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How houses eat money
Old 03-26-2009, 07:09 PM   #1
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How houses eat money

I wanted to share this story with the rest of you to see what you think. I thought he raised some great points, that many of us have never thought of. The scary part is he wrote this at the top of the boom.




How Houses Eat Money - WSJ.com
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Old 03-26-2009, 07:21 PM   #2
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Originally Posted by rec7 View Post
I wanted to share this story with the rest of you to see what you think. I thought he raised some great points, that many of us have never thought of. The scary part is he wrote this at the top of the boom.
How Houses Eat Money - WSJ.com
I think he makes a pretty good financial case for owning a home, if you can stay put for a while. With much of his cost accounted for he is a bit ahead. Maybe if routine maintenence were added he would be about breakeven. But as he points put, he has paid no rent all these years. So in effect he traded his own homeowner labor, yard care, etc for rent.

I still wouldn't want a house, but for most people it probably sounds pretty good.

Ha
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Old 03-26-2009, 07:38 PM   #3
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The scary part is he wrote this at the top of the boom.
I think that is the key point and that it appears he put a great deal of money into the house. Forget about what he put into it - he bought a $442K house at a high point. That he put 130 into a 165 house and time frame for analysis really puts into questions his point of view.


Combine that with my $165,000 purchase price and the $130,000 in home improvements, and I am up to $442,000 -- not much below my home's $500,000 current value. The picture would be even uglier if I counted my initial closing costs, routine maintenance expenses and annual homeowner's insurance, to say nothing of the innumerable hours of my own time that I have sunk into the place. And while I have no intention of selling, that day will come. Imagine I sold today, paying a 5% real-estate commission. After enriching the brokers involved, I would net $475,000, perilously close to my total cost.
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Old 03-26-2009, 07:40 PM   #4
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I think that is the key point and that it appears he put a great deal of money into the house. Forget about what he put into it - he bought a $442K house at a high point. That he put 130 into a 165 house and time frame for analysis really puts into questions his point of view.
What does this mean?
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Old 03-26-2009, 08:05 PM   #5
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I felt he spent way too much on improvement. I have not done the calculation, but his property tax and mortgage interest also appears high for a 165K house.
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Old 03-26-2009, 08:07 PM   #6
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The author needs to subtract off the imputed rent value that he derived from living in the house from the expenses. That just may change the numbers to favor ownership.

The author also makes a great case as to why you don't ever want to put too much, in terms of improvements, in a modest house. Because you'll never recoup your costs.

This same logic goes for "classic" cars that you want to restore. Do it for the love of it, knowing all along that you'll never recoup your time and money.
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Old 03-26-2009, 09:09 PM   #7
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I think he makes a pretty good financial case for owning a home, if you can stay put for a while. With much of his cost accounted for he is a bit ahead. Maybe if routine maintenence were added he would be about breakeven. But as he points put, he has paid no rent all these years. So in effect he traded his own homeowner labor, yard care, etc for rent.


Ha
That is what I was thinking but I would like to add one point. What if he had around 450k in CD in 1992 that would pay 5% or better. That would produce about $22,500 so if he could rent for less than that he would be ahead.
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Old 03-26-2009, 10:29 PM   #8
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Another error he made in math is not counting any of his other deductions he got to take instead of the standard deduction. He calculated the difference as

(mortgage + prop taxes) - standard deduction

In reality, it should be

(mortgage + prop taxes + state income tax + other dedcutions) - (standard deduction)
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Old 03-26-2009, 10:36 PM   #9
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That is what I was thinking but I would like to add one point. What if he had around 450k in CD in 1992 that would pay 5% or better. That would produce about $22,500 so if he could rent for less than that he would be ahead.
True, but to account closely for each of these we would have to go year by year. He didn't invest the full $450k in 1992; he invested most of it over time. Likewise, he would have paid rent year by year, likely increasing each year. You could set up two NPV series and compare them.

It is easy enough to figure out, if this kind of thing would sway someone to make one choice over another.

Ha
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Old 03-26-2009, 11:13 PM   #10
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While a house may become a money sink hole if one is not careful, I never split hair on trying to figure out the cost of owning vs. renting. We needed a place to raise a family, and once we decided to stay in one place (has been more than 20 years now), a rented house just did not feel the same. So, that's that.

We slightly overbought at first, but then grew into it. Once we become empty-nesters, may do something about it. Or we might just stay put (I would have to change my screen-name to reflect the fact I have given up the Puget Sound pipe dream).
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Old 03-27-2009, 04:45 AM   #11
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fuuny i had written something very similiar during a discussion on another site........................................ although we call a home an appreciating asset its part of a much larger picture called your overall housing costs... because you live in it these costs are all paid by you and accumulate over a lifetime unlike rental property or investment property which you pay off the income . . the rise of the house in value over time merely offets the giant lifetime expenses of all the costs a homeowner has for the priveledge of owning that home..... your taxes, mortgage interest, repairs,renovation,maintaince,landscaping,insuranc e ,the gardner,the snow plow guy, the list goes on and on.

a lifetime in housing costs are really measured in who lost the least the buyer or the renter, not who made the most as those expenses whether you rent or buy usually eclipse the value of home appreciation over a lifetime. it never stops accumulating even if you sell a home and buy another... like rent just keep adding it all up over a lifetime.

