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A Dare That May Pay Off
Old 04-08-2007, 03:29 AM   #1
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A Dare That May Pay Off

Scott Burns makes a case that buying even expensive real estate is a better bet than renting if you intend to stay put for awhile.

A Dare That May Pay Off

" Intuition says they should rent. San Diego rents are about half the cost of buying and financing a comparable house. But intuition is wrong. In fact, there is a sublime beauty to falling knives. It still pays to buy, not rent – with this caveat: Arlo and Amanda must be confident they can remain in the house for many years."

" So here's how rent vs. buy plays out if you use consumption smoothing. If San Diego home values rise with inflation or decline, Arlo and Amanda will enjoy a higher lifetime standard of living than if they rented. If the real estate market continues to soar, their lifetime standard of living could be reduced to that of a renter – but they would have the option of selling.

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Re: A Dare That May Pay Off
Old 04-08-2007, 03:50 AM   #2
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Re: A Dare That May Pay Off

That word consumption smoothing. I is used by Laurence Kotlikoff (economics professor) and part owner of E$Planner. I think he and Burns teamed up to write a book.

Their contention is that your retirement assets are there to meet your needs and most of the Financial Service Companies over estimate needs. Partly due to reduced spending as one gets older!

The buy vs rent issues has a number of variables that come into play to determine if one is better-off or worse doing one or the other.

I think for most average people, it has been long considered that home ownership reduces their expenses over the long haul (and is therefore a better investment). But to properly compare these situations, the properties would need to be identical and the only difference was the vehicle used to be able to live in it. In otherwords the only variable that would change would be buy vs rent (i.e., ceteris paribus).

If I chose to rent a small bedroom apartment in the same area that I might other wise choose to buy a $500,000 house... the comparison would not be correct. I would probably be better-off asset growth wise renting the small apt. Why... because I am actually comsuming less and saving more.

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Re: A Dare That May Pay Off
Old 04-08-2007, 09:47 AM   #3
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Re: A Dare That May Pay Off

Lot of “ifs” there. Hey, if Dr. Arlo stays married to Amanda, he will on average be dead in just 20 years at age 55. This is according to another of this morning’s threads. (Is this another April Fool’s Day?) If on the other hand he gets divorced as many young and suddenly affluent doctors do, his stay at home wifey gets the house. Plus, since she obviously cannot continue to make the payments, the good doctor gets to make them for her, plus a nice hunk of spousal support.

Then there is the not remote possibility that Dr. Arlo won’t like his new group, or they won’t like him, or he may even find that he is bored by passing gas all day and want to ER. He sees that if he and Amanda lived in a one bedroom apartment for only 5 or 6 years and saved money like crazy they could retire to San Blas and he would never again have to endure some crabby surgeon putting him down. Plus, no fun wearing those scrubs around all day if he can’t even use them to pick up girls.

So then they don’t want their expensive house after all.

I think both Scott Burns and this suddenly ubiquitous ESP-Planner guy need an injection of reality.


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Re: A Dare That May Pay Off
Old 04-09-2007, 10:43 PM   #4
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Re: A Dare That May Pay Off

Burns wrote a book with Kotlikoff on future generational conflict. Later, Kotlikoff teamed with others to produce the software, ESPlanner. Burns has stated that he has no investment in ESPlanner. He probably has a copy to use in his new financial planning business.

For me, there is a large difference between the time and money for single family home ownership, and the same costs of renting. Burns seems to just look at the payments plus a little more for maintenance. I quit landlording when I found that I spent my weekends working at the renter's place.
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Re: A Dare That May Pay Off
Old 04-10-2007, 08:48 AM   #5
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Re: A Dare That May Pay Off

$56,000 to own a house for the first year versus $30,000 to rent a house for the first year? Is that even a realistic assumption in San Diego? Does a "median" house that costs $579,000 rent out for $2500/month? Looking at San diego craiglist, I didn't see many places renting for $2500/month. I was under the impression that rents were closer to 1/3 the cost of buying a house.

And even though rents will rise with inflation, so do costs of home ownership. Taxes will rise (even with CA's limits on increases, which may end at some point). Insurance will rise. Cost of maintenance, repairs, and renovations/remodels will increase with inflation. The ONLY thing that remains constant year to year (assuming a fixed rate mortgage) is the mortgage when buying a house.

Consider what happens 10-20 years out when it's time to remodel the kitchen and baths and replace the roof. The renter has zero costs (the landlord does it, or the tenant moves to an already updated place). The homeowner is paying out a bunch of money at future year inflated prices. Think about how many furnaces/AC's you'll go through over the course of 30 years. Maybe get the chance to replumb the place, or deal with major foundation settlement. Hope the termites don't get you.

Admittedly, 30 years out you'll own your house free and clear (subject to taxes, insurance, maintenance, repairs and continued capital upgrades, all of which will continue to rise w/ inflation). And all the renter will have is a HUGE stash of money from which they can write out the rent check every month.

Think about saving an extra $25,000 every year and using this pot of money to pay for future rent.

I can understand an emotional "quality of life" argument that says buy a house, raise a family in it, and make it a home. But it seems hard to justify buying a house instead of renting from a strictly financial perspective.

What happens when the Anesthesiologist gets a job offer w/ a 10% pay bump in LA or SF? Time to sell (hope that house hasn't gone down in value 20%!). Time to give the realtors their cut.

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Re: A Dare That May Pay Off
Old 04-10-2007, 10:16 AM   #6
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Re: A Dare That May Pay Off

hmmm, interesting read ... have to say thou, in 20 years I've never seen taxes DROP because values dropped. The cities and town have fixed needs and the tax rate is set accordingly. And insurance is paid to the BANK based on the amount OWED so insurance is certainly not going DOWN in the event of price declines.

Wondering if the "long time" commitment exceeds the average home ownership (7 years).

A few thousand dollar swing is a "push" when you're talking about a half-million dollar investment, IMHO. Point being it's hard to see how a few k REALLY favors owership at those prices.
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Re: A Dare That May Pay Off
Old 04-10-2007, 01:13 PM   #7
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Re: A Dare That May Pay Off

It does take much longer than 7 years (try 30) but ownership is most often a lifetime affair, only the home changes. If one could save and invest the difference one would probably end up ahead, but taxes take an awesome toll on this strategy with high marginal rates. Rent increases in these areas average over 5% over the long term, more than incomes in fact. That is what desirability is all about. Still the difference is extreme now and there will be better times to buy in the future, but it is an open question whether one would be able to when it is, that is, whether one has a job to qualify for a mortgage. Live long enough and you probably won't regret it, especially if you insist on living in these areas.

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