Perry, you are probably right. But there is some truth in the B.S. that the real estate industry is shoveling. That extra $18,000 is not all gone. You have paid down some of the principle on the loan, and you get some tax breaks for the interest that you have paid.
Obviously it’s all about the amount of time that you spend in the house before you sell, and what happens in the market during that time. But I would imagine that even an overpriced $500k home today (probably really worth about $350) will be worth about $500k in 10 years.
Between now and then you haven’t completely lost that $18,000 each year. About $4,600 of that has paid down the principal in the first year (this increases each year). Since the payment is “affordable”, you are probably in a tax bracket where you will get a tax break of about $8,000 the first year.
Example:
Purchased $500k house with $100k Down and a loan of $400K.
At the end of a year, and in the current market, the buyer is in bad shape compared to the renter.
Including the down payment, you’ve paid $136k, with a tax break of $8k, that can be reduced to about $128k. On top of that you still owe about $396k on the mortgage, so your total liability is about $524k (I’m not an accountant, so I don’t know if “liability” is the correct term here). Anyway, you would need to sell for about $506k + comission in order to be out the same $18k that the renter is for that same year. Not likely in the current market. Hurray for the renter!
At the end of 5 years, the buyer is doing a little better, but the renter is probably still winning. Including the down payment, the buyer has paid $248k, minus about $36k in tax breaks over the past 5 years, $212k. The buyer still owes about $374k on the mortgage, for a total liability of $586k. The renter in the same 5 years (if rent did not rise), would have been out 90k. So at the end of 5 years, the buyer would need to sell the house for $496k + comission to still be in the same boat as the renter.
Aha! At 10 years, the buyer has paid about $395k but got $70k in tax breaks. The buyer owes $338k on the mortgage, for total liability of $663. The renter has paid $180k in rent, if their rent never went up! So the buyer could sell for about $483k + commission and be in the same boat as the renter. I think this is about the break even point. If the house can sell for $500k in 2016, that ought to cover any commissions. Right?
The buyer does have some additional benefits at this point though. If the renter is just buying the house at that point, they will just be starting the 30 years it will take to pay off the mortgage. The buyer only has 20 years left on their mortgage. They could probably even refinance the $338k with a 15 year mortgage, and possibly lower their payments depending on the interest rates at that time.
That was a rough 10 years for the buyer, but at the end they seem to be better off than the renter, and it only gets better from there. Was that gamble worth it?
I’m still renting, because $3,000 is not affordable to me. That would stretch me to the limit. If anything happened in that first 10 years and I needed to sell, I would be in dire straits. Besides I have not found any house selling for $500k that I would really want to spend the next 10 years in.
Does any of that make sense, or am I still out in left field?
