rent vs buy: a different comparison
As a person of modest means wanting to buy his first home (in Bellingham) before too long, I have found rent vs buy comparisons like Tim's (http://seattlebubble.com/blog/2008/12/0 ... cial-move/) and this from the NYtimes (http://www.nytimes.com/2007/04/10/busin ... APHIC.html) very helpful. However, they don't really ask the right question for me. They all ask: what's the financial difference between renting for x years vs. buying a house now, keeping for those same x years, and then selling it.
That's not what I want to know, because I'm not looking to buy primarily as an investment. I hope to live in the place for a good while. So I want to know: if the market continues to drop, which I'm convinced it will, how much money will I lose if I buy now, compared to waiting a year, or 2 years.
Here's what I came up with, a comparison between buying a house now, and waiting a year and buying the "same" house. I'd appreciate it if you guys would put this through the wringer, poke holes in it, tell me where I've got this wrong:
http://spreadsheets.google.com/ccc?key= ... wqBiiGPqbw
A few notes:
I of course had to make some assumptions. Here I'm assuming:
* the market will drop 15% in the next year. Maybe gloomy, but not out of the question.
* that I can get the "same" house now vs in 1 year. Of course different houses will be on the market, but let's just play along with that one.
* that mortgage interest rates will be the same in a year as they are now. Unlikely, but I honestly don't know if they're more likely to be higher or lower, so let's just call that a wash.
* that closing costs will be more or less the same. I know this won't be literally true, but I decided to ignore what will probably be a small diff. We'll put 20% down and won't need PMI.
* that congress will come up with something to replace the current tax deduction for first time homebuyers which expires this summer (http://www.irs.gov/newsroom/article/0,, ... 31,00.html). I suspect they may come up with something even better, but let's call this a wash too.
* that if we don't buy, we will rent a relatively nice house (which we already do), rather than save max money by renting a small apt.
* that rent on a decent house would be around $1200. Remember, this is Bham.
* that utility costs would be more or less equal in the house vs the rental. Probably not true, but we do pay most of our own utilities in our rental now.
* that maintenance costs on the house would be the same whether I buy it now or in a year. Even though the rule of thumb is a % of purch price, and the price will change, it's still the same house.
* that given the current climate, I should only expect a 2%, not 3% or higher, return on money invested for a short term like a year. This would probably be a combo of bonds, CD's, and regular savings deposits.
* that we're not willing to wait more than a year or so, no matter the market conditions (unless things get REALLY bad). This is just due to where we're at in our lives. It's not all about money.
The top section shows the costs for buying a $285k house now. The box in green I got by plugging numbers into Tim's spreadsheet.
The bottom section shows the costs for waiting a year, then buying an equivalent house.
My conclusions:
* I save almost $16k the first year by renting (diff in down payments, investment interest, year 1 maintenance, minus year 1 tax break)
* Mortgage payments will eventually be almost $200 less per mo, but that will be partially offset by some missed tax savings for the first few years
What do you think?
That's not what I want to know, because I'm not looking to buy primarily as an investment. I hope to live in the place for a good while. So I want to know: if the market continues to drop, which I'm convinced it will, how much money will I lose if I buy now, compared to waiting a year, or 2 years.
Here's what I came up with, a comparison between buying a house now, and waiting a year and buying the "same" house. I'd appreciate it if you guys would put this through the wringer, poke holes in it, tell me where I've got this wrong:
http://spreadsheets.google.com/ccc?key= ... wqBiiGPqbw
A few notes:
I of course had to make some assumptions. Here I'm assuming:
* the market will drop 15% in the next year. Maybe gloomy, but not out of the question.
* that I can get the "same" house now vs in 1 year. Of course different houses will be on the market, but let's just play along with that one.
* that mortgage interest rates will be the same in a year as they are now. Unlikely, but I honestly don't know if they're more likely to be higher or lower, so let's just call that a wash.
* that closing costs will be more or less the same. I know this won't be literally true, but I decided to ignore what will probably be a small diff. We'll put 20% down and won't need PMI.
