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 ...
>>Something is wrong. And my money says no.<<
Bob, you are no doubt the smart one, here.
Yes - something is wrong. And that is why I am keeping my gas tank full, extra cash on hand, my cupboards full of staples, and several months of bottled water in my garage.
Something is very wrong..........
>>Something is wrong. And my money says no.<<
Bob, you are no doubt the smart one, here.
Yes - something is wrong. And that is why I am keeping my gas tank full, extra cash on hand, my cupboards full of staples, and several months of bottled water in my garage.
Something is very wrong..........
Your point is well taken.
What many fail to mention in favor of home, condo, or co-op ownership are the tax advantages. The interest on your mortgage is tax deductible, a good portion of the maintenance in a co-op ( up to 60% in some) is tax deductible, and part of condo charges are tax deductible.
This often makes owning actually cheaper than renting. So where renting might be $1500 per month, thrown out money, IMHO, paying off your monthly mortgage and maintenance or carrying charges on a coop or condo might make your after tax deduction outlay quite a bit less than your rent. And you are building equity in your property as well.
Rent also goes up. Fixed rate mortgages do not.
One suggestion I would make to people debating whether to rent or own : If you are planning on making this house or apartment your long term home, you should own. Making a profit when selling is only a consideration in the short term, for properties bought as an investment, not your own home .
Your landlord will be paying off the mtg. with your money - he will own the place, and you will have nothing but reciepts.
IMHO, I am totally against renting. Buy a teenie little house - pay it off, sell it, take the equity and buy a bigger house - pay it off, etc. At least it is yours.
He's saying that when you sell that teenie house the price will be less than you originally paid, because house prices will be coming down. When the time comes to buy that big house you will have been far better off renting all along instead of buying at today's inflated prices. You will have more equity down the road if you just pay a teenie rent to live in that teenie house (for much less than it would now cost to own it) and invest the resulting savings wisely.
Your answer, Part I: I honestly don't know.
I am a single man who owned a home in Sacramento from 1987 to 1996, and moved to San Francisco, where I simply can't afford a house on one income. I'm planning a move back to Sacramento and struggling with whether to buy or to rent...
First, we have had explosive appreciation of home values in the last 10 years, brought on by cheap money, easy lending practices, and speculation. So the question is, what will homes be worth in 2017? Nobody knows.
We do know there has never been a 15 year period when California real estate did not at least double, so by 2022, it should double again, if history holds.
But house prices are dropping fast and I suspect they will continue to drop for the next 3-4 years, followed by a few flat years, before taking off again.
I owned a home in Sacramento from 1987 to 1996. I paid $102,000 and sold for $124,000. I think the home peaked about $145,000 in 1990 and the bottom didn't hit for a full 6 years after that, which is when I happened to sell.
The home sold for $22,000 over purchase price in 9 years of ownership, or 21%. That is only 2.4% appreciation per year. Ask me why I'm not rich. Further, I paid $4,000 improvements before selling, $6,000 improvements while I owned, and $8,400 in RE commision and selling fees.
Do the math... I made $3,600 on my $16,000 down payment investment in 9 years. If I had just put that $16,000 in the stock market in 1987 and cashed out in 1996, I would have grossed over $18,000 in profit or more than $15,000 after capital gains taxes.
So your answer is, I don't know... I suspect this time the bottom will take longer to hit, due to the magnitude of the runup, and now every Tom, Dick, and Harry can't qualify to buy anymore, which is NOT going to be good for future home values. Nobody knows how far prices will fall. Prices in Sacramento are between 2003 and 2004 levels. Prices are still falling. So who knows?
People have seen great appreciation in their home, but until they sell, it is only on paper. Remember that people saw huge appreciation in their tech stocks, but were wiped out when the Dot Bomb finally imploded. So people say "buy, buy, homes are a great investment, look how much they went up. But current homeowner have to consider how much they have yet to go down. How low will prices go in the next 3-4 years? I don't know.
