patrick.net

Keep renting. Period.

It has little to do with the monthly money you are saving, which is substantial, and more to do with falling prices.

A house - yes, even in places like Cambrian - priced at $800,000 probably will end up closer to $500,000. In fact, it would have been there already if it weren't for all of the extend and pretend programs.

With your crystal ball, consider that:

1. HAMP is now releasing more foreclosures than it is absorbing.
2. QE2 is done - and though interest rates won't rise much, rates in the 4's are done.
3. Homebuyer tax credits are done and the public won't support bringing them back.
4. Conforming loan limits are set to drop in your area from $729,950 to $625,500

All of these programs were put in place to grow the housing bubble and to prop up home prices as the bubble burst. All of these programs (and many more) are ending.

The first foreclosure moratoriums began in August of 2008. That's 3 full years of foreclosures that should have happened, and most of them still will.

As canaries in the coal mine, even the low-end markets have really started to suffer in the last few months. Concord and Livermore markets have softened dramatically in the last 90 days. The first-time buyers have largely bought and the investors are rightly much more cautious.

Rent for another 3 years. You'll probably "earn" 75K a year in not-lost-equity by doing so.

"I know a guy who has been renting the same apartment since 1993. 18 years x 12 months x (average) $1400 = $302k total rent.
This apartment is in a condo complex.. his unit went for $170k in 1999 and about $220k today, peak value was $450k in 2007.
Yeah, a major benefit of renting is the flexibility to move."

This doesn't include the total cost of ownership.

In my own particular condo complex and state, it's 1% property taxes and about $200 per month in condo fees. This is VERY reasonable.

Doing the math, over 18 years, that comes out to: $43K condo fees and $36K in taxes for a total of $79K. We'll ignore interest and tax savings on interest, for now, because overall that will drive overall cost of ownership up, not down (You get back a small percentage of what you paid in interest so it's a net loss)

So the current evaluation of $79K + $220K is about $300K. Almost EXACTLY what he paid in rent!

Wow!

Of course, the difference being that if he bought rather than rented, he'd own the unit by now but this is assuming he bought at the bottom. During the peak of the bubble, he clearly would have been a fool to buy.

Here's my 2 cents. Before you continue understand that only you can make the decision thus what I have to say is mere opinion.

First of all, in the end the only thing that matters is money. In the end you'll need somewhere between 1 million to 2 million dollars saved in order to retire. The 2 million is more for people who elect to live in expensive places like the Bay Area. 1 million gives you an income of 40k a year. In other words- not much. How you get that money depends on what you invest in. Thus my advice for anyone-regardless of whether they own a house or not- is to see what situation their retirement funds are at. Your house does not count unless you plan on selling and moving somewhere drastically cheaper and thus can use the equity from the sale of your home. Whether homes in other areas will continue to be a lot cheaper in the future is debatable so again- houses usually don't count for much.

Moving on and still in reference to point number one, you would probably need to do some simple math. How much more would it cost to buy a house? What would be the realistic monthly expenditures? That includes the mortgage, down payment, taxes, maintenance, etc etc etc. What about car payments, insurance, health insurance, etc etc etc? If buying is cheaper than renting then the choice is easier. If not or the costs are about the same... perhaps less so. If one costs less than the other, how much money can you make using that extra savings to your advantage? For example, we rent and our rent is about 50% less than buying. We use that savings and invest it in stocks, bonds, and various mutual funds. Despite the bad news, the funds are gaining about 7-10% per year. Thus renting-if cheaper- is not necessarily throwing money away since the money saved can be invested in stocks that are for the most part beating the crap out of real estate that has been losing value for 5+ years so far. Also- if you did buy, could you afford the mortgage on one income? This is perhaps the biggest reason we aren't buying. I've been out of a job twice in 5 years. While I've been lucky and found new jobs, I have other friends who have been out for 2+ years. I am very wary of buying a house unless it could be paid for with one income.

How likely is it that the Bay Area will be your forever home? As we all know, 150k buys a pretty nice house in a nice, safe neighborhood in many, many other different cities, some of which have a decent amount of comparable jobs in the same industries as those in the Bay Area. We ourselves are likely moving to one of those places someday for that very reason. If you have such an eventual plan, does it make sense to buy?

Lastly, I would be less concerned about what the value of a bought home would be. If you plan on staying long-term... as in 10-15 years or so, then chances are good that in the very worst you'll probably break even if you sell. Even if the home lost value, how much of an impact would that really make on your finances? If your finances are heavily tied to the value of your home then that means you're probably investing too much into a house to start with.

