Why do we want to own houses?

[progmac]

I am terribly critical of housing. Where I live, run down shacks cost $300k and nice places can be rented for $750/month. In San Diego, average houses cost twice as much per month to own than rent, not counting insurance, taxes, etc. There is no rational economic argument for owning in much of the country unless you count on appreciation three or four times the rate of inflation, which has never existed except for the past few years.

I have a great rental house, I am mobile, I can treat the house as my own in regards to landscaping, can paint, have no worries about the landlord, etc. Because of rental prices, I save enough each month by not owning that the money I didn't spend on a house will, by the time I retire, be enough of a nest egg that I could rent a mansion off of the interest alone.

Despite all of this, I'm constantly looking at realtor.com and shopping for houses not only where I live but in towns and cities where I used to live. I can't seem to get the idea out of my head that I really need to own a house, even if that idea is totally irrational.

I often wonder, what is the psychology behind this? There is no material difference between owning and renting.

I suppose I'm just brainwashed. I'll buy when I have 20% down and the year is 2011, I tell myself. Then at least the market will again be rational.

[KingOfSomewhereHot]

Buying a house makes lots of sense ... it's a place to live, a good investment. Odds are over an extended period of time, it's gonna appreciate well.

Now... I don't consider a 30 year mortgage to be the same as "buying" a house. That's just renting from a bank! Even if you pay it off in 30 years, you've now paid nearly 500k for a 200k house... I would have a hard time PLANNING on THAT much appreciation just to break even!

A 10 year mortgage?... That makes a lot more sense ... gaining equity quickly and not paying nearly as much in interest over the life of the loan.
Less than 20% down?... then you can't afford the house. Why put yourself in the position of paying insurance premiums to insure the loan FOR the Bank! (PMI)

I think the real key is: DON'T BUY A HOUSE IF YOU CAN'T AFFORD IT! Just because a bank is willing to loan you money, doesn't mean you can afford the loan.

[progmac]

Buying a house makes lots of sense ... it's a place to live, a good investment. Odds are over an extended period of time, it's gonna appreciate well.

Now... I don't consider a 30 year mortgage to be the same as "buying" a house. That's just renting from a bank! Even if you pay it off in 30 years, you've now paid nearly 500k for a 200k house... I would have a hard time PLANNING on THAT much appreciation just to break even!

A 10 year mortgage?... That makes a lot more sense ... gaining equity quickly and not paying nearly as much in interest over the life of the loan.
Less than 20% down?... then you can't afford the house. Why put yourself in the position of paying insurance premiums to insure the loan FOR the Bank! (PMI)

I think the real key is: DON'T BUY A HOUSE IF YOU CAN'T AFFORD IT! Just because a bank is willing to loan you money, doesn't mean you can afford the loan.

It is my thought that people want to buy houses even if it isn't a wise financial decision. Otherwise, how would a single house sell in say the Bay Area or Boston? The only way you can get math to support that decision financially is if you count on say 10 or 12% appreciation over the long haul.

I miss a lot of things about Ohio, including housing prices that make sense.

So anyhow, the idea I am interested in is that people in our culture have some kind of drive to own real estate that isn't based on finances.

[Splinemodel]

In some areas it makes more sense to rent, for sure. In these areas, there's a lot of land value speculation, which is never really a good thing. There are investments you can make that are no more risky, but they pay off many times more: stocks, currency, commodity, private equity, etc. Where I live, an earthquake could come tomorrow and geologically devalue a given plot of land to $0, yet the perceived land value is absurdly inflated.

Unless I had a huge amount money and I could actually develop, I wouldn't touch real estate with a ten foot pole. It's just not a good investment, considering the alternatives. That said, I still own a condo in Florida, which I used to live in. In that area, it was and still is cheaper to buy than to rent.

[KingOfSomewhereHot]

... I wouldn't touch real estate with a ten foot pole...

I agree... if it involves taking out a loan to buy said real-estate. However, if you pay cash for it (or perhaps a short 5 year loan), it can be a pretty stable investment, because your risk is much lower if you're not servicing debt. By not having a mortgage over my head, I can afford to have a rental property sit empty while I find GOOD tenants... or charge lower rent than others and still make a profit.
But then a LOT of investments that look bad when debt-financed, become great investments when there is no debt involved.

But, to the OP's thoughts... Banks do a very good job of MARKETING home ownership. Even to people who have no business buying a house just yet. When people hear that they should buy a house day-in and day-out from various sources, they end up thinking it's the right thing to do even if they're not yet financially ready for that. They may end up paying 30 years worth of interest that could have been spent on a better lifestyle (a lifestyle most people apparently live anyway through the use of credit... but you already know how I feel about that :) )

[e1618978]

I currently rent a house in Boulder for $2500/month - and the mortgage would be $6000/month if I bought it (roughly $600K house). I don't think that real estate will appreciate much over the next 15 years, due to the baby boomers selling their homes - and Colorado will end up being an uninhabitable desert once global warming makes the mountain ice packs go away.

