% ROI -- *definitely* worth doing! - Stay somewhere 5 years yields $1,159.29 interest savings for a 9% ROI -- *probably* worth doing! - Stay somewhere 3 years yields $393.01 interest savings for a 3% ROI -- *definitely NOT* worth doing!

By: The corpse in the library

The corpse in the library — Fri, 13 Apr 2007 10:24:41 -0800

Good point, phearlez and chundo. My previous landladies were women who owned just places I rented, so my perspective was skewed by that. (Because I'm a nosy person I looked up how much they'd paid for the houses, and figured that I was covering their mortgage each month.)

By: LordSludge

LordSludge — Fri, 13 Apr 2007 10:33:38 -0800

frogan: I don't see where you're missing on this one? Typically, when one moves and/or refinances, you roll the built-up equity into the new place or you're refinancing a lower principal (since you have that built-up equity). And since you get to make the call when this happens, typically you'll do so when the interest rate is low enough to defray closing costs and the like. You're still "resetting to zero," but the principal and interest is usually now low enough to result in lower monthly payments. The underlined part (em mine) is hugely important, I think, and not to be glossed over. Depending on how long you lived at your previous house, you've gone from losing 60-80% of your monthly payment to interest all the way back to pissing away more than 85% of your payment as interest. Your cash flow may be better, depending (as you point out) on how much equity you've built in your previous home (again, the amortization schedule really screws you here, so you may have less equity than you think) and depending on how much more expensive the new house is. You're *definitely* flushing a much greater percentage of your payment down the black hole of interest, but I can't say for sure how much you lose in the transaction. I'd be interested to see how the numbers work out over several buys/sell cycles. But, really, I can't figure this in my head. I would need to run some spreadsheet scenarios to give a decent answer. I don't think it's a drop-kick money saver... I think the real lesson here is that you absolutely MUST run the numbers to know what decision to make.

By: konolia

konolia — Fri, 13 Apr 2007 10:57:38 -0800

I forgot to mention that here, at least, buying is cheaper thann renting -monthly house payments are cheaper than rent, that is.

By: zoogleplex

zoogleplex — Fri, 13 Apr 2007 11:24:13 -0800

"I don't see where you're missing on this one? Typically, when one moves and/or refinances, you roll the built-up equity into the new place or you're refinancing a lower principal (since you have that built-up equity)." ...assuming the house appreciates in real dollar value by the appropriate amount during the time you plan to own it. This has been the case for the last 8 years, and indeed for much of the 20th century, but hasn't always applied - and the conditions are pretty much saying it won't apply for a while. Nobody's saying you're a fool for doing what you've done, frogan, clearly you've done well and taken advantage of a favorable set of circumstances - great. If I'd had the appropriate financial resources in 1998, I would have done the same exact thing. Personally, I've been able to more than double the value of my various (modest) market investments, since I got back into the market right at the bottom of the trough in 2002, so I've taken advantage of a similar favorable circumstance. It's just been a matter of timing. If you're saying you can accurately predict what the market will do in the next 5-10 years, get thee to Wall Street. Heh, already there, as I've mentioned. I got burned a bit by the dot-com bomb, but learned from it, and got back in when I saw things were gonna go back up. Perhaps I've just been lucky. :) My feeling is that we're going to have an economic downturn, so I've got my plans in place to move my investments accordingly in order to hang on to my gains. I've already made some shifts. If I had been buying houses and making a profit the last 8 years, right now I'd already be out of that market, by selling a house last year at its top value and either buying a small one that's completely paid for or renting. If a downturn doesn't happen, I've got plans for that too. Either way I should do fine. When, as I feel it will, the market hits bottom in about 2011, I'll be able to buy a nice place, perhaps even a multi-unit income property, with a large down payment. If there is no downturn, then I'll still have a lot of invested cash earning me more money, especially with higher interest rates. Since I personally have no overwhelming psychological need to own a house somewhere - I'm mostly a city kid, I know one can have an excellent family life in an apartment - I'm not really feeling left out when it comes to home ownership. Everyone is different, and these types of situations are different for everyone depending on circumstances. You may think I'm a fool for not buying a home somewhere, anywhere that I could afford one - but I know I'd think I was a fool if I'd bought a house in Victorville and had to commute 80 miles via SoCal Freeways to work every day. Quality of life should always play a huge part in your home-buying decisions. For me personally, buying a home right now anywhere that I'd actually want to live would result in serious deterioration of my quality of life. Other people feel differently, is all. But renting removes any question -- you have no chance to recoup dollars paid to rent, period. As LordSludge has mentioned, I've run the numbers exhaustively for myself. In my particular case because of my luck in living under rent control, renting a nice place in an area in which I actually want to live costs me about 1/7 of what it would to buy a place at this moment - and still about 1/3 of what it would cost to buy a house somewhere that I could actually afford a house - leaving out quality-of-life and available jobs in my desired salary range! I have enough financial discipline that most of that "difference money" is getting socked away in interest-generating accounts and investments, which have been compounding quite nicely. YMMV. As always. By the way, ask the Japanese what an extended bear real estate market is like. They got 15 years or so of steady decline. That may - or may not - happen here as well. LordSludge is right, folks, run the numbers. More than once. And be very sure to factor inflation into your plans, not the government figures but the real inflation figures, so you know what it's all really worth!

