Why Buy a Home?

[swampwiz]

I bought my first house in 1990 at the tender age of 25 for $71K. It was the classic starter home, but gave me the room I needed (I had a nice gameroom collection even back then.) Renting a comparable home just seemed to be a little more expensive, once I figured in the tax savings and the expected (low ~ 3%/yr) appreciation.

I got my mortgage at 9.25% (remember wen mortgages were that expensive?), and within a few years, I refinanced at 6.25% during the early 90's recession, and then again at 4% (variable) during the post Y2K downturn, all the time extracting out equity that allowed me to dump cash into my 401K and then later pursue semi-FIRE at the tender age of 31.

The home got flooded in Hurricane Katrina, but I was able to sell my flooded home to the state (in Oct 2008) for its value as of Aug 2005 for $162K, a 128% gain. And I got an extra $50K government grant because I was low income - cash that I used to buy my present home ( for $39K.) I went back and calculated out the cash flow from interest, insurance, maintenance, etc. (there was no property tax as Louisiana has a very generous homestead exemption), and it appeared that I actually earned an income of by owning the house!

The key is as for any investment - buy low, sell high. I think that some of the super low properties in FL could qualify as worthy deals. It seems that the homes in CA are still too pricey, and I haven't looked at the other bust states. I think that the trend of the destruction of the middle class will force folks to just live somewhere cheap, since living in high cost areas would not be worth it, since the jobs there will be just as low paying as in the cheap areas.

 

[kcowan]

My first house was $21k as compared to renting a 2BR apartment for $800/mo. Easy decision. Got on the escalation ladder early and it worked until 1990.

 

[Sarah in SC]

This is a really provocative piece in today's Freakonomics blog:

Freakonomics » Why I’d Rather Shoot Myself in the Head than Ever Own a Home Again

A few quotes:

I legitimately believe people would be happier if they didn’t mortgage their lives away, if they didn’t fall into the myth of the white picket fence leading to happiness, if they pulled themselves away from the American Dream and found their own path to follow.

I’m a serf and always will be. I’ll never be a “feudal lord.” Fortunately, because of innovation, entrepreneurship, and the rise of economic growth throughout most of the world, the life of a “serf” right now is probably one million times better than any feudal lord could’ve ever hoped for back then. Here are some benefits of being a serf right now:

• More cash. Renting usually does not require a down payment that uses up most of the cash in your bank account. You’re never going to see that cash again if you use it as a down payment. It’s just gone into an illiquid investment and when you most need it, that’s when you are most likely not able to get at it.

• Less debt. It’s true a mortgage locks in your payment. But you’re greatly in debt so you are paying interest straight to the bank that has nothing to do with increasing your ownership. In many cases it will take 20 to 30 years before you stop paying that extra interest to the bank.

• Less inflation risk. Property taxes often go up faster than inflation, whereas rent usually does not (by definition, since government calculated inflation uses rents instead of home prices).

• No maintenance. Homeowners have to take care of all maintenance. Some years that might be nothing (unlikely) and some years that may go up much faster than inflation.

• Less overall costs. When property taxes and maintenance go up faster than inflation it means you are probably not covering the costs (plus the mortgage) via renting.

• More flexibility. In a global economy, opportunities can be anywhere. I like having flexibility.

I enjoyed the piece and will probably hunt up Mr. Altucher's blog for further reading. And another plug for the incredibly well-done podcasts by Freakonomics--the most recent was an interview with Peter Buffett, youngest of Warren's children. Just excellent.

 

[GregLee]

In many cases it will take 20 to 30 years before you stop paying that extra interest to the bank.

And I suppose that seems like forever, to many young people. Altucher finds the prospect of paying lots and lots of interest to a bank to be depressing. And it is. But it's not actually forever, and once you've paid off that mortgage, owning appears in a better light. I'm happy, though, that I was able to arrange a 10 year mortgage -- much less like forever than 30.

 

[Sarah in SC]

Well, in full disclosure, I'm a paid-for house homeowner and very happy with it, but I could see a real benefit to selling up and renting once we get to the point where we don't want to take care of this place any more.

 

[Webzter]

It seems to make sense... depending on age and occupation, the ability to be mobile could be a huge asset. On the other hand, I'm seeing a great number of telecommuting jobs in my field (programming) and, for me, I might be able to wing homeownership while also being mobile.

Also depends on goals... I could never have a garden this big if I was renting, even if I managed to find a plot on a community garden.

 

[CyclingInvestor]

I only bought a house (long since paid for) so that I could own (multiple large) dogs. Otherwise I would be a renter with much more $$ (my stock returns far exceed my real estate returns). However, I am satisfied with my decision.