Having said that, I still plan on buying - because:

1. I want a larger house - and I can't get my perfect setup without buying.
2. I want more freedom (my current landlady does not like her wood burning fireplace to be used, because she thinks it will smell up the house like a smoker does, etc).
3. A landlord can kick you out at any time, you have more security if you buy.
4. In 11 years I plan on moving to Hawaii, and I think that the ice packs will still be OK by then (crosses fingers).

[progmac]

I currently rent a house in Boulder for $2500/month - and the mortgage would be $6000/month if I bought it (roughly $600K house). I don't think that real estate will appreciate much over the next 15 years, due to the baby boomers selling their homes - and Colorado will end up being an uninhabitable desert once global warming makes the mountain ice packs go away.

Having said that, I still plan on buying - because:

1. I want a larger house - and I can't get my perfect setup without buying.
2. I want more freedom (my current landlady does not like her wood burning fireplace to be used, because she thinks it will smell up the house like a smoker does, etc).
3. A landlord can kick you out at any time, you have more security if you buy.
4. In 11 years I plan on moving to Hawaii, and I think that the ice packs will still be OK by then (crosses fingers).

Basically, you want a house because it would be yours and you can do with it what you want. I suppose I feel the same way. But isn't it a more true freedom when you aren't a servant to a bank? Especially when you can save several thousand dollars per month...that's enough money to seriously enrich a life. I'm not putting down the idea of home ownership, but in the case as you describe it probably isn't the wisest decision financially, but there is still a drive to own something. I guess that drive is simply not playing by someone else's rules?

[Flounder]

Now... I don't consider a 30 year mortgage to be the same as "buying" a house. That's just renting from a bank! Even if you pay it off in 30 years, you've now paid nearly 500k for a 200k house... I would have a hard time PLANNING on THAT much appreciation just to break even!

There's more to it than just the house though.

For example, my sister and her husband have a 30 year mortgage on a house. They could pay it off in 10, but they're not going to do that. Why? Because they intend to live in that house until the day they die. If they pay it off in 10 years, then it's just equity in a home they're not going to sell. Financially, it is more prudent to have the 30 year mortgage, and invest the money they would have been paying if they had a 10 year, which will more than make up for the difference in the total amount of money they would pay over a 10 year vs. a 30 year mortgage.

[bclapper]

Because when I'm 55 I'll be rent & mortgage free - at least, that's the idea

[KingOfSomewhereHot]

There's more to it than just the house though.

For example, my sister and her husband have a 30 year mortgage on a house. They could pay it off in 10, but they're not going to do that. Why? Because they intend to live in that house until the day they die. If they pay it off in 10 years, then it's just equity in a home they're not going to sell. Financially, it is more prudent to have the 30 year mortgage, and invest the money they would have been paying if they had a 10 year, which will more than make up for the difference in the total amount of money they would pay over a 10 year vs. a 30 year mortgage.

There's always the "peace of mind" that comes from not owing anybody anything ... I can pay my 10 year mtg in 7 years, and then invest all the money I'm no longer paying in principle and interest and still end up with a hefty little sum at the end of 30 years. And spend the last 22 of those 30 with no worries about job security, making payments, etc, etc.

Yes, you can make the numbers say that a big long mortgage is the right decision ... but when that person loses their job 10 years later (for whatever reason)... It'd sure be easier to cope if there were no big debt payments hanging over his head.

[progmac]

Because when I'm 55 I'll be rent & mortgage free - at least, that's the idea

true. this idea makes sense in a lot of parts of the country, particularly in the midwest. however, where I live and mortgage payments are double rent, if i put aside the difference each month in an index fund that earns 9% over the next 30 years, i'd be able to pay for rent for the rest of my life just off the interest alone. then i'd die and have a nice blob of money for my children.

when i lived in Cincinnati, rent prices approximately equaled mortgage payment PLUS taxes & insurance PLUS another 10-15% or even more. In a place like that, the financially prudent thing to do is buy. But in other places, this isn't so...yet we still want to own.

[bclapper]

Because when I'm 55 I'll be rent & mortgage free - at least, that's the idea

Of course, it helps that I bought pre-2000 before prices went absolutely crazy

I couldn't afford to step onto that proverbial ladder now

[SpamSandwich]

California is a terrible place for the first time home buyer, taxes are out of control and the price of gas is like an adrenaline shot to the heart. It's becoming the Forbidden Zone in the Planet of the Apes.

http://tbn0.google.com/images?q=tbn:U-UPF46FuT5qSM:http://kensforce.com/potakf12.jpg http://tbn0.google.com/images?q=tbn:ms6nB8UheQCA6M:http://prod.ifc.com/film/film-news/02112008_planetoftheapes3.jpg http://tbn0.google.com/images?q=tbn:7MD4Aljvo4zuoM:http://www.democracymeansyou.com/images/planet-of-apes-lg.gif

[Flounder]

Yes, you can make the numbers say that a big long mortgage is the right decision ... but when that person loses their job 10 years later (for whatever reason)... It'd sure be easier to cope if there were no big debt payments hanging over his head.


