patrick.net

EastCoastBubbleBoy says

Factoring in for all of the additional costs of maintaining a home, housing (and its peripherals) would take up just over 50%!

Maybe.

Take this house:

http://www.redfin.com/CA/Santa-Cruz/1808-Hector-Ln-95062/home/2256267

$437,000 with 4% down, 15 year fixed @ 3.25% is a monthly expense of $3500/mo.

This is all expenses included principal repayment.

Actual cost of ownership (PITI less the P) is ~$1700/mo, somewhat under rents I'd guess.

After 15 years the house would be paid off, at an average monthly cost of ownership of $1200/mo. THAT beats renting.

Total outgo is $650,000 over these 15 years, vs. $300,000 for renting.

Really depends on where you see rents being in 10-15 years to make an analysis.

If history is any guide, buying now will be the deal of a lifetime.

Then again, I think history is not a guide now.

http://research.stlouisfed.org/fred2/series/DGS10

I think this is another one of those topics where there are a lot of factors involved and the answers might not be as black and white. Someone mentioned that if you live in a high cost state like California then yes- the cost of renting is generally cheaper. On the other hand I could move to a state like GA or NC and buy a house totally with cash right now. Renting for us has been significantly cheaper. But we also pay unusually cheap rent for the area. We're also big savers and investors. If we continued as we are at this point we could probably retire in another 15-20 years, or at about the time we hit our mid-50's, early 60's.

Then again I know plenty of renters who go out and buy the latest gadget or some new car every few years and the same goes for homeowners. Its all about financial discipline.

This is a false comparison. Plenty of renters, especially in newer construction, pay their own water and heat. I know I did when I lived in an AvalonBay complex. And if you don't pay those bills yourself, NEWSFLASH: THey are factored into your rent! Yes, shockingly renters also pay property taxes. Bet you did not know that, did you?

Hey - I was renting last year. $1500/mo plus gas, electric, water... lawn care - which I took care of. I bought a house for 39,000 which is in better shape than the one I was renting and spend $599/mo to escrow. The house is more efficient and I spend less in heating/cooling. I've spent prob 5-6,000 this year in upgrades... Can't compare the two. It made sense to own. I've got plans for a workshop in hte 2 1/2 car garage, maser bath upgrade and love having a garden which is not a waste of money (making it nicer for the landlord). The house was a foreclosure and was sold twice before in the past 5 years for $150,000. It was a no brainer from cash flow and long term investment stand point.

One factor that is never taken into account in these discussions is whether, in the current economy where the average person switches jobs (or even careers) many times during his/her lifetime, renting might in fact actually cause a person to make more money over their lifetime because it makes it easier, and therefore more likely, that they will accept promotions and job offers in other cities, whereas, due to the transaction costs and headaches of selling a home, a homeowner might be more likely to turn down a fantastic job with a competitor in Chicago, LA, New York or [fill in far away city that require sale of home here] that a renter would jump at? Over time, will the increased career flexibility of renting have its own financial rewards?

Gone are the days when a person started a job as a salaryman at Company X right out of college and stayed there for 30+ years. Today, opportunities can pop up at any time and they can be thousands of miles away - - literally on the other side of the planet. Is it so far fetched to think that a renter who has greater flexibility to chase promotions and new job opportunities in a global marketplace might have a better chance of making more money over the next few decades than a homeowner who is more inclined to stay put? I guess what I am saying is that all of these rent vs. buy comparisions may be missing part of the equation by overlooking the fact that greater and faster mobility will be far more important in building a successful career over the next 25 years than it was during the past 25 years. The flexibility that renting offers (30 days notice and I'm out!) will become increasingly important. Perhaps the rent vs. buy question is not all about which costs more or which is a better investment - - the question of whether one will make it more likely that you can capitalize on opportunities in a global marketplace is relevant too.

"I bought a house for 39,000..."