* that congress will come up with something to replace the current tax deduction for first time homebuyers which expires this summer (http://www.irs.gov/newsroom/article/0,, ... 31,00.html). I suspect they may come up with something even better, but let's call this a wash too.
* that if we don't buy, we will rent a relatively nice house (which we already do), rather than save max money by renting a small apt.
* that rent on a decent house would be around $1200. Remember, this is Bham.
* that utility costs would be more or less equal in the house vs the rental. Probably not true, but we do pay most of our own utilities in our rental now.
* that maintenance costs on the house would be the same whether I buy it now or in a year. Even though the rule of thumb is a % of purch price, and the price will change, it's still the same house.
* that given the current climate, I should only expect a 2%, not 3% or higher, return on money invested for a short term like a year. This would probably be a combo of bonds, CD's, and regular savings deposits.
* that we're not willing to wait more than a year or so, no matter the market conditions (unless things get REALLY bad). This is just due to where we're at in our lives. It's not all about money.
The top section shows the costs for buying a $285k house now. The box in green I got by plugging numbers into Tim's spreadsheet.
The bottom section shows the costs for waiting a year, then buying an equivalent house.
My conclusions:
* I save almost $16k the first year by renting (diff in down payments, investment interest, year 1 maintenance, minus year 1 tax break)
* Mortgage payments will eventually be almost $200 less per mo, but that will be partially offset by some missed tax savings for the first few years
What do you think?
Comments
Assuming you have $57k available as a downpayment, I used the following:
57k down, 228k loan, 5%, $1224
vs
58k down*, 198.5k loan**, variable rates.
A 6.25% rate is $1222 P&I. Operating on that 10% decline you have 1.25% increase in loan rate before you "lose". This seems to be a pretty healthy margin.
However, most of your "savings" are in the distant future, and based on assumptions of declining prices (likely, but to what degree is hard to tell) and stable rates (unlikely, IMO - and not likely to go much lower), and NOT having a cheaper rent. I.E. my rental house is about $2300/mo total costs vs $3500 to buy/maintain/insure it myself - big savings in the current time frame. Since your rental is nearly as much as P&I will be, there's not a huge benefit there. And since you're planning on staying a fairly long time, the "value" of your home becomes pretty hard to forecast, as well as being somewhat irrelevant.
If I were in your shoes, and your rental agreement is flexible, I'd *begin* the buying process sooner rather than later... throw out some offers that undercut the 10-15% decline and if you get a taker, take. I'd look at it more from the perspective of which roof you want over your head and less as a profitable investment.
* 57k with one year of 2% interest
** 10% decline, 58k downpayment
In theory, you could find a home now that you could purchase for 15% less than comparable homes. If that's the case, and you figure another 15% drop will be the bottom, and if you figure you will indeed live in he house for a good long while, then it seems to me that it's more or less a wash. Some people feel like they're not in control of their own lives unless they own a home, some people feel much more secure if they own a home...These are partly emotional decisions ...
For me, personally, it wouldn't make sense to feel better emotionally by spending double my rent on mortgage, but if it's pretty close, it can't hurt to scour the listings now to see what's out there, and take your time figuring out what you want.
I look at it much more simply (maybe too simplistic).
1. What are rents now for what you want/need AND can afford?
2. What are the mortgage costs (assuming 20% down) for equililent homes, now that you can afford? What is the current YOY trend?
3. As Ira said, when rents and mortages are close to each other, it could be a tipping point to buy, all other things being equal. I realize those other things are numerous.
This does not invlove calling the bottom as much as what you can actually afford.
Thats background.
I have brought up before a scenario to them that a lot of people here talk about, i.e. rents are extremely close to mortgage payments on like property, and likewise median income affords a median priced home.
That has brought chuckles and to a fairly interesting opinion that long term guys have on this:
1st. Rents have never been in line or that close to make it a complete wash to own a home rather then rent or close to it. It will always cost more to own. GET USED TO IT. Have seen stats from 70s and on. Ownership is an achievement that majority of people crave for odd reasons.
2nd. This was actually proven. There is ALWAYS a large segment of the market that do not care nor pay attention to economic factors in their home buying decisions. How big that segment is, shows you the amount of sales in Dec. There is almost 1000 obliviously happy people there.