Well, she's a professor who should be given tenure any day now and he works at the college as well. Thus, they have excellent job security. It all depends on the individual situation.

[Galley]

$300K would buy you a mansion here in South Carolina. A year ago I bought a new 3BR, 2BA 1500 sq. ft home for $98,000, one mile from downtown.

[progmac]

$300K would buy you a mansion here in South Carolina. A year ago I bought a new 3BR, 2BA 1500 sq. ft home for $98,000, one mile from downtown.

i think it's time for me to move!

[Outsider]

i think it's time for me to move!

No kidding. We move 2 years ago from CT to NC and were able to put 40% down on a 15 year, and live in a better house and neighborhood.

Also, slightly off topic, but still relevant: Foreclosure suicide (http://www.time.com/time/nation/article/0,8599,1826009,00.html?xid=rss-topstories)

Now, correct me if I'm wrong, you can't collect on a policy if the insured committed suicide, right? Especially if they left a note.

[naftalim]

Boy if anyone knew the answer to this, we wouldn't be in the housing crisis we are in now.

From a purely financial standpoint, buying in today market if mortgage payments are double rent payments, does not make a lot of sense, unless you are able to put a lot of money down so your monthly payments are low and you can leverage the equity in this home for future investments. However, when you pay rent, evey cent of that goes to someone else, whereas if you pay a mortgage, some of that goes into your pocket. Also, there has been mention of saving money to retirement. You don't save your way to prosperity.

As well, there is quality of life. When I rented, I never really wanted to do anything to the place and therefore did not want to spend too much time there. When I own, I want to make it a place where I want to be. The OP alluded to this.

I was lucky in that I purchased in the hot Vancouver, BC Market back in 2002, 2004 and 2005. For someone to buy a 1 bedroom 540 square feet here in downtown Vancouver today its about $380-400K So, in order to have a mortgage of under $1500/month, you would have to put down at least $180-200K and that does not include Property Purchase Tax, legal fees etc.

[trick fall]

I bought because I wanted to have a place that was mine. I always hated renting and I had a good deal when I rented. I paid between 900-980 for a ten year period in Manhattan. I knew when I purchased my house in August of 2006 the market was topping out, but I also knew that historically the neighborhood I was purchasing in was very stable and I wanted to be there for a long time. I'm also surprised that no one has mentioned the tax advantages to owning.

[Splinemodel]

I'm also surprised that no one has mentioned the tax advantages to owning.

Exercise: two equivalent townhouses in a "chi-chi" part of Silicon Valley. The ownership is five years. I assume a 5% annual real estate growth, which at this point may not be realistic. Then again, the 5% apr mortgage isn't realistic either. So this is a bull market study.

#1 Rents for $3000/month
#2 Sells for $1M (20/80 mortgage, 30 year, roughly 5%)

#1 sunk cost over 5 years, assuming 5% annual rent hikes = $199K

#2 sunk cost over 5 years is more difficult to determine. We must factor in:
- mortgage interest
- property tax
- upkeep (easy for townhouse, add $300/month with %5 annual increase
- tax writeoffs (interest paid, some property tax)
- appreciation and sale price

The plan here is to solve for the amount of write-off needed to make option 1 and 2 have the same sunk cost.

paid:
Mortgage per month is roughly $5600 (interest per month is roughly $3200)
5 years of mortgage payments = $336000
5 years of Property tax is roughly = $55000
5 years of assoc fees are = $19900
----------
5 years total cost = $411K

money returned:
appreciation = $276K
after agent fees = $212K

#2 total sunk cost = $199K

So, in this bull market study, the tax advantage is the only thing that makes ownership more desirable than renting. However, renters have better mobility (if that's an issue) and, more importantly, the present market has higher rates and much less potential for appreciation, especially as the boomers start to pass.

The other question is: what if this were five years ago (actually quite realistic) but you had rented, and instead put the $200K into google or Apple? after capital gains taxation, you would come out $1.9M better off than the buyer of the unit next door!

[progmac]

You don't save your way to prosperity.

Did you mean to say "you don't SPEND your way to prosperity?" Just want to double check before I write a long reply. :)

[SpamSandwich]

....the present market has higher rates and much less potential for appreciation, especially as the boomers start to pass

Spline, that is the gigantic elephant in the room. As the sheer number of people decline over the coming years, the housing market will continue to implode. The idiotic "housing meltdown" we're currently experiencing will be dwarfed by what follows. The economies of the world will experience this over the next 30 to 40 years!

[trumptman]

No kidding. We move 2 years ago from CT to NC and were able to put 40% down on a 15 year, and live in a better house and neighborhood.

Way back when the dinosaurs were roaming the Earth and my wife and I were married with no children, we made a decision to move away from the very expensive beach area and move inland. A lot of folks like to chide that decision (including some on here) but the reality is that unless you want to run to stand still, you need to insure housing costs are reasonable and affordable.

I bought because I wanted to have a place that was mine. I always hated renting and I had a good deal when I rented. I paid between 900-980 for a ten year period in Manhattan. I knew when I purchased my house in August of 2006 the market was topping out, but I also knew that historically the neighborhood I was purchasing in was very stable and I wanted to be there for a long time. I'm also surprised that no one has mentioned the tax advantages to owning.