 

[Mulligan]

Everyone has their own unique circumstances, but it appears in general that houses are like the stock market. Everybody wants them when it's too high and no one wants them when their low.

 

[calmloki]

Everyone has their own unique circumstances, but it appears in general that houses are like the stock market. Everybody wants them when it's too high and no one wants them when their low.

Ayup. And when should you buy stocks?

 

[haha]

Ayup. And when should you buy stocks?

It strikes me that in many places, including where I live, even "cheap" houses are really not much of an investment, in that that they would be loss-making for some unknowable time, until inflation made the rent and perhaps the sell price more reasonable.

This may be a good speculation, but it doesn't seem to me it should be considered an investment. Totally different where the real estate is much cheaper, or the rent much higher.

Less true if you buy a total dump which can still be rented at a marginal profit, but eventually will be only marketable as a teardown.

Ha

 

[devans0]

I bought a "TLC needed" house in my early twenties. It was paid off in about 10 years. Since then, only upkeep, taxes, and insurance. As an investment it only kept pace with inflation. I have also enjoyed thirty years of being able to control expenses, LBYM and build wealth.
Growing up, my parents had rough times (medical expenses and business failure) that caused us to lose our home in foreclosure and be homeless. The feeling of owning, free and clear, my own property was a milestone. It could not be taken away, it was mine!
My great grandparents lost their farm during a bank closing during the depression. They took a mortgage on the farm, the bank closed with their crop money in it. By the time the bank returned their money, the farm had been foreclosed, bought by the bank owner for pennies on the dollar. Sometimes, history repeats.

 

[Mulligan]

Ayup. And when should you buy stocks?

In my effort for brevity, I did not provide clarity. Realizing all real estate is local, if a person is ready to take root in area, this is an excellent time to buy a home to live In (I didn't mean necessarily for investment). People who buy an affordable home, pay it off, put money in the bank, and never have carried any debt seem to survive their golden years ok. It worked well for my parents. The debt thing was something I had to learn the hard way!

 

[arebelspy]

This is a really provocative piece in today's Freakonomics blog:

Freakonomics » Why I’d Rather Shoot Myself in the Head than Ever Own a Home Again

A few quotes:

I legitimately believe people would be happier if they didn’t mortgage their lives away, if they didn’t fall into the myth of the white picket fence leading to happiness, if they pulled themselves away from the American Dream and found their own path to follow.

I’m a serf and always will be. I’ll never be a “feudal lord.” Fortunately, because of innovation, entrepreneurship, and the rise of economic growth throughout most of the world, the life of a “serf” right now is probably one million times better than any feudal lord could’ve ever hoped for back then. Here are some benefits of being a serf right now:

[*]More cash. Renting usually does not require a down payment that uses up most of the cash in your bank account. You’re never going to see that cash again if you use it as a down payment. It’s just gone into an illiquid investment and when you most need it, that’s when you are most likely not able to get at it.



[*]Less debt. It’s true a mortgage locks in your payment. But you’re greatly in debt so you are paying interest straight to the bank that has nothing to do with increasing your ownership. In many cases it will take 20 to 30 years before you stop paying that extra interest to the bank.



[*]Less inflation risk. Property taxes often go up faster than inflation, whereas rent usually does not (by definition, since government calculated inflation uses rents instead of home prices).



[*]No maintenance. Homeowners have to take care of all maintenance. Some years that might be nothing (unlikely) and some years that may go up much faster than inflation.



[*]Less overall costs. When property taxes and maintenance go up faster than inflation it means you are probably not covering the costs (plus the mortgage) via renting.



[*]More flexibility. In a global economy, opportunities can be anywhere. I like having flexibility.


I enjoyed the piece and will probably hunt up Mr. Altucher's blog for further reading. And another plug for the incredibly well-done podcasts by Freakonomics--the most recent was an interview with Peter Buffett, youngest of Warren's children. Just excellent.

I agree with the first. You need a down payment. I agree with the last, you're more flexible renting.

Everything else is mostly wrong, IMO, simply because the RENTERS cover those costs, not the homeowner.

That is, I have some rental properties. Rent is enough on them to cover property taxes. It's enough to cover maintenance. Etc.

So a renter may think they aren't paying those, but they are, they're included in the rent.

 

[calmloki]

In my effort for brevity, I did not provide clarity. Realizing all real estate is local, if a person is ready to take root in area, this is an excellent time to buy a home to live In (I didn't mean necessarily for investment). People who buy an affordable home, pay it off, put money in the bank, and never have carried any debt seem to survive their golden years ok. It worked well for my parents. The debt thing was something I had to learn the hard way!

