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Posted by Mark Bole on May 30, 2008, 12:45 pm
Coffee's For Closers wrote:
[...]
> Do you mean 6% or more in agent fees? Isn't that just a form of
> business overhead, that gets passed onto the end customer (I.e.
> the buyer of the house)?
Typically the 6% real estate agent commission is paid by the seller.
Although, local market conditions, high-end prices, increasing use of
the Internet, and sales by owner are all helping to erode the
traditional monopoly on listings that have enabled real estate agents to
charge this fixed price.
> However, if you STAY in the house, then it doesn't matter how
> fashionable your kitchen countertops are.
That's just the problem -- no one can stay in the same house forever.
Even the supposedly smart retiree who has the mortgage paid off and
doesn't keep up the building is just deferring expenses that someone,
someday, will have to pay for (or equivalently, offer a sales discount for).
As long as there are folks trying to claim that home ownership is
somehow cheaper than renting, there will be a need to inject some basic
economics into the situation. Like the post I replied to, often the
confusion is as simple as not understanding the difference between cash
flow and cost.
The cost of shelter is going to be the same no matter what. There is
really no difference between a landlord and a homeowner, except for
their relationship to the tenant. An owner-occupied property is simply
a bundle of shelter plus undiversified real estate investment, a rental
is unbundled shelter only. In the article which started this whole
thread, the differences observed in the "rent ratio" were strictly due
to the real estate investment portion of the equation, not the shelter.
The decision can and should be based on non-economic factors only. The
downside is that all too often, emotional attachment to a specific house
results in someone paying for shelter that has become over time way
beyond what they really need or can afford.
-Mark Bole
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Posted by Default User on May 30, 2008, 2:14 pm
Mark Bole wrote:
> Default User wrote:
> > John A. Weeks III wrote:
> [...]
> > As far as rent vs. buy, in a brief, non-rigorous, purely anecdotal
> > check, I couldn't find any similar houses (3bed, 2bath, 1750sf) in
> > my area that rent for what I pay in mortage/tax/ins/upkeep.
> You are confusing cash flow with income/expense. Isn't part of your
> mortgage payment going to principal? That's not an expense. Don't
> you have equity tied up in your house? That's opportunity cost.
First of all, I was addressing the original statement:
"The rent money that you pay on many rentals would not begin to cover
the cost of ownership."
There are many ways to address "costs", as you point out. I'm not even
worrying about the equity, although a real hard analysis would of
course. Just going with a basic breakdown of month-to-month expenses
(cash flow as you say), it's currently less for me to own than rent.
I'd calculated the following.
$575 Mortgage P&I
$150 Taxes
$100 Maintenance
$50 Sewer/water
$80 Insurance
-----------------
$955 Total
Equivalent houses in my suburb, based on me looking in the Sunday
classifieds, are being offered at $1100 - $1300. That differential goes
into investments.
> Don't forgot those extra transaction costs every time you took out a
> loan, what if that money had been invested instead?
A renter typically pays a security deposit and first/last month's rent.
The deposit and last month are lost opportunity as well, as many
landlords don't even pay basic interest on that money.
> And then there's
> that 6% or more hit you'll take when you do eventually sell.
That's doesn't factor in, because we're ingnoring the actual equity.
The six percent comes out of that. Whatever you get in equity is a
bonus. Rent has no equity build-up, of course.
> Your estimate of upkeep is probably low. It's pretty much a given
> that after twenty years, even with replacing a few water heaters,
> kitchen appliances, HVAC, and a new roof,
If one projected $15,000 for that sort of thing, it would only amount
to about $60 a month over 20 years. You can bump up the maintenance to
$200 a month if you like, that's fine with me.
> parts of your house will
> still be seriously out of date compared to the market. I'm talking
> cabinets, flooring, countertops, fireplaces, windows, landscaping --
> the big ticket items.
While true, that again goes to selling the house. That would come out
equity, and equity isn't in the discussion. If you didn't update, you'd
sell for less.
> No one is at the mercy of a landlord. It's much easier to leave a
> bad rental situation without excess cost than a bad homeowner
> situation.
What if you have a GOOD rental but the landlord decides to stop renting
to you? Then you're at the mercy of the landlord. With intangibles, it
all comes down to which you prefer, for instance flexibility or
stability.
> I've been a homeowner for nearly 25 years, also a landlord and renter
> on several occasions over the years. But I have no illusions as to
> the true economic costs of home ownership.
The "true" cost is so complicated and full of "it depends" that I
couldn't even make a guess for the most part. However, I so often see,
"you'll pay less per month in rent, which you can invest . . . "
Tain't always the case.
Brian
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Posted by Elle on May 27, 2008, 8:09 pm
> Time to Buy? The Conversion of a Renter
> By DAVID LEONHARDT
> http://www.nytimes.com/2008/05/28/business/28leonhardt.html
I saw this article this morning, too. It is a worthwhile
read. It repeats one of T. Borek's points on the subject, a
very good one IMO, concerning the historical ratio of sale
prices to comparable housing rental rates.