Boggles your mind, when you see 1k people jump off the fence for who knows what reason.
Do you really think it's so unlikely that rates could stay flat or even fall? What about this plan we kept hearing about?: http://www.wbaltv.com/news/18210465/det ... l&psp=news
Besides that, and the 15% price decline, I guess no-one's found major fault with my numbers?
It does seem that rents are a little higher w/ respect to purchase prices in Bham than in Seattle. It's also true that since prices are simply lower overall, a percentage loss or gain means less in dollar terms. So I'd be more cautious if I was buying in Seattle.
I should say that I wasn't looking primarily for advice on whether or not to jump off the fence now, but it's welcome if folks want to give it.
On that note, I should fill you in that we already are looking (we started in the fall, before some of the gloomiest econ news hit and started making me skittish). We considered buying a place last month, but decided against it. The place wasn't worth the risk.
There are a few reasons why I'm considering this so carefully. One is that we anticipate a pretty tight budget in a few years when we have kids. So even $200 less in mortgage every month would help. Same with the $16k we could sock away that first yr.
Also, although we feel pretty secure in our jobs, if the recession lasts several years, you never know. So while we want to stay put for a good while, it's not out of the question we could end up having to move sooner to pursue a job. So I'm trying to find a way to feel reasonably good that we won't lose our shirts if that happens.
I understand there's no guarantees with any of this.
Yes, I believe rents will fall substantially over the next 4 years. As the economy worsens more people start doubling up, living with relatives, etc, which shrinks demand. Further, supply increases as increasing numbers of home-owners start renting out rooms in their homes to make ends meet, and the surplus of condos/vacant homes wind up coming on the market as rentals.
As far as real-estate prices go, I believe that a further 15% drop in puget sound medians is terribly optimistic. I am on record for predicting a greater than 80% drop from peak prices by the time we hit bottom. We might see a 20% year-over-year decline in prices for 4 or 5 years in a row. Just remember that urban homes in Japan fell 80% in value from their '89 peaks, and are STILL hovering around these lows.
As far as the low mortgage rates go, these are actually incredibly bearish. Mortgage rates are low precisely because investors/savers are spooked about putting their money into anything other than government guaranteed securities. I wouldn't be surprised to see 30 year fixed mortgage rates drop to 3% sometime in the next 4 years, but that would NOT be a good sign (quite the contrary).
So, here's what I think will happen. Median real-estate prices will drop at least another 70%. Rents will drop some 40% or 50% in the same time-frame.
By the way, I have outlined my case for deflation at my blog at http://www.surkan.com and explained why low mortgage rates are bad at msurkan.podbean.com.
That preserves mukoh's GET USED TO IT, about mortgage costs vs. rents, and makes it sustainable with current income adjusted for inflation, or not. This also assumes Getting used to it, means that other costs of living don't impact the big real estate baron's assumptions too.
Huh? People will always compare the cost of buying a home to the rents on offer at THE TIME they are considering making the purchase. The fact that the cost of buying might be attractive compared to higher rental rates that were prevalent years ago is irrelevant.
However, I do suspect that rental rates won't fall quite as much as the prices of real-estate itself, so the costs of renting and ownership will likely come into synch at some point.
Of course, if my prediction holds true (i.e. that both rents and house prices will keep declining substantially for years), then many people may be skittish of buying a home EVEN if it is cheaper than renting. If people become concerned that prices will keep falling they will put off purchasing.
By the way, I actually believe this will happen when we hit bottom (i.e. that the cost of renting will be MORE than the cost of buying), which is NOT the case today.
