Why Buy a Home?

[walkinwood]

Quote:

Originally Posted by Free To Canoe Landlords have the right to dictate how you live and I don't like it. Homeowners associations are the worst in this regard (this could be its own thread).

Unfortunately, in this land of the free, the town can also tell you what you can and can't do on your property.

I believe there is a rational decision that is best for any one individual or family which takes into account personal, emotional and financial constraints. But generalized arguments for ownership or for rental are always academic.

[haha]

The topic of this thread really interests me, as I plan to stay where I am (central city), and I expect that over time both rents and property prices in central but quality areas of attractive cities will increase faster than rents or property prices in general, even in those same cities. Eventually quality rapid transit may change this, but IMO it will be a long slow slog, and it will always be different to live in a nice leafy neighborhood 4-14 bocks from the business and retail core of a good city, and to live in a suburb, even in a nice suburb serviced by efficient transit.

The x factor in urban living is always- can and will the police suppress crime? That one will not go into a spreadsheet. But it takes a good suburb indeed to lose crime today.

So, in spite of generally distrusting spreadsheets that try to lay out the future, I went geeky and made one with four separate growth factor variables: one for rents, one for property tax, one for HOA/condo fees, and one for bluechip equity dividend. I assumed a cash puchase, and for the apartment condition I invested the purchase price +closing costs into a small selection of quality equities with an estimated beginning yield set at 3%, and an 8% dividend growth rate. Equity price growth is ignored. I assumed RE tax and rents would both increase on average @ 5%, and HOA at @3%. All these factors are variables. For the rent condition, I set Y-0 at my current rent, which is about what the condo I am comparing to would rent at. If anything, my current rent is higher than what the condo in question might bring.

Then I increased each element by its chosen factor, and subtracted the costs other than PP of the condo from the rent at that same year. The exact path of this difference will vary depending on the growth factors, but in my chosen condition it is a small difference that slowly builds to a max at Y-10, then starts falling.

Since I assumed a cash purchase, income tax effects are limited to the untaxed value of the imputed rent. Pushing the other direction is the fact that I made no adjustments for maintenance or capital improvements on the bought condition, other than the HOA fee. These will be variable, but IMO perhaps a push.

Anyway, in this comparison buying is probably a slight winner, but with more risk and a higher hassle factor, over ten years or more. However, rather than increase its lead, buying loses ground relative to renting and investing the PP after about year 10.

Clearly this gets thrown out if rents skyrocket and dividend growth of quality companies stalls out, but that's spreadsheets.

Ha

[Free To Canoe]

Quote:

Originally Posted by haha You convinced me! I wil buy today! Ha

I am just saying that there is a large emotional aspect to this that has not been brought to the forefront in this thread before.

If the financials are favorable and if the emotionals are favorable then you should probably take this big step. As I alluded to in the previous post, it is not for everyone.

In the forest, clinging to my bonds and certificates of deposit.

[plex]

Haha, if you are really comparing investing the difference between renting and buying, you need to consider the scenario where you have a permanent mortgage at something like a fixed 4% (minus the tax deductiblity of the interest), with a downpayment of say 10%, and then investing the 90% difference at 8% (or whatever the investment rate is set at for the money "saved" by renting).

Then you are comparing apples to apples. Buying a home without a mortgage means that someone is making a conscious choice not to invest the difference. Quite often, mortgage rates make it impossible to invest the difference, but what matters is right now, since it is locked in.

Also take into account that the house itself is generally appreciating with inflation, so add something like 3% (or whatever you have set as the inflation rate) to the investment return of buying a house.

In summary, the "investment value" is a wash in reality, for now, with fixed mortgage rates at an all-time low, it won't stay that way. The investment rate is a strong argument for renting in a high interest environment, if you are lucky enough to have a nice landlord who does realize he has his tenants over a barrel in that sort of environment. But that is not the environment we are in at all right now.