> I think this article on the buy vs. rent decision is good,
> but the
> author ignores a factor in favor of buying -- over the
> long term,
> house prices can be expected to rise at the rate of
> inflation, on
> average. For a $600K house, a 3% annual gain is $18,000,
> which cannot
> be ignored.
I respectfully disagree that one should expect as much as 3%
a year. I think Robert Shiller is the best source on this
subject. His data argues appreciation is less than 1% a year
over the long run. See for example
http://money.cnn.com/2005/01/13/real_estate/realestate_shiller1_0502/
Shiller foresaw and wrote about both the tech bubble and the
housing bubble bursting. Guy's a wizard AFAIC.
Plus of course those who bought during this last bubble may
not be seeing any appreciation on their houses for some
time.
> Property taxes and home
> insurance costs probably rise with inflation, though.
Right, and to put it out there, so do the costs of a new
roof, furnace, painting the house, etc.
Renting is often a very sound financial decision. One day it
will again be fashionable to live within one's means.
Elle, whose childhood home, with many improvements, is now
on the market, having appreciated some 5% a year since my
parents sold in 1987; whose current home has appreciated
some 40% in five years (big knock on wood); who in 2001 sold
another home with an appreciation of 50+% after five years;
and who still refuses to buy any home with the expectation
of doing more than getting the original purchase price (sans
inflation) back, due to much reading about historical home
prices and bursting bubbles. One's home is no way no how an
ATM. The only returns one should expect are a safe and
comfortable place to live.
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Posted by Mark Bole on May 27, 2008, 9:22 pm
Elle wrote:
>> [...] it makes sense to buy,
>> because rents can be expected to rise with inflation over time, but
>> the payments on the mortgage would not.
That is a factor in favor of *borrowing*, not buying. If investing at a
fixed rate in times of inflation is bad, then borrowing at a fixed rate
in times of inflation must be good. Pay back with cheaper dollars.
> Plus of course those who bought during this last bubble may
> not be seeing any appreciation on their houses for some
> time.
If they bought at the *beginning* of the bubble, which where I live was
mid-2003, they are doing OK. Not as great as if they had sold two years
later at the top of the bubble, however.
>
>> Property taxes and home
>> insurance costs probably rise with inflation, though.
>
> Right, and to put it out there, so do the costs of a new
> roof, furnace, painting the house, etc.
>
> Renting is often a very sound financial decision. One day it
> will again be fashionable to live within one's means.
Thank you. It's frustrating when discussions on this topic (the subject
of the thread) omit these key points.
> Elle, whose childhood home, with many improvements, is now
> on the market, having appreciated some 5% a year since my
> parents sold in 1987;
Not to be nosy, but since you brought it up: are you saying you bought
your parents home twenty-some years ago? That is an interesting
financial planning technique...of course, the $250/$500K Section 121
home sale tax exclusion was not in place that long ago. I have a friend
who also bought his parents home some fifteen years ago, when he was
still married, although I have a vague notion it involved some tax
benefits to the parents via installment sale.
-Mark Bole
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Posted by Elle on May 28, 2008, 6:55 am
Elle
>> Plus of course those who bought during this last bubble
>> may not be seeing any appreciation on their houses for
>> some time.
>
> If they bought at the *beginning* of the bubble, which
> where I live was mid-2003, they are doing OK. Not as
> great as if they had sold two years later at the top of
> the bubble, however.
That's true. Though I want to be clear that IMO factoids
like this may recklessly be used an argument for speculating
into bubbles. It's perfectly reasonable if a family needs a
home or someone just wants the comforts of a house and puts
down 20% etc. on a conventional mortgage (or carefully
examined for affordability ARM) and then buys during a
bubble.
What's interesting is that I believe Shiller and other
sources provide evidence the bubble started in the late
1990s. Anecdotally, I sure saw this in my neighborhood when
I bought my first home in 1996. Talk about luck. OTOH, no
doubt evidence exists to show the bubble really took off
when interest rates declined and banks got so "clever"
(read: Fire the whole board of Washington Mutual).
> Not to be nosy, but since you brought it up: are you
> saying you bought your parents home twenty-some years ago?
Oh no; the asking price is way out of my league. Plus it's
way too big. My father just happened to write me today that
"the old house" was on the market, and I could see photos of
it and its improvements at xyz realtor's web site. At the
same time, we discussed the economics of its appreciation.
> That is an interesting financial planning technique...of
> course, the $250/$500K Section 121 home sale tax exclusion
> was not in place that long ago.
Somewhat related: Fixer-uppers where the buyer does his/her
own repairs and lives in the house are one area of real
estate investing where I think everyone I know comes out
ahead. Like you suggest, I suspect the tax break is a large
part of the decision to go into this "business." (Again,
speaking only anecdotally and admittedly without any
sophistication on real estate development.)
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