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December 14, 2010 10:36 AM Subscribe

'What's a home worth?' 'There are problems in appraisal land that transcend weak housing markets and debt-ridden borrowers, and that are causing home buyers and would-be refinancers to miss out on low rates and dream houses. "There's been a pendulum swing in appraisals comparable to the one we've seen in mortgage credit, from foolishly lax to overly restrictive," said Walt Molony of the National Association of Realtors. He reported that as recently as October, one in 10 member agents said they'd had a contract canceled as a result of a low appraisal, 13 percent said they'd had a contract delayed, and 16 percent said they'd had a contract negotiated to a lower sales price as a result of a low appraisal.''

'"We haven't seen anything like what we are facing today," said Mark Linne of Appraisal World, a company that provides automated valuation software and services to appraisal companies and lenders.

New and proposed federal rules governing appraisals, changes in the way appraisals are conducted, and a still uncertain housing market have hit the appraisal part of the process in a way that is adding to housing market instability.

Borrowers are watching their "locked in" low rates expire -- while they pay for one appraisal after another. Lenders are afraid to trust the appraisals they get, and are ordering more and more of them. The appraisers themselves say they're being paid less to work faster in a more confusing market than they've ever faced.

"A lot of inappropriate demands are being made," says Patrick Gavin, the mortgage broker who was trying to find a loan for the Stiners. "Underwriters want more comparables. They want more narrative and more photos. Meanwhile the clock is tick tick ticking on your loan."'

posted by VikingSword (90 comments total) 5 users marked this as a favorite

The collapse of the global economy, same as in town.
posted by griphus at 10:42 AM on December 14, 2010 [2 favorites]

Only a few dozen years of rent payments for a comparable home, less property taxes and maintenance expenses. But you don't want to hear that.
posted by 2bucksplus at 10:47 AM on December 14, 2010 [8 favorites]

Better underwriting is better for everyone. These people are complaining because they get paid on transactions and bear none of the risk of the transaction being mispriced.
posted by JPD at 10:48 AM on December 14, 2010 [7 favorites]

Almost as if appraisals a few years ago were exposed to be complete bull. Poor baby appraisal companies having to follow new rules.
posted by inigo2 at 10:50 AM on December 14, 2010 [4 favorites]

So glad I refied and got a good rate when I did 6 months ago. What a nightmare it was trying to get a good appraisal. Now we're trying to get the appraisal lowered since the stupid taxes are ridiculously high. It's a damned if you do, damned if you don't.

For loan--house worth $280k Yea.
For taxes--house supposedly worth $310k. Um in this market with all the foreclosures and no sells in our area? No way.
Reality? We may get $230k if we're lucky. Loan is $215k (we were in a bind and had to cash out).

Looks like we're not moving for a long while.
posted by stormpooper at 10:53 AM on December 14, 2010 [3 favorites]

In Soviet Russia, house owns you!
posted by quadog at 10:54 AM on December 14, 2010 [5 favorites]

@ 2bucksplus:

Given comparable expense, I still tend to come down in favor of ownership. The ability, if I decided that I wanted to, to punch a small hole in a wall between the living room and office closet in order to run CAT-5 and other network cables to an HTPC is worth something to me. When you rent, you can't even paint without permission but when you own, you can do whatever you basically please.

From a purely fiscal standpoint, then sure -- rent is better. Especially right now. But then, if every decision that I made was based purely in what was more frugal then I would be eating baloney sandwiches every day instead of cooking good meals.

Granted, I have the luxury of saying this from within a housing market that is still growing (even if it is only growing at the meanest fraction of what it was only two years ago)
posted by kaseijin at 10:55 AM on December 14, 2010 [1 favorite]

In related news, Freddie Mac finally fixed an online calculator to help people decide whether to buy or rent. What was broken? It didn't allow for the possibility that the value of a house might fall over time.
posted by exogenous at 10:55 AM on December 14, 2010 [7 favorites]

I just purchased a home... there were a number of prices involved....

I paid $125,000

The seller owed $150,000 to his bank

The house appraised at $140,000

I had to insure it for $250,000, 'cuz that's what it would take to replace it...

it's a strange world out there....
posted by HuronBob at 10:56 AM on December 14, 2010

Also... I say "growing," but that's becoming debatable, even here in Austin where things have been largely okay.

The average home price in my neighborhood is $230k-ish, with some being higher and some lower. I bought my home three years ago for $230, and have seen its appraised value rise to $270, and then fall back to $250..which seems reasonable. With my updates that I have made I could probably get $250 for it, since it is one of the few houses in the 'hood with not only a two car garage, but also without the mid-century deco brickwork removed.

But even that's not certain. We've had houses on our street sell recently for $260, and then we also have houses on our street that have sat for months at $220. We have one on the street now, that is in good shape, that is offered at $185...I think that one was a foreclosure.

It's kind of like treading water.
posted by kaseijin at 11:01 AM on December 14, 2010

All I know is that now is the best time to buy, sell, or refinance... as it always is
posted by kurumi at 11:01 AM on December 14, 2010 [4 favorites]

On the other hand, as a renter I have the freedom to move to another house/neighborhood/state when my lease is up in 6 months without having to sell a possibly depreciating asset.

And yeah, sure we can boo-hoo about the poor appraisers and realtors but there's definitely a big burden in this for people trying to buy or sell houses.
posted by ghharr at 11:08 AM on December 14, 2010

In case you were wondering, this is what deflation looks like.
posted by unSane at 11:12 AM on December 14, 2010 [3 favorites]

Only a few dozen years of rent payments for a comparable home, less property taxes and maintenance expenses. But you don't want to hear that.

Well, let's be fair. When I was renting a home I either paid for maintenance expenses out of pocket or ponied up $50 and waited weeks and weeks and weeks for the owners to find a cheap maintenance company whose work fell apart after a few months and had to be redone.

So if taxes, closing costs, expected depreciation, and the difference in insurance is less than your monthly rent payment over the term of home ownership, it still makes financial sense.