Ask people who live in a Hovnanian subdivision where their homes today are with 20% to 30% less than before Hovnanian had their "one time" desperation fire sale.
Keep your powder dry. Ask me in 10 years what I have compared to buying a still overpriced home in Sacramento, California. Renting and investing the difference may see my net worth higher than if I buy an overpriced home and have to wait through 4 years of declines and 5 years of flatlining before homes appreciate again.
I don't have a crystal ball, I'm just calling it like I see it. The author of the article I posted is calling it the same way, unless real estate is in fact cheap enough in your location. It is not nearly so affordable compared with renting in my location.
Yeah!
... and won't get you thrown in jail.
Well if you're gonna get picky... ;)
re: Condo’s....here in Fla condo’s are a bad word..Because when so many were blown apart by the hurricanes, the condo owners were hit with huge special assessments to replace the entire building..One high rise condo that i heard of had a special assessment of $50,000 per condo owner !..Imagine the owner who had lived there for 15 years and had paid maybe $30,000 and was maybe still paying a mortgage...They can hardly give away a condo down here...
Also, many apartment owners converted their properties to Condos and now they are converting them back to apartments because very few condo s are selling...Guess it all depends on what state you live in and your location to see if it makes sense to buy a condo...
My rent is 1/8 my income should I care?
You have convinced me. You are doing the right thing, IMHO.
We’ll have lunch five years from now, and compare figures - ok?
Rent is throwing your money away. Best to buy your house and pay it off quickly. Once it is paid off, you can live in a nice house for a couple hundred a month for the taxes.
Ahh, just hire some lackies to fix what needs fixing. I have plenty of freedom and can go wherever I want whenever I want. For all my properties I just give some goofball a free place and small salary and he does all the fixing. Sure, you get the odd one that robs you blind and you have to fire him and hire another, but that's life. (seriously, thats happened) I have a business to run anyways so "freedom" is what ever money can buy when you get sick of it all and just need to get away from it all. You sound young so if you want to live a little before making your fortune there's nothing wrong with that. Fortunes need to be managed and that takes away a lot of that freedom. I not sure if you can ever get that kind of freedom back either; because when you get my age and think about slowing down, selling out some stuff and retiring somewhat, what are you going to do? I already do all the hunting fishing and traveling I want, work is pretty much something to do. Enjoy your freedom while you can I guess. You can always work till you die later if you've got that part covered.
“Your landlord will be paying off the mtg. with your money - he will own the place, and you will have nothing but reciepts.”
Whereas I will not have had to pay taxes, improvements, utilities (to the extent a house requires), insurance, and will sock that money in savings or investments with a return. The money I save from not paying the above far exceeds the tax break I would get from a mortgage, and with today’s prices, I would still be paying 70% of my income on a house that’s overpriced to begin with, and is dropping in price right now. The “refi out when the rates reset” days are OVER - as is selling a house in a reasonable time frame, for any profit.
Not all renters spend 100% of their income on rent.
“IMHO, I am totally against renting. Buy a teenie little house - pay it off, sell it, take the equity and buy a bigger house - pay it off, etc. At least it is yours.”
Then don’t rent.
“Little” houses start at 3-400K in most metropolitan areas - and that price is unreachable by the median income with a traditional 20% down, fixed rate mortgage. Subprime loans are hard to come by now, and even THEY require perfect credit now. What you propose is simply not possible in today’s market - hello, prices are *falling* in almost all markets - and probably won’t be for several years to come. Unless you can afford the mortgage, and can for a long time, and have no plans to sell, fine. Otherwise, forget it, housing is so toxic right now only a fool would buy anytime soon, unless they have to. Renting is far, far, far, cheaper than buying even the crappiest condo in the worst part of town, and in my area, rents are dropping due to the flood of houses being put on the rental market by desperate sellers. I can rent a 3-4 bedroom house for 2k a month, or pay 4-5K for a mortgage, or higher - and that’s in lousy areas like Richmond or Oakland.
Buy anything? LOL. Riiiiiight.
The roaring housing party is over. Your advise is meaningless in respect to the reality on the street, with all due respect. The median income can’t afford “teeny” houses, because they are so jacked up in price you need a voodoo loan to get one - and now, that’s *if* you can get the loan. If you pay attention, houses are falling out of escrow all over the place, because the lenders are tightening up their standards.
The days when what you posted are meaningful are far, far in the future. This is going to take a long time to shake out.
Bullsh*t!!! You show me anywhere in the United States were you can have a house payment of under five-hundred a month and I’ll show you a three-legged as@hole.
LOL!
I have plenty of freedom and can go wherever I want whenever I want. For all my properties I just give some goofball a free place and small salary and he does all the fixing. Sure, you get the odd one that robs you blind and you have to fire him and hire another, but that's life. (seriously, thats happened) I have a business to run anyways so "freedom" is what ever money can buy when you get sick of it all and just need to get away from it all. You sound young so if you want to live a little before making your fortune there's nothing wrong with that. Fortunes need to be managed and that takes away a lot of that freedom. I not sure if you can ever get that kind of freedom back either; because when you get my age and think about slowing down, selling out some stuff and retiring somewhat, what are you going to do? I already do all the hunting fishing and traveling I want, work is pretty much something to do. Enjoy your freedom while you can I guess. You can always work till you die later if you've got that part covered.
What a great post.
Of course, your post is illustrating the crux of the issue here--it's about the freedom to choose. Some of us are hassled by certain things that others aren't bothered by, some of us make enough money to have a house AND the freedom to leave and wander whenever we want.
It's all about choices, it's all about doing what we like.
That's why I am so high on America. I have talked with friends from Britain, Turkey, Ireland, the Middle East, France, etc. and I simply do not find the variety of lifestyle choices outside the US that I find here.
“I’d say, wait till about Jan or Feb, the market will probably have cooled as much as it’s going to, and buy before the spring market spike.”
That’s a dangerous bet, are you willing to put your own money on the table here?
This is just the beginning. If you think I’m wrong, buy a 400k McMansion in the spring, and tell me how you’re doing in a year.
Nah, I was going to say something but thought better of it. :^)
Yikes I can imagine that scenario. You got to be carefull where you buy, that’s for sure.
Places like that you have to weigh out what insurance coverage you can get, and if it’s really worth the prestige of owning property there.
If moneys no problem, then its really not a problem, but if it’s half your retirement money, then think again. Maybe somewhere more inland near a mountain pond is a better way to go.
Well I live in San Diego and moved here in late 2005 and buying a house upon moving would have been a disaster. So basically it’s all local.
With the foreclosures, NODs, NOTs and REOs that are out there, I almost feel like I’d still be a sucker to buy so I am sitting it out. At some point the banks will be forced by regulators to start unloading homes. My best guess, which ticks off the wife is to hold off buying until 2009.
“A condo is freedom too, not much different than renting. They usually sell fairly fast, OR you can even rent them out.”
LOL, you have NOT been paying attention to the condo market. A condo right now, besides being insanely overpriced (most in metro areas start at 400K), is a ball and chain that are NOT selling. Most metro markets are glutted to the gills with condos and condo conversions that are sitting on the market month after month, dropping in price slowly but surely.
Two brand new condo complexes in my neighborhood were completed in the last few months, and the “for sale” signs are now “for lease”, and they’re not moving, because they’re charging more for rent than a 3-4 bedroom house goes for in rent.
Maybe in 5-6 years you can pick one up cheap, when they’re cheaper to own then rent. We are a LONG way from that.
Besides, I would never buy a condo, I refuse to pay HOA fees, for the money they want I want a garage and more than 2 bedrooms, and most condos are overpriced apartments. The point of buying, to me, is to get OUT of apartment living (no shared walls, land, privacy).
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