Why do we want to own houses?
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.
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.
Comments
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.
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.
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.
... 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
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).
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?
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.
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.
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.
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
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.
$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!
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
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.
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.
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
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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!
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.
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).