Think we agree, but from an investment viewpoint, buy when all are selling and sell when all are buying seems a good plan. For me, houses cost so much that I think of them as an investment always. I look for charm, area, quiet, view, functionality, and a reasonable level of assurance that it will sell for more than we pay. Thus far I'm pretty sure we've stayed ahead of inflation and lived for free in our homes. No, I don't have hard numbers for all the places to prove that feeling, but selling for 4x or better purchase price seems like we did ok. I like ownership. I like to improve things.

 

[Moemg]

I have owned a house since I was 24 but I can see the appeal of renting . I sometimes day dream about living on the beach or a short walk to the beach and with insurance rates it would be much more sensible to rent rather than own .

 

[clifp]

All real estate is local, probably applies now more than ever. In some parts of the country; SF Bay Area, much of LA, NYC, and certainly Hawaii it is makes little financial sense to own rather than rent. In other places like Vegas, the Inland Empire, much of Florida, and Arizona it probably makes little sense to rent. Now I am saying this strictly for a financial view, psychologically there are valid reason to buy or to rent.

In the past a huge financial reason to buy house anywhere in the country was the simple fact that houses never went down. If you owned a 200K house and it might cost you $500/month more to own it than to rent it but since appreciated a 3-5%/year the price appreciate more than compensated for the higher cost. Sure in a few place for a few years houses might stop going up for a bit maybe even go down by 10%, but there was simply no way that houses could drop in value by even 30% much less 75% likes stocks do. Needless to say the last few years have been a big awakening to everyone. Since we now all know that house price can go down, there isn't the same pressure that people use to feel (even if they didn't really want to be home owners like myself). "If don't buy now prices will continue to go up and I'll never be able to afford a house"

My very responsible niece and her minister husband, lost their down payment on their first house. So I was a bit surprised when last year as soon as they found a new job near Palm Springs, they immediately went house hunting. They wanted to borrow money for the down from my Mom (I handle her finances). I told them they should wait a year until the job situation was more secure, and they knew the area. I also gave them a bit of lecture about how times have changed and home ownership was no longer an automatic decision in California. It was a bit of an eye opener to her husband. This year they went looking again. My advice was good, house prices did continue to drop, and they did learn more about the area. However, what had changed dramatically was the cost of ownership. They are now purchasing a larger nicer house than the one they are renting for 1600 month, and the total cost (excluding maintenance) with a 15 year loan is bit over $1300.

A similar situation exists in Vegas it is entirely possible to buy relative new, 3 bedroom, 2 bath 1200-1500' houses/condos in Vegas that rent for $1,000 month for ~70K. With 20-30% down, total payments including insurance, property tax, and home owner/condo fees will be in the 400-600 range.

Five years ago I doubt there was anyplace in the country where is was so much cheaper to buy than than rent. Now of course there are still plenty of places where renting is cheaper but it is no longer true everywhere.

 

[Zoocat]

But is it a good investment to rent? In my experience, the financial appeal of renting wears off in about six months of being a renter. I have a dog, so my choices of rentals are limited. I am consistantly aware that my landlord may decided to sell his condo at any time and I will be forced to find another residence. In addition, rents of desireable properties have gone up 20% in the last six years.

Just like in owning real estate, the desireability of renting depends on location. Where I am planning on moving rents are the same as owning

 

[clifp]

But is it a good investment to rent?
...
Where I am planning on moving rents are the same as owning

Well that is the 6.4 Trillion dollar question. (just think we use to have $64,000 questions and now they are trillions..)

If the after tax cost of buying is the same as renting, I think you be better off buying for the simple reason that after 30 years of writing mortgage checks(plus property taxes, insurance, roofs etc) you'd owe a home and some land.

However the great unknown is what while happen to home prices in the short to medium (say 5 years) in your area. Plenty of people who bought house in the last couple of years after they started dropping have learned that prices could in fact fall further and leverage works both ways.

Still I think if the cost of renting is the same as buying and you intend to stay put for at least 5 years you are better off buying, especially if you area is seeing rising rents.

 

[traineeinvestor]

Hmmmm....I really struggle with claims that people should never own their own home for the simple reason that if owning a home to live in makes no sense then owning residential real estate for investment purposes cannot make sense either. (It's actually much easier to make a case for buying for self use than for investment purposes.)

If it was true that home ownership made no sense then no one would want to invest? There would be no new homes being built etc - which is obviously not true.