Where does one buy a house that costs less than most cars?

tjjenkins says

a homeowner might be more likely to turn down a fantastic job with a competitor in Chicago, LA, New York or [fill in far away city that require sale of home here] that a renter would jump at? Over time, will the increased career flexibility of renting have its own financial rewards?

That's why jobs that require cross country moves come with relocation packages.

HousingWatcher says

Yes, shockingly renters also pay property taxes. Bet you did not know that, did you?

Yes, of course, they do.

The cost of rental should always be more than the cost of ownership, by the way. When it's not, there's usually some sort of market distortion in place. That's because the cost of rental should be the costs for your landlord plus some extra (or else why have an investment property).

TechGromit says

So while it's difficult to justify spending all that money buying a house, just think about those people that you know (maybe your parents) that purchased houses 30 years of more ago and are living for next to nothing while your paying a small fortune to rent a smaller living space.

That's not completely true unless they are letting their house deteriorate. A house is still a consumable item. I know that we've all been inside our grandmother's house that's falling apart because she doesn't maintain it, but that's not the same as a well-maintained renovated house.

edvard2 says

I think this is another one of those topics where there are a lot of factors involved and the answers might not be as black and white.

Yes, the answer isn't black and white. Sometimes it makes sense to do one or the other for several reasons I've detailed more than once here and other people have too.

Nomograph says

How does heating, water, and sewage magically become free when you rent? My renters pay those costs themselves. Maybe in an apartment those are rolled into the rent, but not in most condos or SFHs.

I agree with Nomograph. I require all of my SFH tenants to have all the utilities such as water, cable, gas and electric in their name.......I even have them put the trash pick up in their name. These are properties in CA coastal areas

tjjenkins says

.... that they will accept promotions and job offers in other cities, whereas, due to the transaction costs and headaches of selling a home, a homeowner might be more likely to turn down a fantastic job with a competitor in Chicago, LA, New York or [fill in far away city that require sale of home here] that a renter would jump at?

There are other considerations besides home ownership. A lot of people are not willing to leave relatives or friends and go off and start fresh in a new city.

lurking says

I agree with Nomograph. I require all of my SFH tenants to have all the utilities such as water, cable, gas and electric in their name.......I even have them put the trash pick up in their name.

I thought the same thing, but since this is mainly a California based forum, I didn't know weather or not that was all included in rent by California Law, so I didn't point this out.

corntrollio says

. That's because the cost of rental should be the costs for your landlord plus some extra (or else why have an investment property).

missing factor: inflation + Prop 13 protection.

The places I've rented were built in 1925, 1974, 1960ish, 1975ish, 1984, 1993, and finally 1987, and all were rented out by the original owner or the following owner (the 1925 place WAS the original owner -- she'd been there 60 years already, LOL)

RE investors are generally happy getting a good return thanks to inflation and don't have to pummel every last cent out of their renters.

The market overall takes care of that.

corntrollio says

The cost of rental should always be more than the cost of ownership, by the way. When it's not, there's usually some sort of market distortion in place. That's because the cost of rental should be the costs for your landlord plus some extra (or else why have an investment property).

You'd be surprised at how many "house investors" are out there losing money on rental houses as we speak, particularly in the Bay Area.

tatupu70 says

tjjenkins says

a homeowner might be more likely to turn down a fantastic job with a competitor in Chicago, LA, New York or [fill in far away city that require sale of home here] that a renter would jump at? Over time, will the increased career flexibility of renting have its own financial rewards?

That's why jobs that require cross country moves come with relocation packages.

That does not fully address the issue for several reasons:

1. No "relocation package" includes a benefit that would allow a houseowner that is underwater, as most of them are, to sell and walk away clean. A bank would need to approve a short sale, which can take months or the buyer would need to walk away and have his or her credit destroyed. A renter, on the other hand, can get out quick and clean.

2. Many employers, including tech start-ups, smaller companies and law firms do not pay relocation expenses.

3. Relocation packages, some of which do indeed cover broker fees and commissions, give employers a strong economic incentive to prefer renters or local applicants. Depending on the value of the home being sold, this could be substantial (5-6% of the home value). I would not want to be on the wrong side of that incentive in the future, although I am not sure this has been much of a factor historically.

