Posted on 09/21/2007 10:49:53 PM PDT by Freedom_Is_Not_Free
Sep 17, 2007 -- When you rent, most people mistakenly assume the decision is made out of necessity, not rationality. But there is a very good reason to rent in today's bubble-stricken market: median incomes do not support median home prices.
By Ben W. (bdarbs)
Median income household cannot buy median priced home
The graph above demonstrates three very important facts.
* Whenever prices rise more than the normal trend, they eventually correct and drop back in line. * This housing bubble is an absolute giant when compared to the housing bubbles of the previous decades. * Income levels haven't come close to keeping up with home price inflation. For decades, home prices strongly correlated with median incomes. In 1997, everything changed.
What does this mean?
Now is perhaps the best time in US history to be a renter. You are far better off paying high rents for the next few years than buying a home and watching your equity disappear while the market takes a freefall.
Not convinced? Here's my argument...
The home prices that we are seeing today are artificial and not sustainable. This is because home prices have deviated from the fundamental formula that has always ruled the real estate market. Nationally, median home prices increased by nearly 50 percent in the last decade. The median income, on the other hand, has gone up 10 percent in the last ten years--a very meager increase compared to the change in home prices.
Incomes simply cannot support the bubble-inflated prices. In many places, Americans earning the median income have no chance of reasonably affording a median priced home with a conventional home loan.
(Excerpt) Read more at efinancedirectory.com ...
The mean can be skewed by extremes on either end while the median represents the point where half the data points (Incomes) are above and half are below.
The median always represents half above and half below.
The mean can actually end up representing nothing.
What does an average 2.7 kids mean? Know any families with 2.7 kids?
I would just add that owners, as well as renters, need discipline to keep investing. Buyers need to exercise discipline NOT to borrow against their equity.
I have read several posts in this thread stating that those who have bought before the bubble should still see a big net gain in equity.
But the reality is, we have seen hundreds of millions, if not trillions, in home equity extraction during the bubble. This used to be an unthinkable practice reserved for extreme emergencies. In this decade, people tapped their home equity frequently and for non-emergency reasons. Equity extraction became common.
I won’t take it for granted that everyone who owned their home before the bubble run-up is in good shape. There are going to be many shocked home owners who have far less equity in their homes than expected when they go to sell, because they withdrew their home’s equity during the bubble and now their home is worth much less.
Renters and owners need the discipline to keep investing. Snake oil loan companies made it way too easy to borrow against equity and bombarded everyone from young families to little old ladies to suck the equity and more out of their homes. It’s not going to be pretty for those folks.
“When you convert your house asset into, say, a CD, your taxes go up because you pay income tax on the interest but didn’t on the house.”
I don’t have any answer in your case.
I am currently a renter and a part of my monthly income is automatically transfered to a tax deferred 401(k) plan, so I don’t pay any tax on this money until I draw it out during retirement.
I think everybody needs to estimate the costs of owning/renting/investing for themselves, and to find out what ratio of rent vs. home purchase price is the break even point for them.
Of course, for most homeowners the need to live in their own home is an emotional one. Since real estate is almost always a good investment in the long term, buying a home for your family is never a bad decision. Well, almost never.
In my case, I am single and don’t have the emotional need to live in a home I sort of own (as others have noted, our private property rights are being challenged every day, and unlike our forebearers, nobody in the USA directly owns their home outright, since you MUST pay the government whatever tax assessments it deems you owe, or you WILL lose “your” home.)
Yes, the main issue is supply and demand. The secondary issue is EXACTLY the one you mentioned.
The terms of borrowing money dramatically affect home prices.
Your $210,000 home only rose to a market value of $350,000 because demand outstripped supply. Yet supply was high. Why would such a large supply of houses cause such high demand for houses. It didn’t.
Demand was caused by EASY money. Demand was caused by a 1% prime interest rate, combined with ARMS, Jumbos, interest only loans, liar loans, NINJAs.
Is your home value of $350,000 the peak value or the current market value? Is that what homes are selling for today in your neighborhood. If so, than great. If not, then you can expect to see your house reduce in value, because demand is down because borrowing money is not so easy or cheap anymore.
There are many great reasons to own a home. Money is but one reason. Having a garage is the biggest thing I miss about renting. If I could rent a one bedroom apartment with a 3-car garage, I would do it in a minute!!!