All I know is that now is the best time to buy, sell, or refinance... as it always is

Yeah, this.
posted by muddgirl at 11:16 AM on December 14, 2010

Had this happen to me; financing denied due to low appraisal. They were all like "go get another appraisal! Go get another appraisal!" And I'm like, and shell out $500 every time they tell me it's even lower? I don't think so. Guy tried to convince me that the city's appraisal would be similar to the independent appraisal; yeah right, the city's are always higher so they can collect dem taxes.

The condo is 5% underwater. If it were 20% underwater, I'd be eligible for government programs, but it isn't, so oh well. Never mind that I have a good job and assets that would cover more than the 5%.

Also... I say "growing," but that's becoming debatable,

Oh yes, definitely growing. The population of homeless families being put up in motels by the state is definitely growing.
posted by Melismata at 11:18 AM on December 14, 2010

In case you were wondering, this is what deflation looks like.

Well, it's a little less dramatic than that IMO - it's just a correction of the housing market.

The trouble is that other widely traded goods are usually fungible while houses are not - one share of AOL is the same as any other and when it crashes no one gets all special snowflake about it. Houses are hard to value accurately although not impossibly so. But since they're not all the same everyone argues that while other houses have lost value, their house has not, no way, no how.

Anyway, yes, it's hard having to live in my biggest asset.
posted by GuyZero at 11:24 AM on December 14, 2010

Well, let's be fair. When I was renting a home I either paid for maintenance expenses out of pocket or ponied up $50 and waited weeks and weeks and weeks for the owners to find a cheap maintenance company whose work fell apart after a few months and had to be redone.

I've been a renter for ten years, the last five at least totally by choice. The most I've ever done myself maintenance wise was replace a toilet seat. Maintenance is a real cost of homeownership. Ignoring it in any calculation is incorrect.
posted by JPD at 11:27 AM on December 14, 2010 [4 favorites]

we also have houses on our street that have sat for months at $220

Hi, neighbor! :(
posted by scatter gather at 11:36 AM on December 14, 2010

I've been a renter for ten years, the last five at least totally by choice. The most I've ever done myself maintenance wise was replace a toilet seat.

I see that you live in New York, so there may be a geographic difference. In Texas it seems expected for renters to be in charge of lawn care with no compensation. If they don't want a hole in their fence to slowly grow so large that their dog can escape before the owner gets around to fixing it, they should factor that in to their budget. And when our A/C went out in the middle of a 105° heat wave, we didn't pay for it but we certainly waited 3 weeks for their sucky maintenance person to properly fix it.

So if we're comparing apartments to condos, then certainly factor in maintenance. If we're talking about every-10-year big ticket items that can be slowly saved for, then certainly factor them in. But in my experience, we threw away $1000 maintaining a rental house that only benefited the owner, and then were charged $500 our of our security deposit for not properly maintaining the yard. Seems pretty comparable to me. Or maybe we just signed a shitty lease.
posted by muddgirl at 11:42 AM on December 14, 2010

I bought my house at a pretty deep discount (nearly $300k under asking) and I got a pretty decent rate (4.6%). I think it's definitely a better alternative to renting as long as you treat your house the same way you would a stock investment. Buy low and sell high. If the market bounced back I wouldn't think twice about selling my home and going back to renting.
posted by analogue at 11:44 AM on December 14, 2010

The party is over. A home is only worth 3x your household income, and people are realizing this. The days where you could con a homebuyer into shelling a out more are done. A house isn't an investment, it's a home, and people are going to pay for it like a home.

If the average household income in an area is $75k, then guess what? The average house price should be $225k. In many places, it's still dramatically overinflated, mostly due to idiots failing to realize what a bubble collapse means - it means price reductions that are just as dramatic as the price increases.

Once the prices correct, the market will level out and track with increases in buying power... and if you ain't noticed, buying power is flat, and has been for a long, long time. Flipping homes is a sucker's game, and has been since forever.
posted by Slap*Happy at 11:51 AM on December 14, 2010

Do you guys that say rent, rent, rent is the way to go ... do you guys not understand mortgage tax credits and fixed mortgages?

When I bought my first house, my monthly out-of-pocket payments (with both insurance and property taxes figured in) went down and my tax return went up.

My current house lost value in the downturn, sure. But I'm not underwater. And there's no frickin' way I could rent an equivalent space for the money I pay on the mortgage each month. And, presuming everything doesn't go straight to hell again, that money is mine-mine-mine.

There's predatory lending, sure. But this really isn't rocket science...

Maintenance is a real cost of homeownership. Ignoring it in any calculation is incorrect.

No disagreement there. But again, this is quite manageable with basic smarts. Nobody needs gold-plated toilet fixtures.
posted by Cool Papa Bell at 11:52 AM on December 14, 2010 [2 favorites]

I sold my house a year ago after owning for 15 years. Counting in some major renovations, I don't think I broke even.
I'll never own a house again. Any "calculator" that will tell you owning vs renting is a sound financial decision is full of shit. Never get on the bad end of long-term interest.

Are you sure you calculated right? I hope you don't mean something like "I bought for $220K and sold for $210K after 15 years", because that would be a serious mistake. You need to count in the cost of renting. If you were to rent for 15 years instead of owning, you might have spent, say, average of $1K/mo, about $180K vs $10K by living in a house - so you are actually $170K ahead by owning the house these 15 years, compared to if you had been renting.
posted by VikingSword at 11:56 AM on December 14, 2010 [8 favorites]

oh hey, I think at the right price buying makes sense, my point was that someone upthread was arguing you shouldn't count maintenance because you pay that in a rental as well.

I happen to think that where I live relative to incomes (and taking into account my marginal income tax rate, current borrowing costs, and to some extent my own views on where incomes are going for the people who buy the sorts of homes I am interested in) owning is very expensive. If that changed I'd buy in a heartbeat - even if it just got back to historic levels of multiples of income. Back when I was just out of school the math did make sense to buy, but I didn't have the cash.
posted by JPD at 11:57 AM on December 14, 2010

When you rent, you can't even paint without permission

Depends on the landlord. I've been renting for...Jesus...nearly 20 years now, in one way or another. Best experiences have always been with families that owned a home that was too old to sell/too expensive to renovate, but otherwise fairly well maintained. Almost always, they were good with whatever we wanted to do to the house, within reason. Paint, wallpaper, holes for pictures, they didn't care, so long as we paid on time and didn't make the place look worse.