As you note, there are several tax incentives to buying. No matter what the numbers have to make sense. It won't do anyone any good to think they own a home when the numbers really don't make sense. This is a very big part of the last bubble.

I made it a really clear point to people by noting that at the height or even run up of the bubble I wouldn't have purchased the very house I was residing in. I told them I would have rented because it made sense. You do have to have discipline to invest the portion of money above the rent that you would have left over by not buying. Most people are not disciplined enough in this area.

So, in this bull market study, the tax advantage is the only thing that makes ownership more desirable than renting. However, renters have better mobility (if that's an issue) and, more importantly, the present market has higher rates and much less potential for appreciation, especially as the boomers start to pass.

The other points are fun but I really have to give this one a whack. There is NO, repeat NO estimate I have seen whereby just because the boomers die, the population of the United States actually declines. If anyone is screwed it is the boomers themselves since they are used to the market accommodating their every wish and that may finally no longer be true. They may want to move from a four bedroom home to a two bedroom condo and while they may not get the inflated dollars they want for their home, it also doesn't mean anyone is going to run out and build a bunch of retirement communities for them to go retire to when they can't supposedly sell those homes.

The need for housing will not disappear. The population will still increase. The boomers may have trouble cashing out but that means it is a deal for everyone who needs a home and tries to cash in.

Okay.

I have over $100,000 of student loans. That's kind of like a mortgage in a way, isn't it? What do you think the best repayment plan is? I was thinking of putting as much as I can into my 401k, living like a Spartan for a few years, and paying off as much as I can at first. Is there a better way? (Although I have a feeling that just paying the minimum might be difficult on any budget).

This would be a mortgage for many people. I'll tell you what I would do.

There is a reason people tease about trailer trash. It is because trailer parks, or living in mobiles or recreational vehicles is much cheaper than even an apartment most times.

If I were you, I would get a nice older class C motorhome and live in it as cheaply as possible for a couple years. Keep your car (which is a great car) and you can even use your "home" for cheap vacations and travel. Most of the "advantages" of stick and brick homes have been offset by technology. You can get satellite television. You can use your cell phone.

There is huge money in law depending upon what field you are in and where you are employed. You've never disclosed this so it could radically affect the answer for you. Family law versus underling district attorney are huge earnings differences. So if you are going the big money route, you might not need to do above (you might just need to drink a lot instead.)

[trumptman]

Spline, that is the gigantic elephant in the room. As the sheer number of people decline over the coming years, the housing market will continue to implode. The idiotic "housing meltdown" we're currently experiencing will be dwarfed by what follows. The economies of the world will experience this over the next 30 to 40 years!

I'm going to have to radically disagree with that. Just because white, western baby boomers are declining doesn't mean anyone else or anything else is doing so. The population of the world is still slated to go up. Wealth will still go up.

The reason the boomers are screwed is because they didn't save and spent themselves into a whole while promising themselves the moon and stars. They want the lawn man and the 1.6 children they had to pay for all this. The lawn man and their kids are going to tell them to screw themselves.

[trumptman]

It depends upon the term, several other assumptions and what you are most comfortable with.

[Flounder]

Yeah, it should really depends a lot on the specifics, what sort of return you think you can get on your money, and how much risk you're willing to take in relation to the return on your money that you seek

For instance, if I was my sister, I'd probably pay off that house quickly. Psychologically, I don't like debt hanging around my head, no matter what the numbers say.

[SDW2001]

I am terribly critical of housing. Where I live, run down shacks cost $300k and nice places can be rented for $750/month. In San Diego, average houses cost twice as much per month to own than rent, not counting insurance, taxes, etc. There is no rational economic argument for owning in much of the country unless you count on appreciation three or four times the rate of inflation, which has never existed except for the past few years.

I have a great rental house, I am mobile, I can treat the house as my own in regards to landscaping, can paint, have no worries about the landlord, etc. Because of rental prices, I save enough each month by not owning that the money I didn't spend on a house will, by the time I retire, be enough of a nest egg that I could rent a mansion off of the interest alone.

Despite all of this, I'm constantly looking at realtor.com and shopping for houses not only where I live but in towns and cities where I used to live. I can't seem to get the idea out of my head that I really need to own a house, even if that idea is totally irrational.

I often wonder, what is the psychology behind this? There is no material difference between owning and renting.

I suppose I'm just brainwashed. I'll buy when I have 20% down and the year is 2011, I tell myself. Then at least the market will again be rational.

As others have said...it's where you live and what the market is like. I just bought a townhome in this area (new construction...closing in two weeks) for several reasons:

1. I need more space than my 1 bedroom apartment offers
2. My rent is over $900 a month currently, whereas my raw mortgage will be just over that (not counting taxes).
3. I was able to get a good price in this market (also, the market here is not tanking...it just slowed).

