Renters Gloat Over the Housing Slump

The Wall Street Journal Online/Yahoo! Finance ^ | December 29, 2006 | James R. Hagerty and George Anders

[Labyrinthos]

The housing slump has been painful for millions of people who work in real estate or recently bought a house.

For Patrick Killelea, however, this year has been one long victory lap. Mr. Killelea, a 41-year-old software engineer, has long preached that it makes more economic sense to rent than buy homes. He recalls shouting "Wow!" when he heard about September's 9.7% drop in prices of new homes.

"I didn't want to gloat," he says. "But then again, maybe I did."

For years, Americans who refused to buy real estate at what they considered excessive prices were ribbed for failing to profit from one of the greatest booms in history. "Are You Missing the Real Estate Boom?" needled the title of a 2005 book by David Lereah, chief economist of the National Association of Realtors.

Now, with the housing market in a slump, renters who sat out the boom are finally getting some satisfaction...

[Rippin]

The primary residence also appreciates based upon the leveraged amount and it provides additional tas reductions over investment properties. The gain in appreciation can usually outrun the cost depending on where you live. There is no dividend on rent.

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True, but the question is how much hidden cash flow is poured out for the privelege of the leverage you refer to. taxes, upkeep, insurance, utils (which are often much higher in ownerhsip arrangements) etc. Ultimately it will come down to the speed at which the real estate appreciates. The federal income tax exclusion on the gain on resale of primary residence is huge, and really tips the balance in many cases. For most of us, better to buy more house and take that gain than use an IRA or 401 K where taxes are only deferred not eliminated as they are on the primary residence.

[4yearlurker]

Make sure it's a rental truck. Less liabilities that way!

[FreedomCalls]

Please tell me how in the world you could do that even if you were able to save $400-500/month in renting vs buying (mortgaging).

By putting the money saved by renting into a small business instead. the 22-year old Mark Zuckerberg just turned down a $1.6 BILLION offer from Yahoo to sell Facebook.com. He rents. If he could not afford the hosting fees for the web site at first because he was spending all his money on a mortgage instead of rent oh yeah in 30 years he might have close to a million dollars in equity too if he made all the right moves. But he went from being a college student in debt to owning a $1.6 BILLION asset in just two years by putting his money and effort into a small business (that is not so small anymore).

[Minn]

If an employer provides 6% match it still won't come close to the leverage in real estate.

I think you are misinterpreting what is meant by a 6% match. At my last job a 6% match meant the company matched my contribution 100% up to 6% of my income. My current employer isn't so generous. They match 50% of my contribution up to 6% of my gross income. No way, no how any other investment beats this. In the case of a 1 to 1 match, you earn 100% out of the box. The best advise is always contribute to your 401K up to the limit of your employer match. Then consider other options for anything over and above that.

[Labyrinthos]

I do both -- I own my house and I rent my office space from one of the corporations that I own.

[FreedomCalls]

Meanwhile, you will have pi$$ed away your money.

The money isn't "pi$$ed away" if its invested properly. On the other hand lots of homeowners in a no-interest-down ARM are "pi$$ing away" money to the bank, the tax man, the repair man, the maintenance man, the pool man, etc. You speak like no one ever has had a home repossessed.

Mortgage defaults up 67% in California.

[Minn]

But he went from being a college student in debt to owning a $1.6 BILLION

For every story like that there are hundreds of stories of people that pissed away the difference on consumable goods and ill fated investments. His odds of hitting it that big when he started were no better than the odds of hitting a progressive jackpot on a slot machine. Maybe we should all rent so we can invest the savings in horse track futures.

[Nascar Dad]

What if you live in a rent controlled apt in a big city and are able to save a ton of cash. Is that building up equity?

[goldstategop]

If you plan to own a home only a few years, get an ARM mortgage. By the time you have to resell, you're not out that much.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus

[FreedomCalls]

For every story like that there are hundreds of stories of people that pissed away the difference on consumable goods and ill fated investments.

And there are millions of people pissing away their money by "trading up" in houses every other year, with a negative equity, interest-only mortgage, who take out a house loan to buy plasma TVs and Hummers who are barely making payments because both husband and wife work. If one gets laid off or if there is a downturn in real estate prices then they are belly up.

Foreclosures Up on Subprime Mortgages
MSN Money - Dec 20, 2006
... greater Washington, DC, area can expect a high rate of subprime foreclosures.".

Foreclosures up 60% across county
Concord Monitor, NH - Dec 18, 2006
... of Consumer Credit Counseling Service of New Hampshire and Vermont, said the increase in foreclosures can be

Mortgage foreclosures up in the Midwest
Sioux Falls Argus Leader, SD - Dec 12, 2006
... up from 120,298 filings in 2005, according to the company’s data.

Foreclosures Up on Auto Industry Fallout
Business Wire (press release), CA - Dec 11, 2006
... Missouri: 14,000 filings to date in 2006, up 64.7% over 2005’s total 8,500 foreclosures. Fueled by filings in eastern central ...

Bankruptcies, foreclosures on the rise again
Times-Mail (subscription), IN - 2 hours ago
... This year, she handled 193 sales, which is up about 50 over the 2005 foreclosures. And, already for 2007, she has 23 scheduled to sell in January. ...

Foreclosure rates likely to stay high
Fort Worth Star Telegram, TX - 19 hours ago
... spokesman for RealtyTrac, a California-based company that watches foreclosures. But they will rise, he said. The cost of living is still going up, with higher ...

Georgia leads nation in bankruptcy filings
Atlanta Journal Constitution (subscription),  USA - 10 hours ago
... Foreclosures are up and are expected to continue to increase —- and foreclosures are one of the biggest factors in the state's bankruptcy figures. ...

[Polybius]

You are definitely stuck on interest only mortgages.

No, I have never had an interest only loan in my life.

However, almost half of the new buyers need to resort such a foolish loan to afford the housing bubble prices driven up by such loans.

A Growing Tide of Risky Mortgages:.....Here are some scary statistics: In 2004, fully 50.4% of the mortgage loans issued for purchases of single-family homes in Georgia were to pay interest only. That made the Peach State No. 1 in the nation in its share of interest-only mortgages. But a whole bunch of other states were not far behind: California was second, at 47.1% ................ The trouble comes when the interest-only feature expires, which is often after 10 years. If it's a 30-year loan, then the entire principal has to be paid off in the final 20 years. So the monthly payment could abruptly jump by 50% -- even assuming no increase in the interest rate (nearly all interest-only loans have adjustable rates, so the borrower can get whacked if they rise as well). ....... But even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. "In most of those cases, buyers have no idea how they're going to pay" the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes

Also your tone is a tad angry. Do you have an interest only mortgage?

I'm not angry at all. My mortgages were fixed rate 15 year loans and I paid them off early over a decade ago. As a result, I own two properties, free and clear, in prime locations, one in San Diego, California and one on Puget Sound.

Perhaps it's time for you to get out of California.

I got out of California the very week I finished my medical specialty training but I was able to afford to keep my house as well as buy a second house because I bought my California house with a financially responsible loan and not with a ticking financial time bomb.

My arguments have nothing to do with "California". My arguments deal with buying at a good value without having to resort to extremely risky gimmick loans.

[Myrddin]

No, you certainly aren't building any equity while renting, but you aren't paying for a new roof or fixing a busted hot water heater.

If the landlord is smart, the rent covers mortgage interest, insurance, taxes and maintenance. Anything less is a money losing proposition. There's no such thing as a free lunch. The only difference is that the rent is covering those expenses in advance. As the renter, you won't be calling out the contractor or writing the check for the repairs. If property values appreciate and the tax assessor cranks up the taxes, you can plan on a rent increase.

If you live in the home you are buying, you have equity accrual each month, a homeowners tax exemption (something the owner of the rental property doesn't get) and mortgage interest. You can structure the exemptions on your W-4 to put the money back in your regular paycheck to cover the part of the interest that is a write-off on your federal taxes.

A rental property doesn't get the homeowner's exemption, so guess who pays the full property tax?

[Myrddin]

To each his own, but I think its foolish to rent unless you know you will be moving out of the area in 2 years or less.

I purchased my first condo about 2 weeks before I got married in June 1978. I've purchased 3 more houses since that time. The first condo and first house have been sold. I'm living in the 3rd house with the mortgage paid free and clear. The 4th house was purchased with the intention of making it a rental. I'm keeping it up and using the interest/tax as write-offs on my income tax since my primary residence only has property tax left.

The only time I've rented since 1978 was for 5 months in early 2001 after selling my house in Mira Mesa. I did it only to keep a good address inside the high school boundaries so my son could finish his senior year at Mira Mesa High School. The rest of the family was already moved to the house in Idaho at that time. It was $900/month for a 1 BR/1 BA apartment. We slept on air mattresses and sleeping bags. A card table and a couple folding chairs sufficed for a place to eat and set up our computer keyboards and monitors. I moved out the day after he graduated.

[Beagle8U]

I've never lived in a place like CA with an insane housing market but anyplace I have lived it was a waste to rent for long.

I bought my first home when I was 16 on a land contract. I have never lost one dime on a home, always made money.

[Myrddin]

I purchased my first condo at age 21. Like you, I've never lost a dime on my real estate. The house I purchased in Mira Mesa for $105,000 in 1983 was sold for $242,000 in 2001. It would sell for $500,000 today...if you could find someone with the money to buy it. I was happy to leave with a net $80,000 after covering $60,000 for moving costs and repayment of an equity loan. I tossed another $117,000 from a stock sale into the mix to pay off the mortgage in Pocatello. A 3900 sq ft house on 1/3 acre for $179,000 was just fine in 2000. I purchased the 2068 sq ft future rental with my income tax refunds as total cash out of pocket. Less than $9000 and a PITI payment that I can tolerate as long as I want. It will probably be rented in 2007.

[carolinalivin]

6% of your gross income may be 4,000 per year and if you get 7% on the investment that's a total of $$4,280. If your 400,000 rental goes up 6% you make $24,000.

Your investment house goes up on the basis of the total value of the house, not on the down payment you put into it.

I have helped a lot of clients out of their 401(k)s and other tax deferred investments. We call it a 401 condo.

Also, your tax deferred programs are based on impratical misconception that you will pay lower taxes when you retire because your income will be less.

Why would you want lower income when you retire? How long will that sustain you? Will you work until your 80 so the cost of living doesn't eat up your retirement? You need to do something with a bigger band than a 401 k or IRA if you're serious about retirement.

[carolinalivin]

Did we talk about this last week?

An interest only loan is hardly a ticking time bomb. Is it a ticking time bomb to owe 400,000 on an 800,000 house? You are paying the bank the amount you need to borrow the money. The house appreciates over time and you have used the principal you paid off early to do additional investments or whatever.

You talk about how you bought a second home and paid off your house in 15 years. You gave money to the bank you didn't have to give. Think about how many properties you could have had appreciating rather than giving money to the bank so you could feel like you were doing something financially sound.

[Polybius]

An interest only loan is hardly a ticking time bomb.

That depends upon your financial situation. Today, most buyers that use intrest only loans are buyers that can barely afford the payments during the grace period and have no idea how they will feed the monster after the grace period expires.

Interest-only mortgages were designed for wealthy families who used the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds. .........Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public -- people who are struggling to get into a rising housing market and feel that they couldn't get the properties they want any other way. .......... even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. "In most of those cases, buyers have no idea how they're going to pay" the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes

Is it a ticking time bomb to owe 400,000 on an 800,000 house?

No, but it is a ticking time bomb for those who bought at the top of the bubble and now owe 800,000 on a 700,000 and falling house.

It is a ticking time bomb for buyers who will be forced into foreclosure once the grace period expires.

Mortgage Foreclosures Up 72% Nationally

You talk about how you bought a second home and paid off your house in 15 years. You gave money to the bank you didn't have to give. Think about how many properties you could have had appreciating rather than giving money to the bank so you could feel like you were doing something financially sound.

And think of the money from rental income and mortgage payments that no longer had to be made that went straight into my other investments instead of going to the bank to feed the mortgages.

Think of the fact that, if I stopped working tomorrow, I could maintain my lifestyle for the next 30 years without worrying about foreclosures.

[carolinalivin]

You ticking time bomb is not an accurate analogy. The only ones in trouble are those who took out 100% loans and then for some reason HAVE to sell when the market has gone dowm. That has nothing to do with interest only. It has to do with amount financed, length of time holding the property, and reason for selling.

If you took out a conventional loan and paid PITI for 2 years, you'd pay mostly interest, as you do for about 11-12 years on any home loan. If you had a 100% loan and had to sell, you'd be in big trouble if the market was down.

Worse case: let's say you have an option ARM and are adding $5,000 a year to the principal because you are paying the lowest payment. In 5 years you would add about $25,000 to the principal. In that time, your home may have gone up 20%. A gain of 80,000 on a 400,000 home. The net: $55,000.

Even if you paid 20% down payment and the market went down and you had to sell in a short time frame, you may still clear some money on the sale.

If you buy and hold, the value will increase and you'd be well in the clear.

The difference is that you want to pay more to the bank, while I'd be buying two-three more homes.

I have four homes now with about 900,000 in equity. I could have paid off my one house and had $350,000.

I help people figure this out for a living and how to avoid being upside down. I know it works because I have done it personally and helped a few dozen others do the same thing.

It is an oversimplification to say that interest only should be for the wealthy. If the factors are right, anyone can reasonably take advantage of these loans and come out well ahead on their investment. That's what I help my clients figure out.

[Reagan08]

So you reference a one in a million story. I am talking everyday Joe's here. I view my home as my annuity. Being 38 years old, I can't depend on SS. I'll have my 401K and a home that is free and clear when I am 60 years old. I sell it, move into one that is half the size for half the price (or further away for 1/3 the price) and put $500K in my pocket. I think $500K plus another $1.5MM from my 401K and my wife's 401K will suffice for the rest of our lives. Hell, just 4% annual interest off of $2MM would generate $80K a year. With no mortgage to pay, I think we could "get by" on $6,500/month. Renting is foolish....but all of my landlord clients love you for it.