Quote: (02-24-2010 10:10 PM)kingkong Wrote:
Your accounting of mortgage payment vs rent is naive. Renting has been much cheaper than owning for at least the last decade. You're ignoring all the many major costs of home ownership. Obviously, you have to run the numbers on a case by case basis, but in general home ownership is nothing but a leveraged bet on the housing market. It is not a way to save money. Not least of the unaccounted for costs of home ownership is time and hassle. Renters just pick up the phone.
Renting was much cheaper than owning because we were in a housing bubble for the last decade. Here in Los Angeles(and real estate of course is primarily local of course), home prices have dropped in half over the last few years. I was just looking at some real estate ads last night and now a monthly mortgage on a condo is actually cheaper in some cases than renting. Just 5 years ago, buying was double the price of renting around here. The reversal has been astounding. I'm not saying it's ALWAYS a good time to buy in ANY market, but when the cost of ownership falls below the cost of renting, it's a pretty safe bet. Think of rents as being the base non-speculative market value of living in a certain location. As long as there's no speculation in the housing markets, mortgages shouldn't be drastically more than rents. When the market got overinflated the mortgage to rent ratio went into the stratosphere. It was like looking at P/E ratios of tech stocks in 1999.
If you're looking at the long term and you're getting a mortgage that is affordable to you, and you have locked in a fixed low interest rate, over the long term, you'll be better off than a renter. Inflation is going to continue pushing up the cost of living and rents forever. A locked in low interest mortgage rate will be the same in 30 years from now. My dad bought a house back in 95 for $107,000 in Tennessee. His monthly mortgage was like $500. Now you can't even get a studio apartment in the ghetto for $500. Buying, when the time and value is right of course, is a way of locking in your monthly cost for shelter, and nobody can raise it.
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Actually, rents have been going down. And I am rather confident housing prices will go down for another few years at least and then stay flat for many, many years. Or they might continue falling for well over a decade, as has happened in Japan.
I've been watching housing prices closely over the last few years. They are still going down in shitty places like Vegas and Phoenix that overbuilt. In places like SF, NY, LA that will always be in demand, prices won't stay down for much longer. L.A. prices are starting to tick back up. Slowly, but the bottom was last year, and the rebound is already in. In inflation starts coming back in a big way, interest rates are going to go up, so right now we have the best of both worlds, low prices and low interest. Usually, it's one or the other. That's why I think this is a great time to buy if you want something for the long term.
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If you actually want to play the real estate market, the move to make now is to be building up major cash. Within a few years interest rates are going to go way up and nobody will be able to get mortgages. Prices will come way down and there will be some desperate sellers. You can come in with an all cash offer.
Prices will come down if interest rates go up and we are still in a recession. However, the higher interest rate will offset the lower principle. I don't believe in paying all cash for property. Because that's money that is tied up in a house that makes no income that could be utilized for something with a higher return. A home primarily is a place to live, and secondarily an investment.
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I don't how relevant world population is to the US housing market, but the situation here is millions of boomers will be selling over the next 15 years, and that's on top of enormous overcapacity.
What I meant is that the population of the U.S. is constantly increasing and it's the number one destination of immigrants, yet in cities like LA, SF, NYC, they've already built out, so there's not much room to build more housing and keep up with population growth, so prices in these places will always be pretty high relative to the rest of the country. Boomers may be selling in 15 years, but that's probably not going to help much in my neck of the woods. Not to mention I don't want to be pissing money down the drain to a landlord for the next decade. Housing may not ALWAYS provide a high return, but renting guarantees zero return, unless we're talking about your landlord's bank account.
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Inflation does nothing to help you pay your mortgage if wages aren't inflating, and that simply is not happening. CPI can go up a lot while your wages are flat, or you're unemployed. And CPI can go up while housing continues to decline. In any of those cases you'll just wish you didn't have a mortgage.
If wages stay flat and your fixed mortgage is flat, at worst you'll just be in the same situation. When I first started renting in 1995, I was 19. Had a room mate and a spacious 2+2 condo for $900 a month. 10 years later that same condo was renting for almost double the price. 10 years from now, It'll probably be renting for $2500-3000 a month. If someone bought that condo back in '95, they'd still be paying like $900 a month for something renters are paying 3x that amount for. Inflation is kind to owners with fixed rates, and screws renters.
Owning is the way to go over the long term, but you have to look into whether the timing is right in local markets.
But anyway, getting back to my original point, my main problem with owning, isn't the financial sense of doing so, it's for more personal reasons, like feeling anchored down when I want to be mobile and flexible. Though to be honest, renting doesn't even make you completely flexible as they always want you to sign a one year lease.
I would like like to see what Tim Ferris would think about this issue. I wonder if he answers direct email?