In my case it makes perfect sense. My house will likely appreciate while I'm living in it, especially given the price point. I'm paying around $220K for a three bedroom townhouse with garage and full walk-out basement (with some nice upgrades as well, such as a deck, Corian countertops, etc.)

As the home appreciates, my net worth will increase. I'll have equity if I need it. But in your situation, I agree...it's better to rent.

Haha.

In the spirit of this thread I was actually wondering what the best way to pay back a loan is: slower or faster. I have six figures worth of subsidized, unsubsidized, and private loans. This thread got me thinking because of Flounder's idea that investing money will more than recoup the extra payments of a 30 year mortgage. I'm a novice with this long-term financial stuff.

It's more than just the long term. You also need to look at what that loan debt is going to do to your credit. It's usually my advice that it's better to pay off revolving or unsecured debt as quickly as possible (loans other than auto or home). I think I would look at your rates and see if you can consolidate to a low rate. Then, once you have an actual job ;) , I'd work out a 10 year payment schedule (or less).


I'm going to have to radically disagree with that. Just because white, western baby boomers are declining doesn't mean anyone else or anything else is doing so. The population of the world is still slated to go up. Wealth will still go up.

The reason the boomers are screwed is because they didn't save and spent themselves into a whole while promising themselves the moon and stars. They want the lawn man and the 1.6 children they had to pay for all this. The lawn man and their kids are going to tell them to screw themselves.

Agreed. And why is that no matter what kind of market we get into, people think it will last forever? When it's great, people live like they are on a drunken shore leave. When it's bad, they are shopping for guns to blow their brains out. Nothing is constant or forever in real estate. We're going through a pretty steep correction. In my opinion we're near the bottom (maybe another 6-12 months away). Give it 2 years, and the market will have stabilized. Give it 5 years, and it will be on its way back up, albeit at a reasonable pace. Even the hardest hit markets cannot go down forever.

[KingOfSomewhereHot]

For instance, if I was my sister, I'd probably pay off that house quickly. Psychologically, I don't like debt hanging around my head, no matter what the numbers say.

And that's the thing financial planners can't put a price on ... so it's never figured into their analysis. So they can make a big mortgage sound like a "good investment strategy" on paper... never mind the stress of being in debt.

[progmac]

As others have said...it's where you live and what the market is like. I just bought a townhome in this area (new construction...closing in two weeks) for several reasons:

1. I need more space than my 1 bedroom apartment offers
2. My rent is over $900 a month currently, whereas my raw mortgage will be just over that (not counting taxes).
3. I was able to get a good price in this market (also, the market here is not tanking...it just slowed).

In my case it makes perfect sense. My house will likely appreciate while I'm living in it, especially given the price point. I'm paying around $220K for a three bedroom townhouse with garage and full walk-out basement (with some nice upgrades as well, such as a deck, Corian countertops, etc.)

As the home appreciates, my net worth will increase. I'll have equity if I need it. But in your situation, I agree...it's better to rent.


If I could buy a 3 BR townhome with fancy countertops for $220k, I probably would. that said, it will probably be 5 years or more before much appreciation occurs.

in my neck of the woods, the only hope for a 3BR townhome at that price is an "affordable housing" program, which includes deed restrictions relating to income, resale price, etc.

[SpamSandwich]

I'm going to have to radically disagree with that. Just because white, western baby boomers are declining doesn't mean anyone else or anything else is doing so. The population of the world is still slated to go up. Wealth will still go up.

The reason the boomers are screwed is because they didn't save and spent themselves into a whole while promising themselves the moon and stars. They want the lawn man and the 1.6 children they had to pay for all this. The lawn man and their kids are going to tell them to screw themselves.

Sorry, you're wrong about it being limited to white western Baby Boomers. A cursory glance at demographic data worldwide will tell you that the working populations of all nations are falling. So much so that in Japan and South Korea, they are very worried about having enough caretakers for their aging population, which has resulted in both governments pushing the development of robot assistants and workers.

[trumptman]

Sorry, you're wrong about it being limited to white western Baby Boomers. A cursory glance at demographic data worldwide will tell you that the working populations of all nations are falling. So much so that in Japan and South Korea, they are very worried about having enough caretakers for their aging population, which has resulted in both governments pushing the development of robot assistants and workers.

Sorry if it wasn't clear enough but I consider Japan and Korea to be countries that have adopted Western style beliefs.

There will still be plenty of people. There may not be plenty of Japanese and Korean people but if they want to die alone in their countries while hoards beat at the door, let them wallow in their racist ways.

Demography is destiny. There isn't a law or rule that can overcome that.

[giant]

Sorry, you're wrong about it being limited to white western Baby Boomers. A cursory glance at demographic data worldwide will tell you that the working populations of all nations are falling. So much so that in Japan and South Korea, they are very worried about having enough caretakers for their aging population, which has resulted in both governments pushing the development of robot assistants and workers.
The same concerns exist with China due to the one-child policy and the aging population.

[SDW2001]

If I could buy a 3 BR townhome with fancy countertops for $220k, I probably would. that said, it will probably be 5 years or more before much appreciation occurs.

in my neck of the woods, the only hope for a 3BR townhome at that price is an "affordable housing" program, which includes deed restrictions relating to income, resale price, etc.

