patrick.net

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.

Gee Andy!says

When you can rent for half the total monthly cost of buying, who is the debt slave again?

Um, because you can't rent for half the total monthly cost of buying? That's why!

Obviously there are more biased arm chair anti housing cheer leaders out there than people who really want to give sound advice.

It's been said before, housing is cheaper to rent in certain areas. So spreading false statements as fact without proper context is misleading to others not in the know

Here is a real live example for the arm chair economists, I own an Austin home that I rent for $1000/month. My mortgage if I got it at todays rate would be $584 which includes 2.2% in property taxes.

So my renters can actually pay at least a couple hundred less if they bought my home than if they rented. Just not everyone can come up with down payments and lending standards are more strict. So if you can lock in, then it's obviously a better deal especially considering you own the house free and clear after retirement and can enjoy rent free home the rest of you're life, or downsize and live off the earnings. I hear this is typically what retirees have done

Ofcourse, some areas are the opposite. It depends on how much you can afford and how much risk you can handle. The only risks I see are having to relocate in an emergency and not having enough equity to close. That is an issue for some, but not for me or for someone who can rent their place out to build equity while they are gone until they can sell. Lease to buy options can help out there too I think.

He's talking about desirable areas like the bay area, where you can rent for substantially less than buying.

If you buy a house for $500K and take $4ooK mortgage with 4%, after a year your principal going to be reduced only by $7,044. Now, according to Zillow, average home prices in San Jose dropped by 3.7% last year. Just drop of another 1.4% will eat-up your “build-up equity”. Your build-out equity will be “actually throwing money down to drain”, instead saved while you keep renting.

If you remain brainwashed into thinking that paying rent is throwing money away, you really are a slow learner.

Nobody here can say for certain what will happen with Bay Area housing prices. If you want to play things by the numbers, assume the market will remain flat (appreciation no greater than inflation) for the next 10 years and do the math. There are all kinds of on-line calculators that will do the math for you if you're numerically challenged. The housing market could do better or it could do worse. Only you know your tolerance for that risk.

When asked, most of my guy home owner friends will admit that the main reason they bought their homes is because their wives insisted upon it. The guys were pretty happy renting. Most of those folks bought 10+ years ago and have done okay or very well, depending on timing. But for what it's worth, they all say they would have second thoughts about buying in the current market.

REpro says

Your build-out equity will be “actually throwing money down to drain”, instead saved while you keep renting.

The notional cost of ownership in that case is $1500/mo, plus another $250/mo if you would have been able to manage netting 3% on your down payment money had you not bought.

3.7% price deflation is $1500/mo loss of value, so basically buying in this case is costing $3000/mo plus lost interest on the d.p.

However, if one is not totally focused on timing the bottom (ie. regardless of what the market does from here), one's average cost of this property over the first 30 years of ownership (ie. PITI less the P) would be $1200/mo.

I don't know where the bottom on the $500,000 price point is going. I don't think 3.7% declines can last for too many years. . .

http://www.redfin.com/CA/San-Jose/1255-Westbury-Dr-95131/home/28894957

is what $500,000 buys today apparently.

I'd pay $1200/mo to rent that for the next 30 years, no problem.

Bellingham Bill says

The notional cost of ownership in that case is $1500/mo, plus another $250/mo if you would have been able to manage netting 3% on your down payment money had you not bought.

You forget what is "cost of ownership". This is only cost of borrowing money.
Plus not everybody have the luxury, that life allows living in the same house for 30 years.

REpro says

This is only cost of borrowing money.

No, it's really PITI minus the P, plus a $260/mo maintenance & HOA/utilities set-aside.

A spreadsheet is only as good as its design, but that's the number my spreadsheet is spitting out for a $500,000 place:

On a $400,000 30yr loan @ 3.75%:

Total interest (net tax deduction) is $173,000 or ~$500/mo.
Property tax is $120,000 or ~$350/mo
"Other" is $130,000 or ~$350/mo.

making the total average cost of ownership ~$1200/mo.

Point being if you buy this place and stay there 30 years that's what it will cost you on average, plus you will have the place paid off.

This doesn't count the opportunity cost of what that $500,000 in principal repayment could be doing for you.

The over-arching point I want to make here is that in the past inflationary environments, the buy vs. rent decision might not have made sense at any given time, but the inflation "bailed out" previous buyers, as rents kept going up.

This is the historical pattern of the 1950s - ~2000. Whether the previous decade broke something remains to be seen.

Dunno, really. Things can easily go either way from here, or even stay the same!

Bellingham Bill says

making the total average cost of ownership ~$1200/mo.
Point being if you buy this place and stay there 30 years that's what it will cost you on average, plus you will have the place paid off.

This house will not be "paid-off out of sky". You have to pay principal of 400,000 by yourself which averaging, $400,000/360=1,111/mo. Adding to cost of borrowing/maintaining give you $2,293/mo. fixed 360 months straight. That’s your “cost of ownership” over 360 months! Total $825,480. And after that you debt free, ouch.

I plan to rent for the next 5 years until I can save up enough cash to move to south Florida and buy a home for dirt cheap and have great job that lets me work remote. California is way overpriced.

REpro says

You have to pay principal of 400,000 by yourself which averaging, $400,000/360=1,111/mo.

principal repayment is a form of savings and should be compared to what investment income you get while renting and not compared to monthly rent. My spreadsheet actually does this, model investment gains given several scenarios.

Today's houses aren't going to go to $0 in 30 years. Who knows, they might even double from here.

1982 was also a slump year for RE. Houses are up ~3X since then:

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

But don't get me wrong, I strongly suspect we're not going to be able to avoid the Japan experience, and if we're super stupid we might totally gut our economy and see rents & prices totally collapse.