In the end there's not really any right answers. Its what YOU and your wife feel comfortable doing. Only you know what's right for you. Sometimes decisions aren't even based on financial reasons. Sometimes decisions are based in pure emotion.

Good luck.

therapy says

The rent is reasonable for what and where it is, but I still feel like I'm throwing thousands down the drain instead of building equity.

If the rent is reasonable, you're not throwing it away. Please stop using this stupid realtor cliche. It's false, and given that you've been burned by owning, it's pretty astonishing that you've yet to realize this.

You're paying for a roof over your head. If you bought a house, you'd be "throwing money away" on an assload of interest and taxes. But in reality, you're still just paying for a roof over your head.

As for your expected "equity", consider a risk assessment of what might happen were you to buy a house, and just how unlikely equity growth will be.

You save about $900 per month by renting, even after the tax deduction. I'm not even going to include the expenses that come with owning a house. $900 invested at 6% per year would come to over 900k after the 30 years of your mortgage. Nobody considers what a few hundred dollars per month could compound to with a conservative 60/40 equity/bond index fund allocation.

E-man says

Active listing = 2,381
# of Sales in June = 1,099

That's basically just over 2 months worth of inventory for SFHs in Santa Clara County.

That is not how absorption works.

klarek says

therapy says

If the rent is reasonable, you're not throwing it away. Please stop using this stupid realtor cliche. It's false, and given that you've been burned by owning, it's pretty astonishing that you've yet to realize this.

you said it much nicer than i did.

Hysteresis says

klarek says

therapy says

If the rent is reasonable, you're not throwing it away. Please stop using this stupid realtor cliche. It's false, and given that you've been burned by owning, it's pretty astonishing that you've yet to realize this.

you said it much nicer than i did.

Yes, exactly. People forget that there is a loss from owning as well as a loss from renting. Your mission is to choose the smaller loss and yet live in the same quality and size house.

OK, it's possible that during a bubble, temporary high appreciation might cover all owning expenses. But it's also possible (even likely) that when the bubble deflates, all your gain will be wiped out, and perhaps all your life savings wiped out too.

I created a calculator to compare the options:

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

Renting is mucSF ace says

The risk is not really falling price, it is the risk of having to move. Net of tax deduction, principle payment, owing is cheaper than renting in most cases already, sometimes significantly.

Renting is muuuch cheaper is his area.

My intuition/research has me leaning towards 2016/2017 as being the right time to jump in. I believe the market will return to reasonable (home prices match inflation line) at that time.

I agree; the phrase is just industry hype that has become a common household saying and a wrong headed way of thinking. The mobility that renting allows a person is enough reason in itself to consider renting over buying. That's always been true for young people, those starting out in a career, or who will probably have a family in a few years. Now more than ever, with job stability non existant, we need to be mobile. Renting is the new smart. Buying is really only good for people who can and will stay put for a long time, and who value the few benefits of ownership far more than the benefits of renting. Far too many people fail to do the real math when figuring how much buying costs, or how they pay for the house two to three times over, in the life of the loan, (if they stay there). The real estate and lending industries have to count on an uneducated public to keep up this sham. If people were truly educated they would've never fallen for this BS.

Michael D says

Don't think of rent as just throwing money away. I really wish that simple idea would go away, it's much to simple a way of looking at home ownership vs. renting.

A lot of homeowners wish they weren't throwing money away on an asset that is depreciating in value. There can be financial advantages to paying rent, especially if rents in your area are cheaper than an equivalent home after including property taxes/insurance.

Id wait till after the debt ceiling is resolved and the European defaults and look at the landscape at that point. See who has a job, who has money to spend(foreigners?), interest rates, exchange rates, tax rates for business. etc. Just too many unknowns now in my opinion. How much was the 1 bedroom condo and what did you sell it for?

It is pretty iffy right now unless you find an excellent deal.

1sfrenter says

I've been renting the same SFH in the city for 12 years. Rent was $2100, is now $2300. We pay all utilities. Love our house, but honestly - we've paid well over 300K in rent. WTF.

1sfrenter says

Another 10 years here and we would have paid for what the house could sell for now (maybe 650K?).

Do some simple math here. Let's assume you could get a 4.75% 30-year fixed loan on $650K (no down).

4.75% of $650K is $30,875. So in the first month, you would pay 1/12 of that in interest, or $2573. When you add on principal, taxes, insurance, realtor fees, closing costs, maintenance, etc., you would be paying at least that much per month in housing costs, even when you include the tax deduction on interest.

So how exactly are you throwing money away other than in a psychological sense?

I'm not sure what neighborhood of SF you live in, but are you certain you could buy your current house or equivalent for that price?

