Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
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Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#2Of course, at this time the housing bubble is still deflating, so this kind of calculation heavily favors renters in many areas.
The guy at Shadenfreude Central, a.k.a. www.irvinehousingblog.com, recommends computing the ratio of a house's sale price to the monthly rent for an equivalent house. The charts on this page:
http://www.irvinehousingblog.com/blog/comments/wot-3-22-2008...
assert that the national historic norm for this number is about 180: i.e. a house that rents for $3k should cost about $3k x 180 = $540k. As a rule of thumb, if the sales price is significantly more than this calculation would suggest, it's a good time to rent instead of buying.
Having said all that: The reason to buy a house was well articulated by Christopher Alexander in A Pattern Language (which, as all pattern-wielding Java programmers should know by now, is a classic):
Pattern 79. YOUR OWN HOME
People cannot be genuinely comfortable and healthy in a house which is not theirs. All forms of rental - whether from private landlords or public housing agencies - work against the natural processes which allow people to form stable, self-healing communities...
This pattern is not intended as an argument in favor of "private property," or the process of buying and selling land. Indeed, it is very clear that all those processes which encourage speculation in land, for the sake of profit, are unhealthy and destructive, because they invite people to treat houses as commodities, to build things for "resale," and not in such a way as to fit their own needs.
And just as speculation and the profit motive make it impossible for people to adapt their houses to their own needs, so tenancy, rental, and landlords do the same. Rental areas are always the first to turn to slums. The mechanism is clear and well known. See, for example, George Sternlieb, The Tenement Landlord(Rutgers University Press, 1966). The landlord tries to keep his maintenance and repair costs as low as possible; the residents have no incentive to maintain and repair the homes - in fact, the opposite - since improvements add to the wealth of the landlord, and even justify higher rent. And so the typical piece of rental property degenerates over the years. Then landlords try to build new rental properties which are immune to neglect - gardens are replaced with concrete, carpets are replaced with lineoleum, and wooden surfaces by formica: it is an attempt to make the new units maintenance-free, and to stop the slums by force; but they turn out cold and sterile and again turn into slums, because nobody loves them.
People will only be able to feel comfortable in their houses, if they can change their houses to suit themselves, add on whatever they need, rearrange the garden as they like it; and, of course, they can only do this in circumstances where they are the legal owners of the house and land; and if, in high density multi-story housing, each apartment, like a house, has a welldefined volume, in which the owner can make changes as he likes.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#3Some items the article is glossing over:
First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again.
Next, an 800 sq. ft. apartment isn't equivalent to a 1000 sq. ft. house with a yard. If you really want to cheap out on a house, get a mobile home -- though of course that doesn't include land, which is often leased.
Further, in this example, it assumes you have the difference between the two prices free and clear to invest -- you'll certainly need to make sure your investments do well, because at the end of 30 years, you aren't going to be a homeowner, and will still need a place to live.
Not to mention, pets are typically a problem; you're at the mercy of your landlord; the rent can be increased at any time; you have to deal with shared walls with neighbors; and your 6% return is not going to seem very exciting in 5 years when housing picks up again and that $400k house is worth $800k. It WILL pick up -- the country isn't becoming LESS crowded.
Your monthly investment amount will decrease every year as your rent gets increased, meaning your return is not going to be as good as depicted, especially if wages stagnate (as they effectively have in many sectors for the last 8 years). At 5% rent increase per year, you'll eventually be paying around $4000 for that same apartment in 30 years. Around year 20 the apartment costs more per month than the house. (This is a great area, remember, so the demand will be high. In some areas the rent can jump by 20% in a year instead of 5%.) This would mean you'd do significantly worse than if you bought the house.
The basic premise of this article is really "what if you live cheaply and invest your money vs. what if you spend all your money on housing and your house appreciates more slowly than an index fund".
Step 1. Live in your parents' basement for 30 (more) years.
Step 2. Invest the WHOLE $2400 per month on an index fund.
Step 3. Profit!
As you can see, the article ignores things about having your own house that are nice -- like a stable place for people to visit since you don't move every few years to cheaper places; not being at the mercy of parents or landlords; having a yard; not having to obey "quiet hours", and so forth.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#4Some items the article is glossing over: First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again. Next, an 800 s…
You made pretty much the same points that I was about to.