By: chundo

chundo — Fri, 13 Apr 2007 12:54:01 -0800

If you're saying you can accurately predict what the market will do in the next 5-10 years, get thee to Wall Street. My money is already there, and is soundly beating the real estate market in my area. I understand where you're coming from, but your course of action, especially given that you entered the market at a good time, is not necessarily financially smart advice for everyone right now. I'm certainly not saying you chose the wrong path - but you seem to be saying everyone who rents is choosing the wrong path. There's a time and place where both make sense.

By: frogan

frogan — Fri, 13 Apr 2007 13:34:58 -0800

Well, I respectfully disagree, I think you're all reacting to sensational "financial crisis of the week" media stories, and if you're not paying out more dollars now than you have to, you're incurring a massive opportunity cost, all for the sake of not having to mow a lawn or tighten a few screws around the house.

By: chundo

chundo — Fri, 13 Apr 2007 13:45:54 -0800

Are you disagreeing that there can be a valid reason for renting? Or that the market is going to take a downturn? Because the former is just plain wrong.

By: Heywood Mogroot

Heywood Mogroot — Fri, 13 Apr 2007 13:55:26 -0800

I think you're all reacting to sensational "financial crisis of the week" media stories Bullshit. I've been following RE news in detail a year now; I saw the ongoing subprime meltdown coming a mile away (since late Fall). The lending standards of 1992-2002 that were loosened in 2003-2006 are coming back, bigtime. 5%-20% downpayments are coming back, FICO requirements are coming back, obliterating whole tranches of available loan products for the shallower end of the lending pool. The speculative bubble of 2004-2005 -- the end of which being driven by horrendously lax lending practices -- leavened off in 2006 and there are no more gains to be had in all bubble markets, and there's really no upside -- anything to drive prices further up -- at this time, other than interest rate decreases, which the Federal Reserve hasn't been signalling any great willingess to go for. Prices in my area for my segment (1/2 b condos) have been utterly flat -- if not declining 1-2%, over the past year. With rents still $300-$500 below the equivalent mortgage payment (accounting for the interest deduction) there's nothing really pushing me into the market right now. And with the sheer number of foreclosures in the cards, I think us bubble-heads' saying: "waiting for the monkeys to fall from the trees" has currency now. Go to mlslistings. com. Do the property search for the street 'Navaro'. Note the 2B condo that is listed there. I'll go on record with my strong belief that this property, or an equivalent one, will NOT be selling for over $500K one year from now. And I'll see you in metatalk one year from now to discuss this with you further :)