The bottom line here is that selling a home involves paying a 5-6% commission, plus a host of other fees and expenses. I know, having sold a home in San Francisco earlier this year, that these fees and expenses can be substantial. (I had to pay $13,000 in transaction taxes to the city and $20,000 for staging on top a broker's commission!!!).

Selling a home involves substantial transaction costs. Renting does not. Somebody has to absord that cost. I would not want to count on employers continuing to foot that bill in an era of increasing corporate tightening. I am a renter for the moment and like the freedom it offers after being a homeowner for the past 11 years.

edvard2 says

You'd be surprised at how many "house investors" are out there losing money on rental houses as we speak, particularly in the Bay Area.

No, the point is that I'm not surprised by it. But the fact of the matter is that renting should always cost more to account for being more liquid, to account for transaction costs of buying, and to account for flexibility/convenience. Certainly in some markets, the buying prices make no sense relative to renting, I've always said that. Of course, with interest rates so ridiculously low, that is changing slightly in some cases.

Bellingham Bill says

missing factor: inflation + Prop 13 protection.

Yeah, that matters too. That counts as a market distortion.

When you factor in:

Mortgage
Taxes
Insurance
Maintenance and Upkeep
Heat
Electric
Water
Sewer
Landscaping
Etc, et

Need one more factor I feel. Labor how much is all of this going to take a chunk out of someones ass labor wise. Calculate numbers. Whats not added to is the trouble gone to. I don't bother with numbers.

I went to understand how much of my fucking life this is going to take up. Buy at 23 for a pile of wood stuck together with water and light inside. I might have to labor as bonded for 24/7 possibly. 23 years of my life. Shit. Not to mention more than likely due to some kind of dicky ordinace. I can't even grow food in my yard. Which there really is not enough of to grow food. So I am screwed there to. Nevermind the cattle, sheep, road chickens, lamas and every other kind of STOCK that I can actually trade and live well with without having to shine some other lackeys shoes everyday. Truthfully I don't get it. I guess just sit around and get taken by the swindlers and con's usury people if thats all one knows. They may never learn to have their own life.

tjjenkins says

No "relocation package" includes a benefit that would allow a houseowner that is underwater, as most of them are, to sell and walk away clean

Most homeowners are NOT underwater. The last estimate I saw was 25% of owners WITH mortgages. And there are packages that include the company buying the house from the new employee at either market price or what they employee paid for it (whichever is higher). I don't think they are prevelant, but they definitely exist.

tjjenkins says

Many employers, including tech start-ups, smaller companies and law firms do not pay relocation expenses.

Even startups and smaller companies offer relo packages if they are recruiting nationwide. May not include a specialized relo company to handle everthing for them, but they will give $x bonus for relocation.

tjjenkins says

Relocation packages, some of which do indeed cover broker fees and commissions, give employers a strong economic incentive to prefer renters or local applicants. Depending on the value of the home being sold, this could be substantial (5-6% of the home value). I would not want to be on the wrong side of that incentive in the future, although I am not sure this has been much of a factor historically.

I have found the exact opposite to be true. Companies want you to settle down and put up roots. Then you won't leave. The cost of paying your realtor is MUCH less than paying a headhunter to find your replacement, interviewing, then paying another relo package

tjjenkins says

Selling a home involves substantial transaction costs. Renting does not. Somebody has to absord that cost. I would not want to count on employers continuing to foot that bill in an era of increasing corporate tightening. I am a renter for the moment and like the freedom it offers after being a homeowner for the past 11 years.

I can't argue with that. Buying/renting is a personal choice and there are advantages/disadvantages to each. Sounds like you made the right choice for your situation.

tatupu70 says

Even startups and smaller companies offer relo packages if they are recruiting nationwide. May not include a specialized relo company to handle everthing for them, but they will give $x bonus for relocation.

Not sure if startups do this, but I know some companies will sometimes just give you a signing bonus to deal with this.