Yes, buying should be cheaper than renting because renting should cost the same as buying plus some profit for the landlord. In exchange for paying the excess, you get mobility, low transaction costs, liquidity, etc. That's how things work. If you live in SF, and your rent is less than what buying would be, then how are you throwing money away?

You have to pay to live somewhere one way or another. I'd gladly have paid over 300K in rent anyday and not have a dump with a 700K loan over my head (on a place likely worth 300K or less and falling.) Jeez just THINK.

Simple way to know if the right time to buy:

Just followed what worked in the past. If you put 20% down and get a 30 years fixed rate mortgage, are you spending less money compared to renting an equivalent house?

PS:
"I know a guy who has been renting the same apartment since 1993. 18 years x 12 months x (average) $1400 = $302k total rent.

This apartment is in a condo complex.. his unit went for $170k in 1999 and about $220k today, peak value was $450k in 2007."

... remember that half of what is paid for a mortgage at 5% goes for interest. E.g. if you have a 100k 30 yr 5% fixed rate mortgage, at the end you will pay 100k in principal and 93k in interest. So the guy above still made the right decision, since he's saving money compared to buying. He spend $302K, only 50% could go to the principal, while the rest is thrown down the sink to the bank... :)
... the only way buying could make sense, is if you cannot save any other way. If you cannot stop yourself from buying a $5 latter just because you can afford it, then not having the money in your wallet because you need to pay the mortgage is A WAY to have forced saving. Not my cup of tea.

if you have a 100k 30 yr 5% fixed rate mortgage, at the end you will pay 100k in principal and 93k in interest.

this is variable, depending on the state and income tax bracket, since the MID, assuming it survives, is a tax subsidy to borrowers. In California, the MID reduces the average monthly interest cost of a $450,000 purchase, 20% down, 4.25% loan to $500/mo over 30 years.

Beats renting!

Housing also provides the housing good AFTER the loan is paid off, while rent is eternal.

i know nothing about the demographic you're purchasing in, but my guess is if the area you're looking in hasn't seen a significant hit in pricing over the last 3 years, it probably will - and soon... so it may be wise to sit on the sidelines or consider another area.

what defines a 'good deal' is truly never immediately apparent. to buy in an area that has already been hit hard is probably alot safer than buying in an area that may still be teeter-tottering on its peak.

do some research and get your finger on the pulse of your area so you can try and feel out where it might stand in relation to the rest of the country. until you can see the trend, it will be alot tougher to spot a 'good deal' when it does come along.

good luck.

Too young back then: no career and no savings. But don't you know I wish I had bought back in the mid-90's.

$200 a month increase over 12 years is pretty sweet deal though! Curious why you didn't buy say... back in 1999? I'd imagine if you could afford to rent a $2100 a month home in 1999.. that you could have qualified to buy back in 1999 too?

Home prices were pretty realistic back in 1999...

This is exactly my thinking. After watching my elderly father bounce around from one sublet to another (in Manhattan), I did begin to get worried about being a renter in my old age.

If you love where you live and plan to live there for a long time, at a certain point renting is throwing your money away. When all is said and done, you might be 80 years old with a fixed income/retirement and looking at getting evicted.

All the talk about moving somewhere else does not sit well with me. Maybe for folks without old, dear friends and a strong sense of community, but many of us are perfectly happy living where we live, and hate the idea of moving to a new place where we know no one just because of this housing bubble bullsh*t.

Troy says

Housing also provides the housing good AFTER the loan is paid off, while rent is eternal.

To therapy,
If you are in Santa Clara county, depending on where you are looking at you may be relatively outside of the 'patrick.net' doom & gloom picture that is painted about buying a house.
It is a good idea to do your research - there are a lot of resources online. Check out mlslistings for your searches (forget about realtor.com or sawbuck or redfin), and also make sure you cross correlate with crimereports website to look for a relatively low crime pocket within a several month window. Also look at the number of foreclosed houses in that area within the last six months, which you may be surprised to find is very low or none depending on where you are looking. The whole generalization about people being stupid and getting interest only loans they cant afford doesn't really apply to several locations in Santa Clara county, while it does apply strongly in some pockets within the county. There are still many houses above 1.4M that get multiple offers. Granted, a good proportion of the buyers have cash on hand - but again, that is not an oddity in Silicon Valley - this is something the "generalizers" will always oppose, of course. On the other hand, DO read the articles and advice on patrick.net - they can often open your eyes to important factors to consider. And do use the tools on bankrate, and nytimes buy vs. rent. But remember, these tools are all generalized, when it comes to buying a house - LOCAL factors are most important - for example the high number of innovation IPO firms that fuel silicon valley, leading to high demand. Such a thing just CANNOT be part of generalization, and keep that in mind for future resale value.