That isn't necessarily true. People may compare the historical cost of buying a home to the historical cost of renting. It seems that it would be smart to buy when houses are at a historical low. Similarly, it would make sense to sell and rent when housing is historically high.
http://www.latimes.com/business/la-fi-rent8-2009jan08,0,5261091.story
* quality of the apartment complex(air quality, proximity to high crime area)
* is it maintained or derelict
* is the landlord any good
* is washer/dryer a must in the unit
It's not all black & white like some people believe.
http://realestate.yahoo.com/promo/5-rea ... uying.html
We are a lot farther from equilibrium than falling house prices. Actually, house prices must rise from here to reach a true equilibrium. That is because population is increasing, and yet new construction is at historic lows. There is a short term "doubling up" bubble that is lowering demand for housing in the short term. That is causing house prices to fall until population catches up with previous over-building plus the short-term doubling up. At that point the housing prices will stop falling, and people will stop doubling up. That will cause people to want their space again, and will drive up rents and then building will resume, but only once prices have risen to the cost of new construction again.
Rents were artificially low during the bubble because people were willing to rent for a low price while they made money on appreciation. Now they are artificially low because of the oversupply built during the bubble. As long as population increases, the rent and cost of housing will tend towards the cost of new construction, plus the cost of the land, which is determined by the value of people's time spent in commuting and on gas.
If that increased population doesn't come with a fat a$$ built in bank account then it doesn't mean squat.
Where are the official figures WRT people "doubling up"? Are you saying that the lowered demand has nothing to do with bubble prices?
Get real. Being a landlord is a business, not a charity. Rents are set by the market.
Rents "artificially low"? That's a great one. I guess housing prices weren't "artificially high" eh?
What is this "population increase" you keep referring to?
Are babies born with a sizable bank account and a line of credit now?
Immigrants? The wealthy ones probably already own a home in the U.S.
How is cost of land determined by commute time and gas? Doesn't money come into play? If a person doesn't have the income to support house prices, time and gas prices are a moot point.
Not once did you mention "incomes" in your response, nor did you mention the fact that rents are falling either. Go figure.
I have a friend in BHAM who is always trying to get me to move up there. So...I look at home prices...they are still way overpriced. Pay no attention to the "asking prices" on Craigslist WRT what rents really are...Rents are negotiable also and many people have pie in the sky asking prices and the homes will sit indefinitely.
People are also desperate for roommates up there so take the "doubling" up thing with a grain of salt. My friend knows PLENTY of people that would love to rent a room from me and keeps reiterating the fact. Thing is....I don't have any reason to live in BHAM. BTW...my friend isn't the one looking to rent rooms out. He just knows many that are, and those people would rather do it by word of mouth before they throw their offer out to the world on CL.
Prices have a ways to come down in BHAM IMHO.
If your income is likely to drop, BUY BUY BUY!
When you rent and your income drops, you might get evicted! If you buy, you'll be eligible for the housing market victim compensation fund.
Only if we go back to 1800s-style of many people sleeping in the same bed. The US population goes up by 3 million per year, would would drop current inventory to below the usual level, and with prices already below the cost of construction will lead to a lot of people soon saying what the heck and taking the plunge. There are a lot more vacancies than listed in the inventory, so people could conceivable put all their vacation homes up for sale, but those are in locations where there are not enough jobs for people to want to buy them as their regular homes, so they don't really matter. Also the the excess inventory of homes in retirement areas don't factor in to prices in job centers.
There is a crisis of confidence in our national leadership that is causing people to be extremely cautious in their housing, and that is making the problem worse.
You are too eager to make a straw-man argument. First, the 3 million per year growth was in a very different environment. Immigrants (both legal and illegal) are electing to stay home after all. Young couples are putting off having children. And though I haven't seen it announced in the news yet, you can expect to see stories soon about shortened life expectancy due to lack of health care and perhaps people's inability to provide food/shelter.
But, let's assume none of that so much as slows our immutable 3 million a year in population growth. There are still other factors you are dismissing. Only the poorest demographics are still having more than two children per couple. How will they pay for a house? And even if they do, we're only talking about 1% a year growth. If just 1 out of every 10 households on the block add an additional border, you could see a decade of 1% population growth with need for exactly 0 new houses built.
There is absolutely no reason to expect demand to return to 2007 levels until at least a few years after the recession ends.
Anecdotal evidence that there is tons of housing available for a growing population:
1) A friend of mine who is director of a research program at the Jet Propulsion Labs is one of 5 brothers raised in a house with one bathroom. He is the oldest and went away to college in 1977 and the family did not consider themselves poor or deprived.