One relo package I heard about for a non-CXO (all bets are off if you're C-level -- a variety of things are possible) was an established company being willing to pay up to 7% in transaction costs for selling the home in the other city -- I believe it could have included realtor fees + transfer taxes.

tatupu70 says

Companies want you to settle down and put up roots. Then you won't leave.

The golden handcuffs thing can be important The company wants YOU to spend the money on a house. Then it's harder for you to leave. But you still have to have an important enough job for them to pay for it themselves.

Tatupu70: You make some interesting points, especially about the employer having an interest in employees planting roots so they wont leave.

I agree that buying vs. renting is a personal choice and cannot be reduced to a one-size-fits-all analysis. I am sure I will find myself buying again someday . . .

It pays to buy, if your a RE investor, even more so if you've got certain connections. It's a different story wherever you go. I live in one of those high property tax states so I can rent for about twice the cost of your average annual property tax bill. I could go buy a nice run down shack for 40k right now, but the property taxes are $2500, and I won't pay it.

Relocation packages I believe are a thing of the past. I was out of work for 6 months and I was attempting to get a job outside of Cali. I never asked but every company I interviewed with informed me right up front that no- they would not pay any sort of relocation stuff. Period. Again- I had not even asked.

As far as being offered to relocate wherever- HELL YES, I would do that in a split-second if the company I worked for would let me. I could take a 60% paycut and still be doing a LOT better elsewhere besides here.

edvard2 says

Relocation packages I believe are a thing of the past

It depends on your field I think, but they are definitely still available.

Bellingham Bill says

The baby boom put a lot of money into the market 1980-2010, and they're going to start taking a lot of money OUT of the market.

BINGO! Everyone keeps saying you'd make more investing your money in stocks than housing... I see a lot of Boomers retiring in their homes and just taking money out of the market to live off of in their paid off home... To me that means a stagnant housing market at worst and a falling stock market...

edvard2 says

Relocation packages I believe are a thing of the past.

Relocation packages are alive and well. I have two friends that work for different corporations and they were tranfered for a job promotion within the company within the past two months. One went to NY from CA and the other to the Bay Area. The lady going to NY was underwater on her home by about 90K and the company had a relo company take it over and they listed it with the local RE company. She said that she didn't care what happened to it or how much it sold for because she would be made whole for up to 100K........nice perk, and they she's buying a place in West Chester County so they are putting her up there until the new place closes escrow. The other person had the relo company take their home over as well and they were paid for relocating their belongings, corporate housing for him and his family, etc.

That's not a relocation package, that's a golden parachute.

tjjenkins says

The bottom line here is that selling a home involves paying a 5-6% commission, plus a host of other fees and expenses.

I think it's cheaper if you sell on redfin... so it's more like 4.5% commission.

I'm not saying that buying is better than renting long term, or vice versa. We all can crunch our own numbers for our respective situations.

I'm just surprised at how much more of my monthly income will be devoted to "living" expenses one I do finaly buy. The payment shock makes it difficult to make the leap from renter to buyer.

i think its situation. if housing prices are ballooned it's not a good idea to buy an expensive liability.

otherwise i'd just try to minimize how much it costs to have a roof. If you can't pay cash I wouldn't recommend to buy it, wouldn't want to waste life in debt to a bank.

I've seen a lot of dumps out here in CA for sale, with the realtor/owner whomever jacking up the price like it's made of gold. Now cost of that is not worth buying.

dodgerfanjohn says

The correct answer is that it all depends on what the cost to purchase is vs what the cost to rent is.

True! That's what my calculator is all about:

http://patrick.net/housing/calculator.php

Patrick - in normal times that may be true (I'd need to think about it a bit more before - not sure if I fully agree). but these are not normal times. There is a sizable segment who knowing they are underwater or in a home they cannot afford, try to rent it out to cover their costs. Ergo, rents trend higher than they would if simply economic metrics would dictate (supply vs. demand, income vs. price, etc.)