JohnnyG says

On the other hand, DO read the articles and advice on patrick.net - they can often open your eyes to important factors to consider. And do use the tools on bankrate, and nytimes buy vs. rent. But remember, these tools are all generalized, when it comes to buying a house - LOCAL factors are most important - for example the high number of innovation IPO firms that fuel silicon valley, leading to high demand. Such a thing just CANNOT be part of generalization, and keep that in mind for future resale value.

JohnnyG - thanks. This is some of the most useful information for me in the thread. I'm willing to do the research, but until you posted very few people gave me any heads up as to where to do research. Type "real estate advice" or something similar into Google and you get tons of bullshit.

1sfrenter says

If you love where you live and plan to live there for a long time, at a certain point renting is throwing your money away. When all is said and done, you might be 80 years old with a fixed income/retirement and looking at getting evicted.

All the talk about moving somewhere else does not sit well with me. Maybe for folks without old, dear friends and a strong sense of community, but many of us are perfectly happy living where we live, and hate the idea of moving to a new place where we know no one just because of this housing bubble bullsh*t.

That's all fine and good, but what is your solution at the end of the day? Why haven't you bought a place in SF if this is such a big concern for you? You've paid below buying price to live in SF for 12 years by renting. You can either engage in a higher degree of consumption by buying a property, or you can continue renting and save money. Is it because you couldn't afford it? If so, then how were you throwing money away? -- if you couldn't afford it, that means you spent less money renting than you would have buying.

But this still has nothing to do with "throwing money away" if you're still saving money, because you could easily throw money away by buying in SF. Realtor platitudes should not enter into the decision -- it's a financial decision and a personal decision.

Also, let's not pretend that housing has no costs after 30 years. We've all been in grandma's house with tons of "deferred maintenance."

@corntrollio You nailed it. These romantic issues such as "I own my home" are as bad in my view as the smoke and mirrors bullshit lending that created this mess. I agree 100% it is a financial decision and if you saved money in relation YOU SAVED MONEY. End of story. If anyone is dreaming of the big kill by buying a house I recommend they wake up and wake up fast. At the end of the day a main house is to live in, end of story.

There are two objective means for testing whether or not you should stop renting and buy. The first is comparing the financial benefits of renting vs buying. A calculator such as this one from the NY Times will help you decide when that time is.

The other way to decide is to look at the Case-Shiller Index. I prefer this method because rent to buy ratios can swing back and forth a lot. I'd look for a CSI value of less than 100 for my region. I also expect the CSI to flatline for a long time when the bottom is reached, so I'd wait until I saw some stability there rather than jumping as soon as the index reaches 100. Of course, there may be a good deal you can find before then, but you should be able to tell the good deal by looking at historical prices when the CSI was reasonable.

The answer is two simple words: Rental Parity.

As in "when the place you want to buy reaches rental parity."

That means athat when the total cost to own it (property taxes, mortgage, PMI) all equal less than your cost to rent the same basic place.

It wouldn't hurt to build in an extra $100/mo for repair costs too. Of course, over time due to inflation, your cost to live there will go even lower as "federal" reserve induced inflation causes rents to rise, however your FIXED rate mortgage will not rise in cost.

This is how I chose to buy my house in early 1998 and sell it before the housing market crashed. Simple rental parity. If you can't rent it out for what it costs you, then you shouldn't be in it. If you can rent it out then you have complete freedom. If you need to move you can while the house is rented.

"Opinions are like ass holes, everyone has one and they all stink" Fallow your instincts!

@dizzylucy "Opinions are like ass holes, everyone has one and they all stink" Fallow your instincts!" Well, sure and I say follow spelling manuals also.

I figured I would wait until rental parity before buying. Then pay off the mortgage, head down to the bank, and shit on the banker's face.

But I was thinking: I need not own in order to shit on a banker's face. So now I plan to rent in perpetuity. Near some banks.

nice job avoiding the short sale. Are you still paying $2390 per month in rent?

Yeah, we're renting a house in a great (read - very expensive) neighborhood. It's a 3 bd/2ba with about 1600 sq feet, a pool, A/C, etc. According to Zillow, the house is worth $652,000 now, but the houses on the left and right at worth $1.17M and $989K. And when we moved in, Zillow said it was worth $800k.