Frankly, I really wish I wasn't in such a transient position right now, which forces me to rent, it doesn't get much better than right now (and the past 1-2 years) for buying and investing the difference.

[freebird5825]

I have not lived in a rental situation since 1984. I still live in the only house I ever owned. I only have 1 house on each side on 100' wide lots. My pine trees, cedar hedges, and wood fence give me 100% visual privacy. If there is audio pollution when I am outside, I simply turn on my outdoor Bose speakers to block it out.
I am still young and mobile enough to handle the yard maintenance and am very savvy about hiring contractors to do those things I either have no clue about (a short list ) or require a team or heavy lifting to accomplish.
When I get less agile and/or less young, I will not hesitate to sell the house and rent.
HOWEVER...the main dread of that transition is "who will be my neighbors" ? Non-human factors can be easily analyzed in a cost/benefit exercise. But what about the always fighting couple or the person who lives downstairs and blares their TV in the wee hours while they snore away on the couch? The last time I rented, I had exactly these two types of neighbors in the 2 downstairs apts of a 4 unit subsection. My quality of life was awful.
The human factor is really the biggest reason I have not downsized to a rental.
Another smaller dread...if I decide to buy another smaller house, then I have the mystery of what hidden problems need to be fixed. My current house is a known entity.
Smallest dreads of all....listing the house, having strangers enter to see it, the paperw*rk, and packing it all up to move.

High property taxes and heating costs can be handled with a check. Idiot neighbors are a nightmare I will not suject myself to.

I think I'll stay put for now.

[GregLee]

Quote:

Originally Posted by Free To Canoe I worked with a fellow who could not get dish TV because the landlord would not let him put a little dish out on his porch.

This is a common problem not just for renters but for condo owners and even house owners ruled by HOAs. Every time I read a horror story about the hassles involved with installing a satellite dish, I'm dismayed. I had to put two big 1.2 dishes on my roof when I first subscribed to a satellite service, and none of my neighbors knew or cared. They'd better not -- it's my house and my roof.

[nun]

Owning vs renting is far more than just a financial decision and depends so much on what, where and when you buy or rent so to make general remarks would be meaningless. So I'll tell you why I bought a house back in 1998.

Firstly I was coming out of a divorce and missed what I felt to be the comfort of a home. So after a year renting I was looking forward to having a home with a garden again.

I decided to buy a 2 family house for the extra rental income and to provide income not dependent on the stock market in retirement. So it was diversification.

House prices were going up, but I judged the $329k I paid for my big two family in Boston to be good value. Also it's close to some major colleges and so renters would be easy to find and I hoped real estate values would be strong.

I've probably spent $150k on renovations over the years so my basis is around $479k, but Zillow values the house at $550k so I have a small capital gain. It's not much over 13 years, but it does also produce $1500 a month rent.

I'm close to paying off the mortgage and I'm glad that I won't have to pay rent in ER. My house taxes and insurance are $500 a month and I put $200 a month away into an account to cover repairs and expenses which usually has a nice balance in it at the end of the year.

[W2R]

Quote:

Originally Posted by haha Anyway, in this comparison buying is probably a slight winner, but with more risk and a higher hassle factor, over ten years or more. However, rather than increase its lead, buying loses ground relative to renting and investing the PP after about year 10.

But Ha, isn't there more to the decision than simply the cost? I hope you are also weighing the intangible input from whatever your heart may be telling you. From what you have posted, I suspect that may shift the balance towards renting though I don't really know.