Comparing purchase price to rental cost oversimplfies the scope of the problem. My metric has always been price to income. (Loose lending aside) you can's spend what you don't have.

That said I've hijacked my own thread. My point is that when you account for the "big picture" cost of ownership - it can easily eat up 50% of one's monthly expenditures. Certainly this cannot be sustainable in the long term - but I can't quite discern what impact, if any that has on housing prices, since few seem to look at the total cost.

EastCoastBubbleBoy says

since few seem to look at the total cost

What makes you think this?

Okay, normally I would agree with you, but I hate to listen to coughing, talking and arguing from the morons who live next door. There is only a thin piece of drywall between apartments and stucco boxes and it feels like living in a rats nest.

Here is my solution:

Mortgage 25% down 75% loan over ten years
Taxes Buy a fixer at LOWEST price (less than cost to build) NO politicians to pay off for over priced "building permits" ....keeps the taxes low.

Insurance. Go cheap except always add a large umbrella policy from a CREDIT UNION to pick up all of those items never really covered in a typical policy.

Maintenance and Upkeep I do it myself. Tools from a swap meet or garage sale are as cheap as you want to pay. Some are even free.

Heat. I use blankets and a solar powered water heater

Electric. Two large solar arrays with 50% cash back from Uncle Sam.

Water. I have my own well with two bladder storage tanks. PV Solar runs the pump.

Sewer. I have a leach field off of a properly designed septic tank.

BUILD IT YOURSELF....Go to the country...plenty of room out there.

Landscaping. I do it myself....the grass is cut by my two goats.
My plants are all eatable from our garden .. goats, laying hens

Security System. Two Doberman Pinschers.

Etc,

BUY CHEAP....BELOW the cost of building. Let nature provide your energy and food. You must expend work...to do the rest.

You can exist off the grid. NO TV NO CABLE TV.....

I use "borrowed wifi"

As compared to

Rent
Electric

Of course, everyone is able to pluck raw diamonds from piles of crap and buy $150,000 recently sold homes in foreclosure for $39,000 after/while renting for $1500 and OF COURSE its a MUCH NICER house. Of course.

Lurking... don't know where you live, but this comment:

I require all of my SFH tenants to have all the utilities such as water, cable, gas and electric in their name.....

...Made me think of one of my friends, who's been SFH-shoppingfor about a year now, and said that many of the houses she's seen obviously have a grow room set up. If I was the landlady, around here I think I'd always want water in my name, just one way to keep an eye on things.

It truly matters where the house is located; I'm currently paying about $500 less than I'd pay if I rented the exact same place. The renters around here pay the same out of pocket costs as do "owners," when it comes to water ($30/mo), trash pickup ($20/mo), electric/heat (house specific). We're all septic 'round here and we pay $300/yr HOA fees, which basically covers the firehouse.

My situation isn't typical for a house in Calif or the East Coast, but it is for the rural West. The $39,000 house isn't typical for here... Real estate is local with national issues factored in, I guess.

EastCoastBubbleBoy says

The difference is startling. Rent and utilities are about 25% of my monthly expenditures right now. Factoring in for all of the additional costs of maintaining a home, hosing (and its peripherals) would take up just over 50%!

My experience is different - I'm paying about 15% to buy & maintaint my place - renting would be closer to 28%.

Everything is relative. My 5 year ARM went to 2.75% 8 months ago. my payment is now $720/month (principle and interest...and a decent part of that is principle). Add taxes, insurance, HOA dues, and maintenance and i'm still WELL below $1,000/month. Throw out the utilities argument because i don't know any house renters in my are that don't pay their own utilities (all of them). I live in a cookie cutter HOA so the entire neighborhood is comparable. Houses rent for $1100-1300. I'll take home "ownership" over renting in my situation. For the record, you can buy in my hood for about $130,000. Also, my house is my family's home and we have no intention of leaving it (i know anything can happen in the future). If we do stay put, in 25 years i won't have to choose between a lease or a mortgage. I'll simply have a house that only has taxes ($900/year) tied to it.

underwaterman says

They can't stay low forever

underwaterman says

The odds are against keeping low mortgage interest rates.

