One of the reasons we would often hear people use to justify overspending on a home during the bubble was that they wanted to stop “throwing away money” on rent.
I would hope that by now most people have realized how ridiculous that concept is, but I thought it might help dispel the notion if we consider a pair of hypothetical (but completely plausible) scenarios.
Couple A is renting a 2-bedroom, 1.5-bath townhouse for $1,000 a month in Ballard. Their $1,000 pays for not only the roof over their heads, but the water/sewer/trash, any necessary maintenance, and access to shared facilities such as a pool, hot tub, and workout room.
Over the past three years Couple A have spent around $35,000 on shelter. If they decide they want to move, it’s as easy as waiting until the lease is up and collecting their security deposit.
Couple B decided in 2006 that they were tired of “throwing away money on rent.” They didn’t have a down payment, but that of course didn’t stop them from qualifying for a $400,000 loan on an adorable 2-bedroom, 1.5-bath Ballard craftsman. With an interest rate of 5.7%, their (PITI) payments are around $3,000. Of course, this doesn’t include any services or maintenance.
Over the past three years Couple B have spent around $67,000 on mortgage interest alone, and their home is now valued at around $340,000—15% less than they paid. If they decide they want to move they have three options: Come up with about $40,000 in cash to cover the difference between their mortgage and the house’s value, convince the bank to accept a short sale, or walk away.
Now, which of these hypothetical couples seems more like they have been “throwing away money” to you?
OH NO, how can it be Seattle not in the top 10 of best places to live in the US:
http://finance.yahoo.com/news/Best-Places-to-Live-usnews-15476164.html?.v=1
say it isn’t true.
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By Groundhogday @ 85:
Well that’s one possible future, but probably an unlikely one. Banks are very unlikely to give up opportunities to make money loaning money to people. That’s what they do. That’s why people with 10 credit cards who are carrying $45,000 of credit card debt used to be able to get an 11th card. That might not be possible now, but I strongly suspect it will be possible again in the future. The banks play the odds, and part of the odds are what I call the musical chair part of lending, where one bank jumps in and then gets paid off when another one jumps in.
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RE: EconE @ 89 – Well first, I don’t think many/any escrows would take a direct deposit of gold.
But second, no matter how you trade something, the tax consequences will be the same. Now there might be something you could do to try to hide the transaction, and not report it, but I wouldn’t recommend that as a course of action. In fact, I’d strongly advise against it.
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RE: what goes up must come down @ 100 – They “looked for affordable communities . . ..” Accordingly they only found smaller towns to be the best place to live. There’s not a major city on the list. And smaller cities in Washington probably didn’t have the vibrant economy that they were looking for.
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RE: transplantella @ 99 –
“Our kids are gone, I don’t need a yard, my wages are mine to spend as I see fit not to dump in a stream of upgrades and repairs and and endless upwards spiral of taxes on a house. No”
Uhh you pay the taxes when you rent, your pay for repairs when you rent. The rental market has been crazy lately, but in past rental markets the taxes go up, your rent goes up. Repairs are typically priced into the cost of the rent.
I also get the benefit of writing off interest, and p taxes.
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Just to finish my thought process: Real Estate is one of the best ways to lose money. In the past ten years, if I even thought I might make money, I would buy a house.
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RE: Kary L. Krismer @ 101 –
You obviously haven’t seen the recent foreclosure stats. Sorry, but the banks won’t be lending to these folks any time soon. But you can keep hoping for a reflated bubble.
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RE: Scotsman @ 92 – A flat income tax will never fly. It reduces the ability of the .gov to manipulate us through tax incentives.
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RE: SeaBuyer @ 21 –
Perhaps. But you assume that the renters are “renters for life” not renters saving for a big downpayment to puchase when prices are lower. If that downpayment is big enough and the entry point low enough, the current renters may be able to handle a 15 year fixed mortgage no problem, and wind up actually owning their house much sooner than their “owner” counterparts.
