Rich’s graphs and the data he derives them from tell a pretty convincing story. Make sure you point out that it’s not when the owners bought, but to what degree they are currently mortgaged that counts. There are lots of homes purchased prior to 2000 that are maxed out with 2004-2005 refinances at ARM terms. Take him down the ARM-reset discussion and see if he really thinks the potential for loss is only limited to 10% – 15%. We’re already at 10% losses in a couple neighborhoods in this region and this trend is only picking up speed. Foreclosures are increasing rapidly.

You should fully agree with and support his opinion that rents are a “waste of money” in a stable or increasing market, but that’s not where we are right now. We are in decline.

Do an apples to apples comparison. How much will it cost to buy a house in the area/size that you would consider? 600k? 700k? More? Next, how much is your current rent? Or, how much would rent be for the area/size you that you would consider? Then consider time frame. Is this where you want to be for the next 10-15 years? Both location and specific property? Because if prices are flat or down 10-15%, you may not have a choice in the matter.

I recently did this for my brother. He was considering buying in San Marcos. He told me he could find a nice rental for $1200, and comparable condo for $350k.

For the condo: after raiding his savings for 70k (20% down), his PI on a 30 yr fixed at 6.3% on $280k loan would be $1733. Add in insurance and taxes. Yes, there is a tax deduction. He does not currently itemize. The interest payments in the first year would total appx $17,500. He is in the 28% marginal Fed tax rate. After taking off the standard deduction, his tax savings are $3500. So, his tax savings are probably equal to the amount he would pay in property taxes, and declining each year. After paying for insurance, and the taxes cancelling each other out, he is looking at paying roughly $600-700 more per month. Also, by renting, the 70k could be left in an Emigrant Direct or HSBC online savings at 5%, earning $3500 per year. Buy the condo without raiding the savings, and all monthlies go up, plus you get either PMI or a piggyback loan.

Is renting a waste of money? Well, whom do you want to rent from, a landlord who is responsible for repairs, etc., or a bank? Renting from the bank will cost a lot more as detailed above. If he thinks prices will remain flat or go down 10-15%, you’re nuts to buy now. If you both think prices will still go up, then by all means dive right in.

Buy this book or go to a local bookstore and read about it.

Sell Now! : The End of the Housing Bubble

I’m searching my next home on a daily basis. It’s either dropping in price or more inventories are coming into MLS daily. I’ve cash at hand to pay at least 20% down for a median price home but, by no mean, am I going to catch a dropping knife. All the housing fundamentals are insanely out of whack at this point; basically whoever buy will most like lose money in this few years.

So, I rent.

my husband and i also have significant student loans from grad schools but i think you cannot deduct them if you hit a certain income level. Am i wrong? I am in the same boat as you are mrquoi , my husband also thinks houses will only drop 10% (although he does believe that now renting is more cost effective). His believe is that prices will never be affordable even for 2 MBAs so we better get out of here. We are actually trying to move out. Of course we need to find a job elsewhere first.

If he wants to throw money away.. try and at least convince him into a lease option.. that way you can limit your downside. By the time the least term is up, the strike price and market price will probably have seperated enough for the decision to be an easy one, that is.. keep renting.

People will probably freak that I’ve mentioned this.. but sometimes you can’t make the decisions you want, you have to compromise – I’m only suggesting this is compromise I’d consider if I were in your position.

Lease option from Wiki:

A lease purchase contract (also known as Lease Option) is a legal document that combines a basic lease contract with an option-to-purchase contract. The tenant/buyer pays to the landlord/seller a non-refundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller a sum that is typical to the rental amount usually on a monthly basis. A portion of that monthly payment is then applied to the purchase price of the home. During, or at the end of the lease period, the tenant/buyer has exclusive right to buy the home under the terms to which both parties have previously agreed.

http://en.wikipedia.org/wiki/Lease_option

Key part is “the tenant/buyer has the exclusive right” but is not required to purchase the home under the terms previously agreed. If you do not purchase the home, you lose your deposit.. so negotiating a reasonable deposit is important to whether this will be a good deal for you.

Regarding the tax part of your question, here’s another Wiki link:

“This type of lease can be structured so that the lessee can take the tax benefits as if he were the home owner.”

http://en.wikipedia.org/wiki/Creative_Real_Estate_Investing

I think what your spouse does not realize is how bad a 10 to 15% reduction is, or how long it takes.

The last housing crash was about 10 to 15% down and it was awful. Many people think housing prices in the 90s really crashed, like the stock market, which wasn’t the case. Median price was only down 10 or 15% and people just got killed.

10% of a $500,000 home is $50,000.
Does he make $50,000 in a year?
He is trying to tell you that you stand to lose $50,000 and that is OK? A year’s salary down the drain, but renting is a waste of money?

Amazing to me that anyone could think “it will go down 15% so I’m gonna buy.” Amazing. Tell him to listen to himself.

Also, consider the amount of time it takes for the market to cycle down 15%, then back up. It could take several years for the market to go down and several more for it to come up – call it 7 to 12 years. That is a long time to not make any appreciation.

Plus, you have to be certain that life will not deal you cards which force you to sell when the market is at its worst.

Also, keep in mind if it goes down 15%, it has to come up 17.6% to be even.

Finally – very compelling is the annual pattern of sales from year to year. Always, there are significant sales in the spring and summer, then buyers dry up until next spring. Better to buy later in the year or in January, when the market is really hurting.