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...

[100-Fold_Return]

In a sensible mind an asset is when Other People's Money is paying down and off the mortgages; thereby, increase one's own true value. Logic is all over this arguement.

[Kenton]

When a home that would cost $3,000+ per month to own is renting for $1,500 per month, you can't tell me that owning it makes any sense at all.

Landlords don't rent homes for less than they cost to own. They have to pay the mortgage, taxes and upkeep of the house and still make a profit.

The main advantage of renting is that you can have a roof over your head without coming up with a substantial down payment, but I don't know of any landlord that would be willing to rent real estate that cost $3000 per month to own and maintain for half that, unless the landlord is your rich, generous uncle...

[Always Right]

Until you actual sell that "asset," the only ones making money off that appreciation is your tax assessor.

So you can sell that 'paper asset' and make money, but yet it is not an asset. Interesting. Besides having gold under your pillow, what exactly qualifies as an asset in your mind?

[100-Fold_Return]

Illogical, that liability comes out of your bank account, decreasing that bank account in pure reality; meanwhile, one's ethereal rise in value in the home one lives in doesn't fill up too many bellies on that side of the mortgage.

[Always Right]

In a sensible mind an asset is when Other People's Money is paying down and off the mortgages; thereby, increase one's own true value.

An asset does not have to be sold to have 'true value'. It would be impossible to balance books under your 'defintions'.

[junkbond]

I bought a Hoboken NJ condo in 2002 and sold it in March 2005 and I'm now a renter. The decision to sell and rent was easy for a number of reasons.

1. The cash I got back from the sale generates enough interest to cover 1/2 the cost of my rent.

2. My interest income adjusted rent is about 60% of the monthly cost of my previous tax adjusted mortgage, taxes and association fees.

3. The apartment I am renting is 100 yards from the condo I sold and is 150 sq. ft larger. The rental and the condo have the exact same amenities.

4. The "not having a landlord" premium I paid to own compared to renting was largely non-existant. (ie. In the condo, my ability to make material changes to the floorplan footprint was mostly the same as the place I rent, which was nil. Single family houses, where the ability to add a kitchen or a pool might deserve a premium, but condos, which have the same expansion restraints as a rental, do not deserve such a large premium.)

5. My Rent increases 2.75% last year and will go up 3% this year. My landlord's ability to raise rents is constrained by the huge supply of new construction being built. Since the new construction is being bought by "investors" rather than permanent residents, new rentals open up regularly. My modest rent increases are not just apparent in retrospect but were anticipated when I saw the plans to increase the Hoboken condo supply in 2005.

[Sensei Ern]

The difference between monthly rent, and monthly mortgage, in the DC area is not much.

Rent is going up almost annually. Provided one get a fixed mortgage, you do better in the long run getting the mortgage.

For instance, we pay $2200 for rent. Three years ago, we paid $1250. Six years ago, we paid $800. Had we started with a mortgage of $1250 six years ago, we would still be paying $1250...$950 per month less than we pay now.

Why do we rent? After 9/11, we got hit very hard financially, just as we were preparing to buy a house. Our credit is now so bad we can buy a vowel on a payment plan...you know those pop-up ads that show credit ratings? ours is below the lowest in the list. it goes: Perfect, Great, Good, Average, Poor, and ours is somewhere around, "DUDE! ARE YOU FOR REAL?".

When I do buy, I guarantee is that it will not be a fifty year old fixed up, and it will not have a home owners association attached to it.

[Labyrinthos]

You should win some sort of award. Smart move.

[OCCASparky]

When a home that would cost $3,000+ per month to own is renting for $1,500 per month, you can't tell me that owning it makes any sense at all.

If only that were the case, which it rarely would be.

Assuming a 6 1/4 percent mortgage, you'd have to be financing something on the order of over 500K in order to hit your 3K/mo mark, and then you'd have to add taxes, insurance, and maintenance on top of that.

But let's be realistic--property taxes are deductible from federal returns, as are mortgage interest payments (virtually the entire payment early in the life of the mortgage).

If in fact you could find a 3- or 4-BR house for 1500 a month (highly unlikely if home prices are above 500K) you're not really that much better off.

To wit: Assuming you're in the 28 percent bracket (as I am) deducting 2000 per month in mortgage interest plus 5000 a year in property taxes results in a reduction of taxable income of $29,000 per year. 28 percent of that is $8120 less of a tax burden at the end of the year.

Now, over the long term (at least 5 years) you're going to have an appreciation of at least 5-7 percent per year on that house. Therefore, you could realistically expect to double the value of the home (and thereby have 50 percent equity in your home) in 10-14 years. (FWIW, mine doubled in 4.)

It's not a question of can one afford a house--if you have a decent FICO score and a stable enough job, can you NOT afford a house? I just sold mine in CA and realized an over 300K profit even with having to drop the price twice while it was on the market.

Paper gains, indeed.

[Maneesh]

"So a place to lay your head down every night is not an asset? Is food in the fridge an asset? I a closet full of clothes an asset? Is a car an asset? Is a plasma TV an asset? I guess not under your definition"

All of these are emotional assets but financially they take money out of your pocket every month. I was referring to an asset in a pure financial sense. Emotionally my Porsche could be an asset because it makes me feel good but financially it costs me $1000 / month. Whereas a home which I rent out and I get $1000 in rent with a $700 mortgage will be an asset in most months.

[Labyrinthos]

Landlords don't rent homes for less than they cost to own. They have to pay the mortgage, taxes and upkeep of the house and still make a profit.

In theory yes, in reality, not always. In some cases, landlords rent at a loss because they can't sell the place at a profit and are just looking to mitigate their costs until the market improves. You often see this happen when a person has moved into a new residence before selling their old place, and suddenly they discover that selling the old place without taking a loss is not as easy as they thought so they decide to rent the place until the market turns up only to discover that the rental market is not as strong as they thought.

[Maneesh]

I was not advocating renting, merely stating that a house is a liability as long as you have a mortgage on it. If you do sell it and make a capital gain, at that point it is an asset but before that point it is a financial liability. The tax laws and the ability to convert it into an asset makes it the best kind of liability to have.

[Labyrinthos]

The difference between monthly rent, and monthly mortgage, in the DC area is not much. Rent is going up almost annually. Provided one get a fixed mortgage, you do better in the long run getting the mortgage.

If you actually sit down and do the math, you should discover that you may be better off renting than buying if you don't plan to live in the place for a long, long time. Remember, at 5% down on a fixed rate, 30 year mortgage, very little of your monthly payment goes to principal during the first 7 to 10 years. Tack on real estate taxes, insurance, maintenance, improvements, etc., and the opportunity cost of the money, and buying doesn't seem all that great.

[Minn]

Emotionally my Porsche could be an asset because it makes me feel good but financially it costs me $1000 / month

Very strange definition. Whether or not something is an asset has nothing to do with whether or not it has a corresponding liabilty attached to it. A car is not an "emotional" asset. A car that runs is an asset. It can get you to work, it can provide you pleasure, and can be sold for cash. Whether or not you can afford it, or whether or not there is a lein on it has nothing to do with the utility it provides. A car that does not run and will cost more to fix than it would be worth after fixing is not an asset. It seems so simple

[Alberta's Child]

The home that costs $3,000/month to buy is only renting for $1,500/month because the $3,000 reflects the current price of the home, while the owner who purchased it years ago is basing the rent he charges on a much lower purchase price.

The example I cited here is not just a hypothetical one. It reflects exactly what happened in parts of California within the last couple of years. Once this buy/rent comparison became as heavily skewed as I've shown, a number of smart financial advisors began telling their clients to sell their homes at inflated prices and move across the street into identical homes at a much lower monthly cost.

[Reagan08]

It all depends upon timing. How long you are going to be there and what the real estate market is at the time.

My third house I only lived in for 14 months (due to divorce). The r/e market was heating up and I turned a SIX FIGURE profit. Bought for 3 and sold for 4...........now they are selling in the low to mid 6's.

In a good real estate market, even if you are only going to be in the home for 4-5 years, you'll make some cash.

[MissEdie]

We are! This little place is a nice haven away from the busy streets of big cities (our version of a traffic jam usually entails a couple of Bambi's cousins getting together in the middle of the road to chat about forest life).

[Alberta's Child]

Assuming a 6 1/4 percent mortgage, you'd have to be financing something on the order of over 500K in order to hit your 3K/mo mark, and then you'd have to add taxes, insurance, and maintenance on top of that.

Sorry for the confusion. That $3,000 payment included taxes and insurance -- just as the $1,500 rent would cover all those expenses, too.

Keep in mind that areas where $500,000+ homes are common are also those where a disproportionate number of people find themselves in the AMT bracket -- which means that most of those tax deductions go out the window and there isn't a huge difference (from a tax standpoint) between renting and owning.

With regard to the tax scenario you posted . . . Every tax advantage you posted would be greatly enhanced if the taxpayer in question did something creative with his money instead of buying a home. Starting a business -- even a business of owning rental properties! -- would usually provide a bigger tax advantage than owning the home. Example: a person who owns a rental property can deduct depreciation on the asset -- which is a deduction specifically not permitted for one's primary residence.

[MissEdie]

No, we're enjoying it too much!

[Always Right]

I was not advocating renting, merely stating that a house is a liability as long as you have a mortgage on it.

The note is the liability, the house is an asset. Period. Calling an asset a liability makes no sense. Now a house can depreciate, but it is still an asset.