Here’s a comment that was left recently by a reader that is a good example of an outlook shared by many people who sat out the housing bubble and have been waiting for “the bottom” or something close to it:
Any top or bottom call needs to mention “investor” psychology since I believe psychology is the force driving prices above or below fundamental value. When the last few bulls give up real estate as an investment, and when the average person argues that renting is better than buying, we will be close to a bottom. We’re not quite there yet. You basically watch people and when almost everyone hates housing, you’re close to a bottom.
I mostly agree with this. Just like the infamous June 13, 2005 Time Magazine “Home $weet Home” cover was a strong indicator that we were (nationally) near the top, a good sign that we may be at or near the bottom would be a widespread sentiment that buying a home is a sucker’s game and renting is the way to go.
However, is it true that “we’re not quite there yet”? As evidence that maybe we are there, I offer the following recent articles in fairly major news sources around the country:
Reuters: New American Dream is renting to get rich
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, “100 percent of the time it was better to rent, rather than own.”
That’s right: 100 percent.
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So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era.
Bloomberg: Why Renters Rule U.S. Housing Market (part 2, part 3)
The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy.
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Despite the collapse in prices, homeownership is still expensive relative to rentals, even as apartment rental rates rise and vacancies decline.
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The consumer retrenchment and recession I foresee for this year will only add to the lack of affordability of owning houses and to the attractiveness of renting.
The Atlantic: The End of Ownership: Why Aren’t Young People Buying More Houses?
Between 1980 and 2000, the share of late-twenty-somethings owning homes had declined from 43% to 38%.
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The decline in young home owners is a puzzling trend. Interest rates have steadily declined over the last 30 years. Mortgage lending has loosened. Women have ascended in the workplace and supplemented their spouse’s earnings. How in the face of all of these positive developments did home ownership among the young keep falling?
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Maybe not. But if the last 30 years have taught us anything, it’s that planning for the future is an act of faith. Supply chains and software eat our jobs. Financial wizardry eats our savings. The cost of insuring against these risks — that is, both college and literal insurance — is rising. “It feels like anytime we hit around $20,000 something terrible or some unexpected thing happens,” Steve Kinney, a Brooklyn resident, told the New York Times last year. He’s part of a new renters society, and rental prices are rising now that housing prices aren’t.
The Atlantic ran a follow-up to their piece a few days later: ‘We Wish Like Hell We Had Never Bought’: Voices from the Housing Crisis
On paper, at least, my wife and I are perfect home-owner candidates: Married, taxable income hovering around $100K, parents of 2 children, owners of 2 dogs. We both hold master’s degrees, she owns her own business, I work a unionized job. Our only debts are our mortgage, one car payment, and a loan from my father that carries no interest. Between that latter loan and an inheritance I received, we put down fully one-third of the cost on our 1,100 square-foot, three-bedroom home in San Jose, California.
And we wish like hell we had never bought.
We are tied to a place that is prohibitively expensive to live, requiring both of us to work instead of one parent staying home. Homes require constant upkeep and expense. Psychologically, young buyers like us fail to truly do the math on property taxes, homeowners insurance, flood insurance, earthquake insurance, plumbing, yardwork, general maintenance, drainage, so on and so forth. Young couples buy what we can afford, not what we will need: our home is too small now that we have added a second child.
So does the average person still think that buying a home is always the best decision, or has the tide of public opinion turned against buying? Personally, I think we have already swung just about 180º from the “Home $weet Home” era.
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Renting is great until the landlord decides to increase your rent 10% and you either have to suck it up or move. Moving has it’s own costs and there’s no guarantee that the landlord won’t raise rents after another year as well.
Basically, there is hard and fast rule in terms of home ownership and/or renting. I rented various places for 10 years after college and then bought a house last fall that had been sitting on the market for two years and had gone into contract and fell out of contract once already but that has been my particular situation over the last decade.
For renting, my advice would be to expect your rents to increase at the minimum, 5% a year for the next two years, perhaps even 10% if you live close to downtown Seattle. Landlords aren’t in the business of altruism, know that supply is tight until early 2014, and want to take advantage of a lack of units, at least until a flood of supply hits the market in a couple of years. If your rent is $1400 a month for a 1 bedroom, can you handle it going up to $1540 at the time of renewal and then up to $1620 after another year?
For home buying, I’d say don’t buy more of a house than you need. It’s rather obvious but some people fall for a house pumped up on interior square footage and then kick themselves in the summer time when their yard is 50 square feet but their house is 3,500 sq ft. I also consider a Freddie Mac/Fannie Mae backed mortgage as an inflation hedge. I hate that the Fed Government 3,000 away is involved in the housing market, but I also hate that the Fed has electronically been creating money out of thin air to monetize the debt. If you borrow $300,000 now, inflation will make the burden of paying it back easier. A month $2,200 mortgage payment will remain constant but your salary or earnings with inflate along with general inflation (not at the exact same time since wages are “sticky” and take time to be negotiated upwards to compensate for general inflation).
In sum, there should be no hard and fast rule about ownership vs. renting. No one has the same investment profile and same portfolio allocation so why should everyone rent now or everyone buy now? Basically, I find the blanket assertions about all of this rather silly.
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I look at buying a single family home as the same thing as renting. It makes sense in some circumstances. There are definitely some foreclosures for sale whose all in costs (mortgage, PMI, insurance, taxes, etc.) would be comparable to renting but only after a rehab (done with a rehab loan of course) and only after clawing your way to the home past all the cash buyers out there.
An entirely different category is buying a multi-family (2-4 unit) property. I just bought a triplex with my wife. Rehabbed two units already. We live in one and the renter in the other pays our mortgage and PMI. The other unit will be ready in a week or so and will definitely cover insurance, taxes, vacancy, maintenance, etc, etc and put 2-300 in our pocket every month.