soooooooo if your buying a house think of it as a consumption item, not an investment, think of it as a collector does of fine art, or your jewelry. its something you use and consume and costs you money. the fact a home rises may or may not mitigate the expenses to put you ahead of renting

buy a home for all the things a home can give you (good or bad)

the joy of owning something
doing as you please
the security of owning a payed off home
relatively fixed costs compared to renting

the fun of renovating and changing

etc

while technically a renter appears to be at a dis-advantage because hes not buying anything with his rent that may not be true in alot of areas or situations . here in the greater new york area the cost between renting and buying initially is 1/3 to 1/2 less a month and no massive down payment... it takes about a decade for the rent to equal the costs of buying at the 2 to 3% a year rent increases. each year though the renters advantage grows smaller and smaller as the rent goes up . all though just real estate taxes in alot of areas see bigger jumps the costs are offset with tax deductions on some expenses so its all about what the renter did with the money saved each month and down payment money that determines most of how a renter does.

you cant compare renting vs buying unless you have the renter putting equal amounts of money as well into an appreciating asset. thats where most comparisons fool us, they rarely do this. historically equities have outpaced home appreciation by 2x with alot less expenses in the early years of renting.

i can tell you because home real estate appreciates long term just above the rate of inflation in most markets a person who invests the money he planned to buy with and the money he saves each month compared with buying in nothing more than a mix of diversified index funds stands a great chance of coming out further ahead ...

infact i can say with my own expierience that if you were going to pay cash for the house like i did when i bought my house back in 1987 in queens ny and instead put that money in that same mix of funds (i did that also) i can tell you that today you can subtract out all the rent you would have paid for all those years and still have enough left to buy over 2 houses .....

you have to take a step back and stop looking at just one aspect of your overall cost of housing which is where everyone fixates THE HOUSE
and look at the total costs over a lifetime to know if you spent less renting or buying..... chances are they both cost you and took money out of the ole piggy bank and not made you richer .... housing costs are like food costs, they are expenses not gains

for a eye opening idea of expenses look at only 2 of the many components of expenses a homeowner has , taxes and mortgage interest,,, those two alone usually need the house to appreciate at least 3x and probley more in 30 years just to clear the after tax deduction amount you paid in...

most people pull out one piece of the puzzlel the house cost and what its worth without looking at the big picture namely a lifetime of housing costs and merely look at one aspect without the other parts... since we dont know how much future appreciation will be, we dont know rent increases, we dont know your future expenses or how many times you will sell a house and buy another and incurr more costs there is no answer.. in fact the biggest part on the renters behalf who chose to invest else where and rent is we dont know future market returns..... your trying to predict an outcome thats impossible... we dont know who will spend more in housing costs when all is taken into consideration.

picture it as if you were an investor.. you made big bucks on one investment (the house) but all your other investments tanked.... overall your down , the big gains of the one investment merely mitigated the overall loses


the jury is still out as far as whether the age old debate, is it better to buy or rent financially ?... there is no answer and probley never will be
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Old 03-27-2009, 06:09 AM   #12
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Imputed rent cost - Opportunity cost = Close to Zero (in most cases). I know "it depends".
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Old 03-27-2009, 06:44 AM   #13
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Owning an average house means breaking even. That has been my experience. I think of it as preservation of capital, rather than an opportunity to strike it rich.
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Old 03-27-2009, 08:45 AM   #14
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His math is fuzzy - at best ... he never accounts for the EQUITY he built paying the mortgage for 13 years. On a 15 year note - for example - he'ld be close to done. If "living for free" saved him 2k/month that's another 300k to add to tally (conveniently omitted).

Agree with the home improvement asessment ... people fail to realize they'll get about 50 cents on the dollar back from thier improvements. Add a pool in the northeast and you'll loose closer to 125% of that investment. Amazing what some people want to call "improvements".

This is a little bit interesting ... the last bank owned deal I did for cash (~2004) pulling the purchase out of the stock market when the DOW was ~10,000. Realtor says I could get my $$ back selling today (with all improvement costs). Hindsite being 20-20 that purchase was one of the smarter moves I've made. What's left in the stock market has lost 30-40% of it's value. Point being, there are ways to make real estate work.
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Old 03-27-2009, 09:41 AM   #15
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Owning an average house means breaking even. That has been my experience. I think of it as preservation of capital, rather than an opportunity to strike it rich.
I think you have a key point, an average house or small house would be best at least in the lower cost areas.
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Old 03-27-2009, 09:44 AM   #16
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If I was not married, a mobile home would be fine for me..........

A doublewide in good shape can be had for about $15,000........
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Old 03-27-2009, 09:46 AM   #17
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Owning an average house means breaking even. That has been my experience. I think of it as preservation of capital, rather than an opportunity to strike it rich.
A house is a place to live much like a car is transportation. When folks think of the equity in their home as an "investment", I always wonder why, to me, it is an expense.........
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Old 03-27-2009, 09:51 AM   #18
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A house is a place to live much like a car is transportation. When folks think of the equity in their home as an "investment", I always wonder why, to me, it is an expense.........
That's why I say the cheaper the better.
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Old 03-27-2009, 09:53 AM   #19
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Debating "rent or buy" is almost like discussing religion or politics some times...
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Old 03-27-2009, 10:16 AM   #20
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I think you have a key point, an average house or small house would be best at least in the lower cost areas.
Timing is important. On the starter house (79K) we sold after 7 years and sold for about 100K. Wife had made double principal payments. So we went to the settlement table with about 50K towards the next house.

Worked so well she found a way to make triple payments on the next one. We own that now, and we're waiting a little while to downsize.

I think if you can avoid a great deal of the interest that accumulates in 30 years by paying off early, it works better for the owner. The payoff co-incided with kids going to college. We lost our mortgage interest deduction, but netted about $500 per month. That helped us avoid college loans for kid #1.

Each situation is different. I admit that. I think we were lucky with timing, buying two houses in recession. We saved a lot too.

These buying decisions were introduced to me by tax accountant. Basically, if you can add 50% to the standard deduction you're reducing your taxes and buying an asset that grows slightly over time. Recognize that there are problems, like a 10-20% drop in price right now (or more), but if you hold for 15-30 years, it works.
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