But while I'm content as a renter, I would actually love to take out a loan, buy some land, and build a modest, green-built house for my family that would fit our needs and be ours forever, or at least till our descendants got tired of it. I wouldn't mind all the paperwork and taxes and whatnot. It would be worth it...if the whole damn system of buying and selling property wasn't a complete clusterfuck. We can't even get the banks to stop foreclosing on people who aren't in arrears, or in one famous case, didn't even have a mortgage. Why should I put my bank account and my sanity at such risk?
posted by emjaybee at 12:05 PM on December 14, 2010 [1 favorite]

Nobody needs gold-plated toilet fixtures.

Yeah right, like I'm going to sit on sterling silver?
posted by blue_beetle at 12:08 PM on December 14, 2010 [6 favorites]

I think it's definitely a better alternative to renting as long as you treat your house the same way you would a stock investment.

Always make sure you're well diversified? I don't have that kind of money; I can only afford one house.

Do you guys that say rent, rent, rent is the way to go ... do you guys not understand mortgage tax credits and fixed mortgages?

No, I do not not understand mortgage credits and fixed mortgages. Right?

I mean, it doesn't take a genius to build a spreadsheet that takes into account the mortgage interest deduction. Turns out the market has mostly priced it in.

Look, real estate is not a bad hedge against inflation. If you think there's going to be a lot of inflation over the next 20 years, it might make sense to buy a house.
posted by mr_roboto at 12:10 PM on December 14, 2010

Nobody needs gold-plated toilet fixtures.

Speak for yourself, CPB. I LOVE my Monster 24K Gold Toilet Accessories.
posted by kingbenny at 12:12 PM on December 14, 2010 [2 favorites]

Are you sure you calculated right? I hope you don't mean something like "I bought for $220K and sold for $210K after 15 years", because that would be a serious mistake. You need to count in the cost of renting. If you were to rent for 15 years instead of owning, you might have spent, say, average of $1K/mo, about $180K vs $10K by living in a house - so you are actually $170K ahead by owning the house these 15 years, compared to if you had been renting.

The math doesn't look anything remotely like how you describe it. Renting is still a function of the value of the property. The difference is you get the leveraged upside on the equity (and the tax benefit) when you own, but when the home price doesn't go up the math looks bad really quickly. Buying something for 44k (aka the 20% deposit) and selling it for 34k 15 years later is a terrible investment. You could rent and invest your downpayment at 4% after tax and have 80k. (yes its not quite this bad because there is a tax shield from the mortgage debt, but I'm too lazy to figure out the PV of that)
posted by JPD at 12:14 PM on December 14, 2010 [1 favorite]

Do you guys that say rent, rent, rent is the way to go ... do you guys not understand mortgage tax credits and fixed mortgages?

And do you understand the phenomena of compound interest, and opportunity costs? If you think about it, buying a house with financing (as opposed to all cash) is like setting up an automatic, mandatory contribution to a "savings" account where YOU pay the BANK 4.5% interest or more. Would you ever do that under any circumstance if it wasn't associated with your home? By contrast, if you didn't buy a house, you could put that money into an account earning a positive non-zero amount of interest, or some other productive investment.

So essentially you're speculating that your home will appreciate at a greater annual rate than your mortgage balance grows, plus a lump sum of 6% to pay the sellers' costs.

Now, I understand that this is balanced against the tax exemptions and the amount you would've paid in rent for an "equivalent" home, and what you consider "equivalent," and all that. But the bottom line is it depends on each family's individual finances, and saying "hey, but there's a tax advantage!" is really not a silver bullet argument in favor of home ownership.
posted by rkent at 12:18 PM on December 14, 2010 [4 favorites]

Only a few dozen years of rent payments for a comparable home, less property taxes and maintenance expenses. But you don't want to hear that.

...

Looks like we're not moving for a long while.

Who doesn't know someone in the same situation? There's more than rent money -> mortgage involved in buying a house.

(Also why wouldn't we want to hear that? ... I suppose I took that initial comment differently than most. I read it as "why waste rent for 20 years and end up with nothing when you could own a home?" A "few dozen" (24) years of rent for me is ... over $650,000. That's an expensive home, even in the Bay Area.)

Why should I put my bank account and my sanity at such risk?

That is honestly the question I also ask myself. I would love to have a place where my family could live permanently. But I question the whole system. The sheer number of middlemen involved in the ownership process is a sign that something is seriously amiss.

Also, the tax deduction for mortgage interest is shameful. That sacred calf needs to be slaughtered. Why should the government be promoting home ownership? They should be encouraging less development, in my opinion.

We have a massive housing glut and, at the same time, a massive homeless problem in our cities. Again, something seems seriously amiss.

you shouldn't count maintenance because you pay that in a rental as well

Honestly, I don't. I never have. That doesn't mean that I don't have a leaky faucet in my tub at this very minute that is driving me fucking bonkers. I guess my landlord pays for water anyway, but I agree that maintenance (not only money, but the time) is a major difference between renting and owning.

When you rent, you can't even paint without permission

Of course you can. You just paint it back when you leave (or else forfeit that cost of painting in your security deposit). How many people have been evicted for painting a wall? I call shenanigans.
posted by mrgrimm at 12:20 PM on December 14, 2010 [2 favorites]

Our last appraisal, six months ago, cost $500. Appraiser in house for 10 minutes, never left main floor. Comps pulled were for homes built 40 years ago 15-20 miles from downtown, versus a custom crafted home from 2002 three miles from downtown. Only similarity was they were on acreage. It was laughable. No refi for us, no commission for mortgage broker or lender, and the appraiser probably got $150 from the mill that was farming them out.

We walked away from the refi process. Appraisals may have been a problem before, but right now they are an utter crime.
posted by docpops at 12:21 PM on December 14, 2010 [1 favorite]

Speak for yourself, CPB. I LOVE my Monster 24K Gold Toilet Accessories.