That it exactly....the area. I don't blame you for thinking like you do. It's all about what one can get for the money. Don't feel you have to buy. You're likely better off renting something given the market you've described.

[Splinemodel]

There is NO, repeat NO estimate I have seen whereby just because the boomers die, the population of the United States actually declines. If anyone is screwed it is the boomers themselves since they are used to the market accommodating their every wish and that may finally no longer be true. They may want to move from a four bedroom home to a two bedroom condo and while they may not get the inflated dollars they want for their home, it also doesn't mean anyone is going to run out and build a bunch of retirement communities for them to go retire to when they can't supposedly sell those homes.

The need for housing will not disappear. The population will still increase. The boomers may have trouble cashing out but that means it is a deal for everyone who needs a home and tries to cash in.

The issue is that property values in the middle to upper end markets, especially, will decline as the boomers move out of their houses or die-off. On the flip side, there might be a nice bonus for real estate in the sun-belt, but all indications seem to show that the market for middle to upper end single family homes in most parts of the nation are going to enter an increasingly supply-driven phase for quite a while. The population that will replace the boomers is younger and does not have the same level of wealth. There's also the potential for increased migration to cities and towns as energy prices appear to continue to rise, so the US suburban real-estate legacy may take quite a hit.

So the point that "now is a bad time to buy" rings as loud ever. We are in agreement that property values will rise more slowly and even drop, so the $212K offset in my example, above, will simply not exist. Until the market reacts and the sale prices reach equilibrium (which may take years), it will continue to be a better idea to rent than buy.

[SDW2001]

The issue is that property values in the middle to upper end markets, especially, will decline as the boomers move out of their houses or die-off. On the flip side, there might be a nice bonus for real estate in the sun-belt, but all indications seem to show that the market for middle to upper end single family homes in most parts of the nation are going to enter an increasingly supply-driven phase for quite a while. The population that will replace the boomers is younger and does not have the same level of wealth. There's also the potential for increased migration to cities and towns as energy prices appear to continue to rise, so the US suburban real-estate legacy may take quite a hit.

So the point that "now is a bad time to buy" rings as loud ever. We are in agreement that property values will rise more slowly and even drop, so the $212K offset in my example, above, will simply not exist. Until the market reacts and the sale prices reach equilibrium (which may take years), it will continue to be a better idea to rent than buy.

I'm sorry, but I think you're really off base here. The market is not going to decline because the boomers "die off." If that was the case, the same would have happened when their parents were their age, some 20-30 years ago. But that didn't happen, because as they aged, their children aged along with them, getting better jobs and accumulating wealth. One generation becomes the next, so to speak. In addition, the assumption that younger people don't have the money is not necessarily a good one. We tend to become more affluent with each generation, despite the predictions. Generation X was supposed to be "the first generation not to have it as good as their parents." That turned out to be rubbish, as on the whole, we have far more.

All that said, the market is going through a very steep correction. But like all corrections, it will not last forever. The market will recover over time. Even in hard hit areas, we're getting close to the bottom. One example is where my father lives (Naples, FL...one of the largest bubble markets in the nation). In 2000, he bought a new construction home for about $220,000. Over the next 5 years, the home appreciated to nearly $700,000. Now it's come down to perhaps $350,000 and holding. In other words it's become nearly affordable again. It will appreciate more slowly than it did, but the market is not likely to tank, either.

[Splinemodel]

I'm sorry, but I think you're really off base here. The market is not going to decline because the boomers "die off." If that was the case, the same would have happened when their parents were their age, some 20-30 years ago.

Perhaps, but you're missing the major point here: I hypothesize that, in most areas, the opportunity cost of renting and investing outside of real estate is -- and will likely continue to be -- more financially wise than is home ownership.

In support of this, they are called "the baby boom" for a reason. There are larger numbers of people in that age bracket than there are in the age bracket below, and as a result the housing vacancies will cause the market to be more supply-driven than it had been previously. There's no smoke and mirrors or doom and gloom. I offer a further hypothesis that suburban land values will be hit especially hard, due to rising energy costs and the popularity of city living among generation x and post-x professionals (feel free to check the figures), but these are not central to the argument.

I invite you to take a gamble on real estate. The appreciation that makes home ownership financially viable, in general, will not occur at the kinds of rates that are required to make home ownership a more sensible investment than other alternatives, should you buy at today's prices. That is all my message has ever been. You can track-back through this thread and verify that if you choose.

[SpamSandwich]

Perhaps, but you're missing the major point here: I hypothesize that, in most areas, the opportunity cost of renting and investing outside of real estate is -- and will likely continue to be -- more financially wise than is home ownership.

In support of this, they are called "the baby boom" for a reason. There are larger numbers of people in that age bracket than there are in the age bracket below, and as a result the housing vacancies will cause the market to be more supply-driven than it had been previously. There's no smoke and mirrors or doom and gloom. I offer a further hypothesis that suburban land values will be hit especially hard, due to rising energy costs and the popularity of city living among generation x and post-x professionals (feel free to check the figures), but these are not central to the argument.