It makes much more sense to point out the obvious (to me at least) - that there will be times, places and personal circumstances when owning makes more sense than renting and times when renting is the better option. I've been both an owner and a renter at various times and feel no particular need to attempt to assert that one is always better than the other (either with or without all the recency bias and other issues which, deliberately or not, distort people's views).

 

[donheff]

My next door neighbors rented their house (about the same as mine) for many years before buying. When I first noticed the rent (maybe 5 years after we moved in) it was about the same as our mortgage. So after I took the tax deduction and added in the maintenance it was probably about break even. After many years my costs were significantly less than the next door rent. If I had rented that house instead of buying mine I would not have had anything extra to save so clearly I am better off now. On the other hand, if I could have averaged $500/mth extra savings for the whole period with a 10% return on my investments I would be about even (house value vs savings). This was and will remain a tough calculation and will get decided on subjective factors by most.

 

[brewer12345]

It depends on your circumstances amd the local market. I think that over the very long term (decade plus) it is likely that renting is moderately more expensive than owning, but of course there is a range.

We put down under 20k on our first home in 1998 and the monthly carry at the time was less than rent. When we bought our current home we used some of the proceeds from the old place as a downpayment and pocketed another 60k. We will do similar in the next move, although most of what we pocket is due to aggressive mortgage paydown over the past 9 years. The next place will have after tax carry costs less than rent, plus I get to choose what I do with the property and for how long. The control aspect is what I value most at this point, and I would be willing to pay up for it over renting if I had to.

 

[rescueme]

The control aspect is what I value most at this point, and I would be willing to pay up for it over renting if I had to.

We feel the same way. Over the years, we've rented and (currently) own, and I can see the day (before we're carted off to the old age home) that we will be back into a rental.

That's the possible future. As of today, we perfer owning. I guess for us it's an "investment in lifestyle" over possible financial return...

 

[haha]

I agree with the least few posters. Some people like renting, some like buying. Some people like dating, others like marriage. Even for people who generally prefer dating, there may be times and circumstances when it seems prudent to get married, and vice versa.

Few things are beyond the particular, even health which seems to be a pure good may not always be. Would you rather be healthy or have a broken leg when the king's conscriptors come around looking for cannon fodder?

Control is often put forward as a benefit of owning. But one might ask, control of what? Is it more important that you be able to nail up a picture or paint your kitchen lilac, or that you be able to easily move if the neighborhood changes, or you fall in love with someone across the country or get offered a much better job far from your owned and perhaps hard to sell house?

Different people would answer this differently. I got my fill of painting a long time ago, and Home Despot makes me puke.

Ha

 

[Geoffrey]

My sister was happlily ensconced in a rental house in Shell Beach, CA for many years -- until the landlords decided they wanted to to take the house back so that an adult child could occupy it. They gave my sister 2 months notice. Her entire life was turned upside down. Uncertainty is a big factor when you rent -- and lack of control. In addition, I find it difficult to find rental units that have character and space for a garden. On the other hand, some respected commentators expect home prices to fall another 20 percent (see, e.g., Still Home Sick | John Mauldin | Safehaven.com). And, my own personal concern is that as interest rates inevitable increase, increasing rates will tend to stiffle any price appreciation that we might otherwise see going forward. "Rent vs. Buy" is, indeed, a tough choice for the foreseeable future. I tip back and forth between renting vs. buying as my wife and I try to decide where to live in retirement. We're currently leaning toward buying . . . but, the right rental unit could tilt our decision.

 

[kcowan]

Control is often put forward as a benefit of owning. But one might ask, control of what? Is it more important that you be able to nail up a picture or paint your kitchen lilac, or that you be able to easily move if the neighborhood changes, or you fall in love with someone across the country or get offered a much better job far from your owned and perhaps hard to sell house? Ha

OK Ha who is the lucky person? Either the object of your love interest, or your new boss?

It is apparent to me that the true cost of pet ownership is much higher than food and vet bills. Golly now they have to justify the added burden of home ownership. Including the trips to HD or Lowes every Saturday?

Of course I rationalized those trips and the subsequent work as being theraputic. It was not until I rented that I realized that a trip to the park was much preferred to a trip to Lowes on Saturday.

We own in Mexico where all maintenance is outsourced for pennies. The cost of cleaning the paint brush is outweighed by the price of outsourcing the entire job (Same as in San Diego).

In Vancouver or 5 months, we rent and put up with the landlord. I relate it to my experience with the corporate bureaucracy. I can make them do it. It just takes time and leverage. Kind of a game I know I can win but would rather not play anymore. Then I look at what I am saving every month and justify it. I think those landlords must be scratching their heads, trying to make money in these times!