It totally increases the bandwidth.
posted by inigo2 at 12:22 PM on December 14, 2010 [4 favorites]

Yes, if your bank is kind enough to have written you a zero-interest mortgage. But in that case, who cares, can't you just ask the magical unicorns to shit out some more gold for you if you're running low?

The mortgage interest cost is mitigated by tax advantages not available to renters, so the real cost, unless you have a super high interest mortgage is pretty low. Mortgage rates have been quite low in the past 15 years or so. Also, it's simply not true that renters never participate in the cost of mortgage interest - this is frequently priced into the rent. A bigger factor - especially in some places - are property taxes, but those too are often priced into rent... if they weren't, being a landlord would not be a business. Renters are at the bottom of the chain here, and they absorb all the costs - it takes a special situation to come out ahead as a renter vs buyer.
posted by VikingSword at 12:22 PM on December 14, 2010

When I refinanced a few months ago, the house appraised at more or less what I paid for it 5 years ago (+3k or so) after having flirted with valuations 50k or so above what I paid.

I figure that's fair enough, considering I haven't really done anything to it.

I find it interesting in light of this article that around here, we've started getting radio ads for HELOC loans again.
posted by madajb at 12:25 PM on December 14, 2010

it takes a special situation to come out ahead as a renter vs buyer.

Yeah. Like a real estate bubble.
posted by mr_roboto at 12:27 PM on December 14, 2010 [5 favorites]

The mortgage interest cost is mitigated by tax advantages not available to renters

Mitigated but far from eliminated.

Also, it's simply not true that renters never participate in the cost of mortgage interest - this is frequently priced into the rent.

Eh, sometimes, sure. But every apartment I've rented in the past five years has been in a building which the landlord (or his family) has owned free and clear for decades.
posted by enn at 12:29 PM on December 14, 2010

And, I meant to add, there are plenty of landlords losing money renting right now, too. It's not true that the costs just get pushed onto the renter — there is a rental market and right now, if you bought at too high a valuation, you can only get the renter to bear so much of that cost before he'll rent from someone who didn't.
posted by enn at 12:32 PM on December 14, 2010 [1 favorite]

By contrast, if you didn't buy a house, you could put that money into an account earning a positive non-zero amount of interest, or some other productive investment.

Got any suggestions? (Ideally, ones that don't involve investing in companies I disagree with ...) My credit union pays 0.05% APY on savings accounts up to $100,000 (then the rate skyrockets to 0.15% APY). The 60-month CD pays a whopping 2.12% APY.

By contrast, if you didn't buy a house, you could put that money into an account earning a positive non-zero amount of interest, or some other productive investment.

This doesn't make sense to me. I understand paying the extra 4.5% or whatever on the mortgage balance, but can we assume that you would get 96.5% of your mortgage payment back in equity? (Or, even in an overvalued market, at least "more than 80%" of the payment back in equity?)

There's no extra 4.5% on your rent payment, but there's also no 96.5% equity. So, it seems like you would have to get a hell of a return on that extra 4.5% you're saving to equal the equity you would receive from paying off a mortgage.

Or am I dense?

So essentially you're speculating that your home will appreciate at a greater annual rate than your mortgage balance grows, plus a lump sum of 6% to pay the sellers' costs.

Again, confused. Don't (most) mortgage balances go down as you pay them off? I realize that if you don't pay, the interest makes it go up, and that some people (with no downpayment I suppose) pay *only* the interest for a set time, but do they really make mortgage payments that are *less* than the interest? That seems stupid.
posted by mrgrimm at 12:32 PM on December 14, 2010

We've just bought a nice house that cost below what we could have afforded with 20% down and plan to pay it off in 7 years by paying the maximum overpayments on the mortgage. Then we'll have no rent or mortgage to pay for the rest of our lives. How could that possibly be a bad financial decision?

I think the problem comes when people buy the biggest, fanciest house they can afford and make only the minimum repayments on it.
posted by hazyjane at 12:35 PM on December 14, 2010 [2 favorites]

I understand paying the extra 4.5% or whatever on the mortgage balance, but can we assume that you would get 96.5% of your mortgage payment back in equity?

But you're not paying 4.5% of the balance, you're paying 4.5% compounding. A 30-year mortgage for $250K at 4.5% means you're going to pay $200K+ in interest over those 30 years.
posted by enn at 12:36 PM on December 14, 2010

it takes a special situation to come out ahead as a renter vs buyer.

Not if 1) you move more than once a decade, and 2) you live in an area where real estate doesn't appreciate much.

I played around with the Fannie Mae calculator linked above. Given the numbers I used, which reflect what I understand of the housing market in Fort Wayne, buying an apartment like the one I'm living in might save me about $140 over ten years. $2500 if I drop the estimated maintenance. If I moved in two years, owning'd cost me about $17,000. Even adding in a little appreciation only moves the break-even point up to about six years.

So if you live in an area where the housing market doesn't actually do much price wise--or is actively falling--and/or you aren't confident that you're going to be living in the same space for more than a few years, renting is the way to go. That may be a "special situation," but I'd argue that it's common enough to be worth considering in its own right. Plenty of people's living situations are a bit unstable, and the idea that housing always magically appreciates is looking increasingly silly.

That is, of course, assuming that the only consideration is the bottom line. There are other reasons to buy. Like the ability to run ethernet cable in the walls, or the ability to add solar heating or a groundwater heat pump. Like not having to listen to your neighbors' domestic disputes because you share a wall. All of those are things I'm increasingly willing to pay for. But that's the analysis, i.e. "Is buying getting me things I am willing to pay money for?" not "Is buying cheaper in the long run?" Long run costs do need to be estimated, but even if buying is more expensive, there may be reasons to do it.
posted by valkyryn at 12:40 PM on December 14, 2010 [2 favorites]

But you're not paying 4.5% of the balance, you're paying 4.5% compounding. A 30-year mortgage for $250K at 4.5% means you're going to pay $200K+ in interest over those 30 years.