I invite you to take a gamble on real estate. The appreciation that makes home ownership financially viable, in general, will not occur at the kinds of rates that are required to make home ownership a more sensible investment than other alternatives, should you buy at today's prices. That is all my message has ever been. You can track-back through this thread and verify that if you choose.

Nice to see someone has done their homework on this subject. I've bypassed home ownership for years, preferring apartments and investments. Now, though the stock market is currently in the tank, it will likely recover quicker than real estate. I agree, there will be more opportunities for new buyers in the low-end of the housing market, and I also agree that we may be looking at a decades long slump. "Generation X" and "Y" are going to have a very rough go of it as the Boomer peak lays waste to our country with massively increased taxes to cover their ill-prepared retirements and skyrocketing medical expenses.

[finboy]

I often wonder, what is the psychology behind this? There is no material difference between owning and renting.



From a practical standpoint, do you want to live in a neighborhood where everyone rents or everyone owns? I'm sure there are other, more practical considerations, but this one is pretty obvious.

[progmac]

i get your point, but it's a funny question where i live. the 'owned' houses are second homeowners that are here a few weeks of the year. the grass is long and the houses are poorly kept. the rental homes are lived in by year-round folks, who take reasonable care of their property.

but in general, i get what you're saying.

[backtomac]

In the spirit of this thread I was actually wondering what the best way to pay back a loan is: slower or faster. I have six figures worth of subsidized, unsubsidized, and private loans. .

What's the interest rate on those loans?

If they are in the 7-8% range I would suspect you'll be better off repaying them. Repaying them is a guaranteed return. While a 7-8% return doesn't seem that great, look at the 10 year performance of an S&P Index 500 fund. Now it doesn't look so bad, eh?

I think many people are expecting stock market returns like those in the 80's and 90's and that's probably not likely.

[SDW2001]

Perhaps, but you're missing the major point here: I hypothesize that, in most areas, the opportunity cost of renting and investing outside of real estate is -- and will likely continue to be -- more financially wise than is home ownership.

I don't think that's accurate at all. It's not been the case over the long term, historically speaking.



In support of this, they are called "the baby boom" for a reason. There are larger numbers of people in that age bracket than there are in the age bracket below, and as a result the housing vacancies will cause the market to be more supply-driven than it had been previously.

That's really just a supposition on your part. There's no evidence to support it actually happening. Secondly, you're really hung up on the term "baby boomers," as if they are the only ones causing the demand for housing. Families are now headed by generation X parents, who have created their own baby boom. Evidence of this is the growing school populations in many areas. In fact, much of the growth has been fueled by those who are now in their 30s and 40s. Boomers haven't been demanding bigger and newer housing for a good 10 years, just by function of their ages. Yet growth has still happened.



There's no smoke and mirrors or doom and gloom. I offer a further hypothesis that suburban land values will be hit especially hard, due to rising energy costs and the popularity of city living among generation x and post-x professionals (feel free to check the figures), but these are not central to the argument.

I think you're reading your own press, so to speak. While urban living has become more popular, the suburban lifestyle is still desirable to millions of Americans, including generation x and post-x. I think you're overestimating the impact this will have. Moreover, how much harder can suburban land values be hit? You're not going to see some wave of people leaving the suburbs. There is still demand for housing.



I invite you to take a gamble on real estate. The appreciation that makes home ownership financially viable, in general, will not occur at the kinds of rates that are required to make home ownership a more sensible investment than other alternatives, should you buy at today's prices. That is all my message has ever been. You can track-back through this thread and verify that if you choose.

I realize you believe that, but it's the reason you believe it I take issue with. Either way, home ownership is still a good financial decision in most areas of the country. You're looking at this solely from a financial perspective as well...which is not all that factors into the equation. In many places, one cannot save/invest enough on the difference between renting and ownership to support your position, especially if we take housing needs into account.

For example, I'd have to spend at least $1,400 a month in rent to get a 2 or 3 bedroom town home in my area. That would save me about $200 a month. However, I'd lose a huge tax deduction in the process (as in about $12,000 a year) and not build any equity whatsoever. The rate of return on the money I was "saving" would have to be huge just to make up for the lack of equity and tax deduction.

In other areas, there is more disparity between rent and housing prices, so perhaps then it would make sense to rent.

[e1618978]

In the spirit of this thread I was actually wondering what the best way to pay back a loan is: slower or faster.

Get out of debt first! Any amount of debt drastically increases your chance of bankruptcy - I have come close three times by being over-leveraged. I am much happier now with no debt.

[Powerdoc]

Retired people owning an house, statically have a better level of life than people renting it,

[captaincore]

Depends on the area. in LA / SoCal, you need atleast 600k to get a decent-size house (2000 sq.ft).

In Dallas, you can buy a 4000 sq. ft. house for 200k.

[mydo]

Retired people owning an house, statically have a better level of life than people renting it,

Is there a causal correlation there?

[Powerdoc]

Is there a causal correlation there?