By: zoogleplex

zoogleplex — Fri, 13 Apr 2007 16:02:21 -0800

"I've been following RE news in detail a year now; I saw the ongoing subprime meltdown coming a mile away (since late Fall)." Me, too. I've been seeing it coming since early '05. "and if you're not paying out more dollars now than you have to, you're incurring a massive opportunity cost, all for the sake of not having to mow a lawn or tighten a few screws around the house." ...ummm... So you're saying I'm an idiot for not spending more money than I can actually justify spending? Heh. People were telling me this at the height of the dot-com spike, too. I listened to them; thankfully I was still pretty cautious with my investments, but I still wound up losing 30% of my principal before I was able to get out. Had I just done what the cheerleaders were cheering me to do, I might have lost everything. So please forgive me if, after reviewing my research, I politely disagree with you. If you had said this to me in 1998, I would have agreed completely, and vocally rued the fact that although my credit rating would probably have allowed me to borrow for no money down, at the time I just didn't make enough income to be able to pay a mortgage that would have gotten me a smart real estate investment. "If you're saying you can accurately predict what the market will do in the next 5-10 years, get thee to Wall Street. My money is already there, and is soundly beating the real estate market in my area." Same here. See, the trick is, frogan's coming from the position that with real estate in the last few years, if you bought in 1998 or 1999 for, say, $300,000 - meaning that you put down $60,000 and borrowed $240,000 - and then were able to sell in 2006 for $900,000 (which reflects real estate prices in my area), then you've just made $600,000 an an actual overall cash outlay of roughly $250K (down payment plus mortgage payments over 7 years, plus various expenses) - most of which you didn't pay taxes on. So you made something like $350K, without having to front all the money at time of purchase. That's a fairly good investment. But then, what a lot of people have done (possibly frogan) in the last few years is to borrow the entire price of a house with no money down on a teaser-rate (like, 1-2%), wait a year until the price of the house goes up 20% (or more), then sell it making a profit without having laid out anything but the low mortgage payments for that year. Then you "roll the equity" as he says into buying another house, which again appreciates 20% (or more), and so on and so forth. The effect of this is that the dollar amount of cash you've made can be lot more than someone who put say $60,000 in the stock market over the same period - because money that you didn't have just magically appeared in your pocket as the house that you "bought," but didn't actually pay any money out of pocket for, appreciated. This is as opposed to investing in the market, which requires you put real money in up front. This only happens in an appreciating real estate market, of course. Moreover, it only occurs in a market that's appreciating at a rapid rate. If house prices are appreciating at only 5% per year, you can't do this, or at least not anywhere near as rapidly; at this point, 5% per year means you're not even beating real inflation. The people who are really screwed are the ones who've flipped like this using ARMS and "cashed out" the equity, basically just taking out an even bigger home loan, sometimes for more than the home is worth (that Ditech 125% Loan, for example), then spent all that "liberated equity" on lifestyle stuff like BMWs, jetskis, huge plasma TVs, etc. If housing declines in value, nobody's gonna give 125% loans anymore. In fact, if it declines enough, and you've got a loan running that's worth a substantial amount more than your house is now worth, your bank may call your loan and foreclose you. Some people I know are sitting on this time bomb; they bought a house in 2005 with no money down at the price of $790K, then were able to get a HELOC for another $50K, for a total of $840K. The house has lost 10% of its value, and they still owe a total of something like $815K on a house that's worth $711K. They were jubilant when they bought the house and furnished it lavishly with that HELOC; now they're putting on a brave face, but they're very, very worried, and with good reason. At least they got a fixed rate and can probably make the mortgage payments, but they can't refinance the house now because they're so far underwater. The point of argument is whether the past trend of housing appreciation will continue. Heywood and I believe it will not, based on a whole crapload of research we've been doing lately; frogan's statements say he believes that it will, based on his own information. Like I said, I'm glad you made a profit on your real estate; I'm happy with the profit I've made in the market over the last 5 years. I'd guess our percentage gains have been around the same, but you are probably showing a higher dollar amount than I am - at least on paper. But my funds (other than retirement accounts) are pretty much fully liquid. I can have all my cash profits by Monday, if I want or need them, incurring no debt other than to pay capital gains tax. If your profits are in the value of your house, you can't just turn them into cash instantly with a sale - and if you turn them into cash with a HELOC you're just incurring that as a debt. Hopefully, you've already pocketed your profits. That's why I say that any house that I might hypothetically have bought back in '98, I would have put up for sale around April or May 2006, which is when the prices flattened out for my area (since then they've come down about 11%). Right now I'd have all my profits (less CGT) in interest accounts and investments, with absolutely zero debt, and perhaps be able to live off the interest (even renting!) and semi-retire. But then again, I'm an oddball. I refuse to live outside my means, and I'm especially uninterested in living the recent "American Dream" hyperconsumer lifestyle. A lot of people I know who make a similar salary to me (and some quite a bit more) are buried in debt they'll never be free of - and they still trade in their car for a new one every couple of years. Their material lifestyle is far more opulent than mine, but I'm watching them age about 3x faster than they should. I really do wish I'd been able to get in at the ground floor of real estate back in '98, believe me. I'll get in at the next bottom, for sure. For now, my investments are doing quite well, and I'm pretty relaxed about life with no debt overhead. But, it all depends on location, as konolia points out; she's in one of the few places where buying is cheaper than renting right now. However konolia, let's hope for your brother's sake that Fort Bragg doesn't get closed! (Not likely in the immediate future, I think, so I'm sure you're not worried) So, where do you live, frogan, and where are you buying your houses?