I'm as "Sometimes renting is better then owning as anyone" but this math here isn't quite correct. You need to look at the interest rate you are paying in real terms. If inflation went up to 5%, then a 4.5% mortgage is actually paying you to own your home (assuming the house is fairly priced of course)

$2000/ month in 2035 is going to be worth a lot less then $2000/month today and you need to take that into account.
posted by JPD at 12:40 PM on December 14, 2010

This doesn't make sense to me. I understand paying the extra 4.5% or whatever on the mortgage balance, but can we assume that you would get 96.5% of your mortgage payment back in equity?

Wow. That is so not how loans work.

That 4.5% is an APR on a loan. For a 30-year mortgage on a $300k home with $60k down (i.e. a $240,000 loan), you pay a total of $197,776 in interest and $240k in principle. In other words, about 55% of your mortgage payment goes to building principle.
posted by mr_roboto at 12:40 PM on December 14, 2010

Building equity, that is.
posted by mr_roboto at 12:41 PM on December 14, 2010

Rent tracks real estate prices fairly well... outside of rent-control situations, it's really not a tremendous bargain to rent rather than own. Quality of Life considerations can further swing the accounting - want a yard and a garage? Want to be in the middle of a cool urban area? Want to travel the world regularly? Want to restore motorcycles? Each of those life choices will require a trade-off that will make buying vs. renting something less of a black-and-white decision.
posted by Slap*Happy at 12:41 PM on December 14, 2010

Speak for yourself, CPB. I LOVE my Monster 24K Gold Toilet Accessories.

Now I really wish there were magazines and products for toilet enthusiasts. I'd love to read their woo.

What would you call them? I guess they could be fecophiles, foecophiles, or coprophiles, but I think those are pretty well into Rule 34-land.
posted by ROU_Xenophobe at 12:41 PM on December 14, 2010

Then we'll have no rent or mortgage to pay for the rest of our lives. How could that possibly be a bad financial decision?

Because most people don't live in one place for the rest of their lives anymore. I've lived in ten different places in the last ten years, and odds are pretty good that I'll be moving again in the next two or three.

Granted, I've attended three different post-secondary institutions during that time, but school isn't the only reason one might move around that much. People lose jobs or get new ones. People have kids. People get divorced. People die. Heck, houses burn down. In short, life is unstable. Buying isn't necessarily a bad financial decision--it can be a great one!--but if the only reason for doing it is to eliminate an expense permanently, you should probably try to think of more.
posted by valkyryn at 12:44 PM on December 14, 2010

I'm as "Sometimes renting is better then owning as anyone" but this math here isn't quite correct. You need to look at the interest rate you are paying in real terms.

Sure, I guess I should have said $200K+ interest in nominal dollars. I was mostly just trying to point out that the cost of the mortgage is much more than (interest rate * mortgage amount) as a flat, one-time fee, which someone seemed to be implying above.
posted by enn at 12:47 PM on December 14, 2010

And do you understand the phenomena of compound interest

Wait, wait. I know this one. That's where I take the, ohh, $500 per month I save by having a lower mortgage/insurance/tax burden than an equivalent rent cost and put into the bank, right?

What do I win?
posted by Cool Papa Bell at 12:48 PM on December 14, 2010 [1 favorite]

Again, no inflation and ignoring the taxes, you're ahead if the house is worth more than $100,000.00 at the end, right?

You can't just sweep taxes under the rug like that. Property taxes can easily exceed 1% of a home's value on an annual basis. So in thirty years, you could have paid 30% of the value in taxes, $90,000.

Maintenance is an issue too. Right now, the only maintenance I pay for is light bulbs. But in the past year I've had my dryer's heating element replaced, a light fixture replaced, the faucet in my shower replaced, and the filter in my furnace replaced. That seems pretty average for normal wear and tear, but it'd have cost me an easy $500. As a homeowner, you'll bear all of that cost yourself. Over 30 years, that adds up; even $500 a year is $15,000 over three decades. And replacing a furnace will cost you an easy $1000 right there, so I'd say that $750-1000 a year is more like it. Now we're up to $30,000.

So just with taxes and maintenance, we're talking an additional $120,000 in sunk costs. All of a sudden the house needs to be worth $220,000... which is only a little under the equity one would have in the home.

Do you come out ahead? Yeah, probably. But not a huge amount. And if one places a higher premium on the ability to move across the country at a moment's notice than the ability to truly have control over one's living space, renting might wind up being a better choice.
posted by valkyryn at 12:52 PM on December 14, 2010

I think these sweeping generalizations about renting vs. homeownership don't seem to enter into account when you bought, and what region. I'm pretty sure if you are a married couple, say a software engineer and an accountant, who bought their modest three bedroom in Idaho this year, you are doing just peachy.

Come on people!

Sweeping generalizations about whether renting or owning makes you a smarter person are much more fun than "Depending on where you are - geographically and in terms of your life plans - renting might make more sense than owning. Or vice versa."
posted by rtha at 12:53 PM on December 14, 2010 [2 favorites]

That's where I take the, ohh, $500 per month I save by having a lower mortgage/insurance/tax burden than an equivalent rent cost and put into the bank, right?

If you can swing it. I looked at buying earlier this year, and I found that the only way to actually spend less in housing if I bought was to take a pretty big hit on my amenities. Rent right now is $715, and that includes gas and water. Buying an equivalent amount of space outside a trailer park could cost me $600 a month plus those utilities. Take maintenance into account and I'd have been worse off, just on a monthly liquidity basis.
posted by valkyryn at 12:55 PM on December 14, 2010

Yes, but rent over 30 years, assuming no inflation and thus a steady 1000 a month, is $360,000.00. Under your scenario, you'll have paid $450,000.00 over 30 years for the house. Again, no inflation and ignoring the taxes, you're ahead if the house is worth more than $100,000.00 at the end, right?

Unless you've invested the $100,000 difference between rent and mortgage. At 5% spread over 30 years, that works out to about $230k. Not enough to make up the difference in this case (assuming the house holds value), but there are many markets in the US today where the differential between rents and house prices is such that the amount you could save by renting is truly significant. (For my situation, with "equivalent to rent" house prices sitting at around $700k, I figure I have about a $200k advantage over 30 years by renting).