NOPE

http://research.stlouisfed.org/fred2/graph/?g=3dP

back when total leverage (the red line -- total credit owed / GDP) was under 2 they had the power to monkey with rates to kill the economy.

But in the mid-80s something broke and we are in a different regime now.

external federal debt is $10.2T right now, looking at all gov't debt divided by wages:

http://research.stlouisfed.org/fred2/graph/?g=3dQ

you can see it rising from 0.8 in the 1970s to over 1.8 today.

This means an eg. 5% treasury rate has the anti-stimulative power of 11.25% rates of the past.

Rates shot up in 1980 to stomp wage inflation that was coming from all kinds of conditions that do not obtain today, eg. in 1980 the baby boom was aged 19 to 34, now it's aged 50 to 65.

Speaking of which, my chart above does not include the $4T in debt notionally owned by the various trust funds that also need to be repaid.

The higher the debt goes, the lower interest rates are driven.

Los Angeles Owner says

Everyone keeps saying you'd make more investing your money in stocks than housing... I see a lot of Boomers retiring in their homes and just taking money out of the market to live off of in their paid off home... To me that means a stagnant housing market at worst and a falling stock market...

This was actually discussed in the Economist recently where there was a study done on these things:

http://www.economist.com/node/21530077

In his paper Mr Takats seeks to quantify this effect. He prefers to look at an international sample rather than data on single countries, because that enables more robust identification of the impact of ageing. He also focuses on house prices rather than financial assets, because they are less likely to be influenced by cross-border capital flows. Mr Takats applies two aspects of demography to BIS house-price data from 22 advanced economies: first, total population; second, the ratio of old people to the working-age population, or the old-age dependency ratio. Between 1970 and 2009, he finds that a 1% rise in GDP per person and a 1% rise in the total population each corresponded to about a 1% rise in real house prices. But a 1% increase in the old-age dependency ratio was associated with a 0.66% drop in real house prices.
...
Prices of financial assets do not necessarily shadow those of property: people tend to buy and sell stocks and bonds later in life than they buy and sell homes. But they are also affected by ageing as the old sell them to realise cash. A model developed at the Federal Reserve Bank of San Francisco finds that since 1954 there has been a high correlation between the ratio of Americans aged 40-49 to those aged 60-69, and the price/earnings ratio of the stockmarket. The implication of this relationship for share prices in the future is bearish, it says. Based on standard demographic and earnings assumptions, the San Francisco Fed’s model suggests share prices will fall by 13% between 2010-21. The good news for America is that the relative proportion of middle-aged people should rebound in 2025, implying a strong recovery.

Such estimates should be treated with caution. Ageing, at least in the short term, is fairly predictable, so markets may have already discounted its impact on asset prices. Mr Takats draws attention to the fact that elderly people may end up working longer, which would reduce the pressure to sell their assets.

tatupu70 says

What makes you think this?

I agree with EastCoastBubbleBoy on this one. It is common for many people to look at mortgage cost and perhaps to consider (and overestimate) the mortgage interest deduction, but not consider several other costs, such as maintenance.

In addition, if anything, the bubble showed that people will overemphasize the importance of current mortgage costs without considering changes (recasts and resets) to their mortgage costs. Everyone assumed either values would continue going up 20-30%/year or that they'd be making substantially more money or even that it'd be easy to refi. It was easy to refi when values were rising...

corntrollio says

It is common for many people to look at mortgage cost and perhaps to consider (and overestimate) the mortgage interest deduction, but not consider several other costs, such as maintenance.

Certainly possible--I haven't found that to be the case in my discussions.... Looking at this post, for example, mortgage interest deduction is not even mentioned. Nor is the principle portion of the payment. Nor is the value of owning free and clear at the end of the loan.

Using the bubble as evidence is not useful, IMO. It was clearly irrational behavior, and as such, doesn't really show that people underestimate housing costs...