Good question, because we can see two answers to this statement :
- when you don't have to rent a house (because you own it) you save money
or
- people owning house are in a statitical point of vue more rich, than people renting.

Perhaps it's a mix of both

[captaincore]

pride of ownership

[progmac]

http://www.iaconoresearch.com/BlogImages/07-03-27_japan_real_estate_prices.jpg
Just found this chart last night when I was thinking about Japan, a country that had an early real estate bubble. If we follow in Japan's footsteps, that means that in 2023 housing prices will be lower in inflation-adjusted terms than they are today. That's a sobering thought.

On the other hand, I think about my town and how in 1998 and basic house cost $70,000 and today a basic house costs $260,000. Nothing has really changed since 1998.

[Hiro]

Buy low -- sell high. I bought the lowest priced 3br/2ba house in the zip code 18 months before the market went south. It had been a rental for about a dozen years and was in clean but functionally obsolete shape. Oh, I also bought in one of those upscale neighborhoods everyone wants to live in and took nine months to find the right house. House is still worth more than 100K more than when I bought it even though the general market in the region is down 33%. My immediate neighborhood is up! When we get around to fixing it up to bring it into equivalence with everything else around we will clear an additional 200K after all expenses.

I don't want to hear about houses being bad investments. That's complete bullshit. People do dumb things, but I have made 20%+ on every house I have ever owned and most of that was over the long dark market of the early-mid 90's and around the dot-com crash.

If you are not stupid and willing to get your hands dirty, buying a house is like printing money.

[backtomac]

If you are not stupid and willing to get your hands dirty, buying a house is like printing money.

I hope you can say that 5 years from now.

BTW, where do you live? I think that makes a big difference.

[Hiro]

I hope you can say that 5 years from now.

BTW, where do you live? I think that makes a big difference.

I expect the market to be relatively flat in my neighborhood for the next 5 years, but I bought low into the right neighborhood. Fixing-up will bring me 3 to 1 returns just to get back up to par with my neighbors.

Where you live only makes a difference with the absolute numbers. Percentages are about the same. It all has to do with buying smart, knowing what the local micro-market it likely to do and basing buying decision on that. You buy either at 30% below todays market or 30% below where you think the market will be in a couple years, taking the lower number. There are always houses available at those prices, even more now. You do have to have a clue about what fix up costs will be, but that really isn't that hard if you are willing to spend $200 on a couple estimation books.

I bought knowing a downturn was coming, and knowing I would still make money unless the entire nation goes anarchistic, and then it wouldn't matter anyway.

[backtomac]

... Fixing-up will bring me 3 to 1 returns just to get back up to par with my neighbors.


Well i don't know the particulars about your situation but that's *really* optimistic. Many renovations, a kitchen for example, will yield at best 90%. (http://cgi.money.cnn.com/tools/renovation/renovation.html)

Good luck. Your situation may be unique but you're gonna need time and luck to get a 3x return.

[progmac]

If you are not stupid and willing to get your hands dirty, buying a house is like printing money.

You just summed up the root cause of our current financial mess!

I'd like to restate this: in Japan, a house bought in 2008 is worth half what it was in 1990 and the same as it was in 1980.

[dfiler]

Why own a home?

Everyone seems to be focusing on the financial side of things...
But finances aren't everything in life.

Owning a home means that I can do whatever I want with it. Repairs are done to my specification and in a timely fashion. Best of all? There is piece of mind in knowing that I won't have to move unless I want to. No chance of being evicted at the end of the year when the property is sold out from under you.

[progmac]

Why own a home?

Everyone seems to be focusing on the financial side of things...
But finances aren't everything in life.

Owning a home means that I can do whatever I want with it. Repairs are done to my specification and in a timely fashion. Best of all? There is piece of mind in knowing that I won't have to move unless I want to. No chance of being evicted at the end of the year when the property is sold out from under you.

I hear you. There are good rental situations out there. I can make improvements to my rental and I am reimbursed every dollar. That is nice. Broken toilet? Yeah, I'll fix it and take the $10 for the float valve out of my rent, which is already half what the mortgage on the place would be.

[FloorJack]

I hear you. There are good rental situations out there. I can make improvements to my rental and I am reimbursed every dollar. That is nice. Broken toilet? Yeah, I'll fix it and take the $10 for the float valve out of my rent, which is already half what the mortgage on the place would be.

You must have a nice landlord. Mine would never pay me back for any repairs. You're situation is not the norm.

[trailmaster308]

I would rather own my property than rent from someone else. Its that simple.

[Hiro]

Well i don't know the particulars about your situation but that's *really* optimistic. Many renovations, a kitchen for example, will yield at best 90%. (http://cgi.money.cnn.com/tools/renovation/renovation.html)

That is only true when you use a general contractor to do the whole job. I do the work myself and with a sub here and there. It costs me a third of what it would with a general contractor. I see a 200% return, and I won't do it if I can't get at least a 100% return -- which gives plenty of cushion for surprises. Hardly optimistic at all, just good old-fashioned sweat-equity.