What do I win?

It depends on how you invest it. But you can diversify, at least, which seems sensible.
posted by mr_roboto at 12:56 PM on December 14, 2010 [1 favorite]

>Now I really wish there were magazines and products for toilet enthusiasts.

"To get the warmest, most natural sound out of your toilet, we recommend pairing an authentic whalebone flush lever ($350) with Brazilian hardwood closet bolts ($600/pr)."
posted by xbonesgt at 12:58 PM on December 14, 2010 [3 favorites]

I work with people that are mostly about twenty years older than me, so I'm the odd one out in that I am the only person in the office that rents. Looking at the numbers (and by that I mean the NYT rent vs. buy calculator), based on where we want to live we would break even on buying if we a) bought a condo similarly sized to our current apartment and b) stayed there for 12 years. That assumes a 1% annual home appreciation.

The swing based on changing the appreciation number is amazing! We break even in half the time if it goes up to just 2% annually; we never break even if it stays flat.

Meanwhile, in just the past year we've needed a new hot water heater, exterminators, roofing work, bathroom work, heating system maintenance, and a new front door, none of which we paid a dime for. The biggest downside we have right now is that, being an old building, there's no insulation and our heating bills are pretty high. Even then, I could get the work done myself (and pay for it out of pocket) and it would pay for itself in natural gas savings if we stuck around for a few more years.

The military folk I work with all buy their homes. I think the longest any of them have been in one area has been three years. A colonel I worked with arrived here just about a year ago and was just shipped off to another site; the guy he replaced was here for only six months. I can't imagine having to buy and sell your home in such a short amount of time so often.
posted by backseatpilot at 12:59 PM on December 14, 2010

The swing based on changing the appreciation number is amazing! We break even in half the time if it goes up to just 2% annually; we never break even if it stays flat.

The wonders of leverage. Its not really one vs 2, its 5 vs 10.
posted by JPD at 1:05 PM on December 14, 2010

I've spent much more of my life in rented accommodation than owned accommodation but there's no question that, finances aside, ownership is a for me a vastly more comfortable experience. The freedom to do whatever the heck you want to your living space -- not just decorate, but rebuild or remodel or whatever. Plus of course that there are some circumstances where you simply can't rent -- if you want to build your own house, for example.

The US is a curious situation because of the tax breaks but on a long-term view rents should equate roughly to the local costs of ownership. This is massively distorted in the short term by credit bubbles and other inflationary/deflationary effects but over a couple of economic cycles it will all come out in the wash -- except for people who own property in areas where the population and/or income level is rising rapidly.

The scary thing about the US situation is that prices continue to stagnate despite the fiscal stimuli and quantitative easing which would in other circumstances be massively deflationary. In their absence you would have seen an even more complete collapse of R.E. prices. And that could still happen -- deflationary pressures may yet defeat the Fed, or on the other hand the dollar may come under attack, causing massive inflation which will drive both property prices AND interest rates up -- the exact converse of the current situation.
posted by unSane at 1:06 PM on December 14, 2010

The scary thing about the US situation is that prices continue to stagnate despite the fiscal stimuli and quantitative easing which would in other circumstances be massively deflationary.

I'll continue to display my financial ignorance. I thought houses were still overpriced (in general).
posted by mrgrimm at 1:17 PM on December 14, 2010

well the corollary to that is by creating inflation the government can move houses back to fair value even with flat nominal prices (which is what matters wrt to keeping the market liquid and people repaying their mortgages)

The relative over and undervaluation of homes is very location specific.
posted by JPD at 1:22 PM on December 14, 2010

It also depends on the kind of housing: in my experience, buying an apartment doesn't make sense. Maintenance, as charged by a company, is often close to half the rent: this for the pleasure of having someone vacuum the halls and cut the grass. Any substantial repairs -- new roof, re-paving the parking lot, fixing the foundation or the balconies, replacing the windows, fixing leaks -- are paid for by special assessments, and you don't have much choice on how much this will cost you. And if your next-door neighbours are drug-dealing party fanatics, you're stuck.

Between maintenance costs, taxes (not usually covered) and utilities, a condo often costs twice as much as a comparable rental. And since rents are tied to income, there's a reasonable ceiling: if your 1 BR condo costs you 3,000K a month, good luck keeping a tenant.

On the other hand, I think renting a house is expensive: tenants are responsible for heat and hydro, which can be substantial in a poorly insulated house; you often wind up paying for essential repairs yourself, and you're usually responsible for the yardwork.

I rent apartments: I'll buy a house. All this would be completely different if I had kids, a large dog, a need for a large garage or workshop...but now, I rent apartments. I'll buy a house.
posted by jrochest at 1:25 PM on December 14, 2010

When I was in the process of buying my place, the appraiser didn't even come to the place. The appraisal came in at exactly what I was offering to pay. How convenient. Then the city raised the value shortly after I bought it.
posted by Foam Pants at 2:02 PM on December 14, 2010 [1 favorite]

Let's say I can afford $2500/month in total home costs. In scenario A, I decide to buy a house which has mortgage payments, tax payments, and average monthly maintenance costs totaling exactly $2k. In scenario B, I rent a similar house for $2000 a month (this is the arguable part, but if it isn't appreciably less than $2500 you're with doing something wrong) and invest the rest ($500, or whatever it works out to be). After 25 years, with fluctuating interest rates (as they do over 25 years), I believe that the investment portfolio I'd own under scenario B will be worth more than the house I'd own under scenario A.
posted by rocket88 at 2:11 PM on December 14, 2010

...totaling exactly $2k should read totaling exactly $2500
posted by rocket88 at 2:12 PM on December 14, 2010

After 25 years, with fluctuating interest rates (as they do over 25 years), I believe that the investment portfolio I'd own under scenario B will be worth more than the house I'd own under scenario A.

That entirely depends upon where you buy the house and how much you pay for it. You should also bear in mind that your assumptions are artificial -- in reality your rent will rise over the 25 years in line with inflation whereas your mortgage repayments will decline as you pay off the principal, while your net income increases in line with inflation -- so that the mortgage payments become a smaller and smaller proportion of disposable income.

