Home Ownership - Overrated???

Parent Cafe
81

<p>If barrons said that, I sure missed it. What he/she said is that he/she bought a fixer upper and it appears to have been in a rising market so it’s worth more now than it was when they bought it. Rising markets increase rents because rent differentials, given adequate supply and demand, depend on the cost of buying.</p>

<p>Now, maybe it’s possible that the renters in Lynchburg are of sub-human intelligence and are willing to pay more for rent than they would to purchase a house. I wouldn’t know. But the basic laws of economics are alive and well in my area.</p>

82

<p>Let’s assume that with closing costs and fair market value of labor Barrons paid $125,000 for the house. Assuming you could finance 100% of that on a 15-year basis, annual debt service would be about $13,000 per year (or a little more than $2,000 per year more than she was getting in rent initially), plus there would be insurance, real estate taxes, and maybe water or sewer taxes, and annual maintenance expenses. So either Barrons was out-of-pocket $3-4,000 per year initially, or she was using some significant equity, or she was not paying down principal (and thus not recognizing a real economic cost – depreciation – as a cash cost). Plus, she would have to have some substantial reserves for unexpected capital costs.</p>

<p>It looks like Barrons made a great deal – congratulations! – but it still wasn’t an instant money-maker, and it involved capital/credit beyond the reach of the average low-income buyer, a bunch of risk, and a bunch of experience. People make good deals sometimes, but people make terrible deals, too – even smart people.</p>

83

<p>JHS:</p>

<p>I agree, and I would also like to point out that when I am talking about “cost,” I’m talking mostly about cash flow, since that is what tends to matter to renters. I’m not talking about depreciation (which doesn’t apply to them or to homeowners) or appreciation in value.</p>

84

<p>“But the basic laws of economics are alive and well in my area.”</p>

<p>lol.</p>

<p>It wasn’t too long ago that people were valuing companies with 10 employees, very little sales and zero profits at over a billion dollars.</p>

<p>If rents track the cost of buying, why are rents up 25% in the last 6 or 7 years and home prices are up 50% to 200% in so many areas of the country?</p>

<p>Rents aren’t tracking housing ownership costs where I live. </p>

<p>Why would people pay more for rent than owning a place?</p>

<p>Bad credit? Uneven job prospects? Don’t understand economics? Don’t need the tax deductions? Might move? Don’t want to take care of a place? Worried about a decline in home prices?</p>

85

<p>

Around here, rents are comparable to what a homeowner’s monthly costs are. Property taxes on a modest house will run $1000 monthly. Add in utilities, maintenance, water bill. Mortgage costs. Landlords are finding that they can run in the black.</p>

<p>Many renters are often risk adverse. Or simply not ready to put down roots. Or desiring the freedom of renting & calling the landlord when problems arise. Or unable to raise a down payment. They don’t have sub-human intelligence. They’ve assessed the trade-offs of building equity/ownership vs rental flexibility.</p>

86

<p>Cross posted with dstark.</p>

87

<p>dstark:</p>

<p>The laws of economics account for risk-taking behavior, and the laws of psychology account for socially-driven decision-making, and both of those account for the dotcom bubble. But that’s not the issue in question here.</p>

<p>When you quote rent increases and home price increases, you make my point for me. Rental costs cannot be higher than sales costs FOR COMPARABLE PROPERTIES because very, very few people would rent under those conditions. If I could buy a car for $300/month over three years and own the car at the end, or I could lease one for $330/month over three years and have nothing at the end, which would I do?</p>

<p>So, buying costs are the ceiling on what I can charge for rent. The other factors are supply and demand. As housing costs have skyrocketed, more and more people have scraped together enough money to get on what they hope will be the gravy train. Given declining property values in many cities in the recent past, they may be in for a shock. Or maybe not. We’ll see.</p>

<p>But the real issue is, “What is the desirability of renting vs. the desirability of buying?” THAT, is what drives what I can charge for rent. And it’s not hard to figure out what I can charge. All I have to do is look at some rental properties and look at what the owners are charging to understand my competition. And if my places don’t rent quickly, what do I do? I drop the price. And if I rent out in a day, what do I do? I raise the price.</p>

<p>This is not a hard business. The drivers are pretty straightforward. When interest rates drop, making buying less expensive, I can charge less rent. When they go up, I can charge more, because the cost of rent relative to the cost of buying declines.</p>

<p>Sure, there are some people with bad credit. There are some people who are stupid (though they are not usually so stupid that they can’t read the classifieds and pick the lowest rent for the best property). But the fact that there are outliers does not change micro or macroeconomic theory and practice.</p>

<p>Tax deductions? Not relevant, since they are part of the cost/benefit decision to buy or not buy. Don’t want to take care of a place? They can buy a condo.</p>

<p>Moving can sometimes have an impact. I have an old acquaintance in a small, Missouri town who owns some rental properties. Many people in this town work for a single company. This company transfers people a lot. When the company got rid of its policy of paying to sell employees houses and pay closing and selling costs on transfers, his rental rates shot up because so many employees don’t want to take the financial risk of paying for closing and selling costs.</p>

<p>So, that can happen. I’m not saying there aren’t some distortions in the marketplace. What I’m saying is that, barring some extraordinary evidence, I don’t buy that buying is cheaper (on a cash flow basis) than renting, or ever has been on a macro basis.</p>