And just because you anticipate the counter argument that the renters have been saving and investing the difference between PITI, doesn’t mean that this is not a completely valid criticism of your analysis. I know several couples that are strapped for cash because they’re dumping it all into the mortgage. And they act like saving for children’s education and their own retirement is some sort of “luxury” that they just can’t afford right now. This is nuts.
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RE: The Tim @ 10 – I just want to know where you can find a 2bd townhome for $1,000 in ballard. Currently looking for a place, and going rate for 2bd apts south of 70th seems be closer to 1200-1400….
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RE: chaz @ 110 – See @ 61 above.
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RE: Rojo @ 64 –
HI ROJO:
I have Puget Power, not City Light. Let’s put it this way, my house is all electric and my winter house bill(s) were less than my girlfriend’s Seattle 800 SF 2 bdrm apartment.
ROJO, also: unlike a lot of utility users, I crank my thermostat to 72 degrees 24 7s. I have a special needs adult living with me, so the washer and dryer are on constantly.
Electric use isn’t just the bill, just like your gas milage on an identical car isn’t necessarily my gas milage [I generally get about 30% less gas milage than car owners claim they get for the same car when I drive it myself].
Let’s put it this way, my old McMansion in Bellevue ate twice the energy costs my newer fuel efficient one eats now. I’m the same user, so its comparing apples to apples.
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RE: softwarengineer @ 112 –
I guess the reason I ask is that McMansion or not, energy costs are depending on use habits and construction/insulation quality. My current house >3000sf has lesser bills than my older house house half its size (both constructed in the last 10 years). I pay ~200/month on gas+electricity costs. I am interested in finding out if that is good or bad – that is why I asked. Btw, I have dual fuel system with gas and electric.
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By mukoh @ 65:
Perhaps you should change your screenname to slumlord ;)
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RE: Rojo @ 113 –
HI ROJO:
The way I’ve seen a lot of this glueboard housing get slapped together lately, it doesn’t surprise me, Hades they may of used no insulation on the energy pig and got it by the inspector with a wink and a nod [and a $100 bill in an envelope]….LOL….that sheet rock in new house construction from China lately was a real joke, horrifying toxic fumes.
But all things on a flat table, if you’ve got a big cathedral ceiling and more air to heat, it looks wonderful, but pull out your wallet come winter and it gives you no extra space to live in. Build a house with half the SF [and half the air to heat] and the same insulation quality, I’m positive you’ll get about half the heating bill with the same utility company. I’m an engineer and its pure thermodynamics.
Where you can really get cheap winter heat….get an upstairs condo surrounded by neighbors…LOL….heat rises.
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By softwarengineer @ 115:
In Bozeman, MT we rented an attic apartment with a massage therapist below who practiced in her apartment. One relatively mild winter we never had to turn on the heat. Even in the coldest winters we had monthly bills (electric resistance heat) of $40 at the peak, including lights and stove.
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RE: softwarengineer @ 115 –
Mr. “software”engineer, thermal loss does not scale linearly with floor square footage. It is HIGHLY dependent upon square footage of “exterior walls” (is your house an irregular shaped, rambler, basement, etc.), the number of windows and skylights, physical orientation (open south or west facing exposure), roof to square footage ratio (i.e., rambler vs two story) and a whole host of other items. Even if all things were even, I highly doubt that a house with twice the interior volume to heat would have twice the heating bill. It may take twice the energy to initially heat 2x volume house, but maintaining the temperature once you have heated your house to 72 degrees comes down to thermal loss (radiation + conduction + convection) through the walls, ceiling, and floor–this most certainly would not track linearly with 2x floor space or even 2x interior volume.
I took advanced thermal dynamics (and statistical mechanics which is the study of thermal dynamics at the quantum level) in college and while I agree with your astute observation that it is “pure thermodynamics” it is not trivial thermodynamics.
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RE: sead97 @ 114 – Every successful landlord has slum properties.
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RE: transplantella @ 100 –
Thanks! You put my mind at rest now! I was wandering if paying $1700 a month for rent is a wise choice !
