I am going to make this shorter than I usually do, because I don’t feel like I am the best person to be doing this sort of analysis.
Case in point, I have never actually bought a home.
We tried to there for a while, but we never did manage to find the house we wanted at a price we wanted.
A lot of people are moving to Houston and that is keeping housing prices up even when the economic times aren’t the best. I think the housing market is still quite a bit overpriced around here. Particularly since the area we were looking in it seemed like the minimum number of bedrooms and playrooms and what have you are 7 per house.
Not that I mind terribly much, but there aren’t many other houses to drag down the house values there.
Back to what I was saying, though.
I think it just plain makes more sense to rent most of the time.
I am renting a 4 bedroom atm for 1350/m in an area served by the #5 best elementary school in Greater Houston. House built 2003ish, lots of kids in the surrounding houses.
The houses I was looking at like 9 months ago were a small step up from this one and newer, but if I wanted to buy those I would have been looking at about 3000/m minimum all inclusive.
See, a lot of people look at this the wrong way. They look at rent of 1350 and a loan payment of lets call it 1300 and they say they are throwing away money on rent when they could be building equity and paying less at the same time.
Maybe that’s true. In some places, you actually can buy for cheaper than you can rent. The number of places in America that are like that are probably 10% or less.
When people do these calculations, they factor in the whole rent and only a small fraction of the house ownership expenses.
Some they leave out:
Property Taxes – These probably add up to a few thousand a year or a few hundred a month averaged.
Repairs – These typically run 1% of the house cost per year, or 3k on a 300k house. That’s another 200 or 300/m.
HOA fees – That’s another 200 or 300/m.
Utilities – Sometimes these get included in rent, they never get included in home purchase calculations.
Agent Commissions – 6% on both purchase and sale. On a 300k house that’s 18k each way. That by itself is a 1500/m cost in the buying and selling years.
The amount you see on the loan calculator is like half at best of what you will actually be paying in total costs.
But What About This?
Mortgage Interest Deductions – The Great Equalizer. For every dollar you set on fire from interest expenses (tens of thousands a year) you get to deduct like 20 cents on taxes you owe. So you are really only setting fire to about 80 cents of every dollar you set fire to.
Please line up around the block now.
The fact of the matter is that something like 75% of tax payers file with the Standard Deduction. They don’t itemize, which you have to do if you want to set fire to only 80 cents out of every dollar you set fire to.
More than 25% of people are home owners. That means a rather sizeable percentage of people are home owners and they still find it better to just take the standard deduction. The number of people in that category is roughly half of all home owners. Half of all people who are equalized by the mortgage interest deductions aren’t.
How Should We Look At This Instead?
You are renting either way. Either you are renting a house to live in or you are renting the money it takes to live in that house.
Given that, how can you do an apples to apples comparison?
Loop back around to what I said early on. I am renting for 1350/m and the total cost of ownership for the house I would otherwise own is north of 3000/m. Lets call it 3350/m all inclusive.
That 3350/m stays static in either case. I have that much and it’s either going to build equity in a house or build equity in a 401k or some such.
In the renting scenario, my equity in my 401k will be about 2000/m. In the home ownership scenario, my equity will be about 300/m in the first year. Maybe 600 at best. Once the 2000/m or so mortgage is completely paid off, then I will be getting 2000/m equity in the house scenario.
Where does it sound to you like I am better off?
If I lose my job, which one of those ways will I be better off? Having to pay 1350 or 3350?
But We Don’t Want To Hit Retirement And Still Be Making Payments
I actually agree 100% on this. That would suck. That would be a great way to suffer through retirement.
Or maybe not. Even if I paid off the above house and I wasn’t paying 2000/m mortgage anymore, I would still be paying 1350/m in expenses. Maybe my rent increases before then, but guess what – If I owned the house my house value is up, therefore my property taxes are up and my cost to repair the house is up, etc.
It may very well turn out that rent is just as much as extra expenses are even long term.
Even if you call it a win for the house, you still have to factor in an investment of 2000/m in stocks or something. That’s a big difference in favor of never buying a house. That’s a multi million dollar difference in favor of not owning the house.
Don’t house prices always go up?
They don’t always, especially not lately, but lets go with it. The general trend of house prices is indeed up. Between the time average house prices were tracked and about the year 2000, house prices stuck pretty close to inflation. The lines were more or less the same. For every dollar in value that a home gained, the purchasing power of a dollar at the supermarket decreased exactly enough to even it out.
That makes house prices an inflation hedge, that’s it. Similar to gold.
But, as with gold, there are bubble times where the prices get out of whack. Since about 2000, we have been in that sort of time. The prices of houses have gone a lot higher than the inflation adjusted numbers.
It used to be that people were paying 2x of their household annual income in home prices. These days the norm is more like 3x – 4x. Maybe even more than that. We are buying a lot more house than our ancestors thought was reasonable. Part of that is house prices that are up too far, part of that is that we are stretching ourselves too thin, and part of that is cheap credit.
At some point, people bought into the idea that house prices always go up and never go down. They thought that it doesn’t really matter how much they pay, because they can always sell it for a lot more a year or two later or at the very least sell it for as much as you spent in that time and it lets you live for free in the house in that time.
That belief caused a huge housing meltdown that broke the economy for years.
Unfortunately, house prices didn’t make it back down to where inflation says they should be. They got reasonably close, then they started going back up again.
Is There A Time We Should Buy?
Actually, yes. When there is blood in the streets. When you can get a house at a stupidly low price in relation to its’ actual value. That is a good time to buy the house.
I don’t even really mean the macro level here, but that’s good too. I mean the micro level. Just keep your ear open all the time for people that are motivated to move right now.
The good thing for you is that you are banking maybe 1000/m or 2000/m and you can afford to play the waiting game. The people with cash in hand win this game.
Sooner or later there will be somebody that really needs to sell and they will take well below their house’s actual value to sell it fast and hassle free.
That is when you buy. You have your whole life to wait for those conditions. Every month that goes by you will be better able to take advantage of them too.
It also really helps if the Federal Reserve is worried about inflation and they raise interest rates to prevent it. The raising of interest rates has the effect of restricting the amount people can borrow to more sane numbers. If house owners don’t lower their selling prices they won’t be able to sell houses.
If you buy in a high interest rate environment, you lock in a low amount borrowed. Whenever interest rates go back down, then you refinance and you have both a lower amount owed and a lower interest payment.
Unfortunately, we have been in a zero Fed rate environment for a long time now and that has punished all the people that bought homes in the mean time. That’s a lot of people. Every one of those people paid 100k more than they should have had to.
That’s money they have to work and pay off. Money that comes straight out of their standard of living and their retirement. They can’t refinance their way out of that.