CNN has an article about The National Association of Realtors saying that home sales dropped 8.6% in November. That’s a pretty steep drop for just one month. What I take from that is that this may be one of the best times to buy a home. Buyers have not only this information to negotiate with, but also the benefit of the winter off-season. Mortgage rates are low too – though you might have to have pristine credit to qualify for them.
This news of the home sales drop falls on the heels of Fortune announcing the 10 Worst Real-Estate Markets for 2009. Every year is going to have a 10 Worst Real-Estate Market (even if things are doing well), but some of the predicted drops are huge. Nine of them are projected to lose 20% or more and the 10th, Washington D.C. escapes by the slimmest of margins with a 19.9% projected drop.
It may surprise many that the Fortune list had 8 of the 10 worst markets in California. I always knew that California was expensive, but I didn’t expect it to dominate the list as much as it did. I figured that New York City may be in there as financial, premium fashion, and advertising businesses look to have a tough time next year (in my opinion – I have no objective proof of this).
This made me think, how is my rented-out condo in the Boston suburbs doing? I paid $278,000 for it in the summer of 2004. Zillow, which is very accurate for the property, lists it as currently worth $226,000. Ouch. Pain. Since October it’s dropped more than 13%. I’m actually close to being upside down on the mortgage that peaked at around $300,000 in the fall of 2005. For this reason, I can’t take advantage of cheap refinance rates unless I want to put another huge chunk of money into it to avoid private mortgage insurance (PMI). Sad.
If prices turn around instantly (fat chance) and resume a 5% gain that real estate has made in the past (over the long term), it will take me more than 4 more years for the value to catch up to what I paid for it. At that point, it will have been 9 years of home ownership for no gain. Let that be a reminder to all those who say “renting is throwing money away.”
“Let that be a reminder to all those who say ‘renting is throwing money away.'”
While I understand your point, I can’t say that I agree with the above statement. Unless you’re purchasing a second piece of real estate to invest, you’re really just buying a roof over your head – preferably one that will appreciate in value, but a roof nonetheless. You can either rent forever, or pay a mortgage for 30 years and taxes forever. Don’t forget that most landlords include taxes in your rent.
Like the stock market, home depreciation is only a problem if you sell and realize your paper loss. You’re taking a gamble with any investment, whether it be stocks or real estate.
Best of luck with your condo!
Stacey, it’s a price/value thing. If someone offered me rent of a great place at a ridiculous price of $1 a month, I’d easily take that vs. paying $200,000 or more to own a place. I could take the savings on the roof over my head and apply it to investments that will appreciate (such as guaranteed investments like CDs). As you can see it’s not about the act of renting vs. owning the details of the prices of each.
I should mention that I’m both a landlord (in Boston) and a renter (in California).
LM,
Yep, you have to look at the rent:own ratio. If rent is substantially cheaper than a mortgage, it may be wise not own. This has been the case for Los Angeles for many years now. The cost to rent a 2 bedroom home would be about $2k, but to own it would have been like $4k (with a 20% down). With home appreciations at only about 5%, you would be better off renting and investing that extra money in a high-return investment (such as a mutual fund). In 30 years, you could either have a paid for house or a several hundred thousand in the bank.
“At that point, it will have been 9 years of home ownership for no gain.”
The long term is ten years, at least. Renting almost always makes sense in the short term. But rent increases . A decline of 24 percent palea in comparison to the stock market in the past year, but it will recover too in the long term. And home prices were rising at a record pace before the decline. Mortgage interest and taxes are deductible. Nice satire.
“Let that be a reminder to all those who say ‘renting is throwing money away.'”
Yes, but Real Estate ALWAYS goes up.
“Let that be a reminder to all those who say ‘renting is throwing money away.'”
Yes, but Real Estate ALWAYS goes up.
I refused to get into the housing market several years ago and rented cheap. My friends told me I was crazy because I was throwing money away? I have probably averaged about $1000 a month in rent over the last 4 years for $48K spent. I now have 0 equity to show for it.
My friends who bought a house were probably spending double that in house payments for a total of $96K spent. They now have about -$50K in equity and their payments are going up.
So who was throwing money away?
Double Journey, you . . . Instead of thinking over the past 3-5 years, why not look ahead 40 years. Your rent is currently 1000 bucks but increasing at 3% per year in 10 years it will be around 1350, in 20 it will be around 1800, in 30 it will be 2425, and 40 it will be 3250 or so.
A mortgage payment essentially stays the same the whole time, since a home is an inflation protector. After the mortgage is paid off, that persons housing costs will be reduced to something like 10% of their income. It’s far easier to retire when you own your home.
Most argue that renting you can invest the difference, but you have to Rent less house, and be extremely disciplined in order to pull that off. Considering the negative savings rate of the country the majority of people are better off owning since they won’t invest the difference (unless you count buying a big TV ‘investing’).
We recently refi’d. Our home’s value had gone UP (original purchase 12/05) – to the point where we could squeeze the entire loan amount under 80% and get rid of the piggyback mortgage.
If we found rent for $1, I would definitely rent! But you are right – it really makes a difference where you live. Around here, it costs about the same to rent a 1-bedroom apartment as it does to buy a small single family home… Which would be why no one around here rents. I’m sure the cost to own is much higher in California!
I’m also looking towards the future. We plan to live here for the next 50 years (can’t move, taking care of family), and want the security of a paid-off home in retirement. We’d rather pay $150 per month in taxes than $800 per month in rent/taxes. :)
Traciatim, “Instead of thinking over the past 3-5 years, why not look ahead 40 years. Your rent is currently 1000 bucks but increasing at 3% per year in 10 years it will be around 1350, in 20 it will be around 1800, in 30 it will be 2425, and 40 it will be 3250 or so.”
Ahh, but your investments are increasing at (hopefully) a larger rate.
“Most argue that renting you can invest the difference, but you have to Rent less house, and be extremely disciplined in order to pull that off. Considering the negative savings rate of the country the majority of people are better off owning since they won’t invest the difference (unless you count buying a big TV ‘investing’).”
I don’t know why you have to rent less house… it depends on the area of the country. In San Francisco where I am, a renting dollar buys 2-3 times as much house as a mortgage dollar.
As for people not investing the difference, that’s something that’s completely under their control, so I don’t factor it in. It’s a lot less work to set up an automatic investing process than it is to buy a home. Having done the paperwork for both, it’s not even close. :-)
There’s also the cost of maintenance. A furnace here, a roof there … it adds up over time.
Btw, it’s scary how much some of you folks pay for housing. I’m sure the salaries are higher in the larger cities, but I live in a midwestern university town where ~175K will get you a fairly new 3 bedroom house. Sure, we don’t have a professional sports team (which certainly would be cool) and other amenities, but we also don’t have the traffic and other issues :)
Traciatim,
Yes, it does take discipline to invest, which I have. I have invested the money and have done quite well, even in this down market. If you read my website, you would find I actually really enjoy investing the money and that I have saved every penny I didn’t spend on housing.
Also, I never said I would always be a renter. I was just smart enough not to buy what was very clearly an overpriced asset. It didn’t take a genius to see that housing was way more expensive than it should be.
So I will take the over 100K difference, and soon to be even more, and have a nice chunk of money to invest in a house when prices come down.