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Speaking of using coins or gold to cover escrow, etc., here’s clever guy who was trying to use gold coins to pay for purchases based on the value of the gold, but use the coins face value for tax purposes. DOJ is after the whole lot of them… and on the INTERNET to boot!
http://www.lvrj.com/opinion/47141327.html
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RE: Scotsman @ 13 –
Long time lurker, first time poster. It makes me sick to read this, but it is so true. The responsible person ends up holding the bag.
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I rented in seattle and on the eastside from 1997 until 2006 in 7 or 8 different apartments, and can say that circumstances and timing as well as month to month leases can cost you a lot of money and irritation. I just don’t think it is common to get out for under 1200 with utilities for a 1 bedroom or 1600 for a two bedroom apartment in the nicer areas of seattle or the eastside over the long run. The best deal I had cost me twice as much as I had saved as when it was over asI had to quickly find a new place to live in bellevue during the internet bubble and rates had shot up. (The new place I found quickly also had a neighbor with torrets who yelled out the c word every time someone knocked on my door)
Sure, there are lots of people here and all over the city with great rental rates, and just as many paying too much, but there is always a catch to any good rental deal, which is usually stability and the lack of a lease which allows them to get rid of you as soon as it is advantageous for them.
I used to love my month to month lease, now it would be a huge potential liability for me.
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RE: Scotsman @ 120 –
That was a funny read. The goldbugs coming to his defense are absolute knuckleheads. It’s so easy to see where he ran afoul of the IRS. Not to mention…if he was paying them with GAEs as legal tender at their $50 face value then he’d be breaking the law WRT minimum wage laws.
You could still trade gold for a house if you wanted. Shoot…you could even trade a dang collection of Elvis collector plates for a house if you wanted to. It’s just a matter of paying the taxes correctly.
IMHO…why bother trading gold for a house? Just use dollars. That’s what they are there for. Keep your gold forever as generational wealth….until they confiscate it again. ;^)
…and ditch the Elvis plates.
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On the issue of cost of leasing ($1,200, etc.), I think the best way to do this comparison would be to look at rents in a condo complex–one that doesn’t have any major legal issues overshadowing it, and that qualifies for FHA.
The thing is, perhaps you can find a place to rent for $1,200, or a house in King County for $175,000. The question is though, would you want to live there? By using condo units you could do an analysis in different price ranges, and the “neighborhood” would be a neutral factor (although you might have view, condition or other location factors that could affect the result).
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By transplantella @ 100:
Could not agree more. The housing obsession is hopefully over for good. Why people can’t see counter tops and finishes do not make a happy and comfortable home, the state of mind of the inhabitants makes a happy home. evan in a rented home.
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RE: mukoh @ 53 -
I agree. I’m looking for a 3 BR house with a decent yard in a decent school zone (I’ve got two small kids) in Seattle, and I haven’t found anything even remotely acceptable for less that $2,400 a month. Maybe my standards are too high, but I doubt it. I’d like to see this post’s scenario re-run with a more realistic rent, like, say $2,500.
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I think Scotsman hit the nail on the head with regard to what is “advisable” or “a good life choice”.
Preserving one’s opportunities needs to be balanced against setting down roots and building community.
I am saddened to think how many people are trapped in krappy or unfulfilling jobs for financial reasons. Ethical people who are upside-down come to mind.
On the other hand, once you decide to settle somewhere, if you can afford a house and have enough flexibility to support it (e.g. if you get laid off, you are able to do something else, or have chosen modestly), then I think the rest of the discussion is moot. Whether or not you could have made a better investment decision is a 2ndary question, if you have created a home and are not trapped.
Very interesting discussion. Kind of like a psychological mirror…
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[...] emotional highs and lows.Up: “Let’s buy a home! Yeah! It will be great to stop ‘throwing our money away‘ on rent!”Down: “Dang, houses are expensive!”Up: “Hey, we can [...]
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