By: zoogleplex

zoogleplex — Fri, 13 Apr 2007 16:07:30 -0800

"then you've just made $600,000 an an actual overall cash outlay of roughly $250K" Oops sorry, $650,000. And if you were able to borrow for no money down, you made about $710,000 on a 7- or 8-year outlay of about $190K. Boy, I wish I'd been able to take advantage of that. I'd be sittin' pretty. Next time...

By: Heywood Mogroot

Heywood Mogroot — Fri, 13 Apr 2007 17:16:47 -0800

via frogan's profile he lives near: 1820 210th Ct NE, Sammamish, WA 98074 zillowing this property I see that his neck of the woods (literally!) hasn't really appreciated in a bubbly way over the past 10 years. I also see that houses are comparatively affordable up there. 'course, frogan would be well-advised to check out "Seattle Eric"'s RE investment blog wrt how well the flipping game works up in the NW these days. Actually, he can't, since Seattle Eric got out of the flipping biz with his last set of investment disasters. Having said that, I would think a buy & hold strategy for the nicer subdivisions of eastern Seattle environs would be profitable ove the 10 year timescale, even today. What frogan needs to understand is that there was a HELL of a pop (in addition to normal heated appreciation) in prices 2004-2005 in California and the other bubble areas that the market will be working off over the foreseeable future.

By: zoogleplex

zoogleplex — Fri, 13 Apr 2007 18:24:39 -0800

That there is deep in the heart of Microsoftia - you can probably SEE the campus from that vantage point. I should think that real estate there would be controlled by the fortunes and salaries of Microsoft employees, who I'm sure far outnumber any other sort of people around there!

By: Civil_Disobedient

Civil_Disobedient — Sat, 14 Apr 2007 10:32:11 -0800

The last 10-15 years have been a great time to buy real estate. It looks like the next 5-10 may not be. Actually, the next 5-10 years should be a great time to buy, if you plan on buying it as property and not as "investment". assuming the house appreciates in real dollar value by the appropriate amount during the time you plan to own it. This has been the case for the last 8 years, and indeed for much of the 20th century No, it has not, not at all. Please see my link to the charting of housing prices (taking into account inflation) as portrayed as a roller-coaster ride. For the most part, housing prices rise and fall in normal cycles, just like every other form of investment. The past 15 years is an anomaly directly caused by ludicrously bad decisions of the Fed regarding the lending practices of Freddie Mac, and the cascading effect that has had on the entire housing sector.

By: zoogleplex

zoogleplex — Sun, 15 Apr 2007 23:14:19 -0800

You're quite right, C_D, I have misspoken, and I apologize. Sometimes I type faster than I think... heh. I've seen that roller-coaster video, of course. Looking at all the financial charts for the last 15 years, it seems like all of them scream "anomaly" to me; every index, even accounting for the various regional upsets from time to time, has multiplied by amazing amounts. I understand there's been tremendous change and tremendous increase in world productivity... but it "feels" like the money graphs are magnified too much in proportion to all the other graphs, even including energy usage. It's unsettling.

By: zoogleplex

zoogleplex — Tue, 17 Apr 2007 16:35:03 -0800

Aaaand... for anyone who's still coming back here to look, I've found a site that explains why I'm so unsettled about it. I don't take everything this guy says as gospel, he's got some "crank" attributes to him - for instance, there is some value in "hedonic adjustments" in terms of bang for the buck, so I think he may be too zealous about that one. But the graphs on here that pit the market versus actual physical resources tell the story.