It's a bit high for rent, but not for this neighborhood. In fact it's tough to find a similar place in a safe, walkable neighborhood in the south bay (near both our families) for less than that amount now. Rents seem to have gone up since last year.

therapy says

According to Zillow, the house is worth $652,000 now, but the houses on the left and right are worth $1.17M and $989K.

i read in the book "real estate for dummies" that that's called the principle of progression - where you buy a house surrounded by houses that cost more than yours. this inadvertently increases the price of your house.

conversely, the principle of regression is opposite.

1sfrenter says

I've been renting the same SFH in the city for 12 years. Rent was $2100, is now $2300. We pay all utilities. Love our house, but honestly - we've paid well over 300K in rent. WTF.

This is just not reasonable! I agree with The other people here writing that this is just a line promoted by the industry.

You paid 300k, but over time. Are you better off paying a million bucks plus interest in an instant?! No! That completely eliminates the most important part of the compound interest math! Time!

Having shelter and, usually, much, much more in the U.S. is worth money. Do you look back at how much you've spent on food and say, "I just threw away that money?" No, because you got something you needed for it. Obviously, houseing is a balance of wants and needs, but it always has value.

The idea that a house is a good investment is just not true. It's a great deal for the loaners of the money. That's why we have it.

CaliforniaGray says

The answer is two simple words: Rental Parity.

http://www.youtube.com/embed/Gg5SwyTvAHw

I always vote for men who are so manly that their beards even have balls.

therapy says

(Rent is $2,390 a month, house appraises at $795,000 on Zillow and was appraised last year for $850,000 for refi purposes by the owner).

You just answered you own question. When the cost to rent a house and the cost to rent money go back to par, then you should look into buying. This is not rocket science folks. No wall hanging diploma with signature of people you have never met is needed to figure this out.

Continue to take advantage of the people who rent out their house to good renters and bought at a time when housing was reasonable. Don't become a lemming and follow the fools into the fire. There are too many running out right now, which is a good sign for the patient.

Actually it is rocket science, in that rents and the starting monthly cost of ownership may never get to par but buying will be the long-term correct strategy.

Buying means you don't have to pay rent ever again, which is why there is a premium -- some fraction of all the rent you're not going to pay over the rest of your life -- incorporated into the price.

The higher this npv of future rents, the higher the expected price of the home asset.

Now, I don't know where rents are going from here. If they go up, buying now will be a big win. If they don't, it depends on the house.

But the critical analysis to make is compare where you will be 30 years from now buying now vs. renting now (and maybe buying later).

Paying more per month now buying can in fact put you in a much better position 30 years from now.

So that's how it's like rocket science -- you've got to look at where you're going, not where you are now.

Bellingham Bill says

Buying means you don't have to pay rent ever again, which is why there is a premium -- some fraction of all the rent you're not going to pay over the rest of your life -- incorporated into the price.

That is assuming people actually pay off their mortgage. From my limited view of the last 10 years people have more debt on their homes because of refinancing. They do have a garage full of depreciating vehicles, boats, bikes, etc. Your view of the trade-off didn't do that group any favors.

Sometimes it has nothing to do with where you are going, and everything to do with where the macro economics are goings. A house is a depreciating asset right now, and until we turn the corner home-owners are screwed.

Cash is king and my advice to the original poster is keep accumulating. You are sitting in a strong position that will only get stronger in the next 2-3 years.

I just want to say one thing. Everyone loves to throw around the phrase debt slave. What about rent slave? Either way, until the day you die you will be paying a substantial amount of money to buy shelter. I don't know your situation or your area, or where prices are going or when they are going there, but what you need to ask yourself is the following...Am I going to buy this house with the mindset that this is going to be where I live for the rest of my life? Can I afford all the costs that come with home ownership? Am I getting a good deal on this house, are prices going to fall?
Just a general opinion here, it seems like it may benefit you to wait, but I find it funny when people say they will rent there whole lives and that is the smart option. I will pay my mortgage off in less than 15 years, and be done with paying for housing. Minus the small housing costs associated with owning a home. Still WAY ahead of the game if you ask me. Even if my house gets devalued lower than I bought it for, I STILL will have no rent payment. How the hell can you tell me that is not the smarter thing to do. Again, this is assuming you did not grossly overpay for the home, and you do not plan on going anywhere after you buy, and you are comfortable with the total cost of ownership.

woppa says

Still WAY ahead of the game if you ask me

The game is run by the people who loaned you your mortgage. They're the ones ahead.

Maybe it means as the price of food goes up, people will have less money to spend on housing.

Which is crap because from the looks of it 60% of America can miss a meal or two

It's like cigaretes, the prices has gone up so high that not as many people are smoking anymore as opposed to going broke smoking the same amount.