Is it a good time to buy? For me it is hell yeah. I’m scaping together for my next one.
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Golly you sound just like a hedge fund from New York that is starting to buy rental homes from captured government entities at a steep discount to real value with little or no risk while the taxpayer picks up the tab. You sound just like an investment banker projecting cash flow increases of five to ten percent per year when the renters’ real wages who would pay that rent are declining. Go make your pitch in another city. Maybe one like Vegas where there are tons of gullible people.
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RE: bd @ 13 –
The stock market isn’t the only option, and I didn’t say that it was. The post is about investor dollars. Where are investor dollars going to go?
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By Scotsman @ 53:
I disagree. 99% of people here fully understand buying a home is first and foremost a form of mental masturbation often practiced by those without anything else in their lives to look forward to or feel joy about. The other 1% are investors who have hot-looking girlfriends with good jobs.
And 99% of those who bought into the “house is more than an investment” philosophy back in 2007 will tell you they are dead sick to their stomachs for having wrecked their financial futures.. The other 1% are liars.
BTW, aapl hit a new record high today, up 3% from yesterday. It’s now at $568, and I’m rapidly approaching a double in less than a year. That will buy a whole lot of mental masturbation that won’t require 30 years of debt slavery to pay for.
Moral of the story: Investing is a whole lot more than investments.
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RE: Jonness @ 105 –
Money is great, but it is a means to an end. Without a bigger focus and a greater goal, all the money in the world won’t buy you out of the shallow end of the pool.
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BTW: In the above post, I’m not trying to be insulting to those who want to buy a house. I want to buy a house too. In fact, I’m currently in the market for the house. My point is, people get excited, and they start seeing backwards. The truth is, a truly good investment is a whole lot more than a house. So make sure your house is a truly good investment.
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RE: Jonness @ 105 –
Congrats on your investment!
A guy I knew like to say that when your fridge is empty and the cupboard’s bare all you think about is food. But when you’re used to seeing both as full to overflowing pretty soon food never crosses your mind and you start looking around to see what else may be going on. Friends, family, your health, causes you believe in, there’s a whole world full of other adventures out there besides wondering if your home is an optimized investment. Bottom line, if you buy something you can truly afford it will never be anything but a pleasure. Not everyone is willing to live in a trailer in their bud’s back yard until all is perfect in the world. But to those who want to give it a try- go for it!
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By whatsmyname @ 6:
I spent most of my life as a starving artist creating and inventing the future. You are preaching to the choir.
However, I suggest you take a long look at your claim, and ask yourself, if money isn’t all that important, why would you lock yourself into 30 years of indentured servitude just to get your hands on more money than you are capable of earning from your day job?
The truth is, in most cases, it requires a certain amount of money in order to achieve your greater goal. If that money is nothing more than debt financed by indentured servitude, say goodby to freedom and autonomy and say hello to your new life as a slave.
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RE: Jonness @ 109 –
I didn’t say money is unimportant. I said money great; just not for its own sake.
I am frankly unsure how 30 years of mortgage payments makes one more indentured than a lifetime of rental payments. I’ve been here a while. I like my home; I got to live how I wanted, and if it fit in with my plans, I could sell in this market and walk away with cash. What kind of slavery is that? Have I mentioned the people who lived for the future, and then forgot not to have a heart attack first?
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By Scotsman @ 8:
To each his own. I have my own trailer. Can I move it into your yard? BTW, I have tons of musical equipment that I’ll need to store in your basement. I promise not to practice after 10pm, and I will not play more than 12-hours-per-day.
Give me the address, and I’ll swing by later. I’ll repay you by providing backstage passes to the main stage at the 2012 Seattle HempFest. Bring your own bong!
http://www.shol.com/agita/pigs.htm
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For what it’s worth, I meant there is “no” hard and fast rule.
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RE: Jonness @ 111 –
Deal! But you’ve got to play for my summer lawn parties. ;-)
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By Scrawny Kayaker @ 88:
Oh no, I did it again. I ignored your Alinksy ridicule strategy and posted more hard facts — what to do?? Maybe create more aliases and use more unethical, manipulative ridicule? Maybe call the Tavistock Institute for some guidance?
For anyone wanting to understand the how and why of UN Agenda 21 and its war against private property rights, please check out this information:
http://www.freedom.org/board/articles/lamb-906.html
http://www.freedomadvocates.org/articles/private_property/
Have a nice day!
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RE: whatsmyname @ 110
It’s interesting how many people equate not owning a house to not being alive. And then a fair amount of others feel that the opposite is true, and as soon as you stamp that microchip into your forehead, you lose your soul.
I’m not saying don’t buy a house. I’m saying, don’t be a slave to your debt payments. I own a modest home free and clear. It’s a nice way to live. If you spend your entire life making interest payments, you can never know what it’s like to be free from the burden. Since most people aren’t born rich, a good way to pay off the house early is to live frugally and save up a big down payment before buying it. Then buy within your means.
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RE: Jonness @ 115 –
I’m impressed. In post 107 you want to buy a house. By post 115, you already own one free and clear.
If paying interest bugs you, you are right not to do it. But you and I will pay something for shelter as long as we live because there is always taxes and maintenance. I don’t mind throwing in a little P&I as well. I’m hardly over-leveraged, and I’m sure there are plenty of bubble readers paying more in monthly rent. I did my frugal years, and I also did a large down payment, and I also don’t want to be caught with no choices, so I’m with you there. But we are both old enough to have known people who were consumed with building their net worth. I don’t want to die with a big bank account and a small experience account.
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