However, since I live in the Sacramento area I will add that his numbers seem way off. $400K doesn't get you a 1000 sqft two-bedroomer nowadays, it gets you quite a nice three or four bedroomer (say, http://sacramento.craigslist.org/rfs/672061645.html)... or a huge six-bedroomer if you want to live in a new suburb (http://sacramento.craigslist.org/rfs/676328067.html)
The $950 a month for a one-bedroom apartment is about right.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#5Some items the article is glossing over: First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again. Next, an 800 s…
I agree, the article ignores many positive aspects of homeownership. However, some of the points you make are poorly founded. For instance, there's no guarantee a 400k house in Sacramento will be worth 800k in five years, solely because US is becoming more crowded. It's a bold claim. Also, the idea of being at the mercy of your landlords is weird. In markets with a lot of excess inventory, some landlords can't find tenants. This puts them at the tenant's mercy. Second, if you own a house, you can be at the mercy of the bank, or the local home owner's association, or some such.
Some points are good, though; if one takes out a fixed-rate mortgage, payments are fixed and will become less painful as inflation makes them smaller in absolute terms.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#6Some items the article is glossing over: First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again. Next, an 800 s…
I agree, the article ignores many positive aspects of homeownership. However, some of the points you make are poorly founded. For instance, there's no guarantee a 400k house in Sacramento will be worth 800k in five years, solely because US is becoming more crowded. It's a bold claim. Also, the idea of being at the mercy of your landlords is weird. In markets with a lot of excess inventory, some landlords can't find t…
> For instance, there's no guarantee a 400k house in Sacramento will be worth 800k in five years
Sure, but based on historical events with housing in "great" areas, this can and does happen. If you buy right before a bubble, it can even happen sooner -- in a couple years. A 6% fund is not going to even have the chance to do that.
> In markets with a lot of excess inventory, some landlords can't find tenants.
A given, per the article, is a "great" area. Great areas are always in demand. I have not yet lived in an area that lacked for tenants.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#7$400k for a 2 br place is expensive by national standards, which would make Sacramento a high-priced real estate market (not hard to believe, most of California is).
He claims $949 a month is much higher than median for a 1 br. That does not seem to fit with what I've seen in high priced real estate markets. By comparison, in Ohio, a brand spanking new two bedroom detached condo (nobody builds 2 br homes in most parts of the country, so you couldn't find a newish one) in a great area would cost maybe $150-175k. But rent on a good one BR apartment is still $750/mo.
I've looked at places in a lot of markets (midwest, Vegas, Bay Area among them) over the last 5 years and if what he says is true, it makes me think the rents in Sacramento are depressed for some unusual reason, and the ratio of mortgage to rent is atypical, and therefore not permanent.
My off the cuff guess as to why would be the terrible real estate market there. It's so hard to sell a house right now for more than you owe the bank on it that a lot of people have taken to renting them out instead, creating an unusually high number of rentals. It's a lot easier to rent a place out at a few hundred bucks below mortgage and pay the difference out of pocket than it is to sell it and pay the bank the 50k you'd owe them after. If you're doing well enough to afford two mortgages, you can pick another house up at a good price, move there, and rent the old. That's exactly how we got our place in Campbell, and what a lot of the places we looked at in the bay area were doing as well.
So maybe he shouldn't buy a home in Sacramento, at least right now. There are lots of times in various markets where this happens and it's financially beneficial to rent until the ratio swings the other way.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#8Some items the article is glossing over: First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again. Next, an 800 s…
You made pretty much the same points that I was about to. However, since I live in the Sacramento area I will add that his numbers seem way off. $400K doesn't get you a 1000 sqft two-bedroomer nowadays, it gets you quite a nice three or four bedroomer (say, http://sacramento.craigslist.org/rfs/672061645.html )... or a huge six-bedroomer if you want to live in a new suburb ( http://sacramento.craigslist.org/rfs/676328…
Ok, that makes much more sense. As I said in my earlier comment, his ratio seemed really far off.
Sacramento must have been hit pretty hard eh? I looked there 2 years ago and seem to remember prices being considerably higher. I was looking at a new 2 br attached for about $350k in East Sac.
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#9This may hold true, in certain areas, if you keep the same house for 30 years. I read somewhere that the average American home changes ownership every 11.9 years.
I did a quick calculation on the percentage ROI after 1 year of owning a $300K house.
home cost: $300,000
10% down payment: $30,000
30/yr mortgage @ 6%: $1,618.79
tax at 1.25%: $312.50
maintenance/misc: $200.00
actual mortgage payment: $2,131.29
investment after 1 year (($2,131.29 * 12) + $30,000) = $55,575.48
appreciation after 1 year at 4%/yr: $12,000
percentage ROI: ($12,000/$55,575.48) = 21%
what index fund are you going to see a 21% return on investment from? did I make a horrible mistake?
Re: Homeowner vs. Renter: Why Should You Ever Buy a House (at all)?
#10I think having the ability to have a home equity line is reason enough to buy. That's 100-200 thousand dollars credit you have at your disposal for a rainy day. And unlike credit cards its not at 30% apr.