[haha]

Quote:

Originally Posted by plex Haha, if you are really comparing investing the difference between renting and buying, you need to consider the scenario where you have a permanent mortgage at something like a fixed 4% (minus the tax deductiblity of the interest), with a downpayment of say 10%, and then investing the 90% difference at 8% (or whatever the investment rate is set at for the money "saved" by renting). Then you are comparing apples to apples. Buying a home without a mortgage means that someone is making a conscious choice not to invest the difference. Quite often, mortgage rates make it impossible to invest the difference, but what matters is right now, since it is locked in. Also take into account that the house itself is generally appreciating with inflation, so add something like 3% (or whatever you have set as the inflation rate) to the investment return of buying a house. In summary, the "investment value" is a wash in reality, for now, with fixed mortgage rates at an all-time low, it won't stay that way. The investment rate is a strong argument for renting in a high interest environment, if you are lucky enough to have a nice landlord who does realize he has his tenants over a barrel in that sort of environment. But that is not the environment we are in at all right now. Frankly, I really wish I wasn't in such a transient position right now, which forces me to rent, it doesn't get much better than right now (and the past 1-2 years) for buying and investing the difference.

Unless one is young and moving around, appreciation is meaningless, it only causes you to pay more RE tax. You are right though, in a strict investment analysis appreciation should probably be factored in. But then, I am not including equity appreciation against the cost to buy. Realistically however, I wouldn't be selling unless I were unhappy in the new home, and that is a negative outcome! If I were disabled my kids are way too busy to take on the task of breaking up and preparing my place for sale. As to mortgage rates, I will agree that a 4% mortgage with 10% down is a good deal, but also likely an impossible dream, from what I have seen on the lender sites. Anyway, unless you are buying an expensive place, maybe $300,000+, the standard deduction for a single guy is pretty good and I believe that the mortgage deduction would not be a large factor in my case, and it makes it more work to model. It is true though, that a mortgage is debt cost of capital, and cash payment is entirely equity financing. So ignoring risk, financially it is better to take as much mortgage as possible at relatively low fixed rates.

I see the issue of buying with low rates differently though. All else being equal, high rates push down prices, low rates push them up. If one has cash, no way is he over a barrel as a renter. He can just go shopping again. And of course what I described is exactly buying and investing the difference, just buying for cash. With any capital asset, ideally you buy for cash when interest rates are very high, and enjoy the long ride when (if) that turns around. This is what has been propelling markets since 1980!

@W2R-I get periodically concerned about inflation, but to answer your very central concern, I would much prefer to rent forever as a lifestyle- very likely in the same apartment and building where I now live. So the emotional part for me is anti-own. I don't really want to paint anything, remodel anything, put any satellite dishes anywhere, or drive any nails into any walls. Part of this may even be genetic. When my Dad reached late middle age his dream was to move into a hotel, so he didn't even have to clean his apartment, he could just spend his day doing what pleased him. His exit fee from his current life would have been too steep, so it never happened. The reaper freed him instead.

In four years in this building and several prior years in my duplex, I haven't met any neighbor that I didn't like, and some are very good friends, so I really see that as a non-issue.

Ha

[Sandhog]

Quote:

Originally Posted by plex Haha, if you are really comparing investing the difference between renting and buying, you need to consider the scenario where you have a permanent mortgage at something like a fixed 4% (minus the tax deductiblity of the interest), with a downpayment of say 10%, and then investing the 90% difference at 8% (or whatever the investment rate is set at for the money "saved" by renting).

That depends on the amount of mortgage interest you pay. At 4%, I'm guessing that you'll not get any more than standard deduction with mortgage owed $200K or less. Therefore, you don't really have tax benefit of itemizing.

[OrcasIslandBound]

When I was a student at UCSD, near San Diego, about 1979, we lived in a 5 bedroom house, myself + 4 roommates. Our rent was started at $700/month. At the 6 months mark, the landlord raised it to $800. At the 1 year mark, they raised it again to $950. I never had a greater distaste for landlords before or since. But this was seventies style inflation. Are we headed back to something similar? Why take a chance? If nothing more, owing your own home does a sort of diversification of your investing. Instead of depending on a successful stock market and using those proceeds to pay rent, part of your investment is diversified in that it is the house you live in itself. No rent. Diversification is a good thing in potentially inflationary times.

[Hamlet]

I think that for most people, this decision is not about money.

It is about lifestyle.