But if Romney wins and the Republicans take the Senate back, they'll probably figure out some way to fuck things up again, like they did 2002-2006 and we'll see everything double in price somehow.

REpro says

And after that you debt free, ouch.

Yup, so what's better in 2042 . . . a $500,000 house paid off and a fixed monthly housing expense of $700/mo, or some amount of savings and a housing expense of $3000/mo or more?

Rents for the same place have at least tripled since 1982, eg. go from $400 to $1200.

In one basic scenario, with not much inflation and just 2-3% investment gains and rent increases, my spreadsheet says that renting at $1750/mo vs. buying at $500,000 will put you around $250,000 behind buying:

In 2042, the buyer will have the $500,000 house paid off, enjoy an asset value of $660,000 or so, and a monthly cost of ownership of $700 thanks to Prop 13.

The renter will have $340,000 in the bank (which is throwing off $850/mo in yield) and a $2700/mo rent, for an effective cost of renting of ~$1800/mo.

To summarize, in 2042: $660,000 house, $700/mo cost of living, vs. $340,000 in the bank and $1800/mo net cost of renting.

You've got to run the numbers and not just spout off bullshit.

chanakya4773 says

ust to be on safe side,assume the house appreciation of 0% in 20 years.
for opportunity cost, assume 7 - 12 % of returns per year depending on your case.

You don't need a calculator to figure out the result. The answer is a function of the input, which makes the input relevant and the calculator practically useless as anybody with 9th grade math can figure out how the numbers flow.

APOCALYPSEFUCK is Tony Manero says

The time to buy is when Reatlor® suicides are listed by the dozens in the obit pages under a standing header 'God Smiles Seeing These Scumbags Taking a Short Trip to Hell'.

From experience, when shorters like this are telling you not buy, it's the time to buy. Just the opposite as the boom. Sounds like APOCALYPSE got the short end of the stick during the boom and is quiet bitter or maybe a realtor touched him. I still vote for him shorting the market so he can buy low. He may also be trading real estate ultra shorts like SRS either way, he's definately not wasting his time on here with mindless posts to help other forum members

SJ says

I plan to rent for the next 5 years until I can save up enough cash to move to south Florida and buy a home for dirt cheap and have great job that lets me work remote. California is way overpriced.

My friend bought a 4 plex in a decent area that returns 20% + he can live in it. Florida is full of great deals. But you typically buy these cash. Still at 4%, 20-4=16% ROI. Not bad if you like being a property manager and less desireable areas.

Las Vegas has killer deals too. Brand new homes for 30-40k. banks can't get rid of them. Great for cash buyers.

ducsingle5313 says

If you remain brainwashed into thinking that paying rent is throwing money away, you really are a slow learner.

Even places like the bay area where it's not as cheap, well why do people pay more for luxury cars? Because they can afford to pay extra for luxury items that you can't get in a geo metro. Same with housing, obviously those bay area home owners are paying more for amenities that you can't get in an apartment. If you could, I bet the apartment would cost just as much. So continue to rent if you're broke, nobody said it was a right for poor people to live in luxurious homes./p>

ducsingle5313 says

If you remain brainwashed into thinking that paying rent is throwing money away, you really are a slow learner.

I'm sorry but I do not like renting. To me renting is throwing money away. At least with owning, even if you have a mortgage, some portion goes to the principal. You get some deductions. You can pay off, pay down, or refinance your loan.
Renting is a 100% expense every time and there's nothing you can do about it.

If you're trying to justify renting, he biggest advantage is probably that you can easily move to another place without having to deal with selling your house.
But that is pretty minor.

Never Trust Realtors says

Renting COST MORE than the monthly cost of buying in certain locations.

I'm a troll-FACT

Interest rates can't fall anymore-FACT

I do NOT have a crystal ball-FACT

Why does it sound like I have a hidden agenda?

Buy NOW! at a discount and stave off possible future declines

Living in the empty skulls of realtors. Rent-Free.

For once, I agree with all your statements. You have definately started making sense for once.

toothfairy says

I'm sorry but I do not like renting. To me renting is throwing money away. At least with owning, even if you have a mortgage, some portion goes to the principal. You get some deductions. You can pay off, pay down, or refinance your loan.

You do agree that the amount of rent and the cost of the place make a difference, though..?

Take a ridiculous example. You can rent for $100/month, or you can buy the same place for $1 million. Your monthly payments would be $6000 or so. Would you still consider renting throwing away money? Of course this example wouldn't happen in real life, but the point is that the numbers matter, so if you want to buy for financial reasons make sure you understand the realities of the situation. Otherwise you are likely to lose money making a "smart financial decision", which would suck.

swebb says

Take a ridiculous example. You can rent for $100/month, or you can buy the same place for $1 million. Your monthly payments would be $6000 or so. Would you still consider renting throwing away money?

Yes you are still throwing money away. Even at $100 Your rent is an expense, like the cable bill it gives you some immediate gratification but it's not getting you any closer to owning anything of value.

But that doesn't necessarily mean you should buy. You just need to find some other investments to offset the money you throw away on rent.

swebb says

Take a ridiculous example

Tell me what's wrong with this example.

Assume one 20 year old rents and one buys and both live to 100.

Rent for 80 years of life = 36,000/year x 80. Let's round it off to 3 MIL $3,000,000
Same house payment @4% for 15 year loan = $532,575.31

That's 6 times cheaper than renting!!! Factoring in property taxes would make this figure only 5 times or so better than renting but I also left out the increase in rents over the life span of the person which could increase the 3,000,000 figure to double or triple.

therapy says

decent starter homes

Be careful.

Starter homes is Realtor®-Yuppie-Talk with insinuation and implication for "trading-up". It ("Starter Home Arithmetic") worked in the decades of "real" appreciation and "real" increase in purchasing power of wages over an adult life-span.