2) I did the house-mate thing for 5 years in a house with 1 bathroom and 3 independent professional people living in it while I was working in high-tech from 1989 to 1994 and didn't consider myself put out. We could have each afforded a 1,600 sq foot house, but were very comfortable where we were, and enjoying the extra disposable income we each had. The roommates changed over a bit during the 5 years.
3) My husband and I both work in high-tech and we rented the exact same 2br 1ba apartment from 1995 to 2005 just because it was easy and cheap and left us tons of time to kayak rivers and climb mountains. We did not feel deprived.
4) I am amazed at how many SFD have a full unit downstairs complete with 2nd kitchen. But so many of the recently build huge 2,500 sq ft homes could easily be converted to that model.
5) One person can comfortably live in about 800 sq ft with no walk-in closet, as evidenced by the smaller size condo sales. A couple can live luxuriously (depending on your definition of luxury, and I'm using my own) in 1,100 sq ft as evidenced by my own experiences.
There is tons of excess sq ft of housing that can absorb huge population growth very comfortably. Again, I use my own definition of comfort, but right now my spouse and I are much more comfortable in our 1br 1ba than anyone with an under-water mortgage no matter how many br and ba they have.
I wonder what the avg amount of sq ft per person was in the 1800s and how many decades of population growth it would take for us to get to those levels?
I don't remember the exact numbers, but we did cover this once before. Forget 1800, in 1950 the average home was only about 1,600 sq ft, and it held about 2 more people on average. If standard of living regresses 30 years and stays that way for a prolonged period, we probably have 25 years of supply in urban King County.
Not everything is subject to this, of course. But the irony is that people have been taking up more and more space even as a lot of daily use items have gotten smaller and more efficient. The truth is that too many people fill their extra space with stuff they don't need, rarely use and sometimes don't even remember. There are multiple TV shows about helping people clean out their junk. Standards of living don't need to come down to allow people to liven comfortably in less space, just standards of waste.
When large families lived in the same house, they could all get together in the same room and watch network tv shows because there wasn't that much to choose from and nothing else to watch. That won't ever happen again. Ever try to read a book in the same room as a kid talking to his friends while playing on XBox?
Conversely, the push towards telecommuting means people want a room they can dedicate to their work. Perhaps with the husband and wife in separate offices. People were rushing to buy McMansions with near-zero lot lines because that suits their lifestyle. Having unemployment go from 5% to 10% for a couple of years while inventories are drawn down is not going to change that.
In any case, save up all your ideas for saving space for when the inevitable population pressure catches up with current housing. It will be very difficult to build a house when inflation drives up mortgage rates, so we will have to make do with little more than the current housing stock that we have now for quite a few years to come, until rents rise enough to fully pay for new construction, which as people have noted will be 2x-3x current rates.
There are 19 million empty houses in the US. Probably more, by now. Some cities deal with vacancies by bulldozing houses, because it's easier than finding someone to buy it. 3 million people per year will require at least a decade to eat up that volume.
Locally, there's a huge glut of condos, townhomes, and new-construction SFH in the greater Seattle area. We're grossly overbuilt. Only now are housing prices starting to reflect that.
"The share of empty homes that are for sale rose to 2.9 percent, the most in data that goes back to 1956"
"The vacancy rate was 3.5 percent in urban areas and 2.6 percent in suburbs, the report said."
It won't take long for even 1% growth per year to wipe that out. Great Britain just recently started monetizing their debt, and the Fed will consider that in their meeting next week. If so, that will create jobs here that will attract immigration from countries where they can't do such blatent monetization because it would be a more immediate disaster.
As you point out, some of the vacant houses are in locations of such little value that they are demolished. The movement from rural to urban areas passed the 50% mark, but is still continuing, leaving shacks like the ones you see sometimes on http://www.lovelylisting.com/. The US population is also migrating west, leaving large urban areas in the Northeast and Midwest such as Detroit as ghost cities. The driver's license for Feb is out, and it shows that while people didn't move in to Washington as much as before, there were leaving at an even lower rate, so the net gain is still almost the same.
Hear hear!