When I bought my house, I did so because I had developed hobbies that were hard to engage in a rental (tearing up a large chunk of the backyard for a garden and putting 10+ fishtanks in the basement is frowned upon by most landlords). I was also considering having children, so I wanted a nice yard, a little more space, and a good school district. You can get this renting as well, but it doesn't have the permanence of buying.

Before that though, I happily rented for 10 years after college, and enjoyed the fact that I didn't have to deal with anything that broke, worry about painting, etc. The mobility was nice as well, since at one point I just put my stuff in storage and moved into corporate housing while I travelled for work.

I bought my house in 2005, so it wasn't a good investment from a financial sense. It is a consumption choice.

[kcowan]

Quote:

Originally Posted by plex ...where you have a permanent mortgage at something like a fixed 4% (minus the tax deductiblity of the interest), with a downpayment of say 10%, and then investing the 90% difference at 8% (or whatever the investment rate is set at for the money "saved" by renting)...

What is the permanent mortgage you speak of? Or are you talking about the 30-year kind that can get called when the property value is deemed to be underwater by the lender.

What is this deductibility you speak of? Have you not yet experienced AMT?

It is ironic that buyers speak in absolutes...then compare apples with oranges!

[OrcasIslandBound]

New York Time chimed in on the question of whether it was better to buy or rent. It allows you to run any sort of housing scenario you wish:

Is It Better to Buy or Rent? - Interactive Graphic - NYTimes.com

[arebelspy]

Thanks for the link sbwitte. I had last looked at that a few years back, they've updated it quite a bit.

[SteveL]

There are probably several million more homes to be foreclosed in the next few years. This will create more and more renters and home prices will continue to fall. Over time, rents will increase, and in turn home prices will begin to increase.

If/when inflation returns those in rent controlled housing will find their rents attractive, but the landlords will begin to neglect maintenance. Some places with rent control allow rents to increase when the property is sold. This can lead to faster turnover of rental property and rents closer to market price.

Depending on location, renting may be more attractive for the next 3 to 5 years.

[Sam]

Quote:

Originally Posted by HatePayingTaxes Renting is cheaper (here in So Cal at least), call a property manager if something breaks, flexibility to move, nice big swimming pool for the kids, usually smaller place (this is a positive for various reasons).

How much cheaper? Apple to apple, orange to orange of course.

What you said is definitely true 4, 5 years ago before the real-estate crash, but is it still true today? Anyway I think house price in So Cal is close to the bottom so it might be a good time to seriously consider buying.

[Major Tom]

Buying is waaaay cheaper than renting.

If you're talking about RV's that is.

[SunsetSail]

Quote:

Originally Posted by Sam How much cheaper? Apple to apple, orange to orange of course. What you said is definitely true 4, 5 years ago before the real-estate crash, but is it still true today? Anyway I think house price in So Cal is close to the bottom so it might be a good time to seriously consider buying.

Here is one blogger who would disagree about the so cal bottom (at least LA area): Dr. Housing Bubble Blog

So Cal is so large geographically and population wise that it varies substantially from area to area. I don't know the answer but I will very likely buy a new (to me) home in so cal in the next couple years, but not entirely for financial reasons.

[toofrugalformycat]

Quote:

Originally Posted by nun Owning vs renting is far more than just a financial decision and depends so much on what, where and when you buy or rent so to make general remarks would be meaningless. ... I'm close to paying off the mortgage and I'm glad that I won't have to pay rent in ER. My house taxes and insurance are $500 a month and I put $200 a month away into an account to cover repairs and expenses which usually has a nice balance in it at the end of the year.

+1
The mention of budgeting for maintenance is important. Even if one has paid off the mortgage, maintenance is a continuing expense, even if you're "handy". Don't wait until the roof needs replacing to start socking away that money every month.
Taxes and insurance are cheap here, compared to maintenance costs, which pop up unexpectedly sometimes. If you haven't looked into it already, check out tables of life expectancy for household appliances and windows. They are MUCH shorter than in the "old days".