88

<p>StickerShock:</p>

<p>Property taxes on a modest house in your area are $12,000/year?</p>

89

<p>many many people pay more for rent than most people pay for a mortgage. Why? Because they are stuck in a revolving door of high rent that does not allow them to save for a down payment on a house. Here in north Jersey 1000-3000 a month is what people are paying. That can cost 3000 to 12,000 down - one month rental fee, one month rent, one month security, plus often they then want a second month’s rent so you are paying ahead. This is part of what keeps poor working families in high crime areas.<br>
Even in the poorer towns to be in a semi-safe area you’d pay 200,000 to 300,000 for a starter home. You need a certain % down to get it in the first place.
what I see most often…young couple lives cheap, buys tiny condo, sells up, buys a two family, sells, buy one-family. The other pathway is related families buying a two-family, all packed in one side together and renting the other half, or buying a single family and using it as if it was a two family.</p>

90

<p>OldinJersey:</p>

<p>I never said that rental costs can’t be higher than buying costs. I said they can’t be higher for comparable property. A $2,000/month rent on an apartment in a major city is not the same as an $1,800 mortgage on a starter house in a semi-safe area.</p>

91

<p>Buying is not cheaper than renting most of the time. I hope I didn’t give that impression.</p>

<p>It’s not now.</p>

<p>“This is not a hard business. The drivers are pretty straightforward. When interest rates drop, making buying less expensive, I can charge less rent. When they go up, I can charge more, because the cost of rent relative to the cost of buying declines.”</p>

<p>If interest rates drop and the price of the home doesn’t go up to counteract this, then buying a home is less expensive. That’s not really what happened in the last 6 years, is it? Prices exploded. Owning did not get cheaper, even with the interest rate drop.</p>

<p>Did your rents drop in the last 6 years? Have they dropped in the last 20 years? Interest rates have plummeted during these time frames.</p>

92

<p>No, son did not move to a different area. Apartments in the same town–2Br, 1.5 bath --anywhere from 650-800/mo. He bought new construction for 138K–so no maintenance for a while and his mortgage payments include his escrow for taxes and insurance. He did save for a year (while living at home) to come up with his 10% down.</p>

<p>We bought condo in D.'s college town for 76K–put in 8K in repairs and will sell this spring. Next door neighbor’s identical condo just sold for 92K–so think we will break even at least and D. essentially lived rent free for 3 years (plus roommate paid half of our mortgage payment 250/mo).</p>

<p>Neither of these towns are in large metro areas or inflated area, so I can’t compare to those.</p>

93

<p>oops dstark. I should have said $500k. Never post when you’re in a hurry!</p>

94

<p>lol…</p>

<p>Marite, do you know how many working hours have been spent trying to confirm what you said?</p>

<p>The waste. The waste.</p>

<p>lol</p>

95

<p>Dstark, how many working hours are wasted posting on CC? LOL. Glad to see that people’s nonsense meter is working and that they’re following the Gipper’s admonition “Trust, but verify.”</p>

96

<p>

</p>

<p>On a graph, my rental rates have risen steadily. But there have been fluctuations, and they track pretty closely with significant changes in interest rates.</p>

97

<p>Okay. Verification time. Here is a recent article about Zillow and Cyberhomes.
A 1200 sqf condo in Cambridge has an estimated value of $415k, the City of Cambridge assesses it at 431k and Zillow at $504k (all rounded figures)</p>

<p><a href=“http://www.boston.com/realestate/news/articles/2007/03/04/price_check/?page=2[/url]”>http://www.boston.com/realestate/news/articles/2007/03/04/price_check/?page=2&lt;/a&gt;&lt;/p&gt;

98

<p>

</p>

<p>Glad to hear it was just a mental hiccup. For the record, my “research” took about five minutes. I live to look up factiods on the 'net…</p>

99

<p>We paid cash for the house but could have easily borrowed 80% LTV at around 6% on a 30 year note. Debt sevice would be $571/mo or $6849/yr fixed. By paying cash our closing costs were only about $1,000 for title insurance, home inspection and legal. The taxes are around $1,000 and insurance $500/yr. The tenant pays all utilities including water/sewer and garbage. We pay around $500/yr for some landscaping and maintenance. So our gross income @ $895 is $10,740. If we financed it we’d be paying out $6852 plus expenses of around $2,000 or $8852 which will round up to $9,000 leaving $1740 return on equity invested of around $25,000. That’s 7% before tax benefits and appreciation.
It was not a real fixer but needed TLC including fresh paint (by my wife who is a great painter) new vinyl flooring in the kitchen and a couple of new light fixtures. The yard needed some trimming which I did and we had the gutters and roof cleaned off for $100 ( i hate gutter cleaning). As I said total cost was around $1,000 plus a week of work. We are actively looking for another there but the prices now are around $150K so we are waiting for another good sleeper to come around. We dithered a few days on one a few months ago and somebody else snapped it up within a week of coming on the market. The biggest problem is making the time to go take a look in person as it’s a minimum of two days out and back. </p>

<p>Who rents–we rent this house to two brothers who both work but would rather have a nice truck than save the money for buying a house–like me when I was younger. We have also had a transfer couple in our other house who were unsure about staying and wanted to try the area for 2 years. They ended up moving on and we now have a couple who sold there house and are building a huge place at the NC beach so they needed a place for around 1 year. We are working with a local realtor about making it an exec rental where they pay us a flat rate and do short term deals with local companies. Otherwise we have listed it with the large local hospital to get a new fellow or somebody doing a residency for a few years–they rent.</p>

100

<p>Tarhunt: Yup, $12grand. (Our schools aren’t great, either. But we’re ten miles from Manhattan, low crime, tree lined streets, nice parks.) Plus, closing costs around here were much higher than any of my relatives paid in other states. So even if a person would prefer ownership, if he’s not really convinced that the market is moving in a favorable direction or he’s not staying put for a while, any profit from a sale can be eaten up rather quickly. That can be part of the reason landlords can still charge rents higher than the cost of ownership around here. </p>

<p>That’s why I was shocked at the low taxes in Cambridge, which I presume is a lovely area surrounding the Harvard campus.</p>