Hang in there. You will get ahead. As rents rise, your fixed mortgage will seem less and less. I just hope your property taxes aren’t soaring.
All this is part of the plan of the finpols that control governments. Then the media act surprised that mortgages are going to foreclosure in record numbers. Any dummy could see this was going to happen. They want to keep people poor and this is one way to do it - homes, can’t afford them, so where to live? In bug-infested apartments.
Maybe that is why we haven’t had an actual bank run. Customers of Northern Rock are not too happy with Britain’s housing bubble right now.
And thank you so much for the chart. Great visual. That really says it all.
I agree that a home is forced savings. I can only speak to my experiences in California when I say that buying a home is never a bad move. Even if you pay too much, you have to live somewhere and over time your investment will appreciate.
In my case, I think renting for now is the better choice as I expect to see home prices fall for a few years yet.
The Freeper “CatoRenasci” made a great point that renters tend to spend the difference they save by not owning a home, while homeowners tend to be forced to save in their homes. He and you are dead right.
You make a great point, but every move-up buyer needs to sell his home to someone before he can buy and move up.
The 1st time buyers are the foundation upon which the move-up buyers rely. If 1st time buyers cannot afford to purchase your home, or the home of the guy who wants to buy your home, you can’t sell unless home prices drop to what the 1st time buyer can afford to pay.
The first rule of home buying is that people have to be able to afford to buy the home. The recent gamesmanship with ARMs, Jumbos, NINJAs, and interest only loans dramatically expanded the pool of 1st time home buyers who could afford to buy your home, at least in the short term until those rate resets come due.
That artificially easy money is now dead. The credit crunch is bringing sanity back to the market, and the pool of 1st time buyers has shrunk back down to who can afford to put 20% down and fund a 30-year fixed mortgage at today’s market rates.
Current home prices in bubble regions are still somewhere above this level of affordability, but below peak values. Until home prices come down to where the pool of 1st time home buyers can afford to buy starter homes, the move up buyers are going to be mostly staying right where they are.
This is just my opinion. I’m not financial genius or anything. Just a logical person.
I certainly agree with this. I do believe homes are a great investment. Whether a home or whether stock market investments will outperform the other comes down to so many factors, that one or the other may be the better investment for different people in different situations.
House location, condition, purchase price, vacancy rates, credit-worthiness, the number of homes for rent in a neighborhood,stock market investor risk tolerance, investment vehicle, all of these variables are going to affect your investment performance.
I think homes are generally a great investment. But I have to agree with the author of the article, who believes current home asking prices are still too high to make them automatically a great investment.
We hated every minute of it.
We even taught our parakeet how to say, "Kill the landlord".
bump
Renting is not for everybody. There are real down sides from noisy neighbors, to keeping your car from dirt and damage.
I can’t imagine being a parent and wanting to rent. Being a child, I hated being in apartments when my parents had to rent between homes, and loved being in a home and having a yard to play in.
Families need homes. Singles and couple’s — not so much, but often love the lifestyle, and that is good too.
I’m a gypsy and like the freedom of not being tied to a house. At the same time, it sure is nice having your four walls that you can customize without a landlords OK and not having the rent raised over and over.
Not to say living in a home is a bed of roses. If you really hate a neighbor, there is no moving away from that situation. You are stuck with it.
Apartments are not the only noisy places. When I owned a home, my neighbor had occasional weeknight parties that would run to 2 am or later. The base sound came right through my bedroom wall. Believe it or not, the sound was louder in my bedroom than it was outside. I don’t know why.
Again, you can’t just move away from that kind of problem when you like the rest of your living situation. So you just put up with a few sleepless nights and there isn’t a damn thing you can do about it.
There is a reason homes keep their value. There is a real demand for them, so long as they stay in line with real incomes. I liked living in a home. But I am realistic enough to know that when home prices are far more than rent, it CAN make sense to rent and invest, rather than to buy a home. Especially if you are like me, and detest the work of home upkeep and enjoy the freedom and mobility that renting allows for.
There are 2 sides to every coin.
For me personally, if I ever had to rent again, it would be the worst nightmare of my life. I would honestly rather live in an RV than be a renter.
Yeah, I heard you the first time!
Well you said “there are 2 sides to every coin”. That’s not so in my case. I don’t even like the word, “landlord”. lol
Cheers!
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