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 ...
There are very few things in this world that have true intrinsic value.
Gold and land are among them.
Renting is for losers.
Besides, this is America. We are supposed to own things.
You posted: If I am missing something here, please let me know. I don’t see where my assumptions are wrong, and I end up agreeing with the article I posted.
***
Do you account for the value of living in a home vs. renting something presumably of lesser value in your analysis?
I don’t understand your question.
My analysis compared renting a one bedroom apartment to owning a single family home. I did not compare renting a home to buying a home, because I was trying to minimize both variables.
I was comparing the lowest rent I could pay vs. the lowest cost home I could find and found that renting and investing was clearly more profitable than buying a home, given my assumptions.
In the example, since everyone except Warren Buffet made $100,000, the median is $100,000.
To calculate the median:
You simply list all of the numbers from lowest to highest.(assume you have a group of 99 numbers) You would then count from the lowest number up to the 50th number in the list. The 50th number would then be the point where 49 numbers had lower values and 49 numbers had higher values. The 50th number is the median, since half the numbers are higher and half are lower.
The obvious question is: when is it appropriate to use the mean, and when is it appropriate to use the median?
The mean (traditional average) is appropriate when you are dealing with a normal population. The easiest way to define "normal population" is to simply say that when plotted on a graph, if you get a bell curve, then you have a normal population.
The median will give you a better picture of a "typical" member of a population when you don't have a normal population.
Home prices will not form a normal population because there is a limit to the low end of home prices (zero), but there is no limit to the upper end for home prices. A typical home in the U.S. will sell for a couple hundred thousand dollars, but homes can, and do, sell for 20 or 30 million. The expensive homes will skew the mean upward so that the mean doesn't give you a very good idea of the price of a typical home.
Everyone can't be above average.
For your reading enjoyment, direct your attention to #175
bttt
You are going to have to explain that one to me. I did not follow all those reference about house paid of, taxes, etc.
Oh no, here we go again with that discussion. I give. I give. I’m just not a stock market guy. I’ll go for no debt and be happy.
That is for sure. And there are some great deals on new, never-lived-in four-bedroom homes. I see ads for as low as $1100 a month. And still not takers.
Now should be the time to buy, though, wouldn't you say and get out of rent?
Don’t know about the house payment part of under $500 a month but once it is paid off the taxes is around $200 a month.
For houses with payments under $500 a month, you might try near Erie, PA or Cleveland, OH.
You said rent was “throwing your money away”. I only tried to show if rent is cheap enough, and if home costs are high enough, than renting and investing the difference in the stock market can be more lucrative than buying a home. If you are afraid to invest in stocks or mutual funds, then you are better off buying a home.
I buy because I’d rather hump than be humped...
You either ride or be ridden. And after paying of debt the bank is yours tambien. If you are a renter, you remain, a renter.
In the greater Baltimore area, rents usually are close to mortgage payments once you get out of studio apartment territory.
Not true in the DC market though.
You can’t do 5% - 10% down? You don’t have to do 20%.
Everyone has different goals and desires. Isn’t that what freedom is all about? ;-)
Um...we pay $1400/mo in rent. We could get a similar sized condo, with 10% down and probably be within $100 of what we pay in rent.
There are ways to look for homes that you can buy at $0.70 on the dollar, on today’s prices and you’ll be OK even if the market drops more.
Just have to know where to find them. It’s maybe 1 in 100 homes that fit this criteria, but they do exist.
If you don’t want to expend the effort, then rent.
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