Seattle Bubble

Here’s an interesting piece that ran in the Seattle Times today: To rent or to buy? The story of two couples

The decision to sell their house and go back to renting has meant more time and even more money for Jill and Dan Keto and their family.
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“The point is, putting money into a house is not a wise allocation of funds right now,” says Keto. “And just because you have a home does not mean you will be happy.”
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About the same time the Ketos were going from owners to renters, another 30-something couple and their 3-year-old Great Dane mix went the other way.

After renting an apartment on Capitol Hill for several year, Shana and Michael Graham decided to buy their first house. One of the reasons they made the jump was because they saw prices falling.
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“You have to think of it as perceived value until you really have to sell it,” he says, comparing the housing market to the stock market. “It’s just a perception at this point about how much you would make or lose because it’s always changing.”

It’s interesting to read the rationale of people that are making these decisions right now.

Here are a few other tidbits pulled from the article:

The best thing to do is not think of a house as a short-term investment, says Danilo Pelletiere, research director for the National Low Income Housing Coalition, based in Washington, D.C.

“Ask yourself if you will feel really badly if you buy a house and it falls in value,” says Pelletiere. This won’t happen if you are buying for the right reasons — because you like the house and plan to stay for a while.
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Anyone who plans to live in their house for five years or more would still be safe to buy, according to Pelletiere, who says that rule of thumb still applies even in this declining economy.

These comments are similar to something that was said in yesterday’s comment thread by Steve Tytler:

We may not bottom out on home prices this year, but if you are buying a home to live in for the next 10 years, who cares?

What Steve Tytler and Danilo Pelletiere both seem to be ignoring is what commenter patient pointed out:

If I can get the home 10% cheaper by waiting another year it will improve my cash flow for the time I have the mortgage. That is surely something to care about.

I ran the numbers on a scenario like this to see how much money we were talking about. Here’s what I came up with:

Say you are in the market to buy a home today, priced in the $400,000 range. You have $40k for a down payment. We will assume 5% interest rates.

If you buy now, your monthly outlay for principal and interest only is $1,933. Over a 10-year span, you spend $231,960.

If you wait a year and buy a similar house for 10% cheaper, your monthly outlay for PI is $1,718. Over a 10-year span you spend $206,160.

That’s a monthly savings of $215 (over 10%), while the 10-year savings is $25,800.

To me, saving $25,800 over the course of 10 years is nothing to say “who cares” to. Danilo Pelletiere said that if you buy a house for the “right reasons,” you won’t “feel really badly” if the price goes down. That’s all well and good, but passing up a savings of over $200 a month is a matter of my financial bottom line, not my emotional well-being.

What’s also amazing to me are some of the comments left by Seattle Times readers on the story:

So now the renters won’t have enough deductions to use the long form. No mortgage interest deduction, no property tax deduction, no sales tax deduction.
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The only advantage I can see with renting is that you have no debt. But you forfeit all that leverage and tax deductions.
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In addition to the favorable tax treatment realized by a homeowner in the form of itemized deductions and capital gains exemption, one should also consider the current actions of our federal government.

Clearly it’s going to take more than a year and a half of falling home prices to shatter the ingrained perception in many people’s minds that buying a home is always the right decision, no matter what.