By the end of the mortgage term you will be able to live for free in the property you own, whereas you will still have to pay a monthly rent for the rest of your life, so you should factor that into the overall equation too.

Moreover, the house value will appreciate in line with inflation whereas your investment will be eroded by inflation.

It's all very well to believe what you state but it's worth doing the math. The results may surprise you.

(The average risk-free rate of US T-bills over the C20th was 0.9%, if that helps you figure it out).
posted by unSane at 2:29 PM on December 14, 2010

Speak for yourself, CPB. I LOVE my Monster 24K Gold Toilet Accessories.

I have three words for you. Directional Sewer Lines (just don't hook them up backwards).

Now I really wish there were magazines and products for toilet enthusiasts. I'd love to read their woo.

What would you call them?

Japanese.
posted by dirigibleman at 2:32 PM on December 14, 2010

PS you also need to take into account taxation. If you are in the US then obviously there is a deduction for mortgage interest, but even if that is not the case you do not generally pay tax on the capital gains in your principal residence. You will however pay tax on interest income or capital gains in an investment account unless it is held in a retirement savings plan.

Moreover, you *also* need to include the tax you pay on the income with which you pay the rent or mortgage, since at the end of the 25yrs you will be paying zero on your owned home, but rent+tax on the rented home. If you live another 20 years, that is going to be a massive amount of money.
posted by unSane at 2:33 PM on December 14, 2010

PPS I know it's not fashionable to pay off mortgages these days, but it's when you do that the whole thing starts to make sense.
posted by unSane at 2:34 PM on December 14, 2010

Several years ago a Russian engineer named Dmitry Orlov wrote a paper titled Post-Soviet Lessons for a Post-American Century (we've discussed him before). One of his observation was that Soviet society was composed largely of renters with the State as landlord, which cushioned the blow of economic collapse because everybody stayed in their apartments even though they couldn't afford rent. Our system is much more brittle, as we're seeing now. I'm sorry for all the people getting hurt in the process but it's weirdly fascinating to watch it unfold.
posted by scalefree at 2:44 PM on December 14, 2010

Well, if one good thing has come out of the real estate debacle in the US, its that people at least recognize that 1) real estate doesn't always go up; and 2) the rent vs. buy decision is not a trivial one. It seems that, at the peak of the craziness, people spent far less time analysing the single largest purchase they would make in their lives than researching the purchase of a flat screen TV.

Up north of the border, though, "its different here": real estate will continue to always go up, faster than the rate of inflation or wage increases (if you believe the overwhelming majority of newspaper articles and the general conventional wisdom, that is) and it is common for people to think that you are making a crazily unwise financial decision not to buy.

And yet: for 1200$ I rent a small but charming house walking distance to shops, rivers, parks, and downtown. All maintenance is included (including a lovely garden), as are all utilities (not trivial when temps of -30C are common). There are quite a few houses for sale in the neighbourhood: best as I can tell, something roughly equivalent goes for $350000. Assuming 10% down, looking at 1700$ montly, 2 - 300$ heat, utilities, taxes, and probably 1 - 200$ maintenance and renovations over 25 years (might change all the windows, probably need a new roof at some point, etc). So: 2000 - 2200$. This is a big spread.

Long story short. South of the border, there's at least a worthwhile argument between renting and buying. Here, its not even close.
posted by bumpkin at 3:11 PM on December 14, 2010

A good calculation one should do on rent vs. ownership is this:

Initial Financial Costs of Owning:

(Mortgage interest - call it 5%)
(Taxes - call it 1%)
(Insurance - call it 0.5%)
(Upkeep - call it 0.5%; can be paid with money or personal time)
Total cost is around 7% of the home's value right now. Per year.

Financial Benefits of owning
Mortgage income tax deduction ~0.5% of home value (likely less)
Ability to mess with a home's structure - difficult to quantify

Financial Costs of Renting
(Paying Rent)
(Inflation eats the lump of cash that would be a down payment, ~ 1% right now)

Financial Benefits of Renting
Interest on the down payment - currently 3.5% on a 10-year treasury
Mobility - difficult to quantify, varies from person to person.

So annual rental cost is basically annual rent minus $500.

Compare annual rental costs to home ownership costs, and you've got a good idea of which is the better financial bet for the next few years. This doesn't even touch on closing costs or the hassle of buying & selling, but it's a start.
posted by thatnerd at 3:32 PM on December 14, 2010

Not to get all snarkly, but it seems to me that there are a fair number of people throughout this thread who understand neither the mortgage process, or the time value of money (compound interest, net present value), some good or interesting information here, but if you are looking for an education, this is probably not the place to start.

Here's your first Google Search term. Captialization Rate.
posted by sfts2 at 4:18 PM on December 14, 2010 [1 favorite]

Not to get all snarkly...

If you didn't want to get all snarky, you would write plainly rather than dropping whiny little hints.
posted by mr_roboto at 4:34 PM on December 14, 2010 [2 favorites]

One thing a lot of the rent vs own discussions I read seem to assume is that you will be making mortgage payments forever (or, similarly, that you only make the comparison for the length of the mortgage). When I run the numbers, it would be slightly cheaper (but only very slightly, as in about $100/month) for me to be renting a similar house to the one I live in now. However, I opted for a 15 year mortgage -- in a bit over a decade, I'll be done with those payments, forever, assuming I stay in this house (or sell it and buy something of similar cost).

If I was renting, I'd still be paying rent a decade from now, two decades from now, three decades from now... That's a lot of rent.

So for the life of the mortgage, I'd be smarter to rent. For the longer time horizon, I'm smarter to buy. Even being super pessimistic about maintenance and repair costs only pushes that cross-over point out a few years.

But that's just gravy. Really, I bought so that I will never, ever, have to deal with a landlord ever again. I will never have to beg someone to take care of basic things, or put up with crappy and substandard repairs, or worry that I might get turfed out just because they decided to sell the place or rent to their friend instead. I can make decisions that are (to me, at least) more ethical, like investing in insulation, efficient appliances, and energy saving technologies with long time horizons for repayment. For me, having control over my own space and being able to make my own decisions about it would be worth a pretty steep price premium, so while I like that I'm making a good financial decision, I'd still buy even if the numbers pointed the other direction.
posted by Forktine at 6:19 PM on December 14, 2010 [3 favorites]

This is why I only sleep on my friends' couches.
posted by bardic at 7:46 PM on December 14, 2010

Here is an investment scenario where owning a house might be a very very nice deal. 1) It is one of the only opportunities for a small investor to control a heavily leveraged investment. 2) Amazingly, you can own a heavily leveraged investment and default with minimal recourse. 3) A heavily leveraged investment that is based on a low interest tax deductible loan has some notable features. In a mid to high inflationary environment the monthly payments will become progressively less and less.. Several years into this cycle the payments will seem negligible and the asset will typically increase in value, leveraged!. In the event of a deflationary environment you have the option to walk, which considering you were able to control a large asset for a minimal down payment (assuming say an fha loan) is pretty amazing. So, worst case scenario from an investment point of view would be a low inflation environment... Low inflation... In this case you have a state subsidized loan (tax deductible) and gradually accumulate equity in a large asset... When that is the worst case investment scenario count me in... Mind you, I am analyzing this from an INVESTMENT point of view... There is minimal downside and MASSIVE upside. Assuming you can get in on an FHA. The risk profile changes significantly if you have to put 20 percent down. Just sayin.
posted by jcworth at 10:12 PM on December 14, 2010

I am perfectly willing to believe that there are situations where renting is financially more intelligent than owning over the long term. There are certainly situations where it is more intelligent over the short term. However ...

Saying this is always the case is patently ridiculous. From experience, once you own a home free and clear, the cost of taxes, maintenance, and insurance is tiny compared with the cost of rent. Plus you own the asset, which means even if you have to move, you get a big chunk of money for whatever (new home, rent for a decade or two, and so on.) So a lot depends on how much the house costs, how much you can put down initially, how long it will take you to pay it off, how long you intend to live in one place, etc.

I was able to put away a lot more money when I lived in a home I owned than I do now, renting. Once my gf's career no longer compells us to move every two to three years or so, it will once again make the most financial sense to own rather than rent.
posted by kyrademon at 4:01 AM on December 15, 2010

ghharr writes "On the other hand, as a renter I have the freedom to move to another house/neighborhood/state when my lease is up in 6 months without having to sell a possibly depreciating asset. "

Or be evicted for no reason when your landlord stops paying his mortgage.

JPD writes "I've been a renter for ten years, the last five at least totally by choice. The most I've ever done myself maintenance wise was replace a toilet seat. Maintenance is a real cost of homeownership. Ignoring it in any calculation is incorrect."

Most every renter is paying for maintenance, it's just part of a monthly payment instead of a as needed fee.

mrgrimm writes "Why should the government be promoting home ownership? They should be encouraging less development, in my opinion."

The theory is that home ownership promotes stable communities which tend to be better places to live.
posted by Mitheral at 6:32 AM on December 15, 2010

Most every renter is paying for maintenance, it's just part of a monthly payment instead of a as needed fee.

AHHHH yes - but that comment is in the context of someone saying your shouldn't include maintenance in your calculation for the cost of buying because you have to pay for maintenance when you rent anyway (in addition to the embedded cost of maintenance that is in the rent)

I swear everyone is so eager to prove their point they don't bother actually reading what other people say and why.
posted by JPD at 8:02 AM on December 15, 2010

This is math people. Nothing more. Sometimes buying a home makes sense, some times it doesn't. To generalize either is ridiculous.
posted by JPD at 8:04 AM on December 15, 2010

When you rent, you can't even paint without permission but when you own, you can do whatever you basically please.

Ignoring whether or not renters can paint, your statement is misleading the other way as well.

Most owners can certainly not do "whatever they basically please." There are zoning restrictions, homeowners associations, historic neighborhoods, condo associations, and other sorts of shit that restricts what you can do with your house.

A lot of neighborhoods require that you keep your grass cut below a certain height.

Or from one horse's mouth:

"Any site development construction, reconstruction, refinishing or alteration of any part of the exterior of any structure or other improvement including, but not limited to, walkways, driveways, patios and landscaping, is prohibited until Applicant first obtains approval from the ARC."

My friends owns a small, fairly unremarkable house in what's considered a "historic district" in a midwestern city. He has been unsuccessfully trying to paint a gray brick wall on the side of his house. He wants to paint it a dark shade of red. The neighborhood (particularly one crotchety woman) will not let him.

If I were renting the house, I'd just paint it red and say "fuck you." As an owner, he's liable for that sort of shit (though I can't even imagine what any penalties must be ... a court order to paint it back?)

Here's your first Google Search term. Captialization Rate.

PROTIP: Proofread snark before posting. You completely lost the effect of smug righteousness.
posted by mrgrimm at 10:52 AM on December 15, 2010

The theory is that home ownership promotes stable communities which tend to be better places to live.

And yet the best places to live with the most community involvement are major cities ... filled mostly with renters.
posted by mrgrimm at 10:55 AM on December 15, 2010

If I were renting the house, I'd just paint it red and say "fuck you." As an owner, he's liable for that sort of shit (though I can't even imagine what any penalties must be ... a court order to paint it back?)

CWAA
posted by unSane at 11:10 AM on December 15, 2010

Most every renter is paying for maintenance, it's just part of a monthly payment instead of a as needed fee.

Except some places are in poorer shape than others, thus some landlords will be able to entice renters with lower rents because their maintenance costs are similarly lower. In other words, the degree to which it's "just part of a monthly payment" is hugely variable.
posted by Civil_Disobedient at 4:00 PM on December 15, 2010

mrgrimm writes "And yet the best places to live with the most community involvement are major cities ... filled mostly with renters."

I imagine the reverse is also true depending on which city one picks and how one defines community involvement.
posted by Mitheral at 4:18 AM on December 28, 2010

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