Buy now?

[PerryChase]

I keep on reading in the press that it’s always a good time to buy a house. They say buy a house you really like, live in it for a long time, and you’ll be fine.

The problem is that it’s NOT OK to buy as long as the cost of owning is more than the cost of renting, regardless of your financial situation. What does it matter as long as you have to right to occupy a house as long as you like?

Here is what hipmatt posted on the Inland Empire thread:

“You would think that ridiculous home prices alone would keep people away from making bad decisions about their house, but the taxes are another story. Take a 3000sqft $700k home on a 6200sqft lot in Harveston. The taxes are 1.9% per year. Thats over $13k a year. If the home was paid off, you still would have to budget over $1100 per month just for property taxes. Throw in the $130 hoa, and fire insurance, and you are at about $1400 a month to live in your paid off home. This makes absolutely no sense to me and can no way represent the amount of money it takes to own a home. Imagine buying this home traditionally with 20% down and a 30 year fixed loan. It would be $140k down, a mortgage of about $560k. P and I would be $3285 add taxes and ins. about $4600 total per month not including utilities. And how many people can honestly afford this in the Temecula Valley?”

He’s talking about Temecula but this applies everywhere. With that kind of scenario, no one should buy anything until prices come back down to reality. I hope that the press does some front page stories showing the stark contrasts between owning and renting. The public really needs to be educated about basic home-economics. Contrary to what the real estate industry would like us to believe, renting is not “throwing money away.” It’s just the alternative to paying interest to the bank.

[JES]

Completely agree with you Perry,

I can buy that same home in Fort Collins, CO and my mortgage payment would be the same as the mello roos, property taxes and HOA in Temecula, not including the mortgage! I don’t quite understand all the talk about now being a great time to buy either. A friend in the new home business told me that last week, as did a relative. Once the first news reports came out about falling prices they must have immediately thought “prices are going down, now is the time to buy”.

It is possible that we are all wrong and everything could turn around next Spring. But who on earth would buy now at a time when news reports can’t even keep up with price reductions, the selling season is over and the market is in a virtual freefall! At least wait until next February or March and see what the market looks like before the beginning of the next selling season. Really, what are the chances that everything is suddenly going to take off again next Spring when nobody can afford to buy, the economy is softening and the psychology of the market is dead.

[noone]

I think the “it’s always a good time to buy” statement is true, but only if you add to it:

“with a 30 year fixed rate mortgage and 20% down.”

If you can find a home where you can afford to put 20% down, and can afford the payments on a 30 year fixed mortgage, plus property taxes, plus insurance, then by all means buy it.

Once you have to start changing any of those factors in order to afford it, then it’s probably not a good time for you to buy.

And once most people have to start changing any those factors, then it’s probably not a good time for most people to buy.

[renterclint]

I agree that you probably should not buy a home unless you can reasonably afford the payments (P&I, taxes, and insurance) on a 30yr fixed mortgage, but I don’t believe the 20% down is completely necessary.

I’ve owned two homes so far, and could barely scrape together enough for 5% down pmt. In both cases, I sold at a fair gain. In both cases, I ended up financially better off with purchasing rather than renting.

Obviously, the 20% down helps you if you plan to sell in the next few years, and you’re concerned about declining prices, so the initial equity you paid for will cushion that a bit.

But for some of us who are trying to raise a young family, saving is difficult. If I waited until I had 20% down, I’d probably never purchase a home.

[PerryChase]

noone, I don’t quite understand your logic. It sounds to me like you’re falling into the real estate trap.

For example, even if you could afford to comfortably pay $3,000 in interest, property taxes, insurance, HOA and maintenance, why would you want to? That is especially true if you can rent a similar home for $1,500 all inclusive per month. If you could save $1,500 each month by renting, your house would have to increase $18,000 in value a year to make the purchase worthwhile. I think that, in addition to reporting on general trends, the press should have compare and contrast examples of buy and rent decisions. That will help educate readers on real estate and personal financial management. I’m not sure what kids were taught in school decades ago, but I feel that few people in the general public undertand this issue clearly.

Previously, posters on this board have determined that it costs about twice as much to buy than to rent (inclusive of tax implications). I think this issue should be re-examined periodically as the market evolves. New readers of Piggington might also like to discuss the issue. I’m sure that as the market deteriorates, Piggington will attract many more lurkers and contributors.

[Steve Beebo]

Perry –

This doesn’t apply to someone who may have purchased their first home between 2003 and 2006, but in general, buying a home has always been a good investment, and will be again soon. If you bought a home today, or in two years, with a 30 year fixed, your payment will always be the same, vs. renters who will probably see their rent increase every year. And isn’t the eventual goal of most homeowners to have their house paid off when they are retired?

[PerryChase]

Steve B, buyers who bought between 2003 and 2006 may see all their equity evaporate in a downturn, thus substantially or completely eliminating their net-worth.

There are many ways of saving. It doesn’t help to have a house paid-off if upon retirement you have no savings.

I’m not saying never buy. I’m saying don’t buy unless your debt service and costs of ownership are about the same as rent for a similar home. If cost of ownership is more then rent, then rent and invest the difference. You’ll have much more money in the end than if you bought at inflated prices. To me that should be basic home-economics that every head-of-household should understand. Unfortunately, some people would rather be making offerings to the real estate God.

[MH]

Just a slightly different spin on what's been said… 

Rent vs Buy is a complicated decision and no simple monthly payment analysis is sufficient.  So, while I'd generally agree this isn't a terribly good time to buy, when I return to SD next year we might just buy another house (we're renting one out right now).  Why?

There are some subtle advantages to buying as well if you expect to stay for some time.  One, the mortgage will generally stay the same (save the small property tax increases).  While THIS year might be cheaper to rent, if you are going to remain in the house then you should generally expect to pay less than renting eventually.

Two, renting is a yearly gamble.  If I don't decide to buy again, then the poor family that's renting from me now is not going to get his lease renewed.  Bummer if he's got kids in school, a job, doesn't feel like packing up all his stuff, etc. 

Three… if you don't keep treating your home like an ATM, eventually it'll be paid off.  Mine will be paid off in 2018; that sure makes retirement that much easier to program.  So, while the renter is paying higher and higher rents, I'm down to property tax (and at 1998 appraisal).

Finally, renting is never your house.  Granted, I wouldn't pay 5k/mo to buy a house I could rent for 1k, but there is certainly some value to being home at night.  Paint it, improve it, get to know your neighbors… I could live in an apartment if I just wanted to keep the family out of the elements; let's not completely discount the advantages of owning ones own home.

[no_such_reality]

Beebo, you’re missing the point. At today’s prices, a typical single family detached home in the IE is running $1400 a month in TAXES, Insurance, Mello Roos and HOA payments.

That $1400 is $16,800 a year in TAXES and fees. It is in Riverside, where the median household income is less than $56,000 a year.

That means Taxes and HOA fees alone on these houses exceeds 30% of the Gross median family income for the county.

[DaCounselor]

I purchased my first property in South Mission Beach in 1991. The cost of ownership was substantially more than what I was renting for. Now I own the property free and clear. It was, along with some other property purchases, one of the best financial decisions I have ever made. The argument that “If cost of ownership is more then rent, then rent and invest the difference. You’ll have much more money in the end than if you bought at inflated prices.” is merely conclusory in nature and is just plain bad advice. I’m not advising all renters to run out and buy property tomorrow, but I am saying be careful who’s advice you listen to.

[noone]

(Sorry for the long post)

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?

[PerryChase]

noone, truth to the BS? I think not.

Nothing prevents you from renting now, save the difference between buying and renting and invest it. You can earn nearly 6% per year risk free on a CD. Can you say the same for a house that you buy today?

Then you can buy 5 years from now, when the cost of owning is closer to that of renting.

Assume that real estate prices stay stagnant for the next 5 years. Do you 10-year analysis and see if buying now or buying in 5 years will be most beneficial.

Dacounselor, I bought in 1989 and now I’m sitting pretty. But I still think that it was a great mistake because 1989 prices were inflated. I could have rented (a similar house and enjoyed the same lifestyle) and saved the difference between 1989 and 1996. Had I done that and bought in 1996, I would have more money today. But at that time, there was no Internet for me to get information. I was young and stupid.

Yes, for good financial planning, it makes sense to buy. It’s good to have your house paid-off by the time you retire. The key is not to buy at the wrong time at stupid inflated prices.

[noone]

Oh yeah, I also don’t have $100k for the down payment!

But I sure hope that I’m not the guy that MH is about to evict!

[noone]

Good points Perry.

That message started as kind of thinking out loud. I started putting numbers in a spreadsheet, but I knew I was forgetting some things. On my drive home from work, I was thinking about the fact that the renter could invest the extra money. Of course that takes discipline 😉

And I did not take into account that as things are going, the renter could probably buy the place in 5 years for less than the $500k instead of waiting 10 years for the house to come back up.

[rankandfile]

The $20 Cabbage Patch dolls that once sold for almost $1000 are slowly coming back down their original market price. Ther e’s a ton of inventory and nobody’s waiting in lines out the door to purchase one. High supply, low demand = lower prices.

Buying now would not be prudent in my estimation. Truly, I say to you, that there have been and will be many more, attempts by various factions to keep home prices from declining too fast and keep home sales strong. There are too many people that depend on it staying this way. Interest rate deductions, continued soft-landing arguments and rhetoric in the media, reduction in other commodities such as gas, etc. Yes, it sounds like a conspiracy theory, but those that can have some control of the markets by sheer purchase or production power have it in their best interests to keep the American consumer machine from seizing up.

I find it ironic that all of a sudden the effects of Katrina, the corroded pipeline in Alaska, and Mid East turmoil have had no effect on oil prices. It’s as though they have all been swept under the rug. For a number of years there it seems that if a bee farted in a whirlwind, the price of oil increased due to fears of a refinery going down. Now everything is hunky-dory. I think that there is interest by some groups out there to use this to offset the effects of the cooling housing market, improve Republican standing before the mid-term elections, and boost savings prior to the upcoming Christmas season. They’ve got to keep the ol’ consumption pump primed…can’t let the fuel (spending)levels get too low.

The best way to combat high, slowly-decreasing home prices in your market is to do business with their competition: rental units or moving to another market. As I’ve said before, we plan on giving the SoCal market a couple years to come back down to affordable levels. If is does not, we will move to Colorado or some other more affordable market where we can raise a family in a nice home with a nice yard and wave to our neighbors as we are mowing our big backyard.

[Author]

Posts