You have to pay something to have a place to live. If you rent a little townhome for $1700/month for just 5 years, that's over $100k gone with nothing tangible in return. Even if your house will depreciate $50k between buying and selling it, are you worse off than renting?
The comparison is never that simple. Even if you don't consider the simplicity of being able to pack up and move, or conveniences like garbage collection and maintenance staff (I haven't picked up a snow shovel in two years), you have to account for closing costs for buying and selling as well as the limited equity you will have after only 5 years. As little as 30% of early mortgage payments go towards principal, the rest is paid to interest.
My bank has a financial calculator "should I rent or buy" and if I plug in $1700/mo rent (+3%/yr), $350,000 home with 0% appreciation and %1.25 property tax, and leaving all defaults for closing costs on buying and selling, the calculator suggests I will actually save about $12,000 by renting.
A quick summary of the details suggests that mortgage payments will be lower than $1,700, but additional expenses make the average monthly expenditure closer to $2,100, but in the long run tax breaks will recover most of that. After 5 years without selling, considering only payments and tax breaks, you'll be ahead about $4,000 if you buy. BUT when you try to sell, and look at the big picture, it's actually going to cost you money, because you have to pay the remaining loan balance in addition to closing costs and related fees. You only get back $60,000 or so, which isn't even enough to recover the initial downpayment of $75,000 the renter never had to pay (and was able to invest in something else).
Obviously it's easy to tweak the numbers either way, but the point should be clear that the simple "renters have nothing to show for it" argument doesn't hold water.
I wonder how solid the 3% rent appreciation is on average. Every place I've rented the rent has either stayed the same or, in one instance, decreased. Never stayed anywhere longer than 4 years, so I'm sure I get a dose as a new tenant, I just wonder how bad it is.
Where I lived through 2004-2007, my rent never increased, but that was a much less active rental market than Boston.
Since moving to Boston in 2007 I've only been in the same place long enough to have 2 opportunities for rent-raise requests, and it was raised both times. I don't recall the first (I decided to leave, the company was horrible), and the second the landlord asked for 3% and we haggled it to 2%.
I think some landlords try to balance turnover because there are benefits as well as costs and hassles. Turnover gives you a chance to thoroughly clean and do lots of minor maintenance that a long-term tenant is likely to neglect.
If you rent a little townhome for $1700/month for just 5 years, that's over $100k gone with nothing tangible in return.
The basic idea is that you spend the same amount (X) every month, in scenario 1 (buying) you spend the whole X on a mortgage and hope to make things up in equity but lose some money in the form of interest.
In scenario 2 you rent (The same house/apt as scenario 1) but only spend Y and have X-Y = Z left over to re-invest in some other investment vehicle. The point of the article is that in some places (Manhattan) you can have the same standard of living but make a better investment because Z is so large.
I think the point of the post is that, yes, often you are worse off than renting. There are extra costs and responsibilities that come with owning, plus the substantial financial risk in case your home does drop in value.
Check the NYT rent calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) and see what the situation is if it costs you 30 years rent to buy a place. If the value does not appreciate, you have to rent go up at a rate comparable to mortgage interest and property taxes to even have a chance of breaking even after 30 years.
I couldn't find exact modern numbers on rent increase rates, so I have to wonder how accurate the default of 3% on that calculator is. My rent increased between five and ten percent every year the five years prior to buying my home. Therefore, my home purchase (per the calculator) comes out as the better solution in only four years.
Also, buying last year had the added bonus of an $8,000 tax credit. Not a discount on your income, but an actual dollar for dollar credit (ie, come tax time, I add $8,000 to the refund amount). That's seven months of rent at my prior place. Not a bad deal. Thanks to the deductions from paying my mortgage (versus no tax deduction that I'd have gotten with renting), I saved just enough money on qualified income to fall under the first time home buyer credit limit. Worked out well.
Anyway, it definitely depends on where you live. Circumstances change drastically, even within a state. Even just outside of a main metro area. San Jose is cheaper than San Francisco. Beaverton is cheaper than downtown Portland. Westminster is cheaper than Denver. In some places, owning will simply never be an option. I couldn't afford a million bucks for a 900sqft home in San Francisco. Hell, I could probably barely afford rent.
Based on my personal experience, I would advise people to buy sooner than later. That is, I personally wish I'd have bought five or ten years earlier. On the other hand, I think I was also wise to wait until just the right time in my life and the market to buy and I think that's a wise path to take, too. You may be putting off the benefits of a home if you delay, but at least you're not making any commitments by paying rent, either. In the long run, I think that is the mistake too many people make. They feel the ticking clock and buy because everyone else says that's what adults do. That leads to buying too much and extending yourself and your credit too far. I know home-ownership is "the American dream", but I think it's a dream that you have to let come to you, when the time is right for you.
My rent increased between five and ten percent every year the five years prior to buying my home.
Please check my math: using your numbers and averaging to 7.5 percent per year, that would be a cumulative increase of (1.075)^5 = 1.44 = 44 percent increase.
Did your rent really go up 44 percent over 5 years? Where do you live?
As an additional data point, I rented a house with some friends in Beaverton for 5 years and the landlord never raised the rent.
Close. I think you counted an extra year in there. It increased 5% at the end of the first year, 7% the second, then 10% the third and fourth. I moved out at the end of my lease after the fifth year, so I don't know what the fifth increase going into the sixth year would have been. It started at $900 and five years later, it was $1,215. That's a 35% increase.
I lived in a more expensive apartment than is typical, but there is no housing anywhere near where I am (only apartments). I don't know if proportional increases are typical all over Denver, though. By the end of the fifth year, I was tired of seeing my rent increase at triple the rate of my raises.
Thanks for sharing the interesting historical data! It does sound like buying may be the optimal choice in your real estate market, especially if you are planning on staying put for a long time.
I do think for the near future, rent will continue to rise as more people decide to sit out of the real estate market (waiting for more price drops to occur). Ultimately even this should correct itself as people start buying houses again since they will grow tired of increasing prices and decreasing availability of apartments.
If you buy a home, market fluctuations don't matter. It's your home, you are going to live in it. If you were in the business of flipping properties for a living, it would matter, but not if you buy.
If you toss a mortgage into the mix, which is what I gather most people mean when they say "buy" a house - then yes, market fluctuations can matter a lot - but these are two very distinct things.
Market fluctuations should only impact you when it comes time to sell. Unless your mortgage is an adjustable rate, which is part of the reason we're in this whole mess in the first place. Put enough payment down up front so that you can lock in a good rate that you can tolerate and don't play the ARM game. That seems like lose-lose, to me. Maybe things go really wonky and I find in five years that I could have locked in an even better rate if I just waited? Well, that sucks, I suppose -- but I locked my rate in at an amount that I was willing to commit to (and I bought far less house than I could afford, so that I had some long term wiggle room).
Unless I'm missing another aspect of potential impact, which is totally possible. I can barely tie my own shoes, sometimes. :)
Just curious (because I've never honestly looked) - can you really lock in a rate for the entire, say, 25 year length of the mortgage?
When I asked a mortgage broker friend (Canadian) about this not too long ago, it was explained to me that yes you could lock in a rate for the "term" - but the "term" was 5 years, and after 5 years it would be adjusted depending on the prime rate, etc..... so from what I gathered you coudln't actually just get a plain old "25 years, x%" mortgage.
In the US, it's standard to have a fixed rate for the entire life of the mortgage. It's my understanding that this state of affairs is due to US laws and that most other countries tend to have floating rate mortgages.
That may explain why renting is the norm in a lot of other countries and owning a home isn't considered a big deal (while, in America, it's almost an obligation before you can feel like you've made it). Shifting terms is unsettling. I don't know the history of loans in the states, but I wonder how much of the 30yr fixed was established in response to everyone returning from service after WWII and starting families and buying property?
Dunno about Canada, but in the US a fixed-rate mortgage is, well, fixed. My rate will never change, and thus my monthly payment will remain exactly the same for the 30-year life of the loan.
Canada is distinctly different than the US. I was also surprised when I realized this difference. The scary part of this all is that even though folks with good credit were able to taken advantage of full-term fixed rate mortgages (i.e. prime borrowers), the US still endured the housing bust long after the majority of the sub-prime borrowers defaulted.
I'm not sure about other Commonwealth countries, but Canada definitely does not have this option. Our mortgages have a specific mortgage rate term (usually 3-5 years), separate from the life-time of the mortgage (usually 20-30 years; the 35 was/will be no longer be available). This means that interest rate fluctuations are more devastating when they rise for those who put little to no money down on their expensive housing purchases in Canada recently.
There are longer then 3-5 year mortgage terms in Canada. I believe up to 15 years is commonly offered.
Amortization length of a mortgage can be up to 35 years for residential mortgages. 35 year amortizations were only eliminated for CMHC/insured mortgages.
I would contend that the system is more stable when borrowers are forced to consider the consequences of future interest rate increases.
If you buy a home for a lifetime, sure. But most people do move not too infrequently, and then it does make a difference. That's why the question is: how long do you have to stay in the same place for buying to be financially advantageous.
On the other hand, servicing the interest on the mortgage can be more expensive than rent, and the amortization schedule is such that for the early part of the mortgage you are only paying interest, not paying down principal in any substantial amount. The money you save by renting can be invested elsewhere. But if you say in the house long enough, then yes it makes sense. It depends on what market you live in and how long you plan to be there.
If the potential home buyer wanted to keep their monthly outlay at $1700 whether they rent or own, then I think in 5 years if they lose $50k on their house they are likely out more money with a bigger headache than renting would've cost them.
Without property tax, $1700/mo means taking a 25 year loan of $320k at 4% interest. Obviously whether this is too high or too low depends entirely on where they live, but again I'm assuming that they were getting a similar place for roughly $1700/mo in rent, and are comfortable in that lifestyle. That's also assuming they have the cash for a down payment ($65k if they want to put 20% down).
So, if you run the mortgage numbers, in 5 years, assuming interest rates stay at 4%, they will have paid $61k in interest. Property taxes over 5 years (where I live, anyway) on a $385k home would be $15k-$20k on top of that. If we factor property tax into the $1700/mo, then they can only afford a $265k loan, and only pay $50k in interest over 5 years.
Either way, $50k or more interest + $18k in property tax + $50k in depreciation + $15k in closing and real estate fees costs them a lot more than renting for the same time period, and that's assuming that nothing goes wrong. If their roof starts leaking, the deck collapses, they need to move for work or their growing family in less than five years, they are in an even worse situation. (One might suggest we should amortize the $15k in closing and real estate costs over the 5 years and buy a smaller place accordingly, but at that point your $1700/mo rent becomes more like $1150/mo in mortgage payments, so at that point the question becomes how out of whack the renting and buying markets are, assuming again that you want to maintain a similar living standard, and not be downsizing as you're turning 30.)
The obvious question then is how likely "even if your house will depreciate $50k" ends up being.
At the risk of inflaming some - if you were buying the home, a paper loss in market value is irrelevant unless you are planning on selling the home during that time.
The real problem here is that we're not really talking about home ownership or buying a house - we're talking about taking out huge loans from banks and paying them off over decades, along with a ton of interest, and hoping that property values increase so we can trade up to something bigger and end up in exactly the same situation- rinse, repeat. The real problem is that we discuss "ownership" of